When China Rules the World

Not far from Renmin University in the north-west of Beijing, there is a gargantuan Carrefour hypermarket which sells everything from clothes and refrigerators to sports equipment and food, and which takes a lifetime just to walk through let alone shop in. It is the largest supermarket I have ever used and throngs with many thousands of Beijingers every day of the week. Carrefour, French-owned and the world’s second largest retailer, has 112 such hypermarkets in China, though they vary considerably in size. In April 2008 Carrefour found itself the target of a protest which spread like wildfire across China, with demonstrations taking place outside stores in Beijing, Wuhan, Heifei, Kunming, Qingdao and many other cities. The origin of the anti-Carrefour campaign was a few brief postings on China ’s internet bulletin boards which claimed that the retailer and one of its shareholders, LVMH, the French luxury group, had financed the Dalai Lama’s government-in-exile in India. Coming hard on the heels of the riots in Tibet, it was an incendiary campaign, which was given added charge by the anger felt towards the protests in Paris against the Olympic torch relay and suggestions that President Sarkozy might boycott the Games. The large crowds that gathered outside many Carrefour hypermarkets urged shoppers to boycott the stores. Demonstrators carried pictures of Jin Jang, a wheelchair-bound Chinese athlete, who had been accosted by a French protester during the torch relay in Paris and whose treatment had incensed the Chinese public. Shoppers who bravely ventured into Carrefour stores did so under the protection of scores of riot police. The eruption of Chinese protests against Carrefour, which threatened to engulf other French companies as well, was reminiscent of those staged against Japanese companies in 2005 when relations between China and Japan reached a new nadir.

Alarmed by the threat to their Chinese operations, Carrefour vehemently denied the rumours about it funding the Tibetan government-in-exile and declared its opposition to the splitting of China. To contain the protests, China ’s internet gatekeepers began restricting searches using the French company’s name. Meanwhile, President Sarkozy sought to defuse anger over the protests in Paris by offering a tacit apology for ‘wounded’ Chinese feelings. With French companies growing increasingly concerned about a boycott of their goods by Chinese consumers, Nicolas Sarkozy wrote a letter to Jin Jang, the Chinese athlete, offering his ‘sympathy’. He acknowledged the ‘bitterness’ felt in China about the French protests and the attack on Jin Jang, referring to it as a ‘painful moment’ which he condemned ‘in the strongest possible terms’. ‘I must assure you,’ he continued, ‘that the incidents on that sad day, provoked by certain people, do not reflect the feelings of my fellow citizens for the Chinese people.’ The letter was handed to Jin Jang in person by the head of the French Senate during an official visit to Shanghai. Mr Sarkozy also sent his chief diplomatic advisor to Beijing in an effort to calm feelings.

Earlier that year another French company, Peugeot Citroën, found itself on the wrong end of Chinese public opinion when it carried an advert in the Spanish newspaper El Pais featuring a computer-modified Mao Zedong scowling down from an advertising hoarding at a Citroën car. At the bottom of the ad was the slogan: ‘It’s true, we are leaders, but at Citroën the revolution never stops.’ The ad was attacked on Chinese internet bulletin boards for ‘hurting our national pride’ and ‘damaging the whole Chinese people’. It was hastily withdrawn by the company, which described the ad as ‘inappropriate’ and expressed regret for any ‘displeasure’ caused. Its statement read: ‘We repeat our good feelings towards the Chinese people, and confirm that we respect the representatives and symbols of the country.’ Then in May, Christian Dior, the French fashion brand, became the latest global company to learn the hard way about the danger of offending Chinese sensibilities. Facing the prospect of a boycott of its products, the company dropped the American actress Sha ron Stone from its advertising in China after she suggested that the recent earthquake in Sichuan province was karmic retribution for how Beijing had treated Tibet. In the same month the Dalai Lama collected an honorary doctorate from the London Metropolitan University, which attracted considerable criticism in the Chinese media. In June the university’s vice-chancellor met with officials at the Chinese embassy and ‘expressed regret at any unhappiness that had been caused to Chinese people by the recent award’. It was widely believed that the apology was not unconnected with the fact that 434 students from China were currently studying at the university and that Chinese students have become an extremely lucrative source of revenue for British universities. In their different ways these examples testify to the importance of the Chinese market for many foreign companies and universities, and the extent to which foreign political leaders are prepared to bow to Chinese sensitivities. They underline the growing influence on the global stage of Chinese public opinion, concerns and attitudes.

A new world order, the future shape of which remains unclear, is being driven by China ’s emergence as a global power. As we saw in the last chapter, the most advanced expression of this process is in East Asia, where, in little more than a couple of decades, China has become the de facto centre of the region, an increasingly important market for every country, the key driver of the new economic arrangements presently taking shape, and the country that all others are increasingly obliged to take account of and accommodate, even if the manner of China’s diplomacy remains determinedly and self-consciously sotto voce. So far the changes wrought by China ’s rise have done little to disturb the calm of global waters, yet their speed and enormity suggest that we have entered an era of profound instability; by way of contrast, the Cold War was characterized by relative predictability combined with exceptional stability.

How will the impact of China ’s economic rise be felt and perceived in ten years’ time? How will China behave twenty years hence when it has established itself as second only to the United States and effectively dominates East Asia? Will China continue to operate within the terms of the established international system, as it has done for the last decade or so, or become the key architect and protagonist of a new one? Will the rise of China plunge the world into a catastrophic environmental and climatic crisis as a fifth of humanity rapidly acquires the living standards previously associated with the West? China certainly does not know the answers, nor does the rest of the world, whose behaviour towards China will be a powerful determinant of how China itself responds. International relations experts are fond of citing the rise of Germany and Japan in the early twentieth century as examples of nations whose new-found power could not be contained within the existing international system and whose ambitions eventually culminated in war. The rise of China will not necessarily result in military conflict — and, for the sake of humanity, we must fervently hope that it does not — but it is a sobering thought that the ramifications of China ’s rise for the world will be incomparably greater than those of Germany and Japan, even accounting for the difference in historical times.

The beginning of the twenty-first century marked the moment when China arrived in the global mind. [1037] Until then, for most of humanity, it had largely been a story of a faraway country about which people knew little. Now, within the space of a handful of years, its influence has become real and tangible, no longer a set of statistics or the preserve of policy-makers, but dramatically impacting on popular consciousness around the world. Television programmes and newspaper articles on China have become commonplace. There were two main drivers of this global moment of China-awareness. First, as China established itself as the workshop of the world, ‘made in China’ goods began to flood global markets, from Wal-Mart in the United States to Jusco in Japan, almost overnight reducing the prices of a growing range of consumer goods, creating the phenomenon known as ‘China prices’. Not surprisingly this engendered a feel-good factor about China ’s rise, albeit tempered by the realization that many companies and jobs were migrating to China to take advantage of the much cheaper costs of manufacturing. Second, China ’s double-digit growth rate fuelled a growing appetite for the world’s commodities, which had the opposite effect — inflationary rather than deflationary — of big and persistent hikes in the prices of most commodities, of which oil was the most visible and dramatic. Unless you were a major commodity-producing nation, this induced a feel-concerned factor, a growing realization that there was a downside to China ’s rise. The impact was, thus, felt in different ways around the world: for commodity producers in Africa and Latin America, it primarily meant higher prices for their exports, thereby stimulating economic growth, combined with cheaper manufactured goods; for the West and Japan it meant a large fall in the prices of consumer products and clothing, then spiralling commodity prices; for East Asia it meant a vast new market for their products and low-priced ‘China goods’ at home. Whatever the precise effect, and for most of the world it has so far been beneficial, China ’s arrival on the world market ushered in a new kind of global awareness of China: it marked the foothills of China ’s emergence as a global power.

In 2001 China officially launched its ‘Going Global’ strategy, which was primarily intended to foster a closer relationship with commodity-producing countries and thereby secure the raw materials the country urgently required for its economic growth. The effects of this policy have been dramatic. In the space of less than a decade, China has forged close ties with many countries in Africa and Latin America, and to a lesser extent the Middle East. The West, understandably, is most interested in and concerned about how China directly impinges upon it, but in fact China ’s changing relationship with the developing world is of rather greater import in China ’s emergence as a nascent global power. China’s overseas investment increased by more than five times between 2000 and 2005, reaching $11.3 billion, and has continued to rise sharply, with East Asia the most important destination (accounting for over half in 2004), and Latin America, Africa and the Middle East of growing importance. [1038] In 2000 President Hu Jintao toured Brazil, Argentina, Chile and Cuba, paving the way for a series of deals which have resulted in much closer economic links. Brazil now exports large quantities of iron ore, soya beans, cotton, timber and zinc to China, Argentina supplies large quantities of soya, Chile is exporting growing quantities of copper, and Venezuela and China have concluded an agreement for the long-term supply of oil. [1039] Until the global downturn in 2008 they were all enjoying a boom on the back of rising commodity prices consequent upon Chinese demand. [1040] By 2010, China could become Latin America’s second largest trading partner: China, in short, is beginning to make its presence felt in the US ’s own backyard. [1041] By far the most dramatic example of China ’s Going Global strategy, however, is Africa.

Figure 33. The rising global price of commodities prior to the credit crunch.

