Asia Times: How the US will play China in the new Cold War


	April 19, 2002	atimes.com

China

COMMENTARY
How the US will play China in the new Cold War
By Henry C K Liu

There is a new Cold War brewing. The old Cold War, which ended with the fall of the Soviet Union, was a struggle between competing ideologies backed by two superpowers. International trade among Western bloc economies then occurred mostly within a narrow geopolitical context, with the United States subsidizing dependent economies to build showcase examples of capitalistic market economies.

There was no official trade at all between the two opposing ideological blocs. The old Cold War brought about an all-out militarization of the peace that distorted the US economy, with the actual shooting in recurring regional conflicts confined to local surrogates. Each bloc attempted to show its ideological superiority through economic aid to the weaker economies within its orbit and to needy non-aligned nations.

Since the end of the old Cold War, foreign trade has replaced foreign aid as the development venue of choice. Domestic economic development in the periphery has since been adversely distorted by excessive concentration on export to rich markets.

The new Cold War is less ideologically based and more geopolitically framed, although still couched in residual ideological polemic. This trend actually began with former US president Richard Nixon who saw that world communism was not any more monolithic than world capitalism and that age-old geopolitical factors had not been made obsolete by modern ideology.

In the new Cold War, the US, as the sole remaining superpower, has increasingly adopted a modus operandi of unilateralism and exceptionism against all not to its liking. The US now holds up American values as incontestable universal truths and proudly imposes moral imperialism on a defenseless world through the doctrine of failed states. It sponsors a new economic imperialism through neoliberal globalization. While at the beginning globalization was peddled as a trickling down of benefits from the rich to the poor, it now is presented as a new liberal imperialism that this chaotic world needs.

The new Cold War is a conflict between the world's rich and its poor, between the powerful and the powerless who have been forced to resort to terrorism as a resistance of last resort, which in turn generates violent military response abroad coupled with wholesale assault on civil liberties at home. It is not unreasonable to question whether state terrorism is morally superior to outlaw terrorism. Neoliberal market fundamentalism operates on the principle that the only thing worse than being exploited is not being exploited at all, and the only rational option in dealing with the new imperialism is to be co-opted into the global empire.

Before the war on terrorism, which has been hastily launched in reflexive reaction to the surprise attacks of September 11, the US had unilaterally identified China as its arch-enemy in the new Cold War. It is not that China does not wish to have friendly relations with the US. Rather, the US has made it clear that it will not permit normal, let alone friendly, relations with a communist China, except in the area of non-strategic trade. This shift from the Nixon China policy, despite the moralistic pretense of promoting liberal democracy against totalitarian centralism, represents a faithful commitment to geopolitical realpolitik under changed conditions.

China is no longer considered as necessary for countering Soviet threat. Beginning with the Ronald Reagan administration, the US has been moving toward its historical fixation that any rising power in Asia is deemed a threat to US interests in the region. Replacing the European imperialistic powers, the US after World War II took upon itself the task of extending a new version of its open-doors policy, originally devised to preserve US interests during the de facto partition of China by Western imperialist powers in the 19th century. This new open-door policy is now extended to all of Asia, indeed the whole world, in the name of neoliberal globalization. Thus the US posture of moral imperialism against residual national communism is merely a convenient pretext to contain Chinese national revival in the New Cold War.

There is a strong parallel between current US security policy toward China and US security policy toward a rising Japan in the 1930s. Thus, regardless of domestic political ideology inside China, as long as political developments lead toward Chinese national resurgence, the US will pursue a hostile security strategy toward China. The communism issue is merely icing on the cake. That is the fundamental reason why US-China relations will not be conflict free in the foreseeable future.

Ironically, this US policy pushes China to form coalitions with non-communist governments internationally against US global hegemony. The central weakness of the Taiwan regime is that its subservient alliance with the US is based less on ideological convergence and more on opportunistic separatism that is treasonous to Chinese nationalism.

The new Cold War is different in that while the US and China are locked into a long-term path of escalating security conflict, both governments appear to agree on the need for near-term economic cooperation based on each nation's own separate interests. Whether trade and economic cooperation can be facilitated within the framework of latent security conflict will be the challenge facing political leaders in both countries. History is not without examples of such arrangements.

