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  Global Views
Commentary: This Time, History Isn't Repeating
By William Pesek Jr.
The Great Wall of China

Oct. 17, 2005 — Of all the mistakes the United States is making in dealing with China's rise, the most obvious is this: thinking we've seen this before. Well, we haven't. Never before has such an underdeveloped economy with such a huge population and history of innovation muscled its way onto the world stage so fast.

To say that the global financial system will be transformed is an understatement. The reemergence of China has made the work of John Maynard Keynes, Milton Friedman and even Karl Marx all but irrelevant. Such writers based their theories on the advance of Europe in the 19th century and the United States in the 20th.

Today, economists must contend not only with China's expansion, but with that of India, as well.

If the U.S. government comprehends this, it's not letting on. Depending on whose views you analyze, the administration of President George W. Bush seems to see China as a replay of post-war Japan, or else as the Soviet Union before it collapsed 15 years ago.

China is neither, and the United States needs to understand that if it wants to avoid friction with an economy that may someday dwarf its own.

"Asia's rise will be a test of US competitiveness in the world now emerging," said Henry Kissinger, the former US state secretary.

Comparisons with Japan are inevitable as the U.S. Treasury secretary, John Snow, concludes his latest visit to China. Like its East Asian rival, China is pursuing an export-driven strategy that pits it against manufacturers around the globe. China also is focusing on developing competitive advantages in specific industries, much as Japan did in electronics and autos.

Beijing, meanwhile, continues to face pressure to let its currency appreciate in value. For politicians in Washington, China is a perfect scapegoat on which to pin their nation's challenges, just as they did with the Japanese in the 1980s.

And just as Japan scooped up companies, real estate and art in the 1980s, Chinese enterprises are becoming more globally acquisitive.

For all the superficial similarities, however, China is not a replay of Japan. For one thing, China is looking to bypass the process of domestic company-building that preoccupied Japan for decades. That is why the Chinese have bid to acquire companies like Unocal and Maytag that have well-established global brands.

Even if U.S. politicians are wary of China, many executives are not. The hand-wringing of Corporate America in the 1980s isn't in evidence today. Companies are relying on inexpensive Chinese labor and land to pump up profits. Consumers, rather than slapping "Buy American" bumper stickers on their cars, are happy to load up on low-cost Chinese goods.

The Asian nations' trajectories are different, too. Fears that Japan would swallow up the global economy proved unfounded. China, with 1.3 billion citizens and growing, isn't likely to top out as quickly as Japan, whose population of 127 million is set to shrink. While much could go wrong, China's economy has the potential to surpass that of the United States in 30 or 40 years, if not sooner.

Perhaps the biggest difference is openness. Even though it is far less developed than Japan, China is embracing a more outward-looking development model. In 2004, says Stephen Roach, chief global economist at Morgan Stanley, exports and imports combined accounted for 74 percent of Chinese gross domestic product, more than three times the 23 percent share in Japan.

That, Roach says, explains why China is resisting a currency adjustment akin to the one that Japan agreed to in 1985 as part of the Plaza Accord, and later regretted. China is considerably less wealthy than Japan, and far more reliant on trade. So if Snow thinks his trip to China this month will result in a further strengthening of the yuan, he is mistaken.


Comparisons with the Soviet Union are even more misplaced. Fears of a U.S.-China cold war emerged early in President George W. Bush's first term, when he characterized China as a "strategic competitor," scrapping the "strategic partner" language of the Clinton years.

More recently, the U.S. defense secretary, Donald Rumsfeld, has criticized China for increasing its military spending. Here in Asia, the words "cold war mentality" often crop up in news articles and academic papers on China-U.S. relations.

Yet China is already more intertwined with the global economy than the Soviets ever were and its embrace of capitalism is more progressive. China's economy also is more stable and growing much faster than the Soviet Union's ever did.

Unlike the Soviet Union, which used fear to bend others to its will, China is using economic diplomacy. It has chosen integration and the promise of robust demand for trading partners' goods, rather than confrontation.

China, in part by buying so many U.S. Treasury bonds, also has made its relationship with the world's biggest economy symbiotic, a step the Soviets never took.

Few doubt that a natural rivalry is developing between the United States and China. The need to secure access to energy and commodities alone ensures it. Washington should tread carefully, however, for attempts to fight or contain China's rise would be futile and counterproductive.

Global powers never cede their rank voluntarily and the United States is right to feel antsy about China's potential. As Henry Kissinger, the former U.S. secretary of state, said recently, "Asia's rise will be a test of U.S. competitiveness in the world now emerging."

