Chinese Chess

December 23, 2010

by Irwin M. Seltzer

(Editor’s Note: Here is a major media right-wing Republican publication that sees China’s ascendancy as inevitable. The author observes many of the same phenomena I did in yesterday’s article. But he comes to the wrong conclusion in his last paragraph. He tries to hold that there is still time for Washington to fix its own ills. But DC has neither the political will nor the stomach for draconian spending cuts in the Federal budget coupled with real downsizing of the Federal Government. Washington will be swept into the ashbin of history, and so too the “American Experiment.”)

The Chinese are playing grandmaster chess against an amateur America that can’t see beyond the second move. In a bipartisan display of geopolitical obtuseness, America continues its historic trade policy: It’s free trade, except occasional lapses into protectionism when a whinging constituent must be placated, with a reliance on the World Trade Organization to settle disputes (and believing it has won something of significance when the WTO sides with it in a dispute over such a key product as cheap tires). Occasional public complaints about China’s persistent undervaluation of the renminbi, but refusal to declare the regime a currency manipulator. And conferences, conferences, conferences. All very 20th century.

China is doing a very different thing. The Communist regime sees trade policy as merely one weapon in a war aimed at overtaking the United States as the world’s preeminent economic and, by extension, military power. The undervaluation of the renminbi is a necessary means of keeping China’s export machine running at full tilt so as to create jobs for the millions who are moving from the country to the nation’s cities. Lacking democratic legitimacy, the regime’s principal claim to the loyalty, or at least the submission of its people, is its ability to provide jobs and a rising standard of living, doubly important in this period of transition to a new generation of leaders in 2012. Americans chortle: that mercantilist program of subsidizing exports cannot be sustained forever, as the inflow of dollars will sooner or later trigger inflation. Right: indeed, that is already happening, and forcing the regime to adopt a variety of measures to curb credit and inflation.

But largely irrelevant in the longer term on which the Chinese are focused. By the time the Chinese decide they will have to allow the renminbi to appreciate, they will have accomplished two long-standing objectives. First, their vaults will be stuffed with an even larger hoard of American IOUs, enough to give them an important influence over U.S. foreign policy. “How do you deal toughly with your banker?” asked Hillary Clinton of the then-prime minister of Australia, Kevin Rudd, at a luncheon last year. His answer is not recorded.

It is true that if the Chinese start to dump U.S. Treasuries and dollars, the value of their own piles of dollar-denominated assets would decline. But if the broader geopolitical objective were served, that would merely be a cost to consider as part of the military budget.

Second, by then the Chinese will have copied enough American and Western technology to be in less need of an undervalued renminbi—they will have made-in-China products that can dominate world markets even if their currency approximates its market value. The camels that trod the old Silk Road laden with spices and porcelain will have been replaced with air and sea freighters hauling solar panels and all sorts of goods based on copied technologies and purloined intellectual property. To cite just one example, the high-speed trains that China is now selling worldwide are based on technology brought to China by French, German and Japanese companies.

Every deal to tap the vast Chinese market comes with a requirement that they turn over their technology to the Chinese: nuclear plants, green energy products, autos will be made by American companies in China –until the Chinese complete construction of their copycat plants. The initial orders satisfy the American executives, their eyes focused on the next quarterly report. The Chinese, their eyes focused on 2020 and beyond, know that the technology in hand, they can duplicate the factories and techniques needed to dispense with the American capitalists. Westinghouse Electric recently turned over 75,000 documents to its Chinese customers as the initial part of the technology transfer to which it agreed as part of a deal to sell four nuclear plants to China. Nothing seems to have changed since Lenin observed, “The capitalists will sell us the rope with which we will hang them.”

