The Contest of the Century

by Geoff A. Dyer

  ——

  Of all the China challenges facing Washington in the coming years, in many ways this is perhaps the most complex: how to prevent the political and protectionist pressures that are building up in both countries from splintering the rules and understandings at the heart of the global economy.

  The postwar, liberal economic order that America promoted has survived so long because it has been attractive to enough countries that a decisive challenge never emerged. China has been one of the biggest beneficiaries of the existing system, but the clash between its model of state capitalism and America’s free-market creed could easily tear it apart. While some in China want to tilt the system more to China’s advantage, many in America think Beijing is defying the rules.

  Over time, China’s economic model will gradually change. Former premier Wen Jiabao described the Chinese economy as “unbalanced, uncoordinated, and unsustainable”—and he liked the phrase so much, he repeated it on several occasions. Among senior Chinese officials, there is a broad consensus on the direction of change toward an economy that depends less on heavy industry and investment and relies more on services and individual consumption. These reforms will inevitably reduce the power and importance in the economy of state-owned companies and banks, softening some of the edges of the system that have aggravated foreign businesses. But such changes will be fiercely resisted and will take a long time to implement, which means the tensions will remain. In the meantime, Washington needs to find new ways to build support for ideas for an open global economy and to steer China away from a major rupture with the system.

  One way to do that is to try and establish more areas of common ground with China over the major issues of international economic governance. The last few years have served to demonstrate the big difference in their approaches to financing the developing world, as the China Development Bank has started to challenge the enormous political and economic influence of the World Bank. Yet, over time, this could be an area where the two sides end up with a more similar viewpoint.

  For the Washington-based institutions, the obvious first step would be to abandon the charade of awarding the top jobs only to Westerners—the Americans currently get the leadership of the World Bank, while the Europeans have a hold on the post of managing director of the IMF. In order to remain relevant, the Bank and the Fund need to find ways to engage not just China but the other large developing countries, many of whom are deeply ambivalent about them. Opening up the leadership-selection process would be one obvious step. Competition from China will also likely lead to a gradual shift in philosophy. The World Bank and IMF have already been forced over the last decade into a thorough re-examination of some of the more rigid orthodoxies from the 1990s that were so heavily criticized after the Asia crisis. Whereas once they pushed for rapid budget cuts in the event of economic problems, the World Bank has become more sensitive to the importance of maintaining health care and other public goods. But there is still something to be learned from the Chinese emphasis on providing finance for the kinds of projects, including infrastructure, that the borrowing countries actually want to do.

  China, too, is likely to find that its approach shifts. In a short space of time, China has issued a large volume of loans, mostly to countries with which it has quite shallow relations and only modest understanding. This lending boom has also taken place during one of the biggest bull markets in commodities the world has ever seen. Many of the Chinese loans are backed by oil, copper, or some other natural resource, which gives the Chinese banks the impression of complete security. But if commodity prices ever start to fall sharply and these economies suffer serious financial difficulties, there is a good chance that China will begin to suffer some defaults on its loans. Chinese bankers will learn the harsh lesson about all those difficult conditions that the World Bank and IMF attach to their loans: these conditions may force governments to adopt the sorts of free-market policies that Washington likes, but they are also partly designed to ensure the banks actually get repaid. If China is hit with a wave of defaults, its banks are likely to start paying a lot more attention to the way their clients are actually governed. The most likely candidate for a showdown could well be Venezuela, a country with incredibly opaque finances and looming economic problems, which is by far China Development Bank’s biggest client. Even before the death of Hugo Chávez, CDB had realized it needed to be more hands-on in its approach to Caracas. The former CDB boss Chen Yuan at one stage presented Chávez with a six-hundred-page book of recommendations for how to run its economy. With Chávez no longer around, there is considerable uncertainty about the country’s political future. It is possible that a revived opposition in Venezuela could seek to make the loans now owed to China into a political issue, just as the World Bank and IMF have often become political targets in the past in Latin America.

  Even the recent explosion in dam building could become a source of compromise. After initially despairing at the way Chinese money had completely neutered the campaign against dams, Peter Bosshard at International Rivers is now trying to find a middle ground between the Chinese and Western approaches. Before the Chinese became so influential, his usual tactic would have been to put pressure on the financial backers of a dam-building project, but neither China Eximbank nor China Development Bank needs to go to international capital markets to get their funds, which meant there were no investors or partner banks he could lean on. With his leverage gone, he decided to engage. Bosshard started to visit China and talk with local NGOs, who he thought could become useful allies. He also tried to meet some of the companies involved in the industry. On his second trip to China, in 2006, he got a call out of the blue from China Eximbank, which was then bankrolling much of China’s overseas dam building, asking him to come and meet its chairman, Li Ruogu. It was almost certainly the first-ever meeting between a Western, campaigning NGO and the head of a large state-owned bank.

