China's Growing Pains Shouldn't Hurt Us

By Albert Keidel Washington Post Sunday, July 24, 2005; Page B05

[Albert Keidel is a senior associate at the Carnegie Endowment for International Peace. He previously served as deputy director for the Office of East Asian Nations at the Treasury Department and senior economist in Beijing for the World Bank.]

Yes, China is growing fast and buying global assets. And yes, its economy is going to be bigger than America's.
But this will not happen nearly so soon as most people think -- 2040 at the earliest and more likely 2050. In the meantime, rather than trying to block China's access to U.S. assets and markets, the task at hand is to craft, with China, an international system inclusive enough and flexible enough to enable China to grow and for the rest of the world to share the potential gains its economy has to offer.
This hardly seems to be the spirit here in Washington these days. Anxieties about China's burgeoning economic might have been heightened by the sale of IBM's personal computing business to a Chinese firm and Chinese bids to buy American corporate icons such as Maytag and the oil company Unocal. Other worries have centered on the more than $700 billion of foreign exchange reserves China has piled up, much of it invested in U.S. Treasury bonds.
Yet these anxieties have more to do with our own economic challenges than with China's, which remain largely domestic. And those who would build a Great Wall of America to fend off China's influence could end up jeopardizing everyone's long-term peace and prosperity while doing little to improve prospects for political change in China.
In fact, the United States has a major stake in whether or not China succeeds in pulling most of its 1.3 billion people out of poverty. Average consumer spending in China is less than a tenth that in America. Those fearful of the prospect of a bigger Chinese economy should consider the alternative. If China fails in its ambitious program of market reforms and commercial globalization, it could turn into the "sick man" of Asia, governed at the local level by organized criminals and hemorrhaging desperate boat people and migrants.
We have an even greater stake in ensuring that China's success, which seems likely, does not proceed in a world of growing diplomatic and even military confrontations over access to scarce resources. Otherwise we risk a return to late 19th-century globalization patterns -- not with colonies but with spheres of influence. Leading powers would scramble to expand their spheres at the expense of others, with the United States trying to limit China's access to minerals, technology and information. In the past, this sort of pattern led to war.
Trying to hold on to outdated price advantages, whether for U.S. labor, U.S. industries or U.S. energy consumers through blockade and exclusion can only result in destructive retaliatory strategies and military tensions.
The right procedure for absorbing China's growth is through market mechanisms, especially the price mechanism. China's thirst for scarce commodities will inevitably show up in higher prices. But higher prices trigger a whole range of beneficial developments -- exploration for new resources, development of substitutes, breakthroughs in conservation, and adjustments in human behavior. These changes are faced equally by all nations, and competition dictates who benefits most from the resulting productivity gains.
While we concentrate on China's external posture, China's domestic challenges -- many of them left from the Maoist era -- are so big that the country's attention will be turned inward for a long time to come. The most fundamental of these has been the need for wrenching dislocation of state workers, tearing them from long-held but overpaid and unproductive positions and compelling them to find less secure jobs, to work for themselves, or to move to new cities. Between 1997 and 2004, 50 million Chinese workers lost jobs in state-owned and collective firms. The result has been major gains in market-based productivity and income increases. The cost is anger, social tension, demonstrations and riots.
At the same time, close to 200 million rural workers have migrated to non-farm jobs in towns and coastal areas from remote interior regions. Their competition for jobs and housing is a constant source of social tension, while back on the farm, loss of rural land to non-farm investment often triggers local conflict.
China's transition is thus far from easy, and the country could hit many bumps along its way. The government has acknowledged that more than 50,000 demonstrations take place each year -- many of them large and violent. That is well more than a hundred a day. Many demonstrations are labor actions, protesting unpaid wages, poor working conditions and plant closings. Profit motives have also worsened pollution and environmental degradation. Managing these side effects of market reform is a daunting challenge.
