by Peter Zeihan
China is now the world’s largest importer of nearly everything: iron, iron ore, aluminum, alumina, sulfur, copper, copper concentrate, nickel, plastics, wood, wood pulp, tin, glass, cotton, wool, soybeans, rubber (both natural and synthetic). This list goes on for a good long while. The most strategic of China’s world’s-largest is of course oil. Think of the American oil neurosis of the past half century—and that from a country that controls the global oceans, that imports most of the oil it needs from its co–North Americans. Now think of it from China’s point of view. China’s oil supply lines run past a lot of rivals. Oil shipped in from the Middle East or Africa must pass by India, Myanmar, Thailand, Singapore, Vietnam, the Philippines, and Taiwan.5 In a Bretton Woods world in which the Americans guarantee the sea lanes for everyone, this isn’t a problem. In an Amerocentric world in which the Americans don’t care—or perhaps don’t care too much for China—this is a strategic disaster. Almost all of the countries along China’s oil import route are also oil importers. All already have more than enough naval power necessary to interdict supertankers that go somewhere they don’t wish them to. And China dare not risk tangling with even a mid-powered navy out of range of its land-based aircraft because it lacks meaningful blue-water capabilities.
Unfortunately for the Chinese, the Americans will be the least of their worries. Ultimately, the Americans will not be worried about China because it is a non-naval power and really not a significant threat to American power in a post–free trade world. At the top of the list of future Chinese concerns will be the Japanese. In a post–Bretton Woods world, the Japanese will face many similar constraints to the Chinese: They will need to guarantee access to their own oil supplies, raw materials, and foreign markets. But they will be different from China in two critical ways. First, on average Japan’s dependency on the outside world is less than half that of the Chinese in absolute terms. Second, unlike the Chinese, the Japanese actually have a blue-water navy—the world’s second most powerful, in fact—and so can go get what they need. One of the few things standing in the way of the Japanese will be anything sailing up and down the Chinese coast.
Even if China did have a blue-water navy, it could not use it freely. Bisecting the Chinese coastline is of course Taiwan. The biggest challenge Taiwan presents to the mainland is not its ability to make a mockery of the concept of a “united China” simply by its existence, but rather the fact that it is far cheaper to use a land-based military to threaten sea lanes than a sea-based military. Taiwanese cruise missiles and aircraft can deny Chinese shipping and even military vessels access to a wide swath of territory. And Taiwan isn’t alone. Japan, Taiwan, the Philippines, Indonesia, and Singapore form a line of islands off the Chinese coast that block any possible Chinese access to the ocean blue. All of these countries are broadly hostile to China. All of them have air forces and cruise missile assets that can threaten and in many cases destroy Chinese maritime assets that get too close. And it is likely that most if not all of them will remain allied with the United States in the future (see chapter 10).
The New/Old China
China is the country that has benefited the most from the American Cold War strategy of market access and defanging the various maritime powers, and therefore has the most to lose. In the imminent future, the Chinese face three crushing challenges. First, Japan is likely to start acting less like an NGO and more like the Japan of ages past. Second, China’s geography is nearly as riven as Europe’s, with the great myth of Chinese history that unity is normal soon to give way to a more complex and messier reality. Third, everything that made the Chinese economy a success, everything that has put cars on the road, roads on the map, money in the citizens’ pockets, and food in their mouths, is completely dependent upon an international economic and strategic environment wholly maintained by a country that doesn’t like China all that much.
China has been sliding toward disaster for some time. Two events a decade ago first revealed cracks in the Chinese juggernaut. In the first, villagers of the town of Huaxi, south of Shanghai, protesting local factory-sourced pollution overturned the buses that had brought in security personnel to quell them, in essence barricading out central authorities with their own equipment. In the second, citizens in Dongzhou, near Hong Kong, protesting the building of a power plant found themselves under fire by security personnel, resulting in at least twenty deaths. It was the first significant use of deadly force against Chinese citizens by their own government since Tiananmen Square. Since then public unrest has become nearly omnipresent, ranging from ethnic-themed clashes in places like Xinjiang and Tibet to worker disputes like the Foxconn suicides in 2010 to protests against the nearly 17 million acres of farmland that have been expropriated by various local governments. By 2011 the government was recording one hundred thousand such “mass events” annually.
The stage is most certainly already set, but how China’s transition plays out will depend almost entirely upon the nature and timing of Bretton Woods’ end. Considering the unpredictability of American actions, that is something I cannot forecast. A slow-motion American retreat could leave the Chinese starving for raw materials, which would trigger not just poverty in the coastal regions of Shanghai and to its south but also a contest with Japan and Taiwan that the Americans might or might not participate in. A break in the Chinese financial system would cause a national collapse in development and mass uprisings in the interior. An American panic attack could trigger an overnight revolution across the length and breadth of China as everything from markets to jobs to the power supply cuts out all at once. And that assumes that the target of America’s panic attack isn’t China itself. There are so many things that could trigger China’s fall that mapping out the route of descent is a task best completed once free fall is already in progress.
