contentssummer 2012

70 China - the Next Superpower? (Student 14 CHINA’S WORLDVIEW Writing Award Winner), Roy Dale AND AMBITIONS A74 THE EXCHANGE RATE 16 Norms, Values and Exceptionalism in China’s World View, Prof. William A. CONUNDRUM Callahan 76 The Chinese Yuan - US Dollar Exchange 21 China and Inner Asia: New Frontiers Rate: What Are the Issues?, Prof. Richard T. and New Challenges, Dr. David Kerr Froyen

29 China, Asia, and the ‘American Pivot’, 80 Internationalization of the Renminbi: Prof. Lowell Dittmer What Does History Tell Us About the Precedents?, Dr. Jeffrey Frankel 37 What China Wants in Asia: 1975 or 1908?, Dr. Anis H. Bajrektarevic 83 The New Trading Band and Its Repurcussions, Interview with Hon. Delio 40 China - Getting Ahead or Losing E. Gianturco Ground? (Student Writing Award Winner), Abhismita Sen 86 America’s Hammering China’s Rmb Makes Little Sense, Dr. Yukon Huang A 46 SECURITY POLICY 90 Competition Matters: China’s Exchange Rate and Balance of Trade, Dr. Anwar 48 Chinese Foreign Policy - Interpreting the Shaikh Recent War of Words, Dr. Carla P. Freeman 93 Slow Float to China, George A. Pieler, 53 The Challenge of US-China Relations, Jens F. Laurson Dr. Ali Wyne 97 Chinese Exchange Rate, the US Account 58 China’s Security Policy in Africa and Deficit, and the Global Imbalance, Dr. the Western Indian Ocean, Amb. David H. Jinzhao Chen, Dr. Xingwang Qian Shinn 103 US-China Problems: Is Revaluation of 62 The Growing Potency of the Sino-Indian the Yuan the Solution?, Dr. Haider Khan Rivalry, Dr. Harsh Pant 107 How to Deal With The Chinese 66 Stealth Fighters are Hard Exchange Rate, Dr. David Phillips (Modernization of China’s Aerial Arsenal Encounters Obstacles), David Axe The

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e h T  ABOUT THE FORUM

The Forum is a publication of the International Affairs Forum online journal. Inside each issue you’ll find interviews, editorials, and short essays from academics and practitioners, presenting a wide spectrum of views and from around the globe. In this way, we wish to provide readers with an all-partisan, international look at today’s major issues, and tap into the research and views of major thinkers and actors in the field within the ‘space’ between social science journalism and academic scholarship. That is, we look for carefully considered contributions that can nevertheless be published relatively quickly and which can therefore maintain the impetus of current thinking but which do not require detailed peer review. The extent of our review is therefore largely a matter of informed editorship. We think that this is a valuable approach to extending informed opinion on policy in the international sphere.

Another feature of each issue is recognizing winners of our Student Writing Competition Program by publishing their efforts. As part of our mission, we strive toward providing a platform for students to take next steps toward successful professional careers and as such, believe exceptioanal work should be recognized, regardless of experience level. The program is open to all college students around the world.

We hope you enjoy this issue on China and encourage feedback about it, as it relates to a specific piece or as a whole. Please send us your comments to [email protected]. S u m m e r

2 0 1 1  m u r o F

e h T  Contributors

David Axe is an American military correspondent who writes widely on military life and aspects of current conflicts. He is a regular contributor to Wired.com, The Diplomat and other publications. He blogs at Wired’s Danger Room and at his own blog at www.warisboring.com.

Dr. Anis H. Bajrektarevic is Professor and Chairperson at the International Law & Global Political Studies, University of Applied Sciences IMC-Krems. Prof Bajrektarevic is also Acting Deputy Director of Studies EXPORT EU-ASEAN-NAFTA. He has authored numerous publications and consulted with the Foreign Policy Institute of the Johns Hopkins SAIS, the Malaysian Trade Chamber, the Council of Europe, and the American Bar Association.

Professor William A. Callahan is Chair in International Politics and China Studies, Research Director, Centre for Chinese Studies, and Co-Director, British Inter-university China Centre at The University of Manchester. He is author of China: The Pessoptimist Nation (OUP, 2010), Contingent States: Greater China and Transnational Relations (Minnesota, 2004), and Cultural Governance and Resistance in Pacific Asia (Routledge, 2006). Prof. Callahan has published articles in many journals, including International Organization, Public Culture, Asian Survey, International Studies Quarterly and the Journal of Strategic Studies. S u m m e r

2 0 1 1  Dr. Jinzhao Chen is post-doctoral researcher at Paris School of Economics. His research focuses on Chinese exchange rate and capital controls, international financial integration, and economic growth.

Dr. Lowell Dittmer is Professor at the Charles and Loise Travers Department of Political Science, University of California, Berkeley. His scholarly expertise is the study of contemporary China. He teaches courses on contemporary China, Northeast Asia, and the Pacific Rim. His current research interests include a study of the impact of reform on Chinese Communist authority, a survey of patterns of informal politics in East Asia, and a project on the China- Taiwan-US triangle in the context of East Asian regional politics. Professor Dittmer’s recently published books and monographs include Sino-Soviet Normalization and Its International Implications(University of Washington Press, 1992), China’s Quest for National Identity (with Samuel Kim, Cornell University Press, 1993), China Under Modernization(Westview Press, 1994), and South Asia’s Nuclear Crisis (M. E. Sharpe, 2005).

Dr. Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth. He directs the Program in International Finance and Macroeconomics at the National Bureau of Economic Research, where he is also on the Business Cycle Dating Committee, which officially declares recessions. He served at the Council of Economic Advisers in 1983-84 and 1996-99;as CEA Member in the Clinton Administration, Frankel’s responsibilities included international economics, macroeconomics, and the environment.

Dr. Carla P. Freeman is Associate Director of the China Studies Program; Associate Research Professor; Foreign Policy Institute Executive Director at Johns Hopkins University, The Paul H. Nitze School of International Advanced International Studies (SAIS). She is co-author of China on the Edge: China’s Border Provinces and Chinese Security Policy, co-author (2011); Managing Fragile Regions: Method and Application, co-editor (2010); and numerous journal articles, papers and reviews m u r o F

e h T  Contributors

Dr. Richard Froyen is a Professor of Economics at the University of North Carolina. He has been a visiting economist at the Board of Governors of the Federal Reserve, a Visiting Professor at the University of Leeds (U.K.), and an Erskine Fellow at the University of Canterbury (N.Z.). Professor Froyen is the author of Macroeconomics: Theories and Policies, and of articles on macroeconomics and monetary policy in various economic journals.

