Reverse China Hedge

For the past five years or so, the common wisdom in Washington was that the best way to deal with China's uncertain future was for U.S. policymakers to employ a "hedging strategy" toward Beijing. The logic was elegant: Warriors at the Pentagon should dissuade China from acting aggressively while diplomats in Foggy Bottom should persuade China to act responsibly and peacefully.

This hedging approach was clearly articulated in 2006 in President Bush's National Security Strategy, saying it would "encourage China to make the right strategic decisions for its people while we hedge against other possibilities." Earlier that year, the Pentagon's Quadrennial Defense Review Report similarly spelled out that while it would focus on "encouraging China to play a constructive, peaceful role in the Asia-Pacific region" it would also aim to create "prudent hedges against the possibility that cooperative approaches by themselves may fail to preclude future conflict."

While the United States has been trying to create more policy coherence and be more consultative in its posture toward the world, China has been displaying some elements of a hedging strategy against what some might see as an uncertain future for U.S. power. Several factors might explain China's more multifaceted approach toward the United States, including domestic demand for an external scapegoat for economic woes, uncertainty about how the financial crisis will play out, and an overall more intertwined relationship between China and the world.

When Chinese asked me five years ago whether China was a friend or a challenge to the United States, I would say both. I called this seemingly dissonant approach toward China the result of a complex democratic process of policy making. Similarly, as China's middle class grows and its social stability becomes more worrisome, its own posture is becoming less monolithic.

This is one of the main findings from a trip to China I took last week with China scholar Josh Eisenman. The trip, which was a follow up to a delegation we led last September to Beijing, took us to four Chinese cities (Beijing, Qingdao, Nanjing, and Shanghai) and one farming village in Shandong. In my view, our conversations revealed more ambivalence about China's approach to the United States. As some have said, China may "seize" perceived U.S. weakness to reconfigure its position in the global pecking order. There was no question that China benefited from good relations with the United States and everyone preferred a healthy U.S. economy. But the doubt over U.S. economic health relative to Chinese economic growth has opened the door to a deeper debate.

On one hand, China benefits from the U.S. security, markets, and financial arrangements. On the other, however, China is naturally, almost mechanically, reconsidering its place as it grows.

This theme emerged during a long conversation we had with a senior Chinese scholar. It went something like this:

"Does China feel that the United States is a threat?"

"No."

"So why does China feel the need to expand its power projection and build its military?"

"It is in response to U.S. military power."

In other words, China may not feel that the United States is a threat per se, but the very fact that the United States is powerful is driving China to grow its power and act more like a "great nation." It is like international relations balance of power theory is a natural law.

My message to our Chinese hosts was simple: If China would like to act more assertively in the South China Sea, for example, it needs to provide global public goods as well. As it stands, China's opaque and increasingly powerful military is starting to scare its neighbors. The international system is predicated on safe sea-lanes that are guaranteed by the U.S. navy; the safe sea-lanes facilitate open trade and foster global peace and prosperity. If China wishes to challenge this arrangement, it will have to offer something.

Another area in which this theme has turned up is in the U.S-China economic relationship. Just before we left for our trip to China, Prime Minister Wen Jiabao said he was worried about his dollar assets. "We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," he said. His statement masked China's dilemma: It needs the United States to stimulate its economy with loser fiscal and monetary policies, which could drive down the value of the dollar, hurting China's dollar assets. Complicating the relationship, a weaker dollar could also lead to a lower volume of Chinese exports to the United States at least in the long run.

Fortunately, this week at the G20 meeting in London, Presidents Hu Jintao and Barack Obama found common ground on shared interests of stabilizing the global economy, cooperating in addressing climate change, and creating a high-level strategic and economic U.S.-China dialogue, which could help build trust between these two powerful nations. Out of a common sense of fairness, there seems to be agreement that the governance of the IMF must be restructured as well. The China hedge may be reversing but so far longer-term, strategic interests have prevailed.

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