AFRICA

The attraction of Africa for China is obvious: it needs a vast range of raw materials to fuel its economic growth. In 2003 China accounted for 7 % of the world’s consumption of crude oil, 25 % of aluminium, 27 % of steel products, 30 % of iron ore, 31 % of coal and 40 % of cement. [1042] As I discussed in Chapter 6, China is very poorly endowed with natural resources and as a consequence has no choice but to look abroad. Africa, on the other hand, is extremely richly endowed with raw materials, and recent discoveries of oil and natural gas have only added to this. Unlike the Middle East, moreover, which continues to receive enormous American attention, Africa has, in recent years, been relatively neglected, having remained of marginal concern to the US. [1043] In 2006 the new relationship between Africa and China was publicly consummated, with Hu Jintao’s tour of African capitals followed in November by heads of state and dignitaries from forty-eight African countries attending the largest summit ever held in Beijing. [1044] The Chinese premier Wen Jiabo proposed that trade between China and Africa should double between 2005 and 2010. The Chinese made a range of other undertakings including doubling its 2006 assistance by 2009; establishing a China-Africa development fund of $5 billion to encourage Chinese companies to invest in Africa and provide support for them; increasing from 190 to over 440 the number of export items to China in receipt of zero-tariff treatment from the least developed countries in Africa; providing $3 billion of preferential loans and $2 billion of preferential buyer’s credits to Africa over the next three years; cancelling debt in the form of all the interest-free government loans that matured at the end of 2005 owed by the most heavily indebted and least developed African countries; and over the next three years training 15,000 African professionals, sending 100 agricultural experts to Africa, building 30 hospitals and 100 rural schools, and increasing the number of Chinese government scholarships to African students from 2,000 per year to 4,000 per annum by 2009. At the conference major deals were signed, including for the development of an aluminium plant in Egypt, a new copper project in Zambia and a mining contract with South Africa. [1045]

Table 3. China’s percentage share of certain commodities exported by African states.

Figure 34. Composition of Chinese imports from sub-Saharan Africa.

Table 4. Africa’s mineral reserves versus world reserves.

Figure 35. Chinese share of global consumption of commodities in 2006.

Figure 36. Where does China get its oil from?

Figure 37. Rapid growth of China’s trade with Africa.

Figure 38. Foreign direct investors in sub-Saharan Africa.

Oil now accounts for over half of African exports to China, [1046] with Angola having replaced Saudi Arabia as the country’s largest single oil provider, supplying 15 per cent of all its oil imports. [1047] China has oil interests in Algeria, Angola, Chad, Sudan, Equatorial Guinea, Congo and Nigeria, including substantial exploration rights, notably in Angola, Sudan and Nigeria. Sudan exports half of its oil to China, representing 5 per cent of the latter’s total oil needs. [1048] Already over 31 per cent of all China’s oil imports come from Africa and that is set to rise with the purchase of significant stakes in Nigeria’s delta region. [1049] Over the past decade, China’s imports in all the major primary commodity categories, except ores and metals, grew much more rapidly from Africa than from the rest of the world. Africa now accounts for a massive 20 per cent of China’s total timber imports. [1050] China has overtaken the UK to become Africa’s third most important trading partner after the United States and France, though Africa still accounts for only 3 per cent of total Chinese trade. [1051] While the value of US-Africa trade in 2006 was $71.1 billion, China-Africa trade is rapidly closing the gap at $50.5 billion. [1052] With 80 °China-financed projects, valued at around $1.25 billion in 2005 — before the 2006 conference — Chinese investment in Africa still accounts for only around 1 per cent of total foreign investments in Africa, but future projections suggest that China will very soon become one of the three top investors in the continent after France and the UK. [1053] It seems only a matter of time before China becomes Africa’s largest trading partner and its biggest source of foreign investment, probably by a wide margin, though India may one day emerge as a serious competitor.

The evidence of the growing Chinese presence in Africa is everywhere: Chinese stallholders in Zambia, Chinese lumberjacks in the Central African Republic, Chinese tourists in Zimbabwe, Chinese newspapers in South Africa, Chinese geologists in Sudan, Chinese channels on African satellite television. [1054] There are estimated to be over 900 large- and medium-sized Chinese companies now operating in Africa, [1055] together with a vast number of small-scale entrepreneurs, especially in the retail trade. Chinese shops, in particular, have proliferated with great speed, at times causing considerable alarm in the local African population: in Oshikango, Namibia, for example, the first shop was opened in 1999, by 2004 there were twenty-two shops, and by 2006 no less than seventy-five. In the Senegalese capital Dakar an entire city boulevard, a stretch of about a kilometre, is lined with Chinese shops selling imported women’s shoes, consumer durables such as glassware, and electronic goods at rock-bottom prices. [1056] The rapidly growing number of direct flights between China and Africa are packed with Chinese businessmen, experts and construction workers; in contrast, there are few direct flights between Africa and the US, and the passengers are primarily aid workers with a smattering of tourists and businesspeople. [1057] The Chinese population in Africa has increased rapidly. It is estimated that it numbered 137,000 in 2001 but by 2007 had grown to over 400,000, compared with around 100,000 Western expatriates, and even this could be a serious underestimate. [1058] A more generous estimate, based on Table 5, suggests a Chinese population of over 500,000, but this is excluding Angola, where the figure is estimated at 40,000, and various other countries as well. [1059] The present wave of Chinese migration is very different from earlier phases in the late nineteenth century and in the 1950s and 1960s. Apart from being on a much greater scale, the migrants now originate from all over China, rather than mainly from the south and east, and comprise a multitude of backgrounds, with many seemingly intent on permanent residence; the process, furthermore, is receiving the active encouragement of the Chinese government. [1060] The burgeoning Chinese population is matched by a growing number of prosperous middle-class Chinese tourists. Tourism accounts for a substantial part of foreign exchange receipts in some African countries like Kenya and the Gambia, and it is anticipated that there will be 100 million Chinese tourists annually visiting Africa in the near future. [1061] An ambitious tourism complex, for example, on Lumley Beach in Freetown, Sierra Leone — not one of the countries where Chinese influence is most pronounced — is in the pipeline, with an artist’s impression in the Ministry of Tourism showing pagoda-style apartments and Chinese tourists strolling around a central fountain. [1062] A further significant illustration of the expanding Chinese presence in Africa is the growing contingent of Chinese troops involved in UN peacekeeping operations. In April 2002 there were only 11 °Chinese personnel worldwide but by April 2006 this had grown to 1,271 (with China rising from 46th to 14th in the international country ranking): revealingly, around 80 per cent of these troops are in Africa, placing it well above countries such as the UK, US, France and Germany. [1063] In total, over 3,00 °Chinese peace-keeping troops have participated in seven UN missions in Africa. [1064]

China’s impact on Africa has so far, it would appear, been positive. [1065] First, it has driven up both demand and prices for those many African countries that are commodity exporters, at least until the onset of the global downturn. Sub-Saharan Africa’s GDP increased by an average of 4.4 % in 2001-4, 5–6% in 2005-6, and a projected 7 % in 2007, compared with 2.6 % in 1999–2001, [1066] with China clearly the major factor since it has accounted for most of the increase in the global consumption of commodities since 1998. [1067] In addition, the growing availability of cheap Chinese manufactured goods has had a beneficial effect for consumers. [1068] The losers have been those countries that are not commodity exporters or those producers — as in South Africa, Kenya and Mauritius, for instance — which compete with Chinese manufacturing exports. [1069] Chinese textile exports have led to many redundancies in various African nations, notably South Africa, Lesotho and Kenya. [1070] Overall, however, there have been a lot more winners than losers. Second, China ’s arrival as an alternative source of trade, aid and investment has created a competitive environment for African states where they are no longer simply dependent on Western nations, the IMF and the World Bank. The most dramatic illustration of this has been Angola, which was able to break off negotiations with the IMF in 2007 when China offered it a loan on more favourable terms. [1071] China ’s involvement thus has had the effect of boosting the strategic importance of Africa in the world economy. [1072] Third, Chinese assistance tends to come in the form of a package, including important infrastructural projects like roads, railways and major public buildings, as well as the provision of technical expertise. [1073] (In contrast, most Western investment in Africa is concentrated in oil and other commodities and lacks the infrastructural dimension.) Fourth, Chinese aid has far fewer strings attached than that of Western nations and institutions. While the IMF and the World Bank have insisted, in accord with their ideological agenda, on the liberalization of foreign trade, privatization and a reduced role for the state, the Chinese stance is far less restrictive. [1074] In addition, the West frequently attaches political conditions concerning democracy and human rights while the Chinese insist on no such conditionality. This conforms to the Chinese emphasis on respect for sovereignty, which they regard as the most important principle in international law and which is directly related to their own historical experience during the ‘century of humiliation’. In April 2006, in an address to the Nigerian National Assembly, Hu Jintao declared: ‘ China steadfastly supports the wish of the African countries to safeguard their independence and sovereignty and choose their roads of development according to their national conditions.’ [1075]

Table 5. Number of Chinese in selected African countries, 2003-7.

The contrasting approach of China and Western nations towards Africa, and developing countries in general, has led to a discussion amongst Africans about a distinctive Chinese model of development, characterized by large-scale, state-led investments in infrastructure and support services, and aid which is less tied to the donor’s economic interests and less overwhelmingly focused on the extraction of minerals as in the case of the West. [1076] China ’s phenomenal growth, together with the huge reduction in poverty there, has also provoked enormous interest in what lessons it might offer for other developing nations. [1077] An important characteristic of the Chinese model has been the idea of strong government and the eschewing of the notion of democracy, an approach which has an obvious appeal amongst the more authoritarian African governments. In the light of the country’s economic success, the Chinese approach to governance seems destined to enjoy a much wider influence and resonance in the developing world. The Chinese academic Zhang Wei-Wei has argued that the Chinese model combines a number of features. In contrast to the Washington Consensus, it rejects shock therapy and the big bang in favour of a process of gradual reform based on working through existing institutions. It is predicated upon a strong developmental state capable of steering and leading the process of reform. It involves a process of selective learning, or cultural borrowing: China has drawn on foreign ideas, including the neo-liberal American model, as well as many that have been home-grown. Finally, it embraces sequencing and priorities, as evidenced, for example, by a commitment to economic reforms first and political ones later, or the priority given to reforms in the coastal provinces before those in the inland provinces. [1078] There has been considerable debate, in this context, about a Chinese model, sometimes described as the Beijing Consensus. There are certainly fundamental differences between the Chinese approach and the Washington Consensus, with the Chinese model both markedly less ideological and also distinctively pragmatic in the manner of the Asian tigers.