The Hon. Delio E. Gianturco is adjunct professor at George Mason University and a specialist in international finance, trade develop- ment, foreign direct investment, and microeconomics. Mr. Gianturco served in the U.S. government during 6 different Administrations and was a Presidential appointee, confirmed by the Senate.

Dr. Yukon Huang is a senior associate at the Carnegie Endowment. Pre- viously he was the World Bank’s country director for China; and Russia and the former Soviet Union Republics of Central Asia. Earlier he served as lead economist for Asia and chief for Country Assistance Strategies. He has also held positions at the U.S. Treasury and various universities in the United States, Tanzania, and Malaysia. Dr. Huang has published widely on development issues and is an adviser to the World Bank and the Asian Development Bank, as well as various governments and com- panies. S u m m e r

2 0 1 1  Dr. David Kerr is Director of Durham University’s Centre for Contemporary Chinese Studies, and Lecturer in the International Relations of China. He joined Durham University in 2002 after studying and teaching at the University of Glasgow. In 2009-10 he served as specialist adviser to the UK House of Lords inquiry into European Union-China relations.

Dr. Haider Khan is Professor at the Korbel School of International Studies, University of Denver. His areas of research include environment, foreign aid, trade an investment and economy-wide modeling. Dr. Khans publications include Macroeconomic Effects and Diffusion of Alternative Technologies Within a Social Accounting Matrix Framework: the Case of Indonesia and Foreign Aid, Taxes and Public Investment, and Macroeconomic Effects of Technology Choice: Multiplier and Structural Path Analysis.

Jens F. Laurson is the co-founder and Editor-at-Large of the Center for International Relations’ International Affairs Forum. As a journalist, author, translator, and classical music critic he has written on politics, economics, and culture for several publications, including Forbes, Wall Street Journal, Washington Post, Washington Times, Classical WETA 90.9 et al. m u r o F

e h T 10 Contributors

Dr. Harsh Pant teaches at King’s College London in the Department of Defence Studies. He is also an associate with the King’s Centre for Science and Security Studies and an affiliate with the King’s India Institute. His current research is focused on Asia-Pacific security and defence issues. His latest book is The China Syndrome (HarperCollins, 2010).

Dr. David Phillips grew up in Africa and is a development specialist who, after starting in the private sector, has worked for most of his career in development agencies including the World Bank, and as an academic, specializing in industry and private sector development. He has worked as a long term adviser living in Tanzania and Nepal. He is currently director of a consulting firm based in the UK and US. He has a PhD in the area of technology and development and is the author of a recent book “Reforming the World Bank: Twenty Years of Trial - and Error (Cambridge University Press 2009). He is currently writing a book on foreign aid policy.

George A. Pieler has served as an attorney for the Federal Reserve, and in a variety of administrative and policy roles in both the legislative and executive branches of the US government. He has long experience with economic policy and major issues in budgeting and finance, including constitutional constraints on policymaking; internet taxation; and international trade and economics. Mr. Pieler is an attorney and policy consultant in private practice.

Dr. Xingwang Qian is Assistant Professor at the Economics and Finance Department, SUNY Buffalo State. He has jointly authored numerous publications and working papers including “China’s Outward Direct Investment in Africa” (Review of International Economics), ” Chinese Investments in Africa”, (MIT Press), and “Deviations from Covered Interest S

Parity: the Case of China”, Frontiers of Economics and Globalization, the u Evolving Role of Asia in Global Finance. m m e r

2 0 1 1 11 Dr. Anwar Shaikh is Professor of Economics at the Graduate Faculty of The New School in New York City. His work in political economy has focused on the economic theory and empirical patterns of developed capitalism. He has written on international trade, finance theory, political economy, U.S. macroeconomic policy, the welfare state, growth theory, inflation theory, crisis theory, inequality on the world scale, and past and current global economic crises.

Ambassador David H. Shinn is Adjunct Professor of International Affairs at The George Washington University, Elliott School of International Affairs. He served for thirty-seven years in the US Foreign Service with assignments at embassies in Lebanon, Kenya, Tanzania, Mauritania, Cameroon, Sudan and as ambassador to Burkina Faso and Ethiopia. He is the coauthor of Historical Dictionary of Ethiopia and has authored numerous articles and book chapters.

Dr. Ali Wyne is a researcher at the Belfer Center for Science and International Affairs at the Kennedy School of Government, Harvard University. He graduated from MIT in 2008 with bachelor’s degrees in Management Science and Political Science. While there he founded the Forum on American Progress, a nonpartisan student group that examines American foreign policy. He also established the MIT International Review, the Institute’s first journal of international affairs. As a senior Ali received MIT’s highest honor for students, the Karl Taylor Compton Prize. m u r o F

e h T 12 Student Writing Competition Award Winners

Roy Dale is a student at the Victoria University of Wellington, New Zealand where he is completing a Bachelor of Arts degree, majoring in History.

Abhismita Sen is an undergraduate student of the Jadavpur University Department of International Relations and Strategic studies from Kolkata,West Bengal,India. S u m m e r

2 0 1 1 13 CHINA’S WORLDVIEW and AMBITIONS m u r o F

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CHINA’S Norms, Values and Exceptionalism in China’s 16 World View Prof. William A. Callahan China and Inner Asia: New 21 Frontiers and New Challenges WORLDVIEW Dr. David Kerr China, Asia, and the ‘American 29 Pivot Prof. Lowell Dittmer

What China Wants in Asia: and 37 1975 or 1908? Dr. Anis H. Bajrekarevic China - Getting Ahead or Losing Ground? 40 (Student Award Winner) AMBITIONS Abhismita Sen

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1 1 15 16 The Forum

Norms, Values andExceptionalisminChina’s World Viiew paint arosypictureofChina’s globalpower aftertheyhave “demonized”the West 2011), becauseitistheopposite fromtheU.S.Huherejoinsotherswho canonly China’s toppolitical-economist Hu Angang explainsin cooperation.” Chinathuswillbea“mature,responsible, andattractive superpower,” “tolerant” duetoitsculturethatisguidedby “theprinciplesofharmony, peace,and define the West interms of “selfishindividualism” asa way topromoteChinaas it isdifferentfrom“U.S.hegemony.” Inhighly moralized arguments, Chineseauthors rather thanpositive: China’s world orderwillbebetter, theytellus,simplybecause norms werean“inevitable”partofChina’s rise.Most oftheargumentswerenegative, that thePRC“should”have itsown globaltheory, orthatChinese-stylemodelsand a Chinese-styleworld orderwerelargelyaspirational: scholars andofficialstoldus about thecontoursofapost-Americanworld order. Intheearly2000s,argumentsfor As partofthisgeneral trend,China’s publicintellectualshave beenbusythinking economic, military, politicalandcultural power. cultivate what Chinesecall“comprehensive nationalpower”: thecombinationof and softpower isahugetopicamongofficialsandscholars inChina. The goalisto meeting oftheCentral CommitteeoftheChineseCommunistParty inOctober2011, soft power on theworld stage:cultural power was themaintopicatmostrecent Here Chinesevoices move frommeasuringthePRC’s material power topromote its Asia andaroundtheglobe? leverage itsgrowing economicpower intoenduringpoliticalandcultural influencein T Norms, Values andExceptionalismin asking “what comesnext?” How canthePeople’s Republicof China(PRC) economic success,China’s policy-makers andopinion-makersarenow century willbethe“Chinesecentury.” Reflectingontheircountry’s recent here isabuzzinBeijing:Chinesepeoplearevery optimisticthatthe21st Prof. William A. Callahan China’s World View Manchester University China in2020 UNITED KINGDOM (Brookings,

