Trading places?
China, the United States and the evolution of the international political
economy
Mark Beeson
University of Birmingham
Paper for WISC, 2nd Global International Studies Conference, July 23-26th, 2008,
University of Ljubljana, Slovenia.
Introduction
How times change. During the 1990s it became almost obligatory to describe the United
States’ position in the international system as unprecedented and ‘unipolar’.1 The power
of the US, it seemed, was secure, American influence was pervasive, and other countries
would have to bear the costs of adjustment to the new world order. One of the most
telling expressions of the power of the US and the influence of the international order it
had effectively created was China’s accession to the World Trade Organisation. So
desperate was the Peoples’ Republic of China (PRC) to join a capitalist world order
dominated by the US generally and the Bretton Woods institutions in particular, that it
was prepared to accept terms and obligations that ‘far surpassed’ those of the founding
members (Lardy 2002: 104). Less than a decade later, however, the contours of a new
international order are beginning to emerge as China’s increasingly prominent ‘sovereign
wealth funds’ (SWFs) play a key role in bailing out some of the US’s largest financial
institutions as they scramble to deal with massive losses accrued in various debt markets.
Ironically enough, China’s accession to the WTO, which at the time seemed an
unambiguous expression of American dominance, has played a significant part in the
PRC’s economic rise and at least some of the US’s current problems. While there is a
lively debate about the causes and significance of the US’s trade deficit with China
(Dooley, et al 2003; Frankel 2006; Hale and Hale 2008; Hughes 2005), there is no doubt
that China’s concomitant accumulation of foreign currency reserves has given the PRC
the wherewithal to play a prominent role as a source of investment, and as an increasingly
important actor in the global economy. While this transformation in the relative standing
of the US and China may not prove to permanent, it does shed a revealing light on the
forces that are shaping a rapidly evolving international political economy. To understand
the complex nature of these dynamics I suggest, it is necessary to adopt and longer time
frame; one that encompasses a wider range of factors than simply the relative trade and
investment positions of the US and China.2 Consequently, I begin an analysis of the
fluctuating fortunes of the PRC and the US by briefly placing them in historical context.
Put simply, I argue that the geopolitical imperatives of the Cold War period entrenched
American influence and the comparative marginalisation, if not subordination of the PRC.
Paradoxically, though, ‘winning’ the Cold War may prove to have been something of a
pyrrhic victory, and one which has created the structural pre-conditions for the long-run
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decline of the US and the ‘rise of China’. This is not to suggest that agency is irrelevant,
however. On the contrary, Deng Xiao Ping’s decision to ‘open’ the Chinese economy and
George W. Bush’s decision to invade Iraq are plainly decisions of pivotal long-term
significance for both countries, but they may have accelerated rather than actually
precipitated processes that were already in train, I contend. At the very least, such
historical events provide a vital backdrop for a narrative about more recent events and the
dramatic transformation in the relative fortunes of China and the US. Consequently,
following some historical scene-setting, the last two sections of this article consider the
circumstances surrounding China’s accession to the WTO, and the very different
dynamics surrounding the unfolding debt crisis in the US and the PRC’s role in possibly
ameliorating it.
The way we were
One of way of making sense of the significance of recent events is to place them in
comparative historical perspective. Seen in this longer time frame, China’s recent
emergence as a key underwriter of the public and private sectors in the US becomes even
more striking. After all, for most of the post-war period the US enjoyed an overwhelming
material ascendancy which underpinned what many took to be both the benign nature of
American hegemony and the sort of ‘soft power’ that was thought to accompany it
(Ferguson 2004; Nye 2002). Both aspects of what might be described as the US’s
agential and structural power merit emphasis as both have been transformed in significant
ways that help to explain the decline in its overall position.
For much of the post-war period there was little question about the extent of the US’s
ascendancy. In the immediate aftermath of the Second World War when the Bretton
Woods institutions were established, the US economy, which had grown by 50 percent
during the war, was larger than all the other industrialised economies put together
(Freiden 2006: 261-2). True, much of the rest of the world had been left devastated by the
conflict, but this period of overwhelming structural domination gave the US the authority
and opportunity to try and re-make the emerging international order. Unsurprisingly, the
new international political economy was ‘open’, liberal and reflected deep-seated
American normative preferences on the one hand, and a desire to avoid the ‘mistakes’ of
the inter-war period on the other (Latham 1997). Crucially, the economic ideas that
emerged as the template for the new order were far from ‘free-floating’, but were
institutionalised in the Bretton Woods organisations and enthusiastically promoted under
the auspices of the General Agreement on Tariffs and Trade, the World Bank and the
International Monetary Fund (Beeson and Higgott 2005).