It is still far too early to make any considered judgement about the likely long-term merits and demerits of China ’s relationship with Africa. [1079] The experience has been brief and the literature remains thin. The most obvious danger for Africa lies in the fundamental inequality that exists at the heart of their relationship: China’s economy is far bigger and more advanced, the nearest economic challenger, South Africa, being diminutive in comparison, while the population of Africa as a whole is less than that of China’s. The economic disparity between Africa and China, furthermore, seems likely to grow apace. Whatever the differences in approach between the Western powers and China, it seems likely that many of the problems in the relationship between the West and Africa, emanating from the fundamental structural inequality between them, seem likely to be reproduced in some degree in China ’s relationship with Africa. [1080] The danger facing African countries is that they get locked into being mere suppliers of primary commodities, unable for a variety of reasons — including unfavourable terms of trade and Chinese competition, together with domestic corruption and a lack of strategic will — to move beyond this and broaden their economic development through industrialization.

At a conference in Beijing in 2005, Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs, spelt out these fears:

Africa sells raw materials to China and China sells manufactured products to Africa. This is a dangerous equation that reproduces Africa ’s old relationship with colonial powers. [1081] The equation is not sustainable for a number of reasons. First, Africa needs to preserve its natural resources to use in the future for its own industrialization. Secondly, China ’s export strategy is contributing to the deindustrialization of some middle-income countries… it is in the interests of both Africa and China to find solutions to these strategies. [1082]

Perhaps the country that most exemplifies this inequality is Zimbabwe, where the Chinese enjoy a powerful presence in the economy, controlling key strategic areas like the railways, electricity supply, Air Zimbabwe and the Zimbabwe Broadcasting Corporation. [1083] The fact that China has a carefully worked-out and comprehensive strategic approach to its relationship with Africa, while the African response, in contrast, is fragmented between the many different nations, poorly informed about China, and based on an essentially pragmatic rather than strategic view, serves only to exacerbate this inequality. [1084] The danger is that African nations enter into agreements with China over the exploitation of their natural resources which are too favourable to China, or use the revenues gained in a short-term fashion, perhaps corruptly, to benefit various interest groups, or possibly both.

Although China ’s presence has been hugely welcomed across the continent, and has generated considerable enthusiasm, [1085] there is also unease and concern. This has been most manifest in Zambia, where in the last presidential election in 2006 the opposition candidate propounded a strongly anti-Chinese line, declaring that ‘Zambia is becoming a province — no, a district — of China’, and gained 29 per cent of the vote, prompting the Chinese ambassador to imply that China might withdraw its investments in the event of his winning. [1086] One of the strongest and most persistent criticisms is that Chinese companies prefer to employ Chinese rather than local workers, with the proportion of Chinese workers sometimes reaching as high as 70 per cent. [1087] There are also frequent complaints that Chinese managers display negative attitudes towards local people. [1088] Both of these, of course, touch directly upon the problem of Chinese attitudes towards those of darker skin, and especially Africans, which I discussed in Chapter 8. The evidence is still too sparse to draw any proper conclusions as yet, though the problem is unsurprising. There is a widely held view, especially in the West, that China ’s refusal to require any conditionality in terms of governance means that it is prone to turn a blind eye to human rights abuses, such as those in Darfur. [1089] That has certainly been the case, but the Chinese have recently shown growing sensitivity towards Western criticism, as well as that from within the continent, and as a result have helped to pressure the Sudanese government into accepting the presence of a joint United Nations/ African Union peacekeeping force in Darfur. [1090] There is little evidence, however, that China ’s record in Africa is any worse — and in fact is almost certainly far better — than the West’s own miserable catalogue of support for corrupt and dictatorial regimes on the continent, not to mention its colonial legacy. [1091] Finally, in a rather different vein, the Chinese have become the target of terrorist groups, for example in the Niger Delta and Ethiopia, a phenomenon which is surely set to grow as the Chinese presence and influence expands and they assume the role, visibility and responsibilities of a global power not only in Africa but elsewhere too. [1092]

The significance of China ’s African mission is enormous. Its rapidly growing influence suggests that in due course it will probably become the dominant player on the continent, and serves as a bold statement of China ’s wider global intentions. The speed of China ’s involvement in Africa, and its success in wooing the African elites, has put the West on the defensive in a continent where it has a poor historical record. [1093] Unlike the ‘scramble for Africa’ in the late nineteenth century, which generated bitter intra-European rivalry, China’s involvement has not as yet produced significant tensions with the US, Britain or France, though that could change. The recent establishment of the United States Africa Command to coordinate its military relations and activities on the continent suggests that it is concerned about China ’s growing influence; as of late 2008, however, the US had failed to find an African location for its headquarters, stating that it would be based in Stutt gart for the foreseeable future. Apart from the rather more attractive terms that China offers African countries, one of the reasons for its remarkable progress on the continent is that it does not carry the same kind of historical baggage as the West, a fact which it regularly stresses. In this context China has emphasized that Zheng He’s voyages to East Africa in the early fifteenth century sought no territory and took no slaves, in contrast to the Europeans. More importantly, during the Maoist period China was, in contrast to the West, a staunch supporter of the African independence movements. Thus China, with its own experience of colonization, its anti-colonial record and its status as a developing country, has more legitimacy and enjoys a greater affinity with the African nations than does the West. [1094] This is reflected in the fact that in the 2007 Pew Global Attitudes Survey, for example, respondents in ten African countries expressed far more favourable attitudes towards China than they did towards the United States.

THE MIDDLE EAST AND IRAN

Nearly two-thirds of the world’s proven oil reserves are concentrated in the Arabian Gulf, with Saudi Arabia controlling over a quarter, and Iraq and Kuwait sharing a little under a quarter. These three countries control about half of the world’s known oil reserves. Another potentially large producer in the region, Iran, accounts for a little under a tenth of world oil reserves. The Gulf States are responsible for nearly 40 per cent of world crude oil exports, with Saudi Arabia ’s share around 12 per cent and Iran ’s 7 per cent. China became a net importer of oil products in 1993 and of crude oil in 1996. [1095] It is estimated that by 202 °China will have to import in the range of 57–73 per cent of its oil requirements. [1096] China first became seriously concerned about its future oil supplies during the 1990s and as a result began to take steps to ensure their reliability. Until 2006 its biggest single supplier was Saudi Arabia, but Iran is also very important. It would therefore be natural for China to seek a much closer relationship with the Middle East. Unlike Africa, however, the region is regarded by the Americans as its sphere of influence. The US has become increasingly embroiled in the Middle East over the last thirty years, building extremely close relations with Israel and Saudi Arabia in particular, and becoming involved in two Gulf Wars with Iraq, the second largest oil producer, with the invasion in 2003 culminating in the country’s occupation. The Chinese, as a consequence, have trodden very warily in the region for fear of antagonizing the United States, whose relationship, ever since the reform period began, it has prioritized over all others. In contrast to Africa, which has clearly now assumed a central importance in its foreign policy, China regards the Middle East, as a result, as of only second-tier significance. [1097] Over the last few years it has employed various strategies to try to secure its oil supplies from the region. It has sought to negotiate long-term energy supply arrangements, most notably a ‘strategic oil partnership’ with the Saudis in 1999; [1098] Chinese oil companies have tried to gain rights to invest and develop oilfields in the region; and, finally, China has encouraged companies in the Gulf to invest in Chinese refineries in order to try to promote closer links. [1099]

At the heart of China ’s strategy in the Middle East lies Iran, with which it has long enjoyed a close relationship. The two countries have much in common. They are both very old civilizations with rich histories of achievement and a strong sense of superiority towards other states in their respective regions. They have also both suffered at the hands of the West, which they deeply resent, believing they would prosper rather more in a world no longer dominated by it. Although interests rather than attitudes have primarily driven their relationship, there is a certain sense of affinity between the two countries. [1100] As an emergent global power, China naturally seeks friendly relations with more powerful states as this in turn is likely to enhance its own influence, [1101] and Iran very much falls into this category. China nevertheless has acted cautiously in its relationship with Iran, concerned to preserve its international reputation in the face of the militant Islamic ideology of the Iranian regime post-1979. The single most important constraining factor in China ’s stance towards Iran, however, has been the attitude of the United States. China has walked a skilful diplomatic tightrope, at times cooperating with Iran in ways contrary to US policy and at other times cooperating with the United States in ways contrary to Iranian policy. Until quite recently it managed to thwart American attempts to impose economic sanctions on Iran and it successfully resisted efforts to excommunicate Iran after it had been branded as a member of ‘an axis of evil’ by the Bush administration. [1102] China ’s economic relationship with Iran began to grow after the departure of the US and UK following the 1979 Revolution. The key to their blossoming partnership has been China ’s export of large quantities of high-tech capital goods, engineering services and arms to Iran in exchange for oil and raw materials, with trade between the two countries growing extremely rapidly during the 1990s. [1103] In 2003 two major Chinese motor vehicle manufacturers established production plants in Iran. China negotiated a major package of oil deals in 2004, as a result of which it became a major stakeholder and one of the largest foreign investors in the Iranian oil industry, in addition to Iran being one of its biggest suppliers of oil. [1104] And it signed a further major agreement in 2007 to develop part of the giant Yadavaran oilfield. [1105]

The future of China ’s relationship with Iran is open-ended. China remains constrained by the need to maintain good relations with the United States, and nowhere are American sensitivities greater than in the Middle East. The US regards Iran as an alternative power broker in the region and a major potential threat to its interests — hence its long-running hostility towards Iran. In the long run, China would probably be content to see Iran playing a major, perhaps even dominant, role in the Gulf region, given that it will be a long time, if ever, before China itself could perform such a role; every global power needs allies and Iran is China ’s natural ally in the Middle East. As the international relations expert John Garver argues, a dominant China in East Asia combined with a dominant Iran in West Asia could ultimately become ‘a central element of a post-unipolar, China-centred Asia in the middle of the twenty-first century’. [1106] Possibly China is thinking in these terms for a future multipolar system. [1107] Meanwhile, in order to keep its options open, China is likely to continue to help build up Iran while seeking not to antagonize the United States. The desire of the Obama administration to bring Iran in from the cold could make life easier for the Chinese on this score.