Summer 2012 17 Hu 2030 China China’s Worldview and Ambitions and Worldview China’s The All-under-Heaven All-under-Heaven The strategist Yan Xuetong also Xuetong Yan strategist (Liji, 2nd century A.D.) that describes a perfect utopia, which is based that describes a perfect utopia, which A.D.) (Liji, 2nd century (Tianxia tixi, Renmin Univ. 2011), philosopher Zhao Tingyang revives the revives Tingyang 2011), philosopher Zhao tixi, Renmin Univ. (Tianxia Ancient Chinese Thought, Modern Chinese Power Thought, Ancient Chinese dream” (Renmin Univ., 2011). dream” (Renmin Univ., explained that its ideals guide his plans for the global economy. In explained that its ideals guide his plans for the global economy. order to establish the Angang concludes that China will create a Sinocentric world but is also the “world’s dream,” is not only “China’s which of Great Harmony, World economic, social and political forecasters is the World of Great Harmony (shijie of Great Harmony World economic, social and political forecasters is the Lin has a calligraphic Yifu Bank Chief Economist Justin World datong, tianxia datong). he recently D.C.; Washington in wall passage on his scroll of the Great Harmony Book of Rites this utopian vision song “Imagine,” Lennon’s John Like world order. on a unified chief the endgame for most of China’s still informs plans to create a perfect world: Great Harmony (datong) is another ancient concept that is growing in popularity in popularity (datong) is another ancient concept that is growing Great Harmony from the comes from a famous passage Harmony futurologists. Great among China’s will “restore China’s power status to the prosperity enjoyed during the prime of the prosperity enjoyed status to the power will “restore China’s world at the center of a hierarchical it was when Qing dynasties” and early Tang Han, order. while the U.S. is always the hypocritically evil hegemon. Yan concludes that China’s concludes that China’s Yan evil hegemon. the hypocritically U.S. is always the while non- Yan’s What is “American.” it is not world simply because rise will benefit the of China” in the 21st century rejuvenation argues that “the Yan alternative? Western sophisticated analysis of ethics and international affairs, Yan defines the Kingly Way Way defines the Kingly Yan international affairs, sophisticated analysis of ethics and then follows Yan as thoroughly evil. Way as unquestionably good, and Hegemonic power, the exemplary moral America: China is always the trend to code China and argues that we need to understand global politics in moral terms (Princeton, global politics in moral argues that we need to understand (wangdao) Way” between the “Kingly 2011). He looks to the ancient distinction than using these concepts for a rather (badao). But Way” and the “Hegemonic of governance is “reasonable and commendable.” of governance In benefit from China’s magnanimous rule. He thus concludes that the All-under-Heaven All-under-Heaven the that concludes thus He rule. magnanimous China’s from benefit system for the 21st century because its benevolent system is the “acceptable empire” of individuals and nation-states). In his other works, Zhao looks to a romanticized Zhao looks In his other works, and nation-states). of individuals countries where System, Tributary order—the Chinese world of hierarchical version would the world of Beijing—to argue that recognized the superiority like Korea System utopia (as world unity (tianxia) as a truly global idea of world ancient Chinese desires the on focus its to due violent and selfish is that system present the to opposed After declaring Western notions of international politics immoral, various Chinese various politics immoral, notions of international Western After declaring offered. In been order have world moral ideas for a properly through negative stereotypes. negative through 18

The Forum “ of economicgrowth. now themainengine citizens; thePRCis does notbenefitits success, however, China’s economic “

Norms, Values andExceptionalisminChina’s World Viiew people areuponus.” America’s democratic and capitalistvalues, accordingto that would bejudgednotonlyby God,butby theworld because “theeyes ofall a hill,” accordingtoJohn Winthrop’s 1630sermon“A ModelofChristianCharity,” grows outoftheideathatU.S.isworld’s “firstnewnation.” Itis“a cityupon unique, butuniquelyunique—andsuperior. American exceptionalism year. Exceptionalismheremeansthatyour countryanditsvalues arenotonly exceptionalism,” especiallyfromRepublicanpoliticiansinapresidentialcampaign move towards Chineseexceptionalism. We areusedtohearingabout“American Pan’s argumentthattheChinaModelis“uniquelysuperior” ispartofabroader of GreatHarmony. process ofintegrating divisions intotheorganicwhole, andultimatelyintothe World solved by thestate.Unityhereisguidingvalue becausePan seessocialorderasa organic whole. For Pan, diversity is“division,” andthusaproblemthatneedstobe condemns civil societyas a battlegroundofspecialintereststhatcanonlydivide his is noroominthisnationalvillageforopendebate“civil society;”Pan actually father, andthemassesareloyal, grateful and respectful, likegoodchildren. There the PRCasvillagesocietywritlarge,where thepartyloves the peoplelikeacaring conflict-free organicsociety, arethesource oftheChina’s economicsuccess.Hesees Pan Wei arguesthatthepatriarchal values ofvillagelife,which ispresentedasa the World Bank. Africa. In2009-10thePRCactuallylentmoremoneytodeveloping countriesthan as the World Bankandonthegroundin prominence ininternationalinstitutionssuch growth. Itseconomicideasthusaregaining now themainengineofglobaleconomic does notjustbenefititscitizens;thePRCis poverty. China’s economicsuccess,however, over 300millionChineseoutofextreme government andfreemarketshaspulled Since 1978,Beijing’s mixofauthoritarian to theneoliberal Washington Consensus). as the“BeijingConsensus”(asopposed state +freemarket,” thatisalsoknown as auniquecombinationof“authoritarian 2009). The ChinaModelisoftensummarized can give ussomeclues(Zhongyang bianshi, Wei’s detailedoutlinein Descriptions aregenerally vague; butPan What doesGreatHarmony mean? The ChinaModel