The US traded with Japan until Pearl Harbor. General Motors and Ford, among other major US companies, operated profitably in Germany even after Germany's declaration of war on the US in 1941. History is less clear on the ability of trade to prevent war. The US, while actively promoting trade with China, has maintained an embargo of duo-use strategic and military sales to China in the new Cold War.

Despite a free-trade agenda, the US maintains a trade embargo against a list of other nations that provoke its displeasure, from Cuba to Libya and from Iran to Iraq, on which former US secretary of state Madeleine Albright asserted in a CBS interview on May 11, 1996, that the death of more than 500,000 children among the total 1.5 million deaths caused by US sanctions was a worthwhile policy cost.

President George W Bush defends the US free-trade agenda by arguing that his administration's effort to break down tariffs is a moral imperative, a paraphrase of Henry Kissinger's "peace too is a moral imperative" dating back to rhetoric used in defense of his approach to end the Vietnam conflict and the policy of detente. "Open trade is not just an economic opportunity, it is a moral imperative," Bush declared. "Trade creates jobs for the unemployed. When we negotiate for open markets, we're providing new hope for the world's poor. And when we promote open trade, we are promoting political freedom."

The Bush White House has been reorganized to place its top economic adviser (Lawrence Lindsey) under its national security adviser (Condoleezza Rice).

Such claims remain highly controversial when tested by actual data. Millions of domestic manufacturing jobs in the US have been lost to overseas locations through foreign trade. On a global basis, although the number of jobs has been increased to do the same amount of work through the use of less skilled labor, the aggregate wages for the same amount of work has been falling drastically. The World Bank has shown that globalization has created 200 million newly poor people in the world in the past decade, adding up to a total of 1.5 billion poor, a quarter of the world's 6.2 billion population.

Bush also predicted that China, which reached a trade agreement with the US at the close of the Bill Clinton administration, would benefit from political changes as a result of liberalized trade policies. Yet it is clear that political freedom is often the first casualty of a garrison state mentality which inevitably would result from increasingly hostile US security policy toward China.

For trade to truly benefit the trading economies, two preconditions are necessary: 1) the de-linking of trade from ideological/political objectives, and 2) a recognition that global full employment is the prerequisite for true comparative advantage in global trade.

With regard to Europe, Japan and Australia, the US faces a different situation. While the US is likely to be able to preserve its residual old Cold War security alliances with these nations, despite mounting difficulties in identifying new common threats, the conflict between these decades-old military allies lies in trade contradictions. The US has benefited from an international financial architecture that gives the US economy a structural monetary advantage over those of the European Union (EU) and Japan, not to mention the rest of the world. Competition between these three leading economic heavyweights could spill over into security areas, allowing economic interests to conflict with ideological sympathy.

All three of these stalled engines of growth are desperately seeking new markets, which inevitably leads them to populous Asia, anchored by a fast growing Chinese economy, with its 1.2 billion eager consumers bulging with rapidly rising disposable income. Even the US defense establishment has largely come around to the view that US industries must export, even to China, to remain on top. This was spelled out for Congress recently by Donald Hicks, a leading Pentagon technologist in the Reagan administration. "Globalization is not a policy option, but a fact to which policy makers must adapt," he said. "The emerging reality is that all nations' militaries are sharing essentially the same global commercial-defense industrial base." Already, China is the main supplier of army boots to US troops, a critical item even as warfare turns high-tech.

With trade replacing aid, the US has embarked on a strategy to use Third World cheap labor and environmental lawlessness to compete with its industrialized rivals, taking advantage of the US anti-labor tradition to export low-paying jobs, which both the EU and Japan cannot do with comparable immunity. At the same time, the US has pushed for global financial market deregulation and emerged as a 500-pound gorilla in the global financial markets that left the Japanese and Europeans playing catch-up in the dust.

The enabling tool of this strategy was the hegemonic role of the dollar as the dominant reserve currency for world trade. Out of this emerged an international financial architecture that does real damage to the actual producer economies for the benefit of the virtual financier economies. Money, instead of a neutral agent of exchange, has become a weapon of massive economic destruction more lethal than nuclear bombs and with more extortionary power, which is exercised ruthlessly by the International Monetary Fund all over the developing world on behalf of the Washington consensus.