There are other possible long-term scenarios. China ’s highest priority is Taiwan, and the biggest obstacle in the way of reunification is American military support for the island. The most likely cause of military conflict between China and the US is Taiwan; and in the event of war, China would be extremely anxious about the security of its maritime oil supply routes, especially in the Malacca Strait and the South China Sea, which could easily be severed by the US ’s superior air and naval power. In such an eventuality, Iran could at some point offer the possibility of a land-based supply route from West to East Asia. But there is another possible future scenario, namely that China and the US could arrive at some kind of trade-off involving Taiwan and Iran in which the US agrees to stop sending weapons to Taiwan and China volunteers to do the same with Iran. In effect, China would agree to sacrifice Iran in return for Taiwan, its greater foreign policy priority. Such a deal would represent a tacit recognition that East Asia was China ’s sphere of influence and the Middle East, America ’s. [1108]

RUSSIA

During the 1980s, after two decades of bitter antagonism, China ’s relations with the Soviet Union began to improve. It was the collapse of the Soviet Union in the early nineties, however, that was to provide the conditions for a complete transformation in the relationship between the two countries. Russia became a pale shadow of its former Soviet self, with only half of its former GDP and less than half of its previous population, though still with around 80 per cent of its old territory. [1109] Meanwhile, China embarked on its reform programme and enjoyed non-stop double-digit growth. Together, these two developments represented a huge shift in the balance of power between the two countries, with China now in a far more powerful position than its erstwhile rival. During the nineties the two countries finally agreed, after centuries of dispute, on a common border, which, at 2,700 miles, is the longest in the world. From being a highly militarized region, the border became a centre of trade and exchange. The resolution of the frontier issue enabled Russia and China to withdraw large numbers of troops from either side of the border, Russia to Chechnya and (in response to NATO’s expansion) its Europe-facing territory, and China to the Taiwan Strait. [1110] In the steadily improving atmosphere between the two, they established, along with several newly independent Central Asian nations, the Shanghai Cooperation Organization, for the purpose of promoting collaboration and improving security in the region. A shared, overarching Sino-Russian concern about the overweening power of the United States in the post-Cold War world, with Russia feeling particularly vulnerable following the collapse of the Soviet Union and China relatively isolated after Tiananmen Square, was a major factor in the signing of a strategic partnership agreement between the two countries in 1998. [1111]

Nonetheless, there must be severe doubts as to the strategic potential of their relationship. The underlying problem is Russia ’s sense of weakness, on the one hand, and China ’s growing strength, on the other. Although the rapprochement had much to do with Russia ’s sense of vulnerability following the collapse of the Soviet Union and its desire to make peace with its neighbours, that frailty also left it feeling insecure and suspicious of China. The most obvious expression of this anxiety is to be found in the Russian Far East, where a population of a mere 7.5 million confronts a population of 112 million in the three provinces of China’s north-east. Now that the border has been made porous, numerous Chinese have crossed into Russia to seek work and ply their trade. In 1994 Russian estimates put the number of Chinese residents in Russia ’s Far East at 1 million, compared with a Chinese estimate of less than 2,000. According to some demographic projections, Chinese could be the second largest minority ethnic group in the Russian Federation by 2051. Exacerbating these fears is the demographic crisis facing Russia since the collapse of the Soviet Union, with one estimate suggesting that its population will fall by 3 million between 2000 and 2010 to 142 million. [1112] The Russian fear of being overrun by Chinese immigration speaks both of old prejudices and new fears. The size of the Chinese population tends to arouse these anxieties elsewhere, but they are compounded in Russia ’s case by a long history of prejudice and conflict, the huge demographic imbalance between the two countries, and their long border.

The fact that Russia is rich in oil, gas and many other commodities — as well as being its major supplier of weapons — clearly makes it a very attractive partner for China. But Russia has proved a difficult collaborator, loath to meet its needs, certainly on the terms desired by China. In a long-running saga over the route of a new Russian east-west oil pipeline, with Russia reluctant to concede that it should go to China, as proposed by the Chinese, an agreement was finally reached in February 2009 that there would indeed be a branch to China, in return for Chinese loans to Russian firms. [1113] The Russians are wary of becoming trapped in a relationship with China where they are reduced to being the provider of raw materials for their economic powerhouse neighbour. [1114] Since the turn of the century, indeed, the Russians have become increasingly protective of their oil and natural gas interests, aware that, in its weakened state, these are hugely their country’s most valuable assets, especially in a global market where prices, until the credit crunch, were moving rapidly in their favour. Having rolled back American, European and Japanese stakes in its oil industry, Russia is hardly likely to grant Chinese oil companies a similar interest in the future. Moreover, having embraced resource nationalism under Vladimir Putin, Russia is now driving very hard bargains over its oil and gas with both Europe and its former territories. The Russian suspicion of Chinese intentions extends to the Central Asian nations that previously formed part of the Soviet Union. Russian sources, it has been reported, revealed in August 2005 that one reason for Moscow’s haste in seeking to enter the former American base at Karshi Khanabad in Uzbekistan is that China had made discreet expressions of interest in acquiring it themselves. [1115] China has found itself confronted with many obstacles in its desire to acquire oil interests in Central Asia, even in Kazakhstan, where it has its only major oil stake in the region; the considerable resistance and suspicion would seem to have been encouraged by Russia, which regards Central Asia as its rightful sphere of influence. [1116]

None of this is to suggest that the relationship between China and Russia is likely to deteriorate, though that is not inconceivable should Russian fears about the rise of China become acute, perhaps even persuading Russia, in extremis, to turn westwards and seek some kind of solace with the European Union or NATO. It does, however, indicate that serious tensions arising from the major imbalance of power between them are likely to constrain the potential for the relationship becoming anything more than an arrangement for maintaining their bilateral relations in good order, which, given their troubled history, would in itself be no mean achievement. [1117] For the time being, at least, a strong mutual concern about US power is likely to bind the two countries together, as it has already, in a limited but significant way, on issues like Iraq and Iran. At the same time trade between the two has been increasing very rapidly, with a five-fold rise between 2000 and 2007. Russia ’s intervention in Georgia and subsequent recognition of South Ossetia and Abkhazia as independent states in 2008 were not well received in Beijing although there was no official criticism, simply an expression of concern. It was a further reminder that relations between the two powers are far from simple. [1118]

INDIA AND SOUTH ASIA

China and India have much in common. They are both hugely populous countries, demographic superpowers, which are in the process of dramatic economic transformation. Between them they account for almost 40 per cent of the world’s population. They are both continental giants, China a dominating presence in East Asia and India similarly in South Asia. By the mid twenty-first century, they could both be major global powers. Together they threaten to redraw the shape of the world, tilting it massively towards Asia while at the same time projecting a new kind of nation-state of continental proportions in terms of both territory and population, a very different kind of global order from when the world was dominated by a handful of small- and medium-sized European nation-states. It is hardly surprising, then, that China and India are frequently bracketed together. Despite these similarities, however, in many respects the differences between them could hardly be greater, as symbolized by their long border running through the Himalayas, the greatest natural land barrier in the world, which serves to mark out what can only be described as a political and cultural chasm between the two countries. China has the longest continuous history of any country while India is a much more recent creation, only acquiring something like its present territory, or at least two-thirds of it, during the later period of the British Raj. [1119] Chinese civilization is defined by its relationship to the state whereas India ’s is inseparable from its caste society. India is the world’s largest democracy while in China democracy remains a largely alien concept. China has a powerful sense of identity and homogeneity, in contrast to India, which is blessed with a remarkable pluralism embracing many different races, languages and religions. These cultural differences have served to create a sense of otherness and distance and an underlying lack of understanding and empathy. It is true that India gave China Buddhism, and that there were many other intellectual exchanges between the two countries during the first millennium and beyond, but these are now largely forgotten. [1120]

For over fifty years relations between the two countries have been at best distant and suspicious, at worst antagonistic, even conflictual. After 1988 they took a turn somewhat for the better, but despite the warmer diplomatic words, there remains an underlying antipathy. There are two main causes. First, notwithstanding joint working groups and commissions, the two countries have failed to reach agreement on their border. And it was conflict over the border which led directly to the Sino-Indian War in 1962 when China inflicted a heavy military defeat on India which still rankles to this day. [1121] Second, far from exercising unchallenged hegemony in South Asia, India finds itself confronted by Pakistan, Bangladesh, Nepal and Myanmar, all of which China has deliberately befriended as a means of balancing against India, with these countries embracing China as a way of offsetting India ’s dominant position in South Asia. Of these relationships, the most important is that between China and India ’s sworn foe Pakistan, which, thanks largely to China, possesses nuclear weapons. China ’s shrewd diplomacy has meant that India has constantly been on the back foot in South Asia, unable to assert itself in the manner which its size would justify. India has proved much less diplomatically adept, failing to establish its hegemony over South Asia and not even trying to develop a serious influence in East Asia, notwithstanding the large Indian diaspora in South-East Asia, with which it has singularly failed to establish any meaningful kind of relationship. [1122]

There are two possible outcomes in terms of their future relationship. First, China could accept that South Asia is, in effect, India ’s rightful sphere of influence. In practice, this seems rather unlikely. Chinese influence in the region is too extensive and too well established for it to be rolled back or for China to concede that this should happen. It is an outcome which both China and its formal and informal allies in the region would resist. Furthermore, given China ’s growing strength relative to India, it is probably less likely than at any time in the last half-century. Second, India could accept that China ’s presence in South Asia is permanent and resolve to accommodate itself to this reality by, for example, conceding that an Indian- Chinese partnership is necessary for handling security problems in the region. In the longer run, this could even mean that India acquiesces in China ’s pre-eminence in South Asia as well as in East Asia. [1123] In this context, a major Chinese objective is to prevent the creation of any barriers which might impede the long-term growth of its presence, role and influence in Asia; other examples of this are its resistance to the widening of the US-Japan alliance and its refusal to accept any multilateral approaches or solutions to the sovereignty of the disputed islands in the South China Sea. [1124] The latter scenario — Indian acceptance of China ’s role in South Asia — would be consonant with this objective. In reality, of course, India has been obliged over many years to adapt — de facto at least — to the growing power of China in South Asia, so elements of this scenario already exist in tacit form. [1125]

China ’s rapid economic growth has underpinned its growing strength in South Asia. In 1950 the per capita income of India was around 40 per cent greater than that of China; by 1978 they were roughly on a par. By 1999, however, China ’s was not far short of being twice that of India ’s. [1126] Furthermore, although India ’s growth rate has steadily risen in recent years, it still remains significantly below that of China: in other words, China is continuing to extend its economic lead over India. Although India enjoys some economic advantages over China, notably its prowess in software, the software industry only accounts for a very small proportion of its labour force. Manufacturing accounted for a little over a fifth of India’s GDP in 2003 compared with over a half of China’s, while 59 per cent of India’s population was still employed in agriculture in 2001 compared with less than half in China. [1127] China ’s economy is now three times as large as that of India, [1128] with the gap extending. Even if India ’s growth rate overtakes that of China, it would take a very long time for the Indian economy to become as large as the Chinese. In short, China ’s economic power is likely to overshadow that of India at least in the medium term, if not much longer.