Summer 2012 19 China’s Worldview and Ambitions and Worldview China’s , January 23, 2011). , January that has complete control over people) is indicative people) is indicative that has complete control over Gongshiwang Leviathan Although there are liberal and cosmopolitan thinkers in China, we have to recognize and cosmopolitan thinkers in China, we have Although there are liberal ideas in the PRC. Chinese and exceptionalist conservative the trend toward exceptional values risks becoming the road to fascism, which he concludes would he concludes would risks becoming the road to fascism, which exceptional values push China “off a cliff” ( who promote China’s exceptional values, norms and model. He notes that Nazi exceptional values, promote China’s who had similar statist/exceptionalist debates in the 1930s. and Imperial Japan Germany current ideological debate that feeds on China’s that the PRC’s Xu thus worries of Thomas Hobbes’s Hobbes’s Thomas of the past decade. intellectuals over of China’s right turn” of many of the “collective statists in the 1980s, and nationalists in the 1990s, are now were liberals who People Of course, there are many different views in China. In “Does China Need a different views in China. In “Does China Need a Of course, there are many of current trends in a biting critique Shanghai historian Xu Jilin provides Leviathan,” the shift from nationalism to statism (in the sense Chinese thinking. He argues that tolerance,” Kang states that the “Chinese public’s anti-American sentiment” is anti-American Kang states that the “Chinese public’s tolerance,” and norms.” values American the “resentment of by provoked nation take? Will it preserve China’s rejuvenation? Or will it have superstitious Or will it have rejuvenation? China’s it preserve Will nation take? the road of decline system, and go down democracy’ faith in the western ‘liberal “inherent of Chinese culture’s discussion While there is much and enslavement?” is not western or democratic. Many Chinese futurologists conclude that the world Chinese futurologists conclude that the world Many is not western or democratic. battle between the Chinese system and the civilizational is in the midst a grand Chinese direction will the what thus asks, “In next 30 years; Wei western system. Pan Although his ultimate goal is the World of Great Harmony, Kang primarily sees of Great Harmony, World Although his ultimate goal is the what what China is, but factor—defining not Chinese exceptionalism as a negative simply because it familiar: China is exceptional is now short answer The it isn’t. of the future in terms of China’s uniquely superior civilization uniting the globe in a uniting the globe superior civilization uniquely of the future in terms of China’s that promises peace and prosperity. Harmony of Great World think that their race-nation is the most superior in the world. Even when they are in they when Even is the most superior in the world. think that their race-nation (www. the number one in the world” feel that they should be they always dire straits, thinks exceptionalism thus characteristically confucius2000.com, 2004). Chinese Xiaoguang explains Kang Xiaoguang explains good. Chinese philosopher their country is exceptionally themselves exceptionalism”: “Chinese people “Chinese essay this in his seminal While America is the world’s “first new nation,” Chinese exceptionalism looks to the Chinese new nation,” “first America is the world’s While “first ancient the world’s history to see China as of continuous 5000 years country’s of exceptionalism assume that Like in the U.S., Chinese expressions civilization.” them to other countries—whether those countries like it or not, and often through those countries like it or them to other countries—whether military force. exceptionalists, are so uniquely superior that Americans have a moral duty to export duty to export a moral have Americans superior that are so uniquely exceptionalists, 20 The Forum

by China’s publicintellectualsisunity—ideologicalunity, nationalunityandglobal such debatesisastepinthisdirection.Butasweseehere,themainvalue promoted more diversity inglobaldebatesissurelyagoodthing;includingChinesevoices in at homeandtheChineseempire’s hierarchical “Tributary System”abroad.Having a problem,andpromotevarious versions ofelitegovernance: patriarchal society imperial historyforconcepts.Mostofthepeoplementionedheresee“equality”as futurologists andworld ordertheoristsgenerally arelookingtoChina’s pre-modern Norms, Values andExceptionalisminChina’s World Viiew their elaborate plansforChinainthe21stcentury. American world orderinthemassmedia. They hopethenewleadershipwilladopt mentioned hereareconsquentialbecausetheydebatingthecontoursofpost- leaders arestillformulatingtheirmajorpolicy narratives. The publicintellectuals a once-in-a-decadeleadershiptransition. XiJinpingandtherestof5thgeneration Why shouldwecareaboutideological debatesinChina? The PRCisinthemidstof as animportantstepindominatingtheworld. theorists isgeopolitical:conqueringtheglobaldiscussionofnormsandvalues isseen unity—which leaves littlespacefordiversity. Indeed,themain goalofsomethese

Summer 2012 21 China’s Worldview and Ambitions and Worldview China’s Durham University Dr. David Kerr David Dr. UNITED KINGDOM China and Inner Asia: New Asia: and Inner China Frontiers and New Challenges and New Frontiers

sometimes it is not. 40 years ago Inner Asia had largely disappeared from view, disappeared from view, Asia had largely ago Inner sometimes it is not. 40 years the USSR and between War the Cold but three: War one Cold not by obliterated War the Cold and Iran; Turkey - Eurasia clients in Central West’s and the West the nner Asia is an ambiguous region in the sense that sometimes it is there and Asia is an nner

internal and social changes have been: the emergence of some kind of civil society been: the emergence of some kind of civil have internal and social changes on Asia often drawing in post-socialist societies; the rise of new nationalisms in Inner end of the USSR and the creation of sovereign Central Asia; the rise of China and Asia; the Central end of the USSR and the creation of sovereign of Islam as a factor shaping and the resurgence Asian great powers; India as modern primary The and neighbouring regions. Eurasia the international relations of Central changes. changes. been: the have significant developments the most In external geopolitical changes Asia and to force its Inner Asian provinces into the role of Cold War frontiers. This This frontiers. War into the role of Cold Asian provinces its Inner Asia and to force been fully dismantled and the region has re-emerged Asia has now Inner War Cold changes and external, geopolitical by internal, social driven in new configurations the India, Burma, PRC border in the Southwest was closed except for a single point closed except for a single Southwest was the India, Burma, PRC border in the So one Range into Pakistan. the Karakoram Asia over of access to the interior of to isolate China from interior Asia was in Wars principal effect of the multiple Cold Asia was divided, isolated and militarized. This division, isolation and militarization division, This isolated and militarized. divided, Asia was Asia from the USSR, boundary in Inner notable for China. China’s particularly was of some 16,800 kilometers to round in an arc PRC, DPRK border in the Northeast Inner Asia had nominally four states - the USSR, PRC, Mongolia and Afghanistan nominally four states - the USSR, PRC, Mongolia and Asia had Inner military and intelligence presence Soviet significant had very - but since the latter two At this time, therefore, Inner proxies. states and two the region had two in practice that began with the border war of 1962 but again intensified in the 1970s with Mrs of 1962 but again intensified in the 1970s that began with the border war At that time and the dismemberment of Pakistan. Moscow lean towards Gandhi’s I began in the 1960s but intensified with China’s between the USSR and the PRC that China and India between War the Cold after 1972; and Washington lean towards 22 The Forum