Trade wars are fought through volatile currency valuations. The dollar enables the US to use its trade deficit as the bait for its capital account surplus. Trade is no longer a valid measure of global competition. Today, transnational firms compete with unparalleled success in the global marketplace through foreign affiliate sales instead of exports. This has created a gap between gross domestic product (GDP) and gross national product (GNP). To mask this tilted playing field and unfair monetary regime, GNP has been quietly replaced by GDP as a statistical measure for growth.

GDP measures the total value of a country's output, income or expenditure produced within the country's physical/political borders. GNP is GDP plus "factor income" - income earned from investment or work abroad. With globalization, these two technical measurements have taken on new meanings and relationships. In 1991, GDP replaced GNP as a standard statistical measure for growth - a quiet change that had very large implications as the 1990s were the decade of rapid globalization. GNP attributes the earnings of a transnational firm to the country where the firm is owned and where profits would eventually return as factor income.

GDP, however, attributes the profits to the country where factories or mines or financial institutions are located, regardless of ownership, even though profit and investment may not stay there permanently. This accounting shift has turned many struggling, exploited economies into statistical boomtowns, while seducing local leaders to embrace a global economy. The rich nations at the core are walking off with the periphery's resources and profiting obscenely from local slave wages while calling it a statistical gain for the periphery, with the help of the local elite - a new compradore class whose members are celebrated by the neoliberal press as national heroes.

GDP figures are "gross" because GDP does not allow for the depreciation of physical capital or environmental degradation, let alone the abuse and depreciation of human resources. When the value of income from abroad is included, then GDP becomes the GNP. A declining GNP is particularly damaging for economies with large trade sectors, which includes many developing countries that have been forced to rely on exports financed by foreign direct investment as the sole development path.

Foreign direct investment (FDI) has changed the shape of the international economy. Since the early 1970s, FDI has grown faster than global trade and has been the single most important source of capital for developing countries, displacing near non-existent domestic net savings. Much FDI is denominated in dollars, a fiat currency that the US can produce at will since 1971. By necessity, FDI is concentrated in export-related development, mainly those destined for US markets, or markets that resell to US markets, for dollars with which to provide the needed FDI financial returns, also denominated in dollars.

US economic policy is shifting from trade liberalization promotion to FDI liberalization promotion. A trade spat with the EU over beef and bananas, and now steel, for example, risked large US investment stakes in Europe. And the suggestion to devalue the dollar to promote US exports is dismissed, for it would only make it more expensive for US affiliates to do business abroad while making it cheaper for foreign companies to buy US assets. An attempt to improve the US trade balance, then, would actually end up hurting FDI balance. This is the rationale behind the slogan: a strong dollar is in the US national interest.

In the US, and now also beginning in Europe and Asia, capital and debt markets are rapidly displacing banks as funding intermediaries - savings vehicles and sources of corporate finance. This shift, along with the growing global integration of financial markets, is supposed to create promising new opportunities for investors and make capital allocation more efficient around the globe. Neoliberals even claim that these changes could help head off the looming pension crises facing many nations. But so far it has only created sudden and recurring financial crises as those in Asia in 1997, and Mexico, Russia, Brazil, Turkey and Argentina subsequently. The reasons are traceable to dollar hegemony.

The introduction of the euro has accelerated the growth of the EU region's financial markets. For the current 12 members of the European Monetary Union, the common currency has nullified national requirements for pension and insurance assets to be invested in the same currencies as their liabilities - a restriction that had long locked the bulk of Europe's long-term savings into fragmented local assets. Europe's corporate pensions industry is set to grow from 3.5 trillion euros (US$3.1 trillion) to 17 trillion by 2020 as governments are forced to make companies and individuals pay into pension schemes. Freed from foreign exchange transaction costs and risks of currency fluctuations, these savings fueled the rise of larger, more liquid European stock and bond markets, including the recent emergence of a growing high-yield (junk) bond market.

These more dynamic capital markets, in turn, have placed increased competitive pressure on banks by giving corporations new financing options and thus lowering the cost of capital within Euroland. How this will interact with the euro-dollar market is still indeterminate due to dollar hegemony.