Is the Chinese Communist Party to blame? Yes, in part because of its rigid response to criticism, but no form of government promoting change at this pace could avoid similar tensions, demonstrations and violence. Less energetic economic reforms might result in less violence, but also in less progress in eliminating poverty and raising living standards. Grievances in China are magnified in some cases by local corruption. But even as China arrests and convicts corrupt officials, the introduction of markets in new areas continues to provoke resentment among those losing their previously vested privileges.
China's domestic programs are tackling many of these challenges head-on. There have been improvements in legal mechanisms and procedures, but the process is slow, has a long way to go and is hampered by a severe shortage of qualified personnel. Nongovernmental organizations are becoming more numerous, and there are legal frameworks for those seeking redress. Citizens can sue government officials, even if most cases are "settled" out of court. Demonstrations and protests themselves are one avenue of recourse. Chinese authorities defuse most of them peacefully and often work out some meaningful response to the grievance. Organizers and ringleaders, however, are frequently arrested -- especially if there has been violence.
A different challenge -- infrastructure investment -- also illustrates market-oriented tensions. China's cities are booming -- and so are their needs for mass transit, office space, housing and treatment for water and waste. But infrastructure takes money, and with a low per-capita income of just over $1,000 per person, tax and fee revenues are inadequate. China's solution to the funding challenge has been to use banks and other deposit-taking institutions to raise needed money, with repayment to depositors ultimately guaranteed by the government out of future tax revenues. Such programs are anathema to free-market financiers here in the United States. But this is an East Asian pattern that worked for Japan, Korea, Taiwan and Singapore, at least for a while.
Access to world resources is also a vital part of managing China's market transition. Energy supplies are the best-known problem, along with needs for technologies and management methods, information and technical skills. Opening itself to foreign investment on a scale not seen elsewhere in Asia has helped meet many of these needs. Buying foreign companies has helped too. But at this point, with China getting bigger, the country's transactions begin to impinge on privileged access to resources heretofore enjoyed by already industrialized countries.
If the United States reflexively blocks these transactions, it will damage China's trust in its ability to rely on even-handed global market rules for solving its domestic problems. A good example is grain. China's farmers need to increase incomes by diversifying away from grain. They don't make any money growing grain -- the single most important food in China. If China felt safe relying on grain imports for its food needs, farmers could convert their land to more lucrative crops and products, like vegetables, oilseeds, fruits, meat, milk and fish. And America could sell a lot more grain to China. But China doesn't feel safe. China's leaders worry about a supply cut-off or blockade. And so, the emergence of a rural middle class in China is delayed, and U.S. farm interests are hurt.
Instead of appreciating the challenges China faces, Americans naturally concentrate on what plays well in the domestic political arena. China's currency is a good example. U.S. politicians, sensitive to manufacturing job losses in the last recession, blame China. Never mind that last year China's overall trade surplus (with partners worldwide) was only 8 percent of the U.S. trade deficit, compared to 26 percent for the euro currency zone's surplus, 21 percent for Japan and 19 percent for the rest of Asia excluding Japan and China. The sister countries of Singapore and Malaysia together had a larger overall trade surplus than China last year. No one claims they are causing "global imbalances." But China is fair game.
The result is an image of China's sources of foreign reserves that distorts thinking when China comes to bid for U.S. companies like Unocal. The real source of the large U.S. trade deficit is those surpluses in Euro-zone countries and Japan. But these countries are friends and allies; China is not. And so a recent congressional hearing on China's Unocal bid could unblushingly entertain anti-China rhetoric that is out of touch with the reality of China and U.S.-China relations. One member even wondered whether the Unocal purchase could be the first step leading to China's military occupation of major Middle East oil fields and hence control of world oil prices. It is this kind of rhetoric, not China's desire to acquire a U.S. company, that endangers American national security.
The best U.S. response to China's global emergence is to welcome it on the basis of shared commercial rules and procedures. At the same time, America itself needs to accelerate its own domestic restructuring if it is to raise the productivity and incomes of its own labor force in response to the opportunities and challenges that China presents.

Author's e-mail: AKeidel@CarnegieEndowment.org