All of this happened in the context of the Cold War, of course, an event that is both
widely understood but oddly neglected in much of the contemporary international
political economy literature. And yet, strategic and/or geopolitical considerations are
especially important for the purposes of this discussion not only because they help to
explain the willingness of allies to cede leadership of the ‘free world’ to the US
(Ikenberry 1998), but because they also highlight the situation of those countries—like
China—which found themselves on the wrong side of the ideological divide (Beeson
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forthcoming a). The key point to make about China’s situation for the first few decades
after World War II is that it had to confront the challenges of national political and
economic reconstruction without the assistance of the US, while remaining largely cut off
from the potentially positive impact of integration into a rapidly recovering international
economy. On the contrary, while much of East Asia benefited from American aid (Stubbs
2005), China was left to its own devices and forced into self-reliance (Selden 1993).
Much has been written about the nature of ‘American empire’ or hegemony, and I do not
intend to add to that debate here.3 However, it is important to highlight a number of
aspects of US dominance as their evolution is a central component of what can be seen as
a process of long-run relative decline, especially when seen in the context of the rise of
China. Debate about the standing of the US is, of course, nothing new,4 but there are
grounds for thinking that this time, things may indeed, be different. The sort of ‘imperial
overstretch’ that Paul Kennedy (1989)—perhaps prematurely—identified in the 1980s, is
placing an increasing strain on the US government’s ability to finance major domestic
and international commitments. Plainly, the ‘war on terror’ has been a major cause of the
Bush administration overseeing the largest budget deficit in human history (Politi 2008),
but this simply highlights another more enduring facet of the US’s reduced authority:
even if the invasion of Iraq had not become an unambiguous ‘fiasco’ (Ricks 2007), there
has been a more fundamental decline in its long-term strategic dominance. Simply put,
the benefits to be derived from the political-economy of conflict and military dominance
are not what they were (Brooks 2005).
The possibility that changing geopolitical circumstances might have made some aspects
of national power liabilities rather than asses ought to have been clear from the fate of
Soviet Union. The US’s former ideological rival was brought down—in part, at least—by
an inability to fund its military commitments; an ironic fate which may yet await the US,
some believe (Harvey 2003: 80). Despite the often alarmist commentary that has
accompanied China’s economic resurgence in the US, where the expectations of realist
strategic thinking continue exert a major influence over strategic policy (Art 2003;
Mearsheimer 2001), the reality is that China has spent comparatively modest amounts on
its military, which remains no match for the US (Crane et al 2005). In an era where interstate warfare is in decline, China’s political elites have—like Japan before it—
concentrated on economic development. Unlike Japan, however, China is less
constrained by the obligations that flow from strategic dependence and more willing to
assert itself diplomatically as a consequence. One of the most striking and significant
manifestations of the new international order has been China’s increasingly effective
‘charm offensive’ in East Asia, which has seen it reinforce its undoubted economic
importance with deft diplomacy that has radically altered the way China is viewed by
most regional elites (Kang; 2007; Kurlantzick 2007).
The point to emphasise from these brief introductory remarks is that the world has
changed and so has the relative standing of China and the US. Some of the most
prominent and apparently unambiguous long-term American strengths, especially the
US’s strategic dominance, do not seem to be as decisive as they once were, and have
limited ability to contain potential rivals. On the contrary, one of the great ironies of
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American hegemony is that is has facilitated the economic development of first Japan,
and now China (Beeson 2007). Even more paradoxically, the nation which some
considered the architect of a new global institutional order it was uniquely qualified to
exploit (Ikenberry 2001), has seemed increasingly ambivalent about the multilateral order
it effectively created. Indeed, as Anotol Lieven (2004: 7), ‘many Americans are in revolt
against the world which America itself has made.’ It is possible that a good deal of this
ambivalence and diminution in American influence and authority is a function of a
largely discredited Bush administration, and that some of it, at least, may be reversed
under and new administration. Whether it can be entirely restored is, however, another
matter. The underlying, structural reality seems to be that a painful period of adjustment
may lie ahead for American policymakers and consumers, adjustments that have their
origins in the long-term decline of the US’s economic position, and which are highlighted
by its growing dependence on China.