Interestingly, the European Union Competition Commission rejected General Electric's proposed $41 billion merger with Honeywell International by citing concerns about whether the combination of GE's strong market share in aircraft engines and Honeywell's in avionics would give the merged company an unfair advantage in the European market to possible bundling or tying that could allow the new entity to extend its dominant position from one market to another. A key issue was the aggressiveness of GE marketing through vendor financing in which GE, until now, has enjoyed an unique advantage through its dominance in the US and euro commercial paper markets. Other regional markets, particularly in Asia, will no doubt become more aware of such concerns going forward.

Before the Senate Committee on Banking, Housing, and Urban Affairs on July 20, 2000, Fed head Alan Greenspan summarized his view of the US boom at its peak, "For some time now ... a continuing disparity between the growth of demand and potential supply would produce disruptive imbalances." Greenspan repeatedly insisted that it was to address this anticipated "imbalance", his euphemism for inflation, that governed his one-note monetary policy of raising short-term interest rates. It was not to target the equity market bubble. Between 1999 and 2000, Greenspan raised Fed funds rates (ffr) six times, from 4.75 percent to 6.5 percent to fight phantom inflation. Barely four months later, he was forced to lower short term rates 12 times in 12 months, with the ffr set at a historical three-decade low of 1.75 percent currently, down from 6.5 percent on January 2, 2001.

Price volatility in the equity market is the bastard child of derivatives and portfolio insurance, which Greenspan repeatedly celebrates as the innovative financial tools of the new prosperity. Sudden changes in short-term rates also create volatility in commodity prices. Greenspan is merely trying to defend himself from the monetarist criticism when he defends interest rate volatility as an effective means of combating price volatility, which in some other quarters is considered as fighting fire with gasoline.

Greenspan continued, "The current account deficit is a proxy for the increase in net claims against US residents held by foreigners, mainly as debt, but increasingly as equities. So long as foreigners continue to seek to hold ever-increasing quantities of dollar investments in their portfolios, as they obviously have been, the exchange rate for the dollar will remain firm. Indeed, the same sharp rise in potential rates of return on new American investments that has been driving capital accumulation and accelerating productivity in the United States has also been inducing foreigners to expand their portfolios of American securities and direct investment. There has to be a limit as to how much of the world's savings our residents can borrow at close to prevailing interest and exchange rates. And a narrowing of disparities among global growth rates could induce a narrowing of rates of return here relative to those abroad that could adversely affect the propensity of foreigners to invest in the United States."

Clinton's Council of Economic Advisers pointed out with some accuracy that the current account deficit of the 1990s reflects the nation's economic health. Professor Paul Davidson, an eminent American post-Keynesian economist, also has insightfully observed that the price of US-led globalization is a perpetual US trade deficit. The 2001 current account deficit was $420 billion, compared to $155 billion in 1997. This money eventually came back to invest in US assets, meaning the US ran a capital account surplus.

Foreign direct investment flows into the United States have been robust. Direct investment inflows have been lifted by the extraordinary level of cross-border merger and acquisition activity. Portfolio flows have also been affected by this activity. Many of the largest acquisitions have been financed by swaps of equity in the acquiring firm for equity in the target firm. The Bureau of Economic Analysis estimates that US investors acquired $153 billion of foreign equities in this way in 2001.

The ominous aspects of this situation are the hot and cool money issues. A market crash can result from hot money flight if foreign-owned dollars earned from US trade deficits suddenly exit US markets en masse. And if foreigners exchange their dollars into their own currencies suddenly, in order to buy assets in their own countries, the dollar can go into a free fall. The extra investment income coming from abroad in the form of cool money can eventually cause US entrepreneurs to take too much risk, as has been evident in the Internet and telecom sectors. According to Greenspan, this could create significant problems for the US economy. On this point he is correct, even though he has taken no action to prevent it.

Hot money movement is directly linked to interest rates. As Greenspan raised US rates to moderate reflexive inflation fears, he pushed up the exchange value of the dollar, and thus forestalled potential capital exit. Greenspan has now been forced to lower rates aggressively to a three-decade low. It is anybody's guess when abnormally low US rates will trigger a hot money flight from US assets.