This makes the second scenario — India being obliged to live with and adapt to China ’s power and presence in South Asia — rather more probable. It also increases the likelihood that China will emerge over time not only as the dominant power in East Asia but in South Asia as well. There is, however, an important rider to this, as the rules of the game appear to be chang-ing in a significant way. During the second term of the Clinton administration, the United States established a strategic partnership with India which was extended in 2006 by the Bush administration to include nuclear cooperation, an agreement which was eventually approved by the Indian parliament in 2008. [1129] The agreement violated previous American policy by accepting India ’s status as a nuclear power, even though it was not a signatory to the Non-Proliferation Treaty. This was a pointed reminder that US policy on nuclear proliferation is a matter of interest and convenience rather than principle, as the contrasting cases of Iran and Israel in the Middle East also illustrate. The reason for the American volte-face was geopolitical, the desire to promote India as a global power and establish a new US- India axis in South Asia as a counter to the rise of China. [1130] During the Cold War relations between India and the US were distant and distrustful, and even after 1989 they improved little, with the US pursuing an even-handed approach to India and Pakistan and imposing sanctions on India after its nuclear tests in 1998. It is testimony to the growing American concern about China that the US was persuaded to engage in such a U-turn. For its part, India ’s position had previously been characterized by its relative isolation: apart from its long-standing alliance with the former Soviet Union, its determinedly non-aligned status had led it to resist forming strategic partnerships with the major powers or even second-tier ones. [1131] But there is unease amongst sections of the Indian establishment, especially the military, about China ’s growing power. [1132] Depending on how the US- India partnership evolves, it could dramatically change the balance of power between China and India in South Asia, persuading China to act more cautiously while at the same time emboldening India. [1133] The US-India partnership raises many questions and introduces numerous uncertainties. If it proves effective and durable, then it could act as a significant regional and global counter to China. How China will respond remains to be seen: the most obvious move might be a closer relationship with Pakistan, but it is not inconceivable that China might decide to seek a strategic rapprochement with India as a means of fending off the United States and denying it a major presence in South Asia.

Map 13. Territory Disputed by China and India

Figure 39. Comparative economic performance of China and India.

EUROPE

China ’s relationship with Europe is significantly different from that with the United States. While the US- China relationship has been a more or less continuous source of domestic debate and controversy, the Europe-China relationship has, until recently, attracted relatively little attention. Relations between Europe and China have hitherto been relatively straightforward and conflict-free. Historically this is a little ironic. After all, it was the European powers, starting with Britain and the Opium Wars, which colonized China, with the United States very much a latecomer to the process. The ‘century of humiliation’ was about Europe, together with Japan, with the United States playing no more than a bit part. The present relationship between Europe and China has been low profile largely because Europe, apart from its economic interests, is no longer a major power in East Asia, a position it relinquished to the United States in the aftermath of the Second World War. That Europe is largely invisible in such an important region of the world bears testimony to its post-1945 global decline and its retreat into an increasingly regional role, a process which continues apace and is likely to accelerate with the rise of China and India. [1134] With the exception of the euro, discussion of Europe ’s wider global role is largely confined to what is known as ‘normative power’, namely the promotion of standards that are negotiated and legitimized within international institutions. [1135] Nonetheless, with an economy rivalling that of the United States in size, together with the fact that it forms the other half of the Western alliance, Europe’s attitude towards China is clearly of some importance.

For the most part, Europe’s response to the rise of China has been low-key, fragmented and incoherent. This is because the European Union lacks the power and authority to act as an overarching centre in Europe’s relations with nations such as China. As a result, Europe generally speaks with a weak voice and more often than not with many voices. The European Union is not a unitary state with the capacity to think and act either strategically or coherently, but an amalgam and representative of different interests. [1136] Europe’s economic relationship with China has grown enormously over the last decade, with a massive increase in imports of cheap Chinese manufactured goods and a very large rise in European exports to China, mainly of relatively high-tech capital goods, especially from Germany. This has resulted in a growing European trade deficit with China as well as a loss of jobs in those industries that compete directly with Chinese imports. Until recently this has aroused very little political debate, certainly nothing like that in the United States. There are several reasons for this. Europe’s trade deficit with China has been much smaller than the US ’s, although this is now changing. Political attention is centred not so much on Europe ’s deficit but on that of individual countries, and even these have so far attracted relatively little concern. In contrast to the United States, there has been little debate about the exchange rate between the renminbi and the euro, though the appreciation of the euro against the renminbi prior to the global recession led to growing European anxiety and representations to Beijing about the need for a revaluation of their currency. Finally, Europe has been overwhelmingly preoccupied with the effects of the recent enormous enlargement of the EU, not least the large-scale migration of workers from Eastern and Central Europe to Western Europe, [1137] which has had a much greater impact, and certainly been more politically sensitive, than China.

As a consequence, the levels of concern in Europe about the economic repercussions of China ’s rise have been relatively muted; but with increased anxiety about the value of the renminbi and the growing trade deficit, there have been signs that this might change. [1138] The predominant view in most countries has been that China ’s rise has on balance been beneficial because of its negative effect on consumer prices, though in the less developed European countries like Portugal and Greece, together with the new entrants — all of which compete in varying degrees with China — the attitude has been more mixed. [1139] However, the credit crunch and the onset of a depression has kindled a mood of anxiety in many European countries, perhaps especially France and Italy, about the effects of globalization and the impact of China’s rise. [1140] The result has been increased economic tension with China, raising the possibility of limited forms of action, such as anti-dumping duties and anti-subsidy tariffs, against Chinese imports. [1141] While previously China ’s economic rise was seen as largely benign, and for the most part beneficial, the mood has become less sanguine amid growing concern about its possible consequences for Europe. A further factor fuelling this anxiety is the fear of investments by Chinese multinationals and by the Chinese Investment Corporation in key European industries.

In the longer run, as Chinese companies progressively move up the technological ladder and develop brands which compete head-on with those from Europe, the number of losers could escalate considerably and fuel a demand for protection against ‘unfair’ competition from China, perhaps culminating in Europe steadily raising protectionist barriers against China, a move which would have profound political repercussions. [1142] At this stage, however, it is premature to predict what the likely political effects of China ’s growing competitive challenge to Europe might be in the future.

The lack of any serious European diplomatic or military presence in East Asia means that, unlike the United States, which remains the key arbiter of security in the region, Europe has no major geopolitical conflicts of interest with China. When it comes to Taiwan, the Korean Peninsula or the US-Japanese alliance, all critical issues of US concern, Europe is no more than a spectator. It has no involvement in the United States ’ bilateral alliance system in the region. As a result, Chinese-European relations are unencumbered by such considerations. [1143] The nearest such issue has been the European embargo on the supply of arms to China, which was introduced after Tiananmen Square and which China has lobbied hard to get lifted. Although the European Union eventually obliged in 2005, it rapidly reversed the decision in response to huge pressure from the United States, which turned the issue into something akin to a vote of confidence in the Atlantic Alliance. Only by making it an article of faith in the West did the US manage to hold the line, suggesting that Europe may, up to a point, be prepared to think for itself when it comes to its relations with China. [1144] This is not to suggest that in the long run Europe is likely to detach itself from the United States in favour of China — that is virtually inconceivable — but the reaction of key European nations like Germany and France to the American invasion of Iraq showed that much of Europe was no longer prepared slavishly to follow the US. It is reasonable to surmise that relations between the US and Europe are likely to improve significantly during the Obama presidency, though they are unlikely to return to the intimacy of the Cold War period. With the rise of China and the importance of the Middle East, the transatlantic relationship is no longer pivotal for the US in the way that it once was: rather than being a universal relationship in the mould of the Cold War, the nature of cooperation is likely to vary according to the issue involved. [1145] As the focus of global affairs shifts towards the relationship between the United States and China, there is a possibility that Europe might become a freer spirit than previously, and not necessarily always prepared to do the US ’s bidding. But it is important not to exaggerate any such scenario. Europe is far more likely to take the side of the United States than China ’s in geopolitical arguments, whether it be Darfur, trade talks or climate change. For a variety of reasons, historical, cultural, ethnic and economic, Europe is likely to remain very closely wedded to the US in the world that is unfolding.

THE RISING SUPERPOWER AND THE DECLINING SUPERPOWER

While the domestic debate in the United States might often suggest the contrary, ever since the Mao-Nixon rapprochement of 1972 and the subsequent establishment of full diplomatic relations in 1979, the relationship between China and US has been characterized for almost four decades by stability and continuity. [1146] Although it has been through many phases — the axis against the Soviet Union, the reform period and modernization, Tiananmen Square and its aftermath, China’s rapid growth and its turn outwards in the late 1990s, the rise of Chinese nationalism, and of course a succession of US presidents from Nixon and Reagan to Carter and Clinton — the relationship has remained on an even keel, with the United States gradually granting China access both to its domestic market and the institutions of the international system, and China in return tempering and dovetailing its actions and behaviour in deference to American attitudes. The rationale that has been used to justify the US position has been through various iterations during the course of these different phases, but there has been no shrinking from the underlying approach. It may not be immediately obvious why the US ruling elite has been so consistently supportive of this position, but the key reason surely lies in its origins. The Mao-Nixon rapprochement was reached in the dark days of the Cold War and represented a huge geopolitical coup for the United States in its contest with the Soviet Union. That created a sense of ongoing loyalty and commitment to the relationship with China that helped to ensure its endurance.