The United States can either participate in the Asia-centric economic regime now being created or risk being left out.

Of all the mistakes the United States is making in dealing with China's rise, the most obvious is this: thinking we've seen this before. Well, we haven't. Never before has such an underdeveloped economy with such a huge population and history of innovation muscled its way onto the world stage so fast.

To say that the global financial system will be transformed is an understatement. The reemergence of China has made the work of John Maynard Keynes, Milton Friedman and even Karl Marx all but irrelevant. Such writers based their theories on the advance of Europe in the 19th century and the United States in the 20th.

Today, economists must contend not only with China's expansion, but with that of India, as well.

If the U.S. government comprehends this, it's not letting on. Depending on whose views you analyze, the administration of President George W. Bush seems to see China as a replay of post-war Japan, or else as the Soviet Union before it collapsed 15 years ago.

China is neither, and the United States needs to understand that if it wants to avoid friction with an economy that may someday dwarf its own.

Comparisons with Japan are inevitable as the U.S. Treasury secretary, John Snow, concludes his latest visit to China. Like its East Asian rival, China is pursuing an export-driven strategy that pits it against manufacturers around the globe. China also is focusing on developing competitive advantages in specific industries, much as Japan did in electronics and autos.

Beijing, meanwhile, continues to face pressure to let its currency appreciate in value. For politicians in Washington, China is a perfect scapegoat on which to pin their nation's challenges, just as they did with the Japanese in the 1980s.

And just as Japan scooped up companies, real estate and art in the 1980s, Chinese enterprises are becoming more globally acquisitive.

For all the superficial similarities, however, China is not a replay of Japan. For one thing, China is looking to bypass the process of domestic company-building that preoccupied Japan for decades. That is why the Chinese have bid to acquire companies like Unocal and Maytag that have well-established global brands.

Even if U.S. politicians are wary of China, many executives are not. The hand-wringing of Corporate America in the 1980s isn't in evidence today. Companies are relying on inexpensive Chinese labor and land to pump up profits. Consumers, rather than slapping "Buy American" bumper stickers on their cars, are happy to load up on low-cost Chinese goods.

The Asian nations' trajectories are different, too. Fears that Japan would swallow up the global economy proved unfounded. China, with 1.3 billion citizens and growing, isn't likely to top out as quickly as Japan, whose population of 127 million is set to shrink. While much could go wrong, China's economy has the potential to surpass that of the United States in 30 or 40 years, if not sooner.

Perhaps the biggest difference is openness. Even though it is far less developed than Japan, China is embracing a more outward-looking development model. In 2004, says Stephen Roach, chief global economist at Morgan Stanley, exports and imports combined accounted for 74 percent of Chinese gross domestic product, more than three times the 23 percent share in Japan.

That, Roach says, explains why China is resisting a currency adjustment akin to the one that Japan agreed to in 1985 as part of the Plaza Accord, and later regretted. China is considerably less wealthy than Japan, and far more reliant on trade. So if Snow thinks his trip to China this month will result in a further strengthening of the yuan, he is mistaken.


Comparisons with the Soviet Union are even more misplaced. Fears of a U.S.-China cold war emerged early in President George W. Bush's first term, when he characterized China as a "strategic competitor," scrapping the "strategic partner" language of the Clinton years.

More recently, the U.S. defense secretary, Donald Rumsfeld, has criticized China for increasing its military spending. Here in Asia, the words "cold war mentality" often crop up in news articles and academic papers on China-U.S. relations.

Yet China is already more intertwined with the global economy than the Soviets ever were and its embrace of capitalism is more progressive. China's economy also is more stable and growing much faster than the Soviet Union's ever did.

Unlike the Soviet Union, which used fear to bend others to its will, China is using economic diplomacy. It has chosen integration and the promise of robust demand for trading partners' goods, rather than confrontation.

China, in part by buying so many U.S. Treasury bonds, also has made its relationship with the world's biggest economy symbiotic, a step the Soviets never took.

Few doubt that a natural rivalry is developing between the United States and China. The need to secure access to energy and commodities alone ensures it. Washington should tread carefully, however, for attempts to fight or contain China's rise would be futile and counterproductive.

Global powers never cede their rank voluntarily and the United States is right to feel antsy about China's potential. As Henry Kissinger, the former U.S. secretary of state, said recently, "Asia's rise will be a test of U.S. competitiveness in the world now emerging."

The United States can either participate in the Asia-centric economic regime now being created or risk being left out.

The above article is from Bloomberg News.




 

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