In the non-linear process of historical change, when linear regressions dictate political strategy, it is bound to be incorrect more often than not. So, it is with the U.S ― China strategic economic dialog since Henry Paulson.
As Europe is going through the travails of European integration and enlargement, the U.S ― U.K G2 that had created the post-World War II international order is being replaced by the U.S ― China G2. On the surface it may appear to make sense. After all, the entire arithmetic of global imbalances is because of American budget and trade deficits and the corresponding Chinese budget and trade surpluses. The rest of the world, minus these two elephants in the room, is fairly well-balanced.
Straightforward international economics dictates that American trade policies must aim for the Chinese to buy more American and for the United States to gradually buy less Chinese as China begins to increasingly substitute American consumption with its own. That is a linear regression. To make China pay more going forward instead of lending our money back to us has been the thrust of the Paulson strategic economic dialog. The underlying reality is far more complicated.
For China to raise its domestic consumption it must secure resources. To secure resources it will naturally have to compete with all other countries, including the G7, for them in the short run, assuming that by 2050 at least the energy problem would be solved. For this it will use in part its own currency for it to gain currency around the world along with viable foreign currencies such as those which are already stable and floating in its foreign reserves portfolio.
The United States, having followed a policy of catalyzing Chinese economic change since Nixon and Kissinger upon the advice of Milton Friedman to triangulate with the former Soviet Union during the Cold War, is continuing that status quo with the expectation that China will eventually have to change politically because democratic change, the economists expect, will bring political change through prosperity. This has not been true of American history, nor has it been of any country including the former Soviet bloc countries. So, China is the outlier, not the norm. And this is what makes it a problem. And using China as an instrumental variable to accommodate it in the regression is a bad idea just as it is also not feasible to drop China altogether to fit the data. And China is far too different from the United States to be treated as its proxy. The solution, therefore, lies elsewhere: in the non-linearity of geopolitics.
The U.S ― U.K G2 after World War II was about the sharing the same value systems. The U.S ― China G2 value system is not shared. The Chinese are unclear about their worldview and their vision for the world. China’s is an ego-centric process of development, focused on economic liberalization to safeguard the status quo of the politics of its regime, counter to the expectations of economists in the West. The current crisis makes the Chinese policies only more credible for the Chinese people because western democracies have imploded economically, looking to China for their salvation. They see little reason to change politically.
The result of China’s continued growth under the current state of its politics could mean a stronger China after 2030 that is ready to compete against a polar opposite political-economic system in the West. It will be a vindication of Marxism, by fixing its economics while retaining its politics. Milton Freidman is the Chinese bait to the West to that end.
Still, but for the realpolitik of the West, it can be argued that there is nothing wrong with a strong China. But what could be wrong, is the lack of harmony in the value systems which could potentially turn China into a threat to the rest of the world, as resources dwindle and as China continues to pursue its self-interest of its large population first, in a manner that could be brutally pragmatic for the rest of the world, especially if the rise of China coincides with the weakness of the West. So, the U.S ― China G2 is not a viable anchor to shape the world order going forward. It must continue to be shaped by the U.S ― U.K G2.
To this end, it is necessary for the United States and the rest of the G7 to diversify out of China and compete with it directly in all foreign product, service and resource markets in Africa and Latin America: Russia must be admitted into the World Trade Organization (WTO). The G7 can give the rest of the world a far better deal than the Chinese. It is naïveté to use the Chinese conduit to foreign markets with the fear of losing China if China feels the heat from the G7.
China is ready to compete with the rest of its G7 colleagues. And it must be allowed to. The purpose of U.S trade policy toward China must be to change China politically by treating it as peer, not as a student in international economics if China wants to replace Germany, Japan and the U.K as the world’s second largest single economy to serve as a global anchor along with the United States.