Sketching out China’s future after that transition, however, is actually fairly straightforward. China’s ability to employ its population will end. China’s ability to source the materials to modernize will end. The impacts will vary by region.
As poor as the interior is already, it is the region that will actually see the sharpest contractions in standard of living. While the coastal regions—north, center, and south—can participate in export markets, by dint of geography the interior cannot. As such, the interior is completely reliant upon the perilous Chinese financial system for its income and economic activity.
Interior regions dependent upon fertilizers produced elsewhere will be unable to maintain food production levels, leading to starvation in the cities. Interior regions that have partially modernized will suddenly find they need to operate without electricity, spawning mass population movements. Some of the displaced will return to the farm and so may alleviate somewhat the food production shortages. But food does not grow overnight. Even in the best-case scenario it would be months before food shortages could be meaningfully addressed. The remainder of the uprooted will move to the coast in a great exodus that Mao Zedong would find familiar. Opportunities for political demagogues not under Politburo control will abound.
As for southern and central China—that is, southern and central coastal China—they will face management adjustments. Between the collapse of the Beijing-inspired financial system that has kept the southern and central Chinese happy, and the collapse of the international trade order that has made them rich, every coastal region south of the North China Plain will rebel against Beijing’s control. Most will cut deals with foreign governments and corporations that can promise a degree of access to capital and markets and resources. In essence, everything from Hainan Island to Shanghai will become a series of unaffiliated city-states that hitch their wagons to American, Japanese, Taiwanese, Korean, Australian, and even Singaporean stars. Some of the outsiders might use military means to secure what they are after. Some of the coastal cities may not simply tolerate but actually suggest such moves in order to assist in their efforts to carve out a bit of wealth and security for themselves—and to keep a seething Beij
ing at bay.
For its part, Beijing will fail in its struggle to stay ahead of such a hydra of problems. In no particular order, Beijing will have to try to keep northern China’s food production under lockdown, to make sure the North China Plain itself remains united, to maintain control of the seceding south and center, to resist the swarms of the desperate from the interior cities who have become accustomed to a lifestyle that China can no longer provide, and to stave off the Japanese who see the energy and food resources of northeastern China as a handy package. Even under good circumstances—and between food and energy shortages these will not be good circumstances—China would likely prove unable to handle more than one at a time, and all will hit at once.
It will come down to the unenviable task of prioritizing. Does Beijing go to war with the Japanese to keep control of its northern food-and oil-producing region? Does Beijing go to war with the belt of coastal cities from Shanghai to Hong Kong to keep China in one piece? Does Beijing attempt to intercept the foreign powers that try to fuse those cities to distant destinies? Does Beijing use a military strategy to deal with the tens of millions of would-be refugees from the interior who seek the resources that Beijing must carefully husband? Cold logic would say that China has too many people and that a “correction” of a few hundred million might actually help. Unfortunately for such a value-absent analysis, the “surplus” population lives on the farms, and so will not starve without explicitly deliberate, intentionally horrific, and cruelly and sustained action from Beijing.
Regardless of their decisions, the northern Chinese face a dark, hungry, and harsh future, and even that assumes that Beijing can hold the Chinese core together and avoid the social, economic, and political breakdowns that have plagued Chinese history for the past three and a half millennia.
Scared New World: Reverberations of Fallen Giant
No matter how artificial, coincidental, or ill-planned China’s recent rise has been, it still happened, and no multitrillion-dollar trading nation can exist in a vacuum. China’s explosive rise has impacted nearly every corner of the world, but four outcomes are worthy of particular mention, because when China falls three will furiously unwind and the fourth will become the largest concentration of wealth in the world.
First, China vacuumed up much of the global market share for mid- and especially low-skilled industries such as textiles and toys and garlic and steel and concrete. Chinese success has meant failure for countries ranging from Mexico to Morocco to India that had previous success in such industries. As China unwinds, much of this productive capacity will fall into disuse for any mix of financial, security, or trade access reasons. However, the previous homes of such industries have long since fallen into disuse and disrepair—if the infrastructure still exists in those places at all. There will be what can be described as a hiccup, although in some places a stroke might be a better analogy, as production and consumption patterns adjust to the sudden loss of supply. Finished-goods prices will have to rise. Who will be able to take China’s place at that stage of the production cycle will depend upon the traditional factors: access to capital, markets, resources, and trade lanes. The biggest winners will likely be Mexico and the countries of Southeast Asia, although much of the more highly skilled industry and agricultural production is likely to relocate back to the United States itself.