China and global trade
At first blush, the WTO, and the conditions under which China gained admission, seem
like unambiguous expressions of American hegemony and the US’s ability to
institutionalise its preferences. After all, the original General Agreement on Tariffs and
Trade (GATT) was designed to ensure that the international trading regime remained
liberal, in keeping with American normative preferences and economic interests, and that
the burden of adjustment would be borne primarily by other nations, not the US (Milner
1997). Much the same logic appeared to apply to the WTO: as Elliott and Hufbauer (2002:
405) point out, ‘the United States was willing to accept far more binding constraints on
US unilateralism [in the WTO] because it received, in return, commitments from its
trading partners to lock in policy changes it wanted in agriculture, liberalization of
services trade, and protection of intellectual property.’ In other words, institutionalised or
‘benign’ hegemony appeared to involve lower transactions costs and potentially deliver
greater long-term payoffs than coercion and aggressive unilateralism.
At one level, there is no question that China’s accession to the WTO does indeed mark a
major ‘victory’ for the US, especially as the agreed protocol formalizing Chinese entry
‘far exceeded the obligations of previous new developing nations’ (Breslin 2004: 665).
Seen in a longer time frame, China’s accession represented the symbolic and tangible end
of any effective alternative to the almost universal adoption of some form of capitalism—
even if there are important continuing differences about the way that capitalism is
actually organised within national borders (Hall and Soskice 2001). The record of
Chinese participation in the WTO since it became a member in late 2001 also suggests
that it has been ‘socialised’ into appropriate behaviour in precisely the way that many
either expected or hoped (see Johnston 2008). As Margaret Pearson (2006: 256) points
out, the evolving structure of the Chinese economy, and the importance of continuing
access to markets in the US in particular have meant that, far from being a champion of
‘developing country’ interests, China ‘does not seriously reject the status quo power
structure of the WTO.’ Seen in this light, the fact that integration into the global economy
appears to be exerting a powerful long-term influence on domestic interest groups and
policymakers in China should not surprise us: this is precisely what has happened
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elsewhere as a consequence of economic restructuring (Frieden 1991; Milner 1997;
Solingen 2001).
But, while the ideational influence of ‘Western’ norms on Chinese elites is significant
and potentially to the US’s advantage, making an assessment about precisely which
country has benefited most from China’s participation in the WTO is surprisingly
complex. Even though WTO membership has necessitated painful domestic adjustments
like constitutional reform and increased pressure on China’s uncompetitive state owned
enterprises (Fewsmith 2001), it has also given the PRC’s reform-oriented elite additional
leverage to push through further changes that might have been more forcibly resisted in
the absence of external imperatives. However, even here it is important not to overstate
the short-term domestic impact of reformist pressures, or under-estimate the ability of
China’s extant elites to use them to their advantage. Not only have Chinese state officials
managed to insulate elements of the domestic economy from external pressures, but they
have also utilised growing levels of foreign direct investment (FDI) to underpin the
reform process itself. Contrary to the expectations of some of the more enthusiastic
globalisation theorists, China is far from ‘converging’ on a form of Western capitalism,
much less democratic reform. On the contrary, the China’s political elites have been able
to utilise FDI to reinforce, their own position. As Mary Gallagher (2002: 340) puts it,
‘development amid increasing openness has contributed to the stability of authoritarian
rule in China. In opening its borders to large flows of foreign capital, China’s communist
leaders have made growth and globalization work for them’.
FDI has grown rapidly, and has played a significant part in accelerating the rate of
economic expansion and the growth of exports to the US in particular, especially in the
post-WTO admission period. At one level, this can be thought of as a positive sum game,
in that both the US and China have arguably both benefited from this relationship: China
gets the catalytic impact of greater investment from the US and assured access to
American markets, while US-based companies can take advantage of China’s massive
pool of low-cost labour, and of the cheap consumer goods they produce for export.
However, it is important to highlight three further aspects of this relationship which
suggest that the long-term benefits are moving in China’s direction. First, while FDI from
the US and elsewhere has been an important stimulus to development in China, it has
accounted for only 5 percent of capital formation (Bergsten et al 2006: 21). In other
words, like Japan before it, China has relied on a remarkably high level of domestic
savings to finance investment—a position that stands in marked contrast with the US’s
current situation.5 Indeed, in Giovanni Arrighi’s (2007: 353) view, China’s cheap labour
and potential markets meant that ‘foreign (especially US) capital needed China far more
than China needed foreign capital.’.