These newforces -geopolitical,social, andenvironmental -willshapeanddefine atmospheric warming, pressureonrenewable water supply, andlanddegradation. will riseindiverse impactsincomingdecadesparticularlythroughitseffects labour. A furtherdevelopment that mustalsobenotedisclimatechange, which Inner Asia driven by activities likeresource extraction, trade, investment andmigrant are xenophobicandmilitant;thedevelopment ofneweconomicstrategies for ethnic andreligioussolidarities,someofwhich aredemocratic andsomeofwhich China andInner Asia: NewFrontiersandChallenges “ attention special deserves in InnerAsia China’s role “ of Inner Asia presentstherisingpower ofEast Asia withunusualopportunitiesand in Inner Asia deserves specialattention. The statusofbeingbothinsideandoutside security focushastraditionally beeninEast Asia notInner Asia. Therefore China’s role external sincethevast proportionofitspopulation,economy, government and on accountofitsInner Asian provinces, butithasbeen historicallyandculturally since itistheonlystatethatbothinternalandexternaltoInner Asia: itisinternal Russia, India, Turkey, Iran andtheEuropeanUnion.Chinaisinaunique position relations witheach other. Oftheseexternalpowers themostimportantareUS, interests insecurityandeconomics,ofcoursetheirneedtomanage with influencesfromexternalstates,drawn towards theregion by anumberof The dynamics acrossInner Asia betweenthesestatesandregionsarenow interwoven Xinjiang, Tibet, InnerMongolia,Ningxia,Gansuand Qinghai. the Inner Asian provinces ofChina,which canbevariously definedbuttypically Tajikistan, Afghanistan, ChinaandMongolia.Regionsofsignificanceareparticularly rising importance. The statesare Turkmenistan, Uzbekistan,Kyrgyzstan, Kazakhstan, now haseightstatesandwithinthoseeightsanumberofsignificantregions identities andtherelationsbetweenformerempiresimperialsubjects. The region the regioninteracting witholderissuesinthesesocietiestodointer-ethnic politics oftheregion;asaninternational must have concern forthetransnational risks. As partoftheInner Asian regionit punishment or extermination to pacify the was necessarytoconductcampaignsof typically threeforms.From timetoit as oldthefrontieritself, andhastaken terms oftradition China’s diplomacy is a complexmixofthenewandold.In China’s diplomacy towards Inner Asia is the US,RussiaandIndia. powers, andinparticulartheambitionsof dynamic betweeninternalandexternal actor itmustconcernitselfinthe

Summer 2012 23 In this way In this way 2 China’s Worldview and Ambitions and Worldview China’s Following the none too Following 3

1 China’s ambition to create new organizational and normative frontiers for itself in the ambition to create new organizational and normative China’s This engagement of the frontier allows China to expand its influence outwards, China to expand its influence outwards, engagement of the frontier allows This states and of territorial rights with the former Soviet it agrees to demarcation as even attempts to do this with India. successful attempt to create organizational and normative power for China under power successful attempt to create organizational and normative and mode of promoting ‘peace socialism, China has returned to this conventional the frontier. influence beyond order’ at the frontier and seeking expansion of China’s security with forms of normative power that sought to repress unwanted ideologies repress unwanted that sought to power security with forms of normative as a benevolent of China and promote instead a narrative and political movements peoples. diverse leader for the region and its and civilising reason why some parts of Inner Asia came inside the Chinese Empire and some parts Asia some parts of Inner reason why As this suggests a result of both kinds of politics. were allocated to other Empires was and of economy power mixed organizational has conventionally diplomacy China’s demarcate their territories - the Empire’s property rights - but these boundaries were their territories - the Empire’s demarcate in China’s and governed more mobile Asian frontier that was lain upon an Inner The to Chinese norms. acculturation social organization, and by by subsidy, case by eradication which was only reserved for the most intransigent of cases. the most intransigent for only reserved was which eradication boundary. quite a different thing from the creation of a the creation of the frontier was to and Mughal, did want Persian Empires, Russian and Chinese, Ottoman, The diplomacy was strongly focused on forms of social and ethical propriety and ritual, strongly was diplomacy norms, naming by ordering This things and people. including through the naming of and economic than full-scale considered more desirable always was and enrichment This system of managing peace and order on the frontier by enrichment and social enrichment on the frontier by system of managing peace and order This I mean that Chinese which aspects; by organization had important normative the chiefs were no longer leaders of war-bands, but hereditary wardens of the “peace but hereditary wardens were no longer leaders of war-bands, the chiefs of great governments the frontier fetish of the central is always and order” which empires. according to a classification of greater and lesser chiefs demanded a fixed habitat chiefs demanded of greater and lesser according to a classification of tribal boundaries, promoted the demarcation This and his tribe. chief for each into territorial principalities, in which once been tribal followings had what converting that was very small compared with the cost of frontier wars, and it stabilized the and it stabilized the cost of frontier wars, small compared with very that was of subsidy the regular payment society of the Mongols, because nominally nomadic The system was one of the standard expedients in Chinese history, whatever the the whatever expedients in Chinese history, one of the standard system was The the peace at an expense It kept invention. no means a Manchu and by ruling dynasty, this was a far more economic means of securing the frontier than continuous warfare. than continuous warfare. means of securing the frontier a far more economic this was government’s of the Qing this most elegantly in his study states Lattimore as ever and sedentarisation: subsidy favoured the Mongols which towards frontier diplomacy frontier. More often China sought to organize and enrich the frontier societies since frontier societies the enrich to organize and China sought More often frontier. 24 The Forum