Besides the hemisphere-wide pact pursued at the summit meetings in Quebec City and Mexico City, the US is seeking bilateral trade agreements with such countries as Jordan, Chile and Singapore, as well as a new round of global trade accords. While the US historically has claimed security monopoly in the Americas under the spirit of the Monroe Doctrine, economic and trade conflicts have emerged as problems with uncertain futures, despite Bush's recent declaration of trade as a moral imperative. Argentina and Venezuela, though fundamentally dissimilar, are glaring examples of US policy failure.

Ironically, the weaker economies in the Americas now have alternative options away from US domination because of globalization, despite the US push on a regional free trade zone. Further, populist regimes can no longer be conveniently dismissed as communist stooges directed from Moscow, or be summarily overthrown with military coups instigated from Washington.

Resentment against US hegemony has been growing around the world when government policies are constrained, if not dictated, by US ambassadors and bankers; when globalization turns out to be a trade regime used for the special benefits of US transnationals; and when the global financial architecture is dominated by dollar hegemony. Nationalism developed historically against the forced internationalization of the Napoleonic empire, despite the fact that the French Revolution began as a liberating force against the ancient regime. Nationalism rose up against the Napoleonic idea of a supranational European order unified by uniform law and administration, with a continental economic system, a single-dimensional anti-British foreign policy backed by a grand army under unified command. In the new Cold War, US hegemony has many parallels with the Napoleonic imperial order.

China has no direct security issues with any nation beyond Asia, and most of its security conflicts within Asia are traceable to US instigation. As Nixon played his China card in 1972, Leonid Brezhnev played his India card. Now three decades later, Bush is playing his new India card as part of his pan-Asia strategy to contain China. China does face complex economic issue with the Southeast Asian economies, but the prospect of peaceful resolution of these issues remains high due to the high growth potentials for all of Asia. To do this, Asian economies have to get off the dead-end path of competing for exports to US markets in a race to the bottom. To counter US security hostility, China will develop mutually beneficial economic relations with Russia, the EU, Japan, Southeast Asia, Latin America and the Middle East economies, some of which also face security hostility from the US.

Russia continues to be a security threat to the US by virtue of its formidable nuclear arsenal. Russia also has historical geopolitical security conflicts with Europe, both Eastern and Western, and with Japan and China. An economically desperate Russia will mean problems for Europe, particularly Germany, as an expansionist Russia also would.

Regionally, security relationships between Russia, China and Japan have a triangular nature that may require classic balance of power solutions. Thus both Japan and Russia have incentives to help strengthen China technologically to a certain extent. Russia needs low-cost Chinese consumer goods until it manages to restructure productivity in its economy and Japan needs the vast Chinese market to get out of its decade-long recession.

The US cannot afford to import inflation, especially since last year's interest rate cuts, and a decade-long tax cut program has been designed to stimulate consumption to counter a slowing economy. Also, many suspect that the US monetary strategy of a strong dollar is to continue to export inflation, leading to global deflation in dollar terms and inflation in local currency terms.

US allegations against Chinese military prowess are a false pretense. The US is not seriously concerned about China's present or potential military might in the foreseeable future. The gap between US and Chinese technological capabilities may in fact be increasing. The US is actually uneasy about Chinese economic growth, which might challenge US economic predominance in the 21st century, even though actual data in the past two decade show that the per capita GDP gap between the two economies actually widened, despite impressive strides made by China since 1978.

A Central Intelligence Agency (CIA) report on the year 2015 presents four possible future scenarios, and in all of them US economic power is projected to be waning while China's is rising, not withstanding that in the old Cold War the CIA consistently over-estimated Soviet strength, up to the fall of the USSR, which took the CIA by surprise. Thus, despite anticipated structural problems facing the Chinese economy after World Trade Organization accession and intractable social resistance to economic reform, the US is fixated on China's bullish future, and therefore worried about losing its sole superpower status, at least in Asia.

Washington's real objective is to check China's growth along a path independent of US satellite models. In this scenario, US strategy is to help China develop enough to moderate China's current political system, so as to avoid a total political collapse caused by economic failure, but it aims to prevent China from prospering too much outside of the US orbit as to challenge US hegemony.