China ’s relationship with the United States has remained the fundamental tenet of its foreign policy for some thirty years, being from the outset at the heart of Deng Xiaoping’s strategy for ensuring that China would have a peaceful and relatively trouble-free external environment that would allow it to concentrate its efforts and resources on its economic development. [1147] After Tiananmen Square, Deng spoke of the need to ‘adhere to the basic line for one hundred years, with no vacillation’, [1148] testimony to the overriding importance he attached to economic development and, in that context, also to the relationship with the United States. [1149] It was, furthermore, a demonstration of the extraordinarily long-term perspective which, though alien to other cultures, is strongly characteristic of Chinese strategic thinking. The relationship with the United States has continued to be an article of faith for the Chinese leadership throughout the reform period, largely unanimous and uncontested, engendering over time a highly informed and intimate knowledge of America. [1150]

The contrast between China ’s approach towards the United States and that of the Soviet Union ’s prior to 1989 could hardly be greater. The USSR saw the West as the enemy; China chose, after 1972, to befriend it. The Soviet Union opted for autarchy and isolation; China, after 1978, sought integration and interdependence. The USSR shunned, and was excluded from, membership of such post-war Western institutions as the IMF, the World Bank and GATT; in contrast, China waited patiently for fifteen years until it was finally admitted as a member of the WTO in 2001. The Soviet Union embarked on military confrontation and a zero-sum relationship with the United States; China pursued rapprochement and cooperation in an effort to create the most favourable conditions for its economic growth. The Soviet Union was obliged to engage in prohibitive levels of military expenditure; China steadily reduced the proportion of GDP spent on its military during the 1980s and 1990s, falling from an average of 6.35 per cent between 1950 and 1980 to 2.3 per cent in the 1980s and 1.4 per cent in the 1990s. [1151] The strategies of the two countries were, in short, based on diametrically opposed logics. [1152] The Chinese approach is well illustrated by Deng’s comment: ‘Observe developments soberly, maintain our position, meet challenges calmly, hide our capacities and bide our time, remain free of ambition, never claim leadership.’ [1153] It goes without saying that the relationship between China and the United States during the reform period has been profoundly unequal. [1154] China needed the US to a far greater extent than the US needed China. The United States possessed the world’s largest market and was the gatekeeper to an international system the design and operation of which it was overwhelmingly responsible for. China was cast in the role of supplicant, or, as China expert Steven I. Levine puts it, the United States acted towards China ‘like a self-appointed Credentials Committee that had the power to accept, reject, or grant probationary membership in the international club to an applicant of uncertain respectability’. [1155] In the longer term, when China is far stronger, this rather demeaning experience might find expression — and payback — in the Chinese attitude towards the United States; it might be seen by them to have been another, albeit milder, expression of their long-running humiliation.

Compared with China ’s huge investment in its relationship with the United States, the American attitude towards China, so far at least, stands in striking contrast. Its relationship with China has been seen by the US as one of only many international relationships, and usually far from the most important. As a result, American attention towards China has been episodic, occasionally rising to near the top of the agenda, but for the most part confined to the middle tier. [1156] During the first Clinton administration, for example, China barely figured. [1157] Although George W. Bush made strong noises against China during his first presidential election campaign, describing it as a ‘strategic competitor’, China sank down the Washington pecking order after 9/11 and relations between the two rapidly returned to the status quo ante. [1158] In line with the differential investment by the two powers in their relationship, China ’s impressive knowledge of the United States is not reciprocated in Washington beyond a relatively small coterie. [1159] Following the collapse of the Soviet Union and the passing of the Cold War, the US was obliged to rethink the rationale for its relationship with China. [1160] It was not difficult. With its embrace of the market and growing privatization, China was seen, not wrongly, as moving towards capitalism. Furthermore, given China ’s double-digit economic growth and its huge population, it was regarded as offering boundless opportunities for US business. [1161] China became a key element in the American hubris about globalization in the 1990s, an integral part of what was seen as a process of Westernization which would culminate in the inevitable worldwide victory of Western capitalism, with the rest of the world, including China, increasingly coming to resemble the United States. Many assumptions were wrapped up in this hubris, from the triumph of Western lifestyles and cultural habits to the belief that Western-style democracy was of universal and inevitable applicability. [1162] George W. Bush declared in November 1999: ‘Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy… Trade freely with China, and time is on our side.’ [1163] Or as Thomas Friedman wrote: ‘ China ’s going to have a free press. Globalization will drive it.’ [1164] It was regarded as axiomatic, American author James Mann suggests, that, ‘the Chinese are inevitably becoming like us’. [1165] This view, which is still widely held, burdens American policy towards China with exaggerated expectations that cannot possibly be fulfilled. [1166] The idea of globalization which lay at its heart was profoundly flawed.

During the course of the 1990s, US policy towards China was assailed by a growing range of different interest groups, from the labour unions which, concerned about the huge increase in Chinese imports, criticized China ’s trade practices, to human rights groups that protested about the treatment of dissidents and the subjugation of Tibet. [1167] While China policy remained a presidential rather than a congressional matter, it was relatively invulnerable to the critics’ complaints. However, it should not be assumed that the present American position towards China will inevitably be maintained into the indefinite future. Until the turn of the century, China impinged little on the conduct of American foreign policy, apart from in East Asia, and that was largely confined to the question of Taiwan. True, China’s exports to the United States — combined with the lack of competitiveness of the US’s own exports — had combined to produce a huge trade deficit between the two countries, but this was mitigated by China’s purchase of US Treasury bonds, which fuelled the American credit boom, and the benefit that American consumers enjoyed from the availability of ultra-cheap manufactured goods from China. But as China began to spread its wings at the beginning of the new century — its economy still growing at undiminished pace, the trade gap between the two countries constantly widening, the amount of Treasury bonds held by China forever on the increase, Chinese companies being urged to invest abroad, the state-sponsored quest for a sufficient and reliable supply of natural commodities drawing the country into Africa, Central Asia and Latin America, and its power and influence in East Asia expanding apace — it became increasingly clear that China no longer occupied the same niche as it had previously: across many continents and in many countries, the United States found itself confronted with a growing range of Chinese interests and, as a result, a steady growth in the sources of potential disagreement and conflict between the two countries. [1168]

No sooner had the new century begun than two developments suggested that a major change in their relationship was likely, even though it did not appear immediately obvious that this was the case. First, the Bush administration abandoned the previously consensual multilateralist US foreign policy in favour of a unilateralist policy that, amongst other things, embraced the principle of pre-emptive strike. The US turned away from its previous espousal of universalism and towards a nationalism which denied or downplayed the need for alliances. The new strategy placed a priority on military strength and hard as opposed to soft power, a position made manifest in 2003 with the invasion of Iraq. The principle of national sovereignty was subordinated to the desirability of intervention for the purpose of regime-change. A new and aggressive America was born. [1169] In the event, an overwhelming majority of nation-states opposed the invasion of Iraq and, according to global opinion polls, an even more decisive majority of their citizens. As the occupation faced growing opposition and was perceived to have failed, the United States became unpopular to an extent not seen in the sixty years since the Second World War. [1170] Second, around 2003-5, the moment of China arrived, as global awareness of its transformation, and the meaning and effects of that transformation for the rest of the world, suddenly began to dawn. By accident, these two developments happened to coincide, thereby serving to accentuate their impact. [1171] It was widely acknowledged that China was on the rise and there was a slow dawning that the US was not as omnipotent as had previously been thought. There was a growing perception that the balance of power between the two countries was starting to shift in China ’s favour. [1172] The mood in the United States towards China grew more uncertain. [1173] James Mann, in his book The China Fantasy, challenged what he described as the ‘Soothing Scenario’, namely the consensus which holds that engaging with China through trade will be to the political and economic advantage of the United States and will ultimately result in a free-market, democratic China. Mann argued that, notwithstanding China ’s market transformation, it by no means automatically followed that China would become democratic. [1174]

The general mood of uncertainty and unease was accentuated by the credit crunch which started in summer 2007 and which a year later brought the American financial sector to its knees, with illustrious names like Lehman Brothers going bankrupt and the few remaining American investment banks forced to renounce their status — Goldman Sachs, the favoured bank of recent US administrations, amongst them. In an extraordinary volte-face, the government announced a huge bail-out of the financial sector, marking the demise of the deregulated neo-liberal regime which had been the calling card of American capitalism since the late 1970s. In a few spectacular weeks the Anglo-American model had imploded, plunging the Western economies into a serious recession. The fact that the US had been living well beyond its means — and relying on Chinese credit in order to do so — underlined both the fallibility of American prosperity and the shift in the centre of economic gravity from the United States to China.

GROWING CONFLICT

There are a number of issues that seem likely to shape US attitudes towards China and increase the possibility of conflict between the two countries.