of aneconomicorsecuritynature-areinthefirststagesdevelopment. This extraction, logistical corridors,civilian andmilitaryinfrastructures, andbureaucracies power: theorganizational modeofexpansion-by trade, aid,investment, resource need tobeemphasized,however. First, wearestillintheera ofChina’s emergent a Eurasian greatpower forthefirsttime,andnotjustanEast Asianpower. Two points particularly thecasebecauseifChinacanexpandto West thenitcanclaim tobe West isanimportanttestcaseofChina’s newgreatpower status,therefore. This is China andInner Asia: NewFrontiersandChallenges who promoteself-government, typically Tibetans, Uyghurs,andMongolswho say particularly ofMuslimsand Buddhists. The claimofsplittismisdirected againstthose the Chinesegovernment’s righttodefine,monitorandcontrol religiousactivities, civilians. The claimofreligiousextremism isdirectedagainstgroupsrejecting is directedagainstarmed militantssaidtobeattacking government agenciesand these evilsbeingterrorism,religiousextremism,and splittism. defines thosehostiletoitsruleinthe Western regionsofChinaas‘threeevilforces’; to employ thesemechanisms inthenewera ofInner Asia. The Beijinggovernment subsidy, assimilationby culture,andrepressionofhostileforces; anditcontinues As notedChinatraditionally hasgoverned theInner Asian frontierby amixofnorms, The NewPolitics ofInner Asia Asia. in otherpublications,toconsiderChina’s roleinthenewnormative politicsofInner set asidetheorganizationalprospectsofChina,which arebeingdebatedatlength frontiers, newambitionsbutalsochallenges tomeet. The restofthispaperwill power inInner Asia isundeterminedwithinan region.Chinahasnew afford toleave thenewopenfrontiertobedominatedby China. Therefore, China’s the otherambitiouspowers -Russia, America, India,and others-noneofwhom can it intocontactandcompetitionwiththeorganizationalnormative resources of Asian societieswillshapethecontextofChina’s power; andofcourseitwillbring the newgeopoliticalcharacter ofInner Asia andthesocialchanges withinInner government forInner Asia butthiscannotnow comeback. The interaction between Inner Asia isquitedifferentfromtheold. Empirehasbeentheconventional formof and ordertothreatinstability. The secondcriticalpointtonoteisthatthenew precisely why thisspaceisopentosuch vastly differentinterpretationsfrompeace best tosay thatatpresentthenormative shapeofChina’s power isopaque,which is normative character thatwillshapewhat theorganizationalpower isusedfor. important thantheorganizationalstructuresofChina’s power sinceitwillbeChina’s more clearlydefinedideaofChina’s normative purposes. These arearguablymore organizational power thanitpresentlydoes,butwewould have tohave amuch a superpower needtoacceptthatnotonlywould Chinaneedtohave more even moretrueofChina’s normative power. Those who say thatChinaisalready 5 The claimofterrorism 4 Itis

Summer 2012 25 China’s Worldview and Ambitions and Worldview China’s The extent to which the which extent to The 6 It is important to remember that xenophobia means fear of the 7 by vertical xenophobias between former imperial subjects and imperial rulers. In vertical by political The regional identities. over this sense imperial rule casts a long shadow stemming from the imperial past. Since Inner Asia was governed in history largely governed Asia was stemming from the imperial past. Since Inner ethnic groups can be cross-cut Empires the horizontal xenophobias between by histories of coexistence. Nearly all Inner Asian societies are multi-ethnic (Mongolia histories of coexistence. Nearly all Inner is an exception) so rising ethnonational consciousness can exacerbate traditional problem then mixes with another This ethnic phobias within and across societies. and even violent. and even In - and not fear of the unknown. - or at least think we know we know strangers histories of mistrust as well as Asia different ethnic and religious groups have Inner and sometimes the national and the religious combine as Muslims and Buddhists and sometimes the national and the Of course, not all of this for national solidarity. use religious solidarity as a driver some of it is xenophobic, and democratic; civil consciousness can be classed as in different ways. Sometimes the national and democratic combine giving rise giving combine Sometimes the national and democratic in different ways. the religious and sometimes as the ‘colour revolutions’; known are to what push for freedom of religious expression; combine as groups in society democratic society that is seeking autonomy and self-organisation following the long period following and self-organisation society that is seeking autonomy Broadly speaking three types of consciousness of hibernation in socialist society. - and these combine Asia - national, religious and democratic are rising in Inner The point that is rarely mentioned by China and its partners is that a lot of the new mentioned by point that is rarely The in the sense that it emerges from a new civil Asia is democratic, politics of Inner the Shanghai Cooperation Organization, founded in 2001 with Russia, China, Organization, the Shanghai Cooperation as members; and India, Uzbekistan, Kazakhstan, and Kyrgyzstan Turkmenistan, and Mongolia as observers. Iran Pakistan, often seem to be its cause. Nevertheless, China can use the common problems often seem to be its cause. Nevertheless, for its diplomacy. to create a channel that elites face from anti-regime radicalism Asia, forum for Inner for its multilateral is, for example, one defined function This pressures and the extent to which these are responses to authoritarian and arbitrary and arbitrary these are responses to authoritarian extent to which pressures and the Asian Xinjiang as in other Inner and Tibet In is hard to determine. government radicalization can defines as the cure for political the government societies what government and the use of repression and violence to maintain themselves in power, in power, themselves and violence to maintain and the use of repression government case. Uzbekistan being the obvious regime in the Karimov and independence radicalism militancy, is generating Asia Inner new of politics of elites say they are battling against militants, against religious extremism, and against militants, against religious extremism, they are battling against elites say considerably varies though the extent of these movements ethno-national separation, authoritarian elites to justify by of cases is being exaggerated and in a number Zhonghua minzu) but proto- nation (Zhonghua of a Chinese are not ethnic minorities that they not unique to Chinese Inner are forces These self-determination. nations entitled to political parts of the region. Many of political conditions in other Asia and are typical 26 The Forum