In the 1980s, despite a lingering fear for the Soviet threat, a main concern in Washington was the rise of Japanese economic power, which looked like it was destined to surpass the US, at least in manufacturing, and impose a whole new set of alien values onto US society. Anti-Japanese sentiments rose sharply in the US as a consequence, until the US figured out the new game of finance capitalism, leaving the Japanese economy to wallow in obsolete industrial capitalism.

Similarly, the Chinese economy in the coming decades could eventually overtake that of the US in size if not in sophistication. Furthermore, as Japanese transnational companies did in the 1980s, Chinese transnationals could challenge US transnationals' market shares in sectors that the US no longer considers critical, or shift the natural loyalty of some international transnationals away from US national interests.

There is also the ugly race issue that has yet to subside fully in US geopolitics. A new containment policy against China is becoming the main fulcrum around which US foreign policy is framed, affecting Washington's traditional Eurocentric perspective as well as US policy in the Middle East, as evidenced by recent US-Israeli conflict over the Israeli sale of military technology to China.

The increasingly visible manifestation of US policy of hostile confrontation has in turn fueled anti-American sentiment among the Chinese public, putting the current Chinese leadership on the defensive on its pro-US policy of the past two decades. The anti-China Blue Team in the Bush administration currently dominating US policy on China views a policy leading to a revival of the radical left in Chinese domestic politics as serving to kill two birds with one stone: the stone is its anti-China Pan-Asia strategy, and the two birds are: 1) minimize the potential success of China's reforms and open-to-the-outside policies that would lead to Chinese economic prowess, by creating conditions that would encourage the rise of the radical left in domestic Chinese politics in the name of nationalism, and; 2) promote a global high-tech arms race that would bleed China of its economic potential.

The real battle in the US-China-Taiwan arena is the battle between the trade doves and the security hawks on all three sides. In reality, no amount of arms sales to Taiwan, quantitative or qualitative, can enhance the security of Taiwan. What makes China think twice about taking Taiwan by force is the cost-benefit analysis of the possibility of a direct military conflict with the US over Taiwan. If such conflict is inevitable due to US policy in Asia generally, then a military offensive to achieve the reunification of Taiwan would simply be a matter of forsworn conclusion.

The "one country, two systems" (OCTS) policy, originally framed during the final phase of the old Cold War, has become China's response to the new Cold War. For Hong Kong, OCTS has a time limit of 50 years. For Taiwan, OCTS has no time limit. The two systems refer to the socialist and capitalist systems in a strict economic sense, although allowances are tolerated in Hong Kong for a neoliberal socio-political-legal infrastructure deemed necessary for the smooth functioning of a market economy. OCTS assumes a non-adversary relationship between the two economic systems. It is a precarious assumption. Hong Kong is not expected to be an anti-China political base nor is market capitalism expected to work for the demise of socialism. Neither of these expectations has been fulfilled flawlessly in the almost five years since Hong Kong was returned to China in 1997. One aspect of the OCTS policy that is conveniently underemphasized is that the "two systems" arrangement implies that socialism will remain the operative system on the mainland, that Chinese policies of reform and open-to-the-outside do not include anti-socialist objectives. Many supporters of OCTS are in fact quietly and openly working for the "one country, one system" - the capitalist system, with direct US support.

It is not at all clear that OCTS has redeeming positive impacts on the economic development of China, or on the reunification of Taiwan. On the other hand, OCTS legitimizes the Hong Kong Relations Act and the Taiwan Relations Act, two pieces of US legislation that the US relies on to interfere openly in China's internal affairs. The Taiwan Relations Act further provides the legal basis of provocative US arms sales to Taiwan.

Trade in the new Cold War also has domestic consequences in all countries. Widening domestic income disparity in both rich and poor countries is justified as necessary for national security, as are unemployment and environmental abuses. The battle is increasingly shaping up to be one between an international elite against the world's poor, many of whom live in the rich economies.

Henry C K Liu is chairman of the New York-based Liu Investment Group.

((c)2002 Asia Times Online Co, Ltd. All rights reserved. Please contact ads@atimes.com for information on our sales and syndication policies.)