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16 June 2014
The US-China Debate

Asian century roller coaster

The Asian century scenario has been on a roller coaster since the outbreak of the global financial crisis in 2007-2008. Which way next?

The Asian century scenario has been on a roller coaster since the outbreak of the global financial crisis in 2007-2008. Which way next?

When the Lehman crisis struck in 2008, the Chinese government responded with perhaps the biggest fiscal stimulus the world has ever seen. This drove several years of very high economic growth in China.

This stimulus also kept the world economy afloat, according to Yuen Pau Woo of Canada's Asia Pacific Foundation. Natural resource exporters like Australia and Canada, and China's Asian neighbours benefited more than most other economies.

Since the Lehman shock, China has overtaken Japan to become the world's second biggest economy. It is just a matter of time before China overtakes the US, and according to some estimates this may happen this year.

China is now the world's biggest exporter, and the biggest trading partner for some 127 countries, whereas the US is the biggest trading partner for only 76 countries (however granular analysis of China's exports does reveal that Chinese value added is very low in its many export assembly activities, such as for the iPhone). And China is now well on the path towards internationalization of its currency, the RMB, and opening its capital account.

The 2008 financial crisis was also a turning point in China's positioning in the world. "The Chinese have come to see the status quo of the international economic system as one which may not be conducive for China's aspirations, and may run counter to China's interests", argued Yuen Pau Woo -- as China "has started to embrace its position as a major global power".

With the US economy in crisis and in apparent decline, and Chinese economic power in the ascendancy, China began to behave in a "more assertive manner", including on questions of territorial disputes and cyber-espionnage.

Yuen Pau Woo interprets "the aggressive statements and actions by Beijing concerning the South China and East China Seas to be as much about Sino-US relations as about disputes with Japan, Vietnam, Philippines, and other Asian neighbours". This is the well known Chinese tactic of killing a chicken to scare the monkeys. It also seems to be a renunciation of Deng Xiao Ping's maxim that China should bide its time and keep its head down.

Yuen Pau Woo did recognize that China's massive stimulus package has created problems of its own, in the form of "dubious projects, resulting in a mountain of bad debt in the financial system that now threatens to destabilize the economy".

In reality, China seems to be struggling with many challenges -- a slowing economy, massive and rising debt, an environmental disaster, social unrest, internal terrorism, and squabbles with virtually all of its neighbors -- indeed, many more challenges than is widely appreciated. Further, an aggressive anti-corruption campaign, designed to save the Communist Party from popular discontent, may backfire on the leadership, as it brings down many "tigers" as well as "flies".

It now seems clear that doomsayers may have been too quick in writing off the US, and declaring victory for China in the international contest underway. As former US Treasury Secretary Larry Summers told an audience at this week's Conference de Montreal, the US has proven to be remarkably resilient and made much progress since 2008 -- against all the odds!

For its part, the US also mounted a rapid and massive response to the financial storm. And while growth has not been as strong as it could be, the economy has been growing since 2010. The US has now regained all the jobs lost in the Great Recession. Indeed, private sector employment is now above the 2007 level, while public sector employment is below.

A win-win opportunity exists for the government to invest in infrastructure, create jobs for construction workers, and finance this by borrowing at today's cheap rates. Unfortunately Congress is not interested. Inequality is a big problem, with technology and globalisation creating more opportunities for the highly skilled. Better education and more progressive taxation should be part of the solution.

But despite these challenges, we should not underestimate the achievements of the Obama administration like the Dodd-Frank financial regulation reform, and Obamacare. An energy boom is now underway in the US, with the prospect of energy self-sufficiency on the horizon. For the past three years, US health care costs have also grown more slowly than GDP. On the social front, there has been a revolution in gay rights these past few years -- coinciding with growing social repression in China.

The US is once again demonstrating the dynamism of its system.

The current widespread global instability -- like Russia/Ukraine, Middle East and East Asia -- demonstrates that only the US is capable of ensuring global peace and security. It might seem tempting for the US to retreat from international affairs. But history shows that international vacuums only get filled by less benign forces.

Despite all the noise it makes, China has never demonstrated the willingness or capability of accepting global responsibilities. Indeed, with growing Islamic terrorism at home, China is running scared of the Middle East.

Perhaps some of the wisest words on the Asian Century have come from one of the most unlikely sources, Australia's Prime Minister Tony Abbott -- a man who feels a much closer affinity to British royalty than to Australia's Asian neighbors:

"I'm looking forward to the coming Asian century. The Asian century will be an Indian century, a Japanese century, a Korean century and an Indonesian century -- as well as a Chinese one.

The Asian century will be an American century too because America is a Pacific power as well as an Atlantic one.

Asia needs America involved. The world wants America to succeed. The world needs America to succeed. My hope is that you Americans will have as much faith in yourselves as the rest of the world has in you."

Abbott is right. America remains the world's indispensable power, and will do so for a very long time.

Indeed, the US is the world's greatest source of new ideas, as Abbott also said. That's one of the reasons why so many Chinese send their children to US schools, and why China undertakes so much cyber-espionnage.

The biggest risk that America faces is not China, but Washington which may even tear the country apart -- although the resilience of recent years suggests that the American economy and society may even be able to weather the storms coming out of Washington. To quote Larry Summers again, "the US will do just fine".

Author

John West
Executive Director
Asian Century Institute
Tags: china, us, asia pacific foundation, larry summers, asian century, yuen pau woo, conference de montreal

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