China hasitsown version ofnormative orderingandaspirestoprovide solutions contentiousness hasbecomeanissueininternational,asmuch as,nationalpolitics. ethno-national cleavage orvertical post-imperialcleavage. Managingthiscomplex to rulingelites.Italsoembraces problemsofxenophobiaonlineseitherhorizontal national, anddemocratic consciousnesswithinsocietiesandthechallenge thisposes contentiousness ofInner Asia ismulti-faceted,therefore.Itexhibitsrisingreligious, China andInner Asia: NewFrontiersandChallenges it doessuggestthatChina facesresistancetoitsnewmovement intothefrontier, a None ofthissuggestsmovement towards anti-Chinese xenophobiaonany scale; punitive campaigns canstillshapepublicperception ofChina’s contemporary power. The Chinesemethodsofsubsidy, assimilationby culture, and,where necessary, the centreofitsknown orderandinapositionofsuperiorityover frontiersocieties. Chinese hierarchical systemofthepast. The Chinesedynastic systemplacedChinaat To thisperception ofChinesedemographic pressuremustbeadded memoriesofthe preceding 50years andsocietiesfeeldemographically exposedtoChinesemigration. 6 million,andHuimillion.Butthefrontierisnow much moreopenthaninthe 13 million,KazakhsUyghurs10 Mongols8million,Russians groups inexcessof5millionbeing:Uzbeksat28 million, Tajiks 15million,Pashtuns whom HanChinesearethelargestethnicgroupatperhaps60million,with other region isabove 180million(assumingthedefinitionofInner Asiagiven above) of of theanxietyisnomorethandemographic pressure. The total populationofthe up neweconomicroles,thiscangive riseto formsofpost-imperialanxiety. Part ethnic heritages. As farasChineseare presentacrossInner Asia, especiallytaking the transcultural Eurasianism thataspirestotranscend andmixdifferentcultural and border, where beingChineseisviewedaslargelymonocultural incontrast to religious andoftenlinguisticlives. Asia HanChineseandtheothernationalitiesleadseparate cultural, economic, Chinese equivalent ofEurasianism, itisclearthatthereisn’t one.InChineseInner fact thatitsorganizationalcapacityisatalow historicalebb.Ifweaskwhat isthe legacy tomaintainaformofnormative power inInner Asia, andcompensateforthe between Europeans, Turks, MongolsandSiberians.Russia isabletousethiscultural identity -amulti-ethnicandmulti-confessionalthatblurreddistinctions normative legacy inInner Asia isboundupwiththeideaofatranscultural Eurasian development andaspectsofEuropeanculturethatwerewelcomed.Russia’s brought many hardships,especially intheStalinera; butitalsobroughteconomic Asian frontier, Russia.RussianandSoviet ruleover Inner Asia was authoritarianand to considerthisisby contrast totheothergreat normative ordererontheInner resistance toitsorderingalongboththeethnicandpost-imperialdivides. Oneway as oneofthenormative structuresfortheSCO process.ButChinaalsoencounters (minzu hexie)andtalksaboutharmony withindiversity (heerbutong)enshriningthis for thecontentiousdiversity ofInner Asia. Beijingseekstopromoteethnicharmony 8 The sameistrueofChineseliving beyond the

Summer 2012 27 China’s Worldview and Ambitions and Worldview China’s

9 with Tibetan populations and monasteries, monks and nuns have since March 2011 been since March populations and monasteries, monks and nuns have Tibetan with with policies, interacting of self-immolation to protest at government adopting the practice December 2011. Tibetan to others. In China’s the self as well as outwards towards can be directed Violence 7 but four adjacent provinces Region Autonomous Tibet include not only the areas, which Xinjiang in July 2009: Xinjiang’s Development and Progress, State Council of the People’s and Progress, State Council of the People’s Development 2009: Xinjiang’s Xinjiang in July Republic of China, September 21 2009, Beijing. of Habeas the Failure Torture, Witness”: 6 See, for example, the discussion in ‘“No One Left to Watch, Human Rights York: New in Uzbekistan,” Corpus, and the Silencing of Lawyers 4 See the essays in Callahan and Barabantseva, 2012, op. cit. for various outlines of the outlines 2012, op. cit. for various in Callahan and Barabantseva, 4 See the essays power. normative origins and purposes of China’s violence in of inter-communal in the wake produced White Paper 5 See the government Power and Foreign Policy, William A. Callahan and Elena Barabantseva (eds.) The Johns Johns The (eds.) Elena Barabantseva A. Callahan and William Policy, and Foreign Power D.C. Washington, Center Press Wilson Woodrow Press, Baltimore for the Hopkins University 2012, pp. 143-179. 3 I discuss the on-going attempt to create a stable frontier between China and Islamic 3 I discuss the on-going attempt to create China, at the New Frontier: and Modernity Tradition of “Paradoxes Kerr, societies in David Soft Normative World: Orders the in China Islam, and the problem of ‘different heavens’”, 2 See Perdue’s account of the Qing campaign to pacify the frontier in the 18th century: Peter to pacify the frontier in the 18th century: Peter account of the Qing campaign 2 See Perdue’s Belknap Harvard: Eurasia, of Central the Qing conquest West: China Marches C. Perdue, Press, 2005. Notes Affairs, Historical Setting of Inner Mongolian Nationalism”, Pacific 1 Owen Lattimore, “The 9, No. 3, 1936, p. 391. Vol. central government; and many obstacles, internal and international, will have to be to obstacles, internal and international, will have and many government; central West. in the before China can become a great power overcome Chinese government will be more concerned with managing the internal part of the will be more concerned Chinese government As with past expanding into the external frontier. frontier than it will be engaged in for the ‘peace and order’ on the frontier will remain a fetish Chinese states achieving and Tibet most obviously - appear to be participating in the new Inner Asian participating in the new Inner - appear to be most obviously Tibet and and religious consciousness suggests that the politics of rising national, democratic, mechanism for Chinese penetration of new nation-states that are in difficult processes of new nation-states that are for Chinese penetration mechanism of imperial long memories have political identities and of establishing autonomous Xinjiang, China - Inner Mongolia, West fact that key parts of The subordination. of smooth progression. In distinction to those who see China expanding by means expanding by see China In distinction to those who of smooth progression. is either indifference to this Asia Inner the view from or soft power of normative a potential is seen as power resistance. Often Chinese normative project or actual into the same space. matter Asia is unlikely to be a ordering for Inner normative As this suggests China’s movement all the more problematic because it encounters other major states moving states moving other major because it encounters problematic all the more movement 28 The Forum

by Dibyesh Anand isavailable at:http://zeenews.india.com/news/exclusive/tibet-self- people-s-republic-china-self-immolations-tibetan-populated-are. An academicevaluation November 32011,available at:http://www.hrw.org/news/2011/11/03/open-letter-president- Amnesty InternationalandHumanRights Watch intheiropen lettertoPresidentHuJintaoof participation intheBRICssummitMarch 2012. The issueofself-immolationisaddressedby China withanexiled Tibetan self-immolatinginDelhiadvance ofPresidentHuJintao’s heavy saturation of Tibetan areasby securityforces. This proteststrategy spreadoutsideof China andInner Asia: NewFrontiersandChallenges 2010, pp.127-152. 1, 86: Affairs International emergence,” strategic China’s on perspectives Russian and Asian DavidKerr,in, fully “Centralmore problems these of dimensions Central Asian the discuss I 9 Frontier,” Inner Asia, 13,2011,pp.7–25. David see, interviews field on based China’son Boundaries Ethnic North-Westand Tobin, Unity Xinjiang Ethnic Communities: “Competing in segregation ethnic of study recent a For 8 immolation-won-t-trigger-china-spring_742597.html

Summer 2012 29 Pivot’ United States China’s Worldview and Ambitions and Worldview China’s Dr. Lowell Dittmer Lowell Dr. University of California, Berkeley University China, Asia, and the ‘American the ‘American Asia, and China, s first American “Pacific president” (born in Hawaii, raised in Indonesia), Hawaii, president” (born in “Pacific American s first the outset of from Asia-Pacific has attempted to focus on the Obama Barack Asia, based on the contention called a “return” to was This his presidency. the foregoing Bush by that the region had been unduly neglected