The potential importance and implications of this claim can be seen in a second, related
consideration: the trade and investment relationship between the US and China
highlights the latter’s importance to the profitability of American corporations like Walmart,6 and means that a powerful pro-China lobby has been created in the US, limiting
the US policymakers’ options as a consequence. Finally—and despite the concerns that
are raised about the depth of the industrialization process in China and the amount of
5
technological transfer that is actually occurring (Steinfeld 2004)—some commentators
are concerned that American companies are giving up their technological advantage as
part of the investment process. David Lei (2007: 24), for example, argues that ‘U.S. firms
have essentially ceded their leadership positions across dozens of industries to eager
suppliers that have used the outsourcing arrangement as a vehicle for their own long-term
learning and technology accumulation.’
Given the scale, complexity and rapid evolution of the Chinese economy, it is not
surprising that the empirical record tends to be contradictory and unclear at times. What
is more certain, however, and what has attracted increased political attention in the US
and elsewhere as a consequence, is the scale of China’s expanding trade surplus with the
US. The US runs an enormous overall trade deficit, but since China replaced Japan as the
largest single contributor to this ‘problem’7 it has become the focus of growing
protectionist pressures in the US. The fact that more than a quarter of ‘China’s’ exports to
the US are actually generated by subsidiaries of American multinationals (Hale and Hale
2008: 58) has done nothing to defuse political sensitivity in the US. On the contrary, the
US’s Trade Representative Susan Schwab has recently claimed that the deficit is
‘unsustainable’ (Klapper 2008). But no matter how discomfiting the headlines may be for
US political leaders, the reality may be that their ability to achieve a political resolution
of this issue is increasingly circumscribed. Not only does the conventional economic
orthodoxy suggest that trade deficits—if they are a problem at all—are a consequence of
inadequate saving, a lack of competitiveness, declining productivity, or a simple failure
to make some of the products that consumers actually want, but US policymakers are
increasingly constrained in their dealings with their counterparts in China.
One of the most striking illustrations of both the rapid evolution of China’s place in the
international economy and of the shifting balance of economic power between the US
and China has been the latter’s rapidly expanding foreign currency reserves which have
been derived from its trade surplus with the US. This would be a significant enough
development in itself and a telling indicator of the changed position of both economies,
but what gives it added significance is the fact that the vast majority of this money has
been reinvested in the US, primarily in low interest Treasury bonds.8 Without continuing
inflows of capital from initially Japan and more recently China, the ability of the US
government to fund its budget deficits so cheaply, and the ability of America’s consumers
to continue propping up the American economy in quite the way they have, would be in
serious jeopardy (Murphy 2006). In the long-term the sustainability of this relationships
is also in question, as we shall see. But the short-term reality, as successive Treasury
Secretaries have discovered, is that there is little that the US can do to force the PRC
government to revalue its currency or make other potentially painful adjustments to
alleviate American problems (Presek 2007; Weisman 2007).
The failure of American officials to secure the compliance of their Chinese counterparts
in making such adjustments is a striking indication of the limits of US influence. But the
more significant long-term story may be about the continuing, remarkably rapid evolution
of the international political economy and China’s place in it: China’s initial trade
expansion and success is also transforming the basis of its overall integration into, and
6
role in, the wider world economy. Crudely put, this marks a shift from a form of
international integration primarily based in trade, to one that is increasingly centred in
global finance. Equally significantly, in the same way that China’s leaders learned to
adjust to and take advantage of a the global trading system, they are also beginning to
take a much more active role in the financial sector.
Global finance, regional influence
China now has the largest foreign exchange reserves in the world, totaling some $1.5
trillion, having been $1 trillion only a year before (Economist 2008). But it is not simply
the sheer scale of China’s material assets that makes them significant: China is
unencumbered by the sort of strategic and foreign policy constraints that generally made
Japan—its regional rival and former developmental champion—unable to act decisively
in pursuit of its own ‘national interest’, especially where this might be seen as conflicting
with the preferences of the US (Samuels 2007). China suffers from fewer inhibitions, and
over the last decade or so has demonstrated a surprisingly effective capacity to develop a
sophisticated foreign policy. Seen in a longer timeframe and geopolitical context, the
significance of China’s transformed economic position, particularly its importance to
both the US and the East Asian region of which it is a part, is that this emerging material
or structural power is being translated into political influence and agential capacity.