Consider, also, solar panels, a product that demonstrates the difference between Chinese and American attitudes. The Chinese agree with President Obama about one thing: solar panels are an increasingly important product and source of jobs. The main raw material is polysilicon, and when its price soared the Chinese made it a national priority to replace foreign supply sources. Government money was marshaled and, more important, the permitting process was short-circuited so that plants could go from ground-breaking to full production in a bit over a year; in the West that is a multi-year process. Result: China controls half the world market for solar-power equipment. In a demonstration of what many now take to be the superiority of state over market capitalism, the Chinese created this and other industries from scratch—and quickly.

There is worse. While Barack Obama and American supporters of free trade are congratulating themselves on negotiating a trade deal that will enable American carmakers to sell a few more cars to South Korea, the Chinese are establishing themselves in Africa, South America and the Middle East so as to lock up supplies of minerals, oil and food. The regime has already demonstrated that these moves on the world’s chess board are about more than money and trade balances. Offend them with some move on the world chessboard that does not suit them, and they ban the export of rare-earth minerals crucial to the manufacture of myriad products. Their control over the world’s supply—reports are that they control 95 percent of available supplies and are buying up undeveloped resources in Africa—is in part due to their willingness to bear the high environmental cost associated with the processing of these minerals in order to reap the benefits of control over the manufacturing output of Japanese and Western countries. American liberals and greens prefer a more pristine environment.

Still another problem is the difference in attitudes towards foreign investment. American policy discourages foreign investment by attempting to raise taxes on foreign earnings. Meanwhile China, having already invested massively in resource rich African countries such as Sudan, is turning its attention to Latin America. In Argentina alone China’s state-owned and subsidized companies have invested in oil and gas properties: copper, gold, silver and lithium mines; lands for soya production; and in port development to facilitate the large-scale shipment of these resources to China.

Then, of course there is India, a giant democratic country growing at a pace equal to or faster than China’s, and now the prize in the 21st century version of the Great Game. Barack Obama and an enormous trade delegation visited India and returned to trumpet success in working out trade deals worth an estimated $10 billion. This week Wen Jiabao, China’s premier, played one-upmanship and booked $16 billion in deals, financed by China’s banks, and announced he would open China’s markets to Indian goods as part of a plan to double trade between the countries to $100 billion annually by 2015.

Even more important are two additional factors, one economic, the other military. Beijing has its eye on the dollar. Not the jiggles in its value, although it complains about the threat QE2 poses to the value of the dollar and therefore to its dollar-denominated holdings. But on replacing the dollar as the world’s currency of choice. Countries can now invoice and settle trade deals in renminbi, which more and more will do as China gradually makes the currency more easily convertible. Economists at HSBC are guessing that within three to five years half of China’s trade with developing countries—that trade accounts for 55 percent of all of China’s trade—will be in renminbi, compared with 3 percent at present. No need for dollars.

Then there is the military consequence of all of this. China is becoming increasingly aggressive in asserting its territorial claims to the Senkaku Islands, now controlled by Japan, and to territories claimed by Vietnam and others in the South China Sea. It is building submarines and aircraft carriers and modernizing its navy, cyber-warfare capability, missiles, and anti-satellite weaponry. No surprise that Australia and other nations in the Asia-Pacific region are reviewing their policy of relying on America as a force capable of imposing stability on their region.

But there is good news, news that trumps all of these problems. Lawrence of Arabia, at least according to the David Lean film, countered Arab belief in inevitability with the retort, “Nothing is written.” So it is in the Sino-U.S. jockeying for supremacy. America remains the source of most of the world’s innovations and the home of most of its great entrepreneurs; unlike China, America is blessed with a relatively young population; bright Chinese still prefer to be educated at great American universities, and the American Dream remains a magnet for risk-takers looking for an opportunity to move up in the world; the American military is still the most potent in the world; and this nation is blessed with an abundance of natural resources. There is time to fix things: “The Chinese currency is still a long way from replacing the U.S. dollar as the world’s reserve currency,” writes Chi Lo, CEO of HFT Investment Management in Hong Kong. All that is missing are sensible policies. And it truly is not written that we will continue to pursue the self-destructive policies of recent years.

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