The first concerns American attitudes towards globalization. In the 1990s globalization was seen in the US as a win-win situation, a process by which the US left its imprint on, and gained advantage in its relationship with, the rest of the world. In effect, it was something that the United States exported to the world and then reaped the benefits from at home. [1175] Now, however, globalization is seen more and more like a boomerang that is returning to haunt the US. [1176] Previously, the US was regarded as the overwhelming agent and beneficiary of globalization. Now the main beneficiary is perceived to be East Asia, and especially China. [1177] Through globalization, China has transformed itself into a formidable competitor of the United States, with its huge trade surplus, its massive ownership of US Treasury bonds, its consequent power over the value of the dollar, and the fact that it has undermined key sectors of American manufacturing industry, with growing numbers of workers being made redundant. The widening controversy over the value of the renminbi, the safety of Chinese exports such as food and toys, and the frequent accusations of ‘unfair’ competition, are a reflection of growing sensitivity towards China. [1178] This is not to suggest that the balance of American opinion has shifted significantly as yet. The winners, above all the US corporate giants that have moved their manufacturing operations to China and the consumers who have benefited from China prices at home, still considerably outnumber the losers and in any case enjoy much greater power. [1179] But this could change. The political consequences of spiralling commodity prices, especially oil prices, which were brought to a premature end by the credit crunch, could, if they had continued, have turned American attitudes towards China in a more negative direction. More pertinently, the threat of a serious and prolonged depression is already leading to growing demands for protection. [1180] It is striking that, even before the credit crunch, the number of Americans who thought that trade with other countries was having a positive impact on the US fell sharply from 78 per cent in 2002 to only 59 per cent in 2007. [1181]

In the longer term, as Chinese companies relentlessly climb the technology ladder, the US economy will face ever-widening competition from Chinese goods, no longer just at the low-value end, but also increasingly for high value-added products as well, just as happened earlier with Japanese and Korean firms. [1182] In that process, the proportion of losers is likely to increase rapidly, as will be the case in Europe too. Such a development could undermine the present consensus in support of free-trade globalization and result in a turn towards protectionism, the most important target of which would be Chinese imports. [1183] The impact of the depression, however, suggests that this process may already be happening. If the United States did resort to protectionism, one of the key planks in the Sino-American relationship since the early eighties would be undermined. It would also signal a more general move towards protectionism worldwide and the end of the phase of globalization that was ushered in at the end of the 1970s. The failure of the Doha round is a further indication that this kind of scenario is possible. [1184]

This brings us next to East Asia. There is clear evidence, as discussed in the last chapter, of a fairly dramatic shift in the balance of power in what is now the most important economic region in the world, East Asia having overtaken both North America and Europe. Nothing decisive has happened but nonetheless China has palpably strengthened its position, with even established US allies like Singapore and the Philippines now hedging and seeking a closer accommodation with China. Only two countries, in fact, have tried to resist being drawn closer to China — Japan and Taiwan, though both have become deeply involved with China economically. Furthermore, it is clear that, notwithstanding the presence of a large number of its troops, the American position on the Korean Peninsula has weakened as South Korea has moved much closer to China and the US has been forced to depend on China playing the role of honest broker in defusing the nuclear crisis in the North. The wider significance of these developments in terms of Sino- US relations is that East Asia has, ever since the last war, been a predominantly American sphere of influence, threatened only by a relatively isolated China during the Maoist period and, of course, the US’s defeat in the Vietnam War. This can no longer be presumed to be the case. East Asia is now effectively bipolar. The fact that the US ’s position in East Asia has declined could well have knock-on effects for its commitment to Taiwan, potentially even undermining it. [1185] The waning of American influence in East Asia also has implications for its position globally, on the one hand serving to embolden China and on the other acting as a marker and signal for other nations. As yet, there is little sign of any clear American response to these trends, although the Obama administration seems to recognize their importance. The US has been hugely distracted by its entanglement in the Middle East and, as a consequence, has neglected its position in East Asia. [1186]

China, meanwhile, has slowly begun to emerge as an alternative model to the United States, a view which the Chinese have cautiously promoted, though in a manner very different from the kind of systemic competition that characterized the Cold War. The growing American emphasis on hard power, especially since 2003, has made it increasingly unpopular in the world and created a vacuum which China in a small way has started to fill, not least with its embrace of multilateralism and its emphasis on its peaceful rise. [1187] China ’s pitch is essentially to the developing rather than the developed world, with its offer of no-strings-attached aid and infrastructural assistance, its respect for sovereignty, its emphasis on a strong state, its opposition to superpower domination and its championing of a level playing field. As a package these have a powerful resonance with developing countries. [1188] The main plank of American soft power is the stress placed on the importance of democracy within nation-states: China, by way of contrast, emphasises democracy between nation-states — most notably in terms of respect for sovereignty — and democracy in the world system. [1189] China ’s criticism of the Western-dominated international system and its governing institutions strikes a strong chord with the developing world at a time when these institutions are widely recognized to be unrepresentative and seriously flawed. Most powerfully of all, China can offer its own experience of growth as an example and model for other developing countries to consider and learn from, something that the United States, as the doyen of developed countries, cannot. East Asia apart, there has been a significant shift of power and sentiment away from the United States and towards China in Africa and Latin America. This should not be exaggerated — it remains embryonic — but it is, nonetheless, significant. Meanwhile the spectacular collapse of the neo-liberal model in the financial meltdown has seriously undermined the wider appeal of the United States, notwithstanding the exhilarating and uplifting effect of Barack Obama’s election as president. And the fact, more generally, that the American-run international economic system has been plunged into such turmoil as a result of a crisis which had its origins in the United States has served further to accentuate the loss of American power and prestige. [1190]

Finally, there is the question of China ’s military strength. This has been persistently highlighted by the United States. The Americans attach greater emphasis to military power than anything else, a position which is reflected in their continuing huge military expenditure and the importance they place on maintaining overwhelming military strength in relation to the rest of the world. In the 2002 National Security Strategy of the United States of America, such massive military expenditure is advocated in order to ‘dissuade potential adversaries from pursuing a military build-up in hopes of surpassing, or equalling, the power of the United States ’. [1191] The fact is that American unipolarity is overwhelmingly a military phenomenon. [1192]

The American argument that China is determined to develop a strong military capacity of its own, beyond what is needed in the context of Taiwan, plays on the fears of many nations, especially in East Asia. China ’s size and cohesiveness, together with its history of authoritarian rule, arouse doubts enough in the minds of others, so the suspicion that China is also embarked on becoming a military superpower could help to tip the balance of perception towards something closer to paranoia. The political purpose behind the annual Pentagon statements on China ’s military spending, as well as the not infrequent warnings from members of the Bush administration, [1193] has been to create a mood of doubt and distrust, playing in part on old Cold War fears about the Soviet Union. [1194] In fact China, as we have seen, has hitherto opted for a different path, one that emphasizes economic growth rather than military capacity. Although it has undertaken a major modernization of its armed forces, the twin objects of this have been to ensure that China can respond by force if necessary to any declaration of independence by Taiwan, and to pose a sufficient deterrent to any external power that might otherwise contemplate attacking China. [1195] Both of these are long-established concerns, the first a product of the civil war, the second a function of China ’s ‘century of humiliation’ and its overriding concern for its national sovereignty. China ’s ability to develop a powerful military is also seriously constrained by the fact that its own technological level remains relatively low and that its only source of foreign arms, given the EU embargo and the US ban, is Russia. [1196] As a result, China is much weaker militarily than Japan. It still does not even possess an aircraft carrier, a crucial means of power-projection, unlike ten other countries in the world that do — including the UK, which has three. [1197] True, as China ’s power grows in East Asia and it acquires new responsibilities and commitments there and elsewhere, its military strength is likely to expand in tandem, but how much and in what ways is difficult to predict. [1198]

The danger is that at some point the United States and China will be drawn into the kind of arms race that characterized the Cold War and which produced such a climate of fear. There is no doubt that the United States feels rather more comfortable on the terrain of hard power than China, first because its military superiority is overwhelming and secondly because the language of hard power is deeply inscribed on the American psyche — partly as a result of the Cold War and partly as a consequence of the violent manner of the country’s birth and expansion, as exemplified by the frontier spirit — in a way that it is not on the Chinese. [1199] But there are dangers here for the United States too. The fundamental problem of China for the US is not its military strength but its economic prowess. This is what is slowly and irresistibly eroding American global pre-eminence. [1200] If the US comes to see China as primarily a military issue then it will be engaging in an act of self-deception which will divert its attention from addressing the real problems that it faces and in effect hasten the process of its own decline. [1201]

These four issues — the United States ’ attitude towards globalization; the shift in the balance of power in East Asia; China ’s emergence as an alternative model to the US; and the issue of military power — do not lie at some distant point in the future but are already beginning to unfold; nor do they exhaust the likely areas of friction. As China ’s power and ambitions grow apace, the points of conflict and difference between the US and China will steadily accumulate. Such is the speed of China ’s transformation that this could happen more rapidly than we might expect or the world is prepared for: China-time passes rather more quickly than the kind of time that we are historically accustomed to. It is not difficult to imagine what some of these points of difference might be: growing competition and conflict over the sources of energy supplies — in Angola or Venezuela, or wherever; an intensifying dispute over the expanding strategic partnership between the United States and India; Chinese firms, awash with cash, threatening to take over American firms and provoking a hostile reaction (as happened in the case of the oil firm Unocal); the Chinese sovereign wealth fund, its coffers filled with the country’s huge trade surplus, seeking to acquire a significant stake in US firms that are regarded as of strategic importance; [1202] and a pattern of growing skirmishes over the militarization of space. [1203] Moreover, China being culturally so different from the United States, in a way that was not nearly as true of the USSR, only adds to the possibility of mutual misunderstanding and resentment. Furthermore the fact that China is ruled by a Communist Party will always act as a powerful cause of difference as well as an easy source of popular demonization in the US, with memories of the Cold War still vivid. [1204] Any serious, protracted depression could serve to heighten the prospect of friction as countries, in the face of stagnant living standards and rising unemployment, become increasingly protectionist amidst a rising tide of nationalist sentiment. [1205]

Potentially overshadowing all these issues in the longer run is the growing threat of climate change and the need for the world to take drastic action to reduce carbon emissions. Under the Bush administration the United States adopted a unilateralist position on this question, refusing to be party to the Kyoto Protocol or accept the near-universal body of scientific opinion. As a developing country, China was not required to sign the Kyoto agreement, but now that it is the largest emitter of greenhouse gases its exclusion is unsupport able from a planetary point of view. [1206] Any new climate treaty will be meaningless unless it includes the United States, China and India. But any agreement — involving inevitable conflict between the interests of the developed countries on the one hand and the developed on the other, with China the key protagonist for the former and the United States for the latter — will be very difficult. [1207]