This is still a controversial claim for at least two treasons. First, the idea that China might
posses ‘soft power’ still seems outlandish to many given the PRC’s association with
authoritarianism and its still modest levels of overall development. And yet China has not
only established itself as an effective actor in, and supporter of, multilateral institutions in
a way that stands in conspicuous contrast with the Bush administration, it is also
becoming associated with an alternative model of development that resonates powerfully
with some states in Asia, Africa and Latin America (Kurlantzick 2007; Ramo 2004). The
second reason for questioning China’s growing influence is more pertinent to the present
discussion and raises important questions about whether the US or China is the primary
beneficiary of the bilateral relationship as it is currently configured.
There is an old joke which suggests that if you owe the bank £1,000, that’s your problem;
if you owe them £1,000,000, it’s the bank’s problem. Much the same could be said about
the scale of China’s investment in dollar-denominated assets in the US. In what was
described by former US Treasury secretary Larry Summers as the ‘balance of financial
terror’, China and Japan in particular have been willing to invest huge sums—an
estimated trillion dollars in China’s case—in US securities to underwrite the US budget
and support overall consumption patterns (Ellis 2007). For some observers, US
indebtedness is, paradoxically enough, actually a manifestation of strength and structural
leverage in the global economy (Seabrooke 2001). According to Panitch and Gindin
(2004: 63 & 66), for example, the
increase in international holdings of highly liquid US Treasury bills not only had a major
impact on furthering the development of massive secondary markets in bonds, but lay at the
core of the reconstituted form of American imperial rule. It allowed the American state to
consistently rely on global financial reserves to expand its - and capitalism’s - global
7
reach…The fact that major New York investment banks took the lead in providing financial
services and advice for mergers and acquisitions in all the regional financial centers from
Europe to East Asia meant that they came to play a significant role in transforming not only
financial markets, but business practices generally, on US lines.
This argument had much to recommend it while Japan and China were passive investors
and too intimidated by the possible consequences of their own actions to undermine the
status quo; any suggestion that they might be seriously re-thinking their commitment to
the US economy and currency might trigger a disastrous collapse in the value of the
American dollar and the ability of the US market to continue absorbing Asian exports
(Beeson 2007). However, the recent rapid decline in the value of the dollar has focused
the attention of Chinese (and other) policymakers on the risks involved in holding dollardenominated assets. As Chinese Premier Wen Jiabao recently observed: ‘We are worried
about how to preserve the value of our reserves’. Well they might be. Although the
precise scale and composition of China’s foreign exchange reserves is unclear, given that
it is generally thought to be above $1400bn, of which two-thirds is US dollars, this is
plainly a significant problem and level of exposure for China’s government (Dickie 2007).
The risk of triggering a currency crisis involving an even more rapid depreciation of the
dollar has meant that the PRC government has, understandably enough, been keen to
offer rhetorical support for the dollar’s status as a global reserve currency (McGregor
2007). Significantly, however, the actions of China’s policymakers tell a different story
and reflect a decline in confidence about the US economy, a sophisticated appreciation of
the need to diversify risk, and a recognition that they can combine capitalist dynamics
with realpolitik. The ‘national economic interest’ can, it seems, be pursued even in a
global economy apparently dominated by the West. At one level this is manifest in
China’s participation in the growing move out of the dollar and into other currencies,
especially the euro (Dougherty 2007; Peters 2007). This is significant enough in itself,
because such a move, should it persist, will undermine the US’s ‘seigniorage’ privileges,9
increase the associated cost of borrowing, and generally undermine the centrality of the
US economy in the international system. Of potentially equal long-term significance,
however, is the fact that Chinese policymakers have shifted from being passive to active
investors and are rapidly expanding their activities—and the impact of their form of
capitalism—on global markets.