  Li Ruogu, a former deputy governor of the central bank and one of China’s leading financial officials, has a reputation as something of a bully. But on the day when Bosshard was due to meet him, Li was suffering from a bad cold and had partly lost his voice, so he opened the meeting by asking Bosshard to outline his concerns. Then Li started to talk. Bosshard assumed he was about to hear the sort of evasions he used to get from Western banks in the 1980s and 1990s, to the effect that environmental and human-rights concerns were not really the responsibility of a bank. Instead, he received a lecture on how China had developed its economy using precisely these types of projects. “Li said that the bank had some responsibility for the social and environmental aspects of the projects it took on, but he also told me that China had needed to first grow out of poverty before it could start to worry about the environment,” Bosshard says. “He said that China would not stand in the way of other developing countries that were trying to do the same thing. China was not just lending them money—it was exporting its development experience.” At the end of the meeting, Li proposed a sort of informal collaboration. He said he would send a team to investigate problems at the Merowe Dam in Sudan and other cases brought up by Bosshard. But he asked that Bosshard talk to him before making any more public criticisms. Although he was aware that he risked being muzzled, Bosshard agreed. “If we believe that people are listening to us, that is not really a problem,” he says, in justification of his acceptance of the deal.

  The private dialogue with China Eximbank lasted for about a year. In May 2007, the African Development Bank held its annual meeting in Shanghai, another striking indicator of the new economic symbiosis between China and Africa. Bosshard decided to bring along two activists, one from the Merowe region of Sudan and the other from Mozambique, where Eximbank had signed another controversial dam-building agreement. He tried to organize a chance for them to talk to officials at the bank about their experiences, but after a lot of delaying, Eximbank declined to arrange a meeting. So Bosshard went to the media instead, offering a session with his two African visitors to
the Shanghai Foreign Correspondents Club. Eximbank was furious and has not spoken to International Rivers since.

  After falling out with China Eximbank, Bosshard began a similar dialogue with Sinohydro, the biggest dam-builder in the world. International Rivers has been discussing with the company a new policy of environmental guidelines. Sinohydro has ordered that all its overseas subsidiaries must use Chinese environmental law if they are working in countries that have weaker regulation, which Bosshard says could be an important step forward. He says they are taking it more slowly this time, after the bust-up with Eximbank, to see what sort of response the NGO gets from the company. But the revealing aspect of Bosshard’s attempt to engage with China’s hydropower sector is the way it has started to change some of his own views on dams and economic development. Bosshard is now married to a Chinese woman, and when I met him in Beijing, he had just come back from spending Chinese New Year with her family in Benxi, a rough mining town in the northeast. Even there, he said, it was clear how life has improved for the residents as a result of the booming economy. Western NGOs can be so focused on their particular human-rights or environmental issues, he says, that they can sometimes forget that economic growth is also a prerequisite for improving the welfare of ordinary people. He has not altered his views on the need to have much greater social and environmental protections attached to large dams, but he has come to see how major infrastructure projects do not always end up as huge boondoggles that hurt the poor. If well executed, they can have a major impact on the broader economy. “The years we have spent coming to China have definitely persuaded us that things are more complicated than we thought,” he admits.

  ——

  Working more with China is one approach. At other times, the U.S. will need to work around Beijing. In a contest for influence, the country that prevails will be the one that manages to draw a larger number of other governments to its side. By building strong coalitions of support on specific issues, Washington can shape Chinese behavior, even in areas where they do not agree.

  This approach is already being used in trade policy. As well as the Trans-Pacific Partnership (TPP), the trade agreement that brings together a group of countries from Asia and the Americas, the U.S. is also negotiating a trade agreement with the European Union which would unite into one economic zone 40 percent of the world’s GDP. The two negotiations have a powerful theme in common: they are partly designed to take on Chinese state capitalism. The agendas of both agreements cover subjects like intellectual-property protection, generous financial subsidies, protection of foreign investment, and labor rights—precisely the areas that are becoming so contentious because of China’s model of doing business. American negotiators see these agreements as a firewall against what they describe as Chinese abuse of trade rules. If Washington can get enough of the most important economies in the world to sign up for this sort of trade agreement, it can effectively set standards for the way international trade is conducted that China would find very hard to overturn.

  These trade talks reflect a very different approach to dealing with China. American officials once talked about encouraging China to be a “responsible stakeholder” in the international system, and in the first year of the Obama administration there was a brief flirtation with a sort of G-2, an informal compact to try and solve some of the world’s problems together. But by working around China in this way, Washington is almost trying to present China with a fait accompli. If the international consensus is strong enough, China could risk appearing like a pariah if it tried to resist the new rules. On many of these issues of economic governance, the U.S. is likely to find that the EU shares the exact same concerns—from cyberhacking, which is a huge issue for German manufacturing companies, to fears about Chinese subsidies. As China’s economic influence grows, the U.S. and Europe are likely to find greater common ground, although Europe will likely remain divided on how to deal with China.