Second, China’s growth—and in particular its financial system that broke the link between expenditure and efficiency—resulted in unprecedented demand for every industrial commodity under the sun. Bereft of ravenous Chinese hunger, demand for industrial inputs whether they be oil or copper or zinc will plunge. Producers dependent upon the mix of Chinese-driven high prices and American-guaranteed shipping security will be those most impacted, with most output from places such as Brazil and Africa being put in extreme danger. The producers who survive will be those with lower production costs and better relations with and access to the United States: Canada, Australia, and, again, Mexico and Southeast Asia.
Third, China’s rise also led to an improvement in diet for most of its 1.35 billion citizens. As with industrial commodities, much of China’s food is sourced abroad. However, there will not be a wholesale collapse in international demand in basic foodstuffs. Most of China’s food imports serviced China’s coastal populations, which will still be able to somewhat access international supplies. This foreign access will be doubly important when one considers that China’s financial system boosted local agricultural output right along with manufacturing. The demise of the financial system will hurt Chinese food production and may well necessitate greater food imports rather than the opposite. After all, the final service that any government cuts before it dies is food access. If China’s failing governments cannot guarantee that, they are no longer governments.
Finally, throughout this entire process—from today until well beyond the day that a unified China is no more—U.S.-dollar-denominated assets, and especially U.S. government bonds, will become ever more popular. Many have opined how everything from America’s seemingly chronic budget deficits to political deadlock to a weakening international profile demand that the days of the U.S. dollar are numbered. Even if you don’t believe in the long-term strength of the American economy, the unassailable nature of the American geography, and the centrality of American decision making to how the world functions—even if you can find fault with absolutely everything presented in this book—the fact remains that there just isn’t any competition to the U.S. dollar.
• Once the Europeans decided to partially fund their bailouts with insured bank accounts in 2013, the euro’s candidacy for status as a global currency—much less the global currency—ended.
• Japan’s financial system is closed to the world just as China’s is; opening it would trigger heretofore unheard-of levels of capital flight.
• The remaining hard currencies of the world—the British pound, Swedish krona, and the Canadian, Australian, and Kiwi dollars—combined are but half the circulating volume of the U.S. dollar.
• Gold isn’t an option either. The total value of all gold mined throughout history is about $9 trillion—shy by half of what the world would need. Half of that $9 trillion is simply unavailable for use as a currency backer, existing as it does in things like class rings, cellular phones, and Egyptian museum exhibits. Two-thirds of the remainder is held by the world’s various central banks, and is unlikely to be pooled into currency that none of them would control. Various investors control the remainder, and they certainly won’t be willing to part with their holdings for anything but an exorbitant price—doubly so if those holdings are about to form the core of a new global currency regime. New gold flowing into the system is under $4 billion USD equivalent monthly. On average, China expands its money supply by forty times that rate, while global goods trade alone is worth some $18 trillion annually!
But don’t believe me. Believe the Chinese. Specifically, believe Luo Ping, a director-general at the China Banking Regulatory Commission, the agency responsible for keeping China’s banking sector functional. In 2009 he noted, “Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion–$2 trillion [in new debt]… we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”
If the Chinese realize that they have no options but to pour their earnings and savings into U.S. assets when their financial system is still humming along, when their demographics are still favorable, and when the global trade order still holds, just imagine the volumes that will flood toward the United States once China fails.
CHAPTER 15
Migration and Terrorism
In the coming age, most governments across the world are going to be suffering from problems at home that challenge their ability to cohere internally. The most dramatic changes will happen in
places that are not key to U.S. security interests and yet were dependent either upon global market access and/or the security environment the Americans created. Such places will be forced to function on their own merits, most of which have precious few. Places like Greece, Lebanon, Turkmenistan, and Syria will simply die as modern states. Some that profited mightily from the global free trade network—China, South Africa, and Italy—will face pressure to simply hold themselves together. Others—with Russia and Ukraine at the top of the list—face a degree of desperation that can only come from the creeping implosion of demographic dissolution.
The Changing Nature of Immigration
What all of these groups of countries have in common is that life will get worse.
Rapidly aging populations will reduce local consumption and with that demand for locally produced goods. Consequently, employment levels will fall. Yet governments will have to increase the proportion of their spending that goes to their elderly. Lower economic activity, lower employment, and higher outlays all point to the same end result: much higher taxes. Citizens faced with an ever-increasing volume of their ever-decreasing incomes going to support governments that give them very little back will come to a hauntingly common conclusion: It is time to leave. And that’s for the regions where central authority holds. In places where central government is flirting with disintegration, the decision to leave is even easier to make.