‘State capitalism’ and the rise of sovereign wealth funds
In a recent speech on the ‘democratic imperative’, British foreign minister David
Miliband (2008) suggested that the economic success of China meant that ‘we can no
longer take the forward march of democracy for granted.’ This observation was hardly
novel, but demonstrated a growing recognition among policy-making elites of the wider
implications that might flow from not just China’s rise, but also from the growing
economic power of resource-based economies like Russia, Venezuala and the oil-rich
states of the Middle East (Gat 2007). The stubborn persistence of forms of ‘illiberal’
political rule in parts of East Asia in particular has been widely recognized (Zakaria
2003), but what alarms many Western commentators and governments is the possibility
that this enduring political proclivity will be reinforced by growing economic might. In
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the capitals of the ‘Anglosphere’, there is a growing concern that not only will the
neoliberal model continue to be rejected in East Asia and elsewhere (Beeson and Islam
2005), but that countries like China will successfully ‘marry capitalism with a large state
role in the economy’(Rachman 2008). In short, the increasing prominence of ‘state
capitalism’, fuelled by a powerful combination of economic nationalism and the proceeds
of trade and resource revenues, is overturning assumptions about the direction of
economic development and the best methods of achieving it. The growth of sovereign
wealth funds is emblematic of this new reality.
Although SWFs have been around for decades,10 the recent emergence of the China
Investment Corp. (CIC) has provoked particular attention because of its potential
‘strategic’ role on behalf of the state. Such fears have been reinforced because of the
sheer scale of extant SWFs. The recent growth in the size and number of SWFs is in large
part a consequence of the overall growth of global foreign exchange reserves, which now
total some $5.75 trillion, with Asia alone accounting for $3.66 trillion (Lyons 2007: 4). In
an East Asian context, the Government of Singapore Investment Corporation (GIC) and
Temasek, another Singaporean government controlled investment vehicle have pioneered
the use of SWFs. Both funds are notorious for their lack of transparency and closeness to
the Lee dynasty that has dominated Singapore’s authoritarian political system for decades.
The key point to emphasize about the Singaporean experience is that foreign reserves
have been recycled through state investment vehicles to underpin an overall vision of
economic development and strategic investment (Rodan 2006). Tamasek in particular has
been responsible for exporting this strategic investment approach overseas. Significantly,
the Singaporean approach has been a major influence on China’s emerging overseas
investment strategy (Burton 2007).
What made the establishment of the PRC’s first SWF especially significant was not
simply its potential scale given China’s rapidly expanding foreign reserves, but recent
conflict with the US over other potentially ‘strategic’ investments. When the China
National Offshore Oil Corporation (CNOOC) announced an unsolicited bid for the USbased Unocal Corporation, for example, it sparked a major debate about the national
security implications of such a move in the US, and an unabashedly protectionist policy
response. The US found itself in the ideologically awkward position of having to oppose
an ostensibly commercial investment on national interest grounds—precisely the sort of
argument it had spent years discouraging developing countries from adopting in response
to the investment strategies of US-based multinational corporations (Schortgen 2006). In
a further irony, US energy and security policy was beginning to reflect the sort of neomercantilist logic that had been pioneered by Japan in the 1970s and 1980s. The priority
attached to energy security by the Bush regime and the dependence of the US economy
on oil (Klare 2004), especially when combined with a perception that China was
increasing its geopolitical influence at US expense (Sutter 2005), meant that a clash with
China of some sort was almost inevitable. What is surprising, perhaps, is the muted
nature of the US response thus far—especially as far as China’s non-resource based
investments are concerned.
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The CIC was established with an initial capital base of $200bn, and its first major
investment—a $3bn, 9.9 percent stake in Blackstone, a US buy-out firm—gave an
indication of the breadth and ambition of China’s evolving strategy. In a significant
attempt to defuse a Unocal-style protectionist backlash, the Chinese government took the
‘unusual step’ of giving up its voting rights (Guerrera 2007). However, two developments
have changed the underlying dynamic and balance of influence between US and Chinese
interests since the Blackstone deal was struck. On the one hand, the Chinese have seen
the value of their investment drop by 25 percent as a consequence of a general decline in
equity values brought on by the sub-prime crisis in the US. On the other, this experience
has led the CIC to take a much more assertive line in subsequent negotiations with
distressed American financial institutions (Barker 2007).
