China: Failure is Not an Option

September 1, 2009

Future global economy as seen from 1965. Mario

Depending on whom you ask, state capitalism will either propel China to superpower status, or it will prove fragile and destined to fail. According to David Pilling, "Books about China ruling the world used to be prefaced with 'if'. Now, more often, they are preceded by the assumptive 'when.'" On the other hand, in a recent edition of Foreign Policy, Minxin Pei disputes China's imminent dominance and counters with a sober look at the litany of risks that lie ahead. While China's total economic output is projected to surpass the United States in 2027, Pei points out that it will be at least 47 years before China matches America on a much more relevant measure: per capita GDP. Both of these time frames are sufficiently long that any meaningful predictions will be fraught with peril.

According to Pei, the potential pitfalls facing China in the medium term include demographic challenges stemming from an aging population, a shortage of fresh water, air pollution (currently killing 400,000 people each year), the threat of a severe energy crunch, the impact of climate change on the agriculture sector, overcapacity in the manufacturing sector, and the threat of political instability that could be triggered by secessionist hotspots.

After reading Pei's article, some Americans may find comfort in the image of a rising dragon that falls back down to earth, leaving American hegemony unchallenged. But upon closer inspection, the United States should consider Chinese collapse to be the single largest foreign policy risk. To understand why, we need to look back to 1991.

The fall of the Soviet Union and the end of the Cold War was a watershed moment for the liberal Western systems of democracy and market capitalism. It drove China and India to rapidly transform their economic thinking from Soviet-style socialism to Western-style capitalism, opening up massive new markets and raising the standard of living for hundreds of millions of people. How this affected Russia, however, is somewhat different.

In 1990, the average Russian earned $12,690. By 1998, that figure had fallen to an average of $7,301 per person. Income in Russia did not return to 1990 levels until 2006, boosted largely by record high oil and gas prices. This helps to explain why Russian Prime Minister and former President Vladimir Putin describes the end of the Cold War as "the greatest geopolitical catastrophe of the century."

Russia has now returned as a powerful player on the international scene, awash in valuable natural resources, with an authoritarian regime that has brought a return to prosperity and stability after a failed foray into Western-style reforms. It is a Russia willing to invade its neighbors in order to protect its regional influence and willing to use gas reserves to extort concessions from Europe.

History, in the case of China, is not destined to repeat itself in quite the same way. In the event of a Chinese collapse, the outcome would be worse. The first lesson from the Russian experience is that a newly adopted Western system must deliver and distribute long-term growth and stability, or else the domestic appetite for Western solutions will diminish. In 1998, seven years into their Western experiment and with incomes nearly halved as a result, Russians were not clamoring for more of the same. If China experiences a collapse of this magnitude, its people will likely draw similar conclusions. The sheer size of China's population will magnify problems in ways that are difficult to anticipate.

Macroeconomic conditions are also different now than when the Soviet Union fell. In 1991, dozens of countries were transitioning toward a market economy, opening up huge potential for trade and global prosperity. Also, the United States had minimal interconnection with the Soviet Union, leaving it with little economic exposure when the Union collapsed. Today, there are no massive new market opportunities that will open if China falters, and U.S.-Chinese economic interconnection is at unprecedented heights, tying the fate of the two nations together in ways that could never have been dreamt of with the Soviet Union.

One theme evident in current discussions about China is the regime's almost singular focus on stability. Its drive to maintain employment and economic growth is motivated by a fear that failure to do so will destabilize the country and threaten its survival. For many who see no immediate end to China's robust economic growth, the chance of instability is slim and will remain so for quite some time.

Nevertheless, the consequences of a destabilized China are serious enough to deserve committed attention. The good news is that a stable and prosperous China will continue to bring enormous opportunities, both economically and diplomatically, for the United States. To advance its own interests, the United States needs to be a partner in China's quest for stability and take seriously its stated commitment to a "positive, cooperative and comprehensive relationship for the 21st century." In what is now the world's most important bilateral relationship, the options are either win-win or lose-lose.

In their recent Foreign Affairs article, "The G-2 Mirage," Elizabeth Economy and Adam Segal conclude that "further elevating the bilateral relationship [between the United States and China] without addressing the very real differences in values and enforcement capacities between the two countries will lead nowhere." Collaboration is complicated by differences in governance and implementation capabilities, legal infrastructure to protect intellectual property rights, political accountability, and military transparency. Economy and Segal also note that the two countries have vastly different perspectives on how quickly these gaps should be closed, with China looking at change "over decades," and the United States expecting a much shorter time frame.

Troubling patterns of protectionism also stand in the way of deeper economic ties. In the United States, domestic pressure from the financial meltdown and a middle class with stagnant incomes has brought protectionist sentiments back to life. The 2008 Pew Global Attitudes Survey illustrates the changing American perspective: only 53 percent of Americans are of the opinion that trade is good for their country, down from 78 percent in 2002. These feelings could be mirrored in China in the coming years. "A different but no less potent economic nationalism will grow stronger as China faces inevitably slower growth and challenges posed to its successful growth model based on exports and other international linkages," writes Mark Frazier, Professor of Chinese Politics at the University of Oklahoma in China.

Despite the ample challenges that confront a stable, long-term U.S.-Chinese relationship, the stakes are sufficiently high that failure is not an option. Fortunately, the Obama administration seems to understand the significance of this relationship, as did the Bush administration before it. They have created numerous bilateral mechanisms and enrolled the United States in broader regional initiatives that should serve to strengthen ties and provide conflict resolution frameworks to ease tensions when they arise. Initiatives of this nature need to be expanded and strengthened in the hopes that integration and greater exposure between the two cultures will enhance understanding and present further opportunities for mutually beneficial economic, diplomatic, and even military relations. The alternative is in no one's best interest.