  The talks are also the harbinger of a different way of trying to address global issues. The U.S. used to push its ideas through the ambitious global organizations it set up after the Second World War, including the UN, the World Bank, and the World Trade Organization. But whether it is the prolonged deadlock over the Doha round of trade talks or the endless series of climate-change talks that produce little, there is now a pervasive sense of gloom about the idea of big global agreements. TPP and the U.S.-EU trade talks are a reflection of a more modest approach, the idea that the best way to get things done now is through smaller agreements with like-minded governments, diplomatic coalitions of the willing.

  The danger in such an approach, of course, is that it alienates China further and gives it more reason to break with the American-led system. Beijing is frank about what it thinks of the new trade talks. “The U.S. is trying to rewrite global trade rules behind our backs,” says one senior Chinese official. A strategy based on sticks alone will likely only create a more frustrated China: Washington also needs to devise some carrots.

  ——

  During the decade when he ran China, Hu Jintao rarely looked more relaxed than on the day he visited a Boeing factory in Seattle in 2006. He smiled broadly, donned a baseball cap with the Boeing logo, and gave a factory supervisor a hug. Hu’s speech was somewhat leaden, but he still received a loud round of applause from the workers. As the event was coming to an end, the then head of Boeing’s aircraft division, Alan Mulally, put one hand on Hu’s shoulder, pumped his fist with the other, and shouted: “China rocks!” Such moments have been rare, however. It has become so common to talk about the interconnectedness of the U.S. and Chinese economies that it is surprising just how shallow the personal links are in China. For all the powerful financial and trade ties that bind China to the U.S., the number of members of the Chinese elite with a direct stake in the U.S. economy is limited. China may own $2 trillion of U.S. assets, but those investments are handled by the small group of bureaucrats who manage the central bank’s reserves. Trade offers a similar story. At least half of China’s exports of consumer products are manufactured by foreign-owned companies in China. The number of Chinese firms that rely on the U.S. is much smaller than the headline figures would suggest. Investment has been even shallower. Of all the money that Chinese companies have started to invest in other countries in recent years, only 1 percent has come to the U.S. In terms of big-picture economics, China leans heavily on the U.S., but that does not translate into business careers and life experiences.

  The coming wave of overseas Chinese investment is a new opportunity for the U.S. to think about what sort of relationship it really wants to have with China. Given the toxic politics over cybersecurity and the suspicions that Chinese companies enjoy unfair financial advantages, it would be easy to see a repeat of the Japan scare that accompanied Japanese investments in the early 1990s. Some politicians might be tempted to indulge in a round of China bashing. Yet that would be a big mistake. At a time when military rivalry between the two countries is accelerating, and when new economic tensions are swirling, one way to persuade China that the U.S. has no plans for containment would be to roll out the red carpet for Chinese investments that do not have clear national security implications. This is one of the tools America has at its disposal as it tries to influence China’s long-term calculations.

  The U.S. has an opportunity to build up its own lobby of supporters within the Chinese system. The bosses of the large Chinese state-owned companies are among the most important officials in the country, and if they have a personal stake in continued good relations with the U.S., this can only help Washington. Until China started to play hardball with foreign multinationals, the biggest supporter Beijing had in the U.S. was the business lobby. A surge in Chinese investment would also give the U.S. a bigger window to try and shape the behavior of large Chinese companies as they become important global players. CNOOC, the oil group which was humiliated in its 2006 effort to buy Unocal, has since then acquired a group of smaller assets in the U.S. One upshot is that CNOO
C and the rest of the Chinese oil industry have been relatively cooperative with the U.S. over the issue of Iran sanctions. Chinese companies have not progressed with the large investment deals they had signed in Iran and, under pressure from Washington, they have scaled back imports of oil from Iran. Encouraging Chinese state-owned groups to operate in the U.S. is one way of acquiring a little more leverage over them and the senior party officials who manage the companies.

  America, it should be said, also needs the money. There is an odd disconnect between the way some in Washington see Chinese investment and the response in the rest of the country. In 2011, when Hu Jintao visited the U.S., the White House put on a grand state dinner in his honor, yet that evening the leaders of Congress—the speaker and the Senate minority and majority leaders—realized that they had somewhere else they would rather be. Not one wanted to be seen having dinner with the Chinese leader. The next day, Hu went to Chicago, which put on a lavish reception for him in the hope that China would send some investment its way. Richard M. Daley, the mayor and heir to his family’s political dynasty in the town, called Hu a “man of vision.”

  During the 2012 election campaign, Barack Obama and Mitt Romney crisscrossed Ohio, slamming “Chinese cheaters” who were taking American jobs. On the same September day when both candidates were in Toledo, the city’s mayor, Michael Bell, was hosting a conference for a group of 150 Chinese businessmen he had invited to try and attract investments. “I have to say, the campaign is really hindering us,” Bell told me, referring to both candidates’ China bashing. “The Chinese people we invited here are asking, ‘Why are you picking on us?’ or ‘Why are we suddenly the big issue?’ ” Bell had made three trips to China in the previous two years to solicit investments. (His business card has his name in Chinese on the back.) In turn, he has received thirty different delegations of potential Chinese investors, many of whom have been treated to private performances of the Toledo Symphony.