If relations between the US and China should seriously deteriorate, any attempt that might be entertained to exclude China from the present international economic system would simply not be an option. China has become so deeply integrated into global production systems that it would be well-nigh impossible to reverse that process. Chinese manufacturing has become a fundamental element in a complex global division of labour operated by the major Western and Japanese multinationals, which presently account for a majority of Chinese exports. The fact that the value added in China (30 per cent or less) is only a small proportion of the total value added because of the extremely low cost of Chinese labour means that any attempt to impose sanctions on Chinese exports, for example, would inflict far greater economic harm on the many other countries involved in the production process, especially those in East Asia, than on China itself. [1208] Powerful evidence of China ’s integration has been furnished by the global recession: from the outset its involvement was regarded as fundamental to any solution and its continuing rapid growth has been seen as vital in limiting the severity of the recession. One might add that the US ’s options are also limited in East Asia. If it decided to start pressurizing its East Asian allies — such as the Philippines, Singapore and Indonesia — to move away from China, it is not at all clear that it would meet with a positive response; indeed, it is conceivable that such a move might even be counter-productive because, in the event of being forced to choose, these countries might opt for China as the rising power in the region. Finally, if the United States chooses to become more confrontational with China and engages it in an arms race, this could well harm the US ’s global standing rather more than China ’s, which is what happened in the case of the invasion of Iraq; and China, for its part, might simply refuse to be drawn into such a military contest. [1209] The problem for the United States, meanwhile, is that China ’s relative economic power, on which all else depends, continues to grow in comparison with that of the US.

THE FUTURE OF THE INTERNATIONAL SYSTEM

A key characteristic of the world’s leading power is its ability to create and organize an international economic system to which other nations are willing or obliged to subscribe. Britain ’s version was the international gold standard system which, prior to 1914, encompassed a large part of the world in some shape or form. In the interwar period, as Britain declined, this gave way to an increasingly Balkanized system based on currency areas, protected markets and spheres of interest. After 1945 the United States became the world’s leading power and the new system that was agreed at Bretton Woods, and further elaborated in the years that followed, was essentially an American creation, made possible by the fact that the US economy was responsible for over one-third of global GDP at the end of the war. That system only became truly global when China joined the WTO in 2001 and the former members of the Soviet bloc queued up to join the international system following the collapse of the Soviet Union. With China’s growing economic power, the greatest single threat to the United States’ global economic pre-eminence, apart from its own decline, lies in China’s attitude towards the international system. [1210] Since Deng Xiaoping decided that the country’s interests would be best served by seeking admission to it, China has become an integral part of the international system, but China ’s attitude towards it will not necessarily always remain unambiguously supportive. [1211]

Take the IMF, for example, of which China is a member. During the Asian financial crisis, Malaysia and Japan proposed that there should be an Asian Monetary Fund, such was the level of dissatisfaction within the region about the role of the IMF. This was strongly opposed by both the US and the IMF, which correctly saw the proposal as a threat to the IMF’s position, and also by China, which was concerned that it had emanated from Japan. China has since abandoned its opposition and is now exploring with others in the region the possibility of creating such a fund. Any such body would undoubtedly have the effect of seriously weakening the role of the IMF. In the event of another Asian financial crisis, it is likely that a regional financial solution would play a much bigger role than was the case before. The power of the IMF, moreover, has declined significantly over the last decade or so, with its role as a lender having diminished. In fact sovereign wealth funds have injected more capital into emerging markets in recent years than the IMF and World Bank combined (see Figure 40). This brings us to the World Bank. As China ’s financial power expands, its ability to make loans and give aid will increase dramatically, as we have seen in the case of Africa, where Chinese loans already exceed those made by the World Bank; in time, Chinese aid and loans could dwarf those made by the World Bank on a global basis as well. [1212] Meanwhile the WTO, with the demise of the Doha round — effectively torpedoed by China and India [1213] — together with the growing popularity of bilateral trade agreements, presently looks rather less important than it did a decade ago when trade liberalization was in full swing. The process of trade liberalization in East Asia since 2000, indeed, has largely bypassed the WTO, with China playing a key role through bilateral trade agreements. Another institution of the present international economic system, the G8, acts as a kind of metaphor for the way in which the international system might come to look increasingly less relevant. Bizarrely, China, as of 2009, had still not been admitted as a member — and with the G8 being clearly unrepresentative of the global economy, it now suffers from a chronic lack of legitimacy. [1214] This was explicitly recognized in autumn 2008 when the world was faced with the prospect of the worst global recession since 1945: pride of place was taken not by a meeting of the G8, but a gathering convened by President Bush of a previously obscure entity called the G20, which included not only the rich countries but also China, India, Brazil, South Africa, Indonesia and other developing countries. It represented, at a critical moment, a belated recognition that the rich world no longer had sufficient clout on its own and that the big developing countries needed to be embraced if any action was to be effective.

The rise of China and the decline of the United States are central to the present global recession. The fact that China is such a huge creditor, based on its propensity to save and export, and the United States such a colossal debtor, based on its addiction to spend and import, reflects a deep shift in the balance of economic power between the two countries. The American consumer boom depended on China ’s willingness to keep lending to the United States through the purchase of US Treasury bonds. In its present enfeebled state, the United States is still enormously dependent on China ’s willingness to continue buying US Treasury bonds, even though the rate of return makes little sense from a Chinese point of view: the resources of a poor country could be put to far better use, as is now being openly discussed in China. [1215] But the Chinese, as I discussed earlier, are in a catch-22 situation: if they start selling US Treasury bonds, or cease buying them, the dollar will plummet and so will the value of their dollar assets. So a Faustian pact lies at the heart of the present relationship between the US and China, which in the longer run is neither economically nor politically sustainable. The United States ’ position as the global financial centre and the dollar as the dominant reserve currency are on a Chinese life-support system. At the heart of the present global financial crisis lies the inability of the United States to continue to be the backbone of the international financial system; on the other hand, China is as yet neither able nor willing to assume that role. This is what makes the present global crisis so grave and potentially protracted, in a manner analogous to the 1930s when Britain could no longer sustain its premier financial position and the United States was not yet in a position to take over from it. Any talk of a global solution to the present economic travails has to confront these highly complex and intractable questions.

As a harbinger of the decline, and ultimate demise, of the present US-DOMINATED system, there is the prospect of the emergence over the next decade of the renminbi as a reserve currency, which would mean it could be used for trade and be held by countries as part of their reserves. [1216] Having acquired full convertibility against other currencies, it could rapidly assume a very important role outside China, acting as the de facto reserve currency in East Asia, marginalizing the yen, and challenging the position of the euro and ultimately the dollar as global reserve currencies. [1217] It is clear from the American financial meltdown in 2008 that the days when the US economy could sustain the global reserve currency are now numbered.

The present international system is designed primarily to represent and promote American interests. As China’s power grows, together with that of other outsiders like India, the United States will be obliged to adapt the system and its institutions to accommodate their demands and aspirations, but, as demonstrated by the slowness of reform in the IMF and even the G8, there is great reluctance on the part of both the US and Europe. [1218] Fundamental to this has been the desire to retain these institutions for the promotion of Western interests and values. For example, after China and Russia vetoed the Anglo-American bid to impose sanctions on the Zimbabwe president Robert Mugabe and some of his regime in July 2008, the US ambassador to the UN, Zalmay Khalilzad, stated that Russia’s veto raised ‘questions about its reliability as a G8 partner’. [1219] From late 2008 there was much talk of a new Bretton Woods, but any such agreement would require far more fundamental reform than the West has hitherto entertained. At present the Bretton Woods institutions — the IMF and the World Bank — are dominated by the Western powers. The US still has 17.1 per cent of the quotas (which largely determine the votes) and the European Union an additional 32.4 per cent in the IMF as of May 2007, while China had just 3.7 per cent and India 1.9 per cent. [1220] If these institutions are to be revived as a result of any new agreement, the West will have to cede a large slice of its power to countries like China and India. China, after all, is hardly likely to put very large resources at the disposal of the IMF unless it has a major say in how they are used, as Premier Wen Jiabao has made clear. [1221] Should reform remain reluctant, partial and ultimately inadequate, then the international system is likely over time to become increasingly bifurcated, with the Western-sponsored bodies abandoning any claim to universality in favour of the pursuit of sectional interest, while a new Chinese-supported system begins to take shape alongside. [1222]

Figure 40. IMF resources and countries with largest foreign exchange reserves.

The American international relations scholar G. John Ikenberry has argued that because the ‘Western-centred system… is open, integrated, and rule-based, with wide and deep foundations’, ‘it is hard to overturn and easy to join’: [1223] in other words, it is far more resilient and adaptable than previous systems and therefore is likely to be reformed from within rather than replaced. This is possible, but perhaps more likely is a twin-track process: first, the gradual but reluctant and inadequate reform of existing Western-centric institutions in the face of the challenge from China and others; and second, in the longer term, the creation of new institutions sponsored and supported by China but also embracing other rising countries such as India and Brazil. As an illustration of reform from within, in June 2008 Justin Lin Yifu became the first Chinese chief economist at the World Bank, a position which previously had been the exclusive preserve of Americans and Europeans. [1224] In the long term, though, China is likely to operate both within and outside the existing international system, seeking to transform that system while at the same time, in effect, sponsoring a new China-centric international system which will exist alongside the present system and probably slowly begin to usurp it. The United States will bitterly resist the decline of an international system from which it benefits so much: as a consequence, any transition will inevitably be tense and conflictual. [1225] Just as during the interwar period British hegemony gave way to competing sterling, dollar and franc areas, American hegemony may also be replaced, in the first instance, at least, by competing regional spheres of influence. It is possible to imagine, as the balance of power begins to shift decisively in China ’s favour, a potential division of the world into American and Chinese spheres of influence, with East Asia and Africa, for example, coming under Chinese tutelage, and forming part of a renminbi area, while Europe and the Middle East remain under the American umbrella. In the longer run, though, such arrangements are unlikely to be stable in a world which has become so integrated. [1226]