Although it is not possible at the time of writing to know quite how deep, prolonged or
painful the impact of the US’s debt crisis will prove to be,11 some things seem clear
already. First the status of some of the most prominent financial institutions in the
heartlands of Western capitalism have been profoundly altered: Morgan Stanley, Merrill
Lynch, Bear Sterns, Barclays, Standard Chartered, HSBC have all found themselves
having to accept capital injections from SWFs in Asia and the Middle East. Most
spectacularly, perhaps, Citigroup, the largest financial institution in the world, posted
losses of nearly $10 billion in a single quarter, forcing it to go cap-in-hand to SWFs in
China and elsewhere for urgent assistance (Thomas 2008). The most acute problem for
the distressed Western financial institutions, however, was not that their new dependence
on, and loss of control to, SWFs and other overseas financial institutions would continue,
but that it wouldn’t. It is becoming clear that many foreign investors are concerned about
the possibility of throwing good money after bad in American markets. As the Gillian
Tett (2008) observed, ‘having stepped into the breach so visibly late last year, some funds
are now getting jitters. In China, for example, there are rising complaints that funds are
foolish to shovel cash directly into risk-laden US banks when they could be using it in
better ways, such as purchasing western commodity or manufacturing groups.’
Such concerns have seen a noteworthy new development on China’s rapidly evolving
foreign investment strategies which, while they may not have as immediate an impact on
the US in the short-term, are illustrative of an international order that is shifting against
the US and shoring up China’s relative standing. The Chinese government-backed
company Chinalco provoked surprise and consternation when—in a noteworthy
collaboration with the US company Alcoa— it spent $14bn to acquire a 12 percent share
in Rio Tinto, making BHP’s proposed takeover (and potential dominance of a resource
sector upon which the PRC is highly dependent), that much more difficult (Trounson
2008). Not only was this the largest ever cross border investment by a Chinese company,
but it signaled both a growing capacity to take part in such corporate power plays, and a
lively appreciation of the need to secure long-term resource supplies. Indeed, so savvy
have Chinese officials become as a consequence of their integration into the conduits of
Western capitalism that there was a real possibility that they would attempt to take legal
action against BHP on the grounds of anti-competitive behavior (Webb and Schneyer,
2008).
10
Some might see such behaviour as an indicator of the US’s continuing hegemonic power
and the pervasive influence of American legal norms and practices (Kelemen and Sibbitt
2004). While there is something in this argument, the ability of Chinese public officials to
turn such mechanisms to their advantage should not be underestimated. There is, however,
a more traditional and unambiguous expression of the US’s declining influence which
China’s recent investment in Rio Tinto highlights: not only are such strategic
investments designed to ensure long-term resource security, but they are also presenting
acute foreign policy challenges for countries like Australia, where such investments are
taking place. On the one hand, the newly-installed government of Kevin Rudd faces
perennial questions about the national interest and economic sovereignty (Uren 2008);
such questions are especially acute in the case of a ‘communist’ power apparently bent on
achieving ‘comprehensive security’ (Sexton 2008).12 On the other hand, generations of
Australian policymakers have relied on the US to underwrite national security and until
recently, at least, there was little to suggest that would change. Yet, even in the area of
previously non-negotiable national security, however, Australia’s growing economic
links with China are causing it to develop a far more even-handed and inclusive approach
to the PRC and other regional allies (Rudd 2007).
When formerly stalwart allies like Australia begin to recalibrate their foreign policy to
reflect new economic and strategic realities, clearly something important is changing in
the region. China has became a vital, if not the single most important economic partner
for much of East Asia, and this helps to explain its growing influence and acceptance as a
major diplomatic force in the region (Beeson forthcoming b; Lampton 2007; Ross 2006).
The PRC’s highly effective diplomatic offensive in the region stands in marked contrast
to that of the US, and has further consolidated China’s influence and importance as a
consequence (Bergsten et al 2006: 133-34). If China’s remarkable growth trajectory can
be sustained in the face of profound environmental constraints—a very big if and one that
is still not given the attention it deserves (but see, Economy 2007)—then we might
expect the long-run transformation in its influence to continue.
Concluding remarks
Does the rise of China and the apparent decline of the US mark an enduring shift in their
long-term relative standing? To paraphrase former Chinese premier Zhou Enlai’s famous
assessment of the French revolution’s impact: it’s a bit too soon to say. What we can say
is that a belief that some sort of tectonic shift in the structure of the international system
is underway and gathering pace has now become an increasingly uncontroversial view.
Some of the most influential champions of Western free market capitalism are beginning
to acknowledge the damage that has been done to the US’s material and ideational
standing as a consequence of the Bush administration’s foreign policies in general and
the recent crisis of American capitalism in particular. As Martin Wolf (2007) of the
Financial Times observed, ‘what is happening in credit markets today is a huge blow to
the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism.
A mixture of crony capitalism and gross incompetence has been on display in the core
financial markets of New York and London’.
11
This matters for two reasons. First, the problems in the US economy and the increased
reliance on China to underwrite its overall economic position and bail-out distressed
financial institutions is a dramatic and unambiguous illustration of how much has
changed in only the last decade or so. This material transformation in the relative position
of the two economies is important enough in itself, but it is arguably the longer-term
ideational shift that underpins a second, even greater long-term consequence of recent
developments. Not so long ago, the US was able to encourage or impose the array of
policy prescriptions subsumed under the rubric of the ‘Washington consensus’ because
its economy was dominant, its concomitant political leverage was immense, and its
capacity to institutionalize and operationalize its policy preferences was unrivalled. In
such circumstances, it was difficult for critics of the neoliberal orthodoxy to get much of
a hearing, much less carve out the policy space in which alternative paradigms might be
adopted (Wade 2003). Now, however, things look rather different. Not only is there an
alternative ‘Beijing consensus’ emerging around China’s pragmatic, state-centric
approach to development, but the unparalleled development of the Chinese economy is
dramatically reinforcing its material influence and even its ideational appeal.
Having said that, it is important to remember that China has a long way to go before it
rivals the US in terms of military capacity, living standards or ideational dominance. But
given that China has only been integrated into the global economy and an active
participant in its international institutions for a few decades, its achievements and pace of
growth are remarkable and unprecedented. If it can be sustained, then its rise and the
US’s relative decline are likely to be the key dynamics that will reshape the international
system. If it can’t, China’s problems rather than its strengths may well be what will
preoccupy its—and everyone else’s—policymakers. For better or worse, coming to terms
with China is likely to be the defining issue of the twenty-first century.
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1
There is a substantial literature on this issue. Representative samples include, (Art 2003; Wohlforth 2002;
Kagan 1998).
2
Further complicating this discussion is the ontological status of national economies, something that has
become increasingly contentious as a consequence of transnational ownership and investment patterns.
With these caveats in mind, however, we shall continue to use ‘China’ and the ‘the US’ as a convenient
shorthand to describe economic activity and power centred on those geographical areas. See Agnew (2004);
Cerny 2008.
3
For an overview of the major positions see, Beeson (2006).
4
During the 1980s the ‘declinist’ literature was very prominent, only to give way rapidly to assertions
about ‘new American century’. For an overview of the literature, see Cox (2007).
5
Increased levels of foreign ownership in the US are leading some prominent figures to fret about longterm security and autonomy. Larry Summers (2004: 48), argues that ‘in a real sense, the countries that hols
US currency and securities in their banks also hold US prosperity in their hands.’
6
Wal-mart alone is China’s 8th largest trading partner and its low-cost business strategy would not be as
feasible without the China connection. See Hughes (2005: 94).
7
There are some widely recognised problems in measuring and/or making sense of trade flows in an
environment where trade is often replaced by FDI. See Quinlan and Chandler (2001).
8
The details of China’s investments are unclear, but it is estimated that in addition to $600bn of US
Treasury bonds, it may have another $100bn exposure to the US’s troubled mortgage-backed securities.
See Bradsher (2007).
9
Seigniorage refers to the difference between the face value of money and the cost of actually producing it.
The US’s international seigniorage refers to benefits that accrue from the dollar’s cross-border circulation
and the fact that such activity effectively generates a subsidized or interest free loan from abroad. An
international shift away form the dollar will erode both this benefit and an important source of US
hegemony. See Cohen (1998: 123-25).
10
Lyons (2007) suggests that began in the early 1950s in the Middle East. The combined assets of the top
20 SWFs is already estimated to be over $2 trillion, and this figure is expected to rise rapidly.
11
Some seasoned observers considered it ‘the worst crisis in 30 years’. See Hutton (2007).
12
The idea of ‘comprehensive security’ was originally developed by Japan during the 1970s when it
became apparent that energy dependence had become a major strategic vulnerability. Such ideas have been
emulated in China and elsewhere and inform East Asia’s distinctive approach to security issues. See
Alagappa (1998).
18