We begin with a brief exploration of the apparent reasons for the pivot. This is This for the pivot. of the apparent reasons begin with a brief exploration We dimensions. an examination of its diplomatic, economic, and strategic by followed combination of domestic and foreign policy reasons, the “return,” now rechristened a rechristened now reasons, the “return,” combination of domestic and foreign policy form, at least from the Chinese perspective. began to take a more threatening “pivot,” in the SED for the first time in 2011. For a course correction. underwent a significant Asia policy after 2009, Obama’s Yet range of concerns. Military-to-military exchanges between the two countries, albeit between the two exchanges of concerns. Military-to-military range were Taiwan, 2010 amid Chinese criticism of US arms sales to suspended in January PLA officers were also included year. request the following Washington’s resumed at Obama, the Obama administration expanded the Sino-American economic dialogue expanded Obama, the Obama administration Economic Dialogue, and to a Strategic Secretary Henry Paulson Treasury initiated by a wider facilitating annual discussion of Washington), 2009 in July or SED (launched China has played a central role in the “return.” The Sino-American relationship was Sino-American relationship was The role in the “return.” a central China has played and by Clinton Aside from the visits “G-2.” world, deemed the most significant in the visited Japan, Singapore, South Korea and China and participated in the APEC and China and participated in the Singapore, South Korea visited Japan, month. Economic Leaders’ Meeting the same was a “listening tour” to Tokyo, Jakarta, Beijing and Seoul, followed by attending by Beijing and Seoul, followed Jakarta, Tokyo, tour” to a “listening was Economc Cooperation Asia Pacific and the (ARF) in July Forum ASEAN Regional the 2009 President Obama In November (APEC) Ministerial Meeting in November. A February 2009 first trip abroad in Clinton’s Secretary of State Hillary administration. 30 The Forum

(2008-2010) phaseofObama’s “returnto Asia.” From theadministration’s The central reasonfortheshiftis a senseofmutualdisappointmentintheearly The ObamaPivot Republican opponentinthe2012presidentialelection,MittRomney. We thenturnforabrieflookatthealternative policy sponsoredby Obama’s putative China, Asia, andthe‘AmericanPivot’ presumably, butChina’s exclusive economiczoneandlargeportionsof theEastand naval intrusionintoChina’s notionalmaritimefrontier(not onlyitsterritorialwaters, such asaircraft carriersoranti-shipballistic missiles(ASBM),designedtodeter PLA rearmamentfocused ondeveloping “anti-access/area denial”(A2AD)weapons, regional alliesmoreso. Although Chinanever directlychallenged theUSpresence, area. But Washington was uneasyaboutaperceived shiftinthebalanceofpower, its challenge American interests,astheUShasnoterritorialclaimstoeitherdisputed fishing lines,arrestingfishermenandconfiscating fish). ThisdidnotinChinese eyes of thoseclaims(e.g.,warning othershipsaway fromdisputedwaters, cutting claims totheEastChinaSeaandSouth Seaandcertainactionsindefense repeated orofficiallydenied.It was however followed by moreassertive Chinese South ChinaSeawas alsoa“coreinterest,” acontroversial claimnotpublicly The following year beganwithareportedChineseclaiminbilateral talksthatthe and even sanctiontheUScompaniesinvolved inthearmssales. decades Beijingannouncedthatitwould curtailmilitaryexchanges with Washington certainly includedtheirclaimsto Tibet and Taiwan. Initstoughestresponseinthree visit vowing mutualrespectfor“coreinterests,” which fromBeijing’s perspective These actionsseemedtoBeijingatoddswiththeaccordreached duringtheObama mine huntingshipsandcommunicationsequipmentfor Taiwan’s agingF-16fighters. including Patriot missiles,Black Hawk helicopters,Harpoonlandandseamissiles, the DalaiLamaandapproved aUS$6.4billiondollararmssalepackage to Taiwan, Chinese disappointmentsurfacedlater, when Obamaheldhispostponedvisitwith November tocooperate onthisissue.. developing nations,ledby theUSandChina respectively—China hadpromisedin outline ofaglobalagreementthankstoanopendisputebetweendeveloped and the ClimateconferenceinCopenhagenfollowing monthreached onlyaweak president oflive accesstoaChinesemedia audience awarded hispredecessors. And the Obamateamwas underwhelmed by theChinesereception,which deprived the Though itembraced abroadvisionoffuturecooperation onawiderange ofissues, Dalai Lama),Obama’s inaugural November 2009visittoChinawas disappointing. sensitivities (by postponingthedecisiononweaponssalesto Taiwan andavisitofthe perspective, aftermakingconsiderable efforttoassuageBeijing’s nationalist

Summer 2012 31 1 China’s Worldview and Ambitions and Worldview China’s neighbors, negotiating weapons sales, joint military exercises, naval port calls and naval neighbors, negotiating weapons sales, joint military exercises, example, in 2010 the nuclear- For other forms of enhanced security collaboration. solutions, and PRC representatives rejoined such discussions with obvious chagrin. chagrin. discussions with obvious rejoined such solutions, and PRC representatives with China’s diplomacy bilateral also pursued more active Washington Meanwhile Cooperation (TAC) and joined the East Asia Summit (EAS) under Obama, and at their Asia Summit (EAS) and joined the East (TAC) Cooperation raised maritime security issues. 2011 in Indonesia again first meeting in November the publicity and has consistently opposed multilateral by embarrassed China was American “national interest” in the South China Sea disputes because the credibility as well as freedom of commerce, involved, American alliance commitments was of Amity and Treaty of ASEAN’s US finally signed The resolution. calling for multilateral to raise the issue of China’s more assertive territorial claims for public discussion more assertive the issue of China’s to raise 210 at the July Thus resolution. than bilateral rather and to call for multilateral of State H. Clinton suddenly declared an summit, Secretary ASEAN Regional Forum of the other two arenas in which the two countries engaged. The multilateral Asian multilateral The countries engaged. the two arenas in which of the other two leading US officials, often Clinton or by frequented diplomatic forums were now board American leaders often used these forums as a sounding Obama himself. But How to explain these paradoxical developments? If we can assume that bilateral If we can assume that bilateral developments? to explain these paradoxical How lie in one must the answer cordial and productive, remained on the whole diplomacy State James B. Steinberg and East Asia Security Council counselor Jeffrey Bader, both Bader, Asia Security Council counselor Jeffrey Steinberg and East B. State James by officials in the Defense and displaced was influence Their in 2011. stepped down line. emerging policy shared a more “realist” view of China’s State departments who trust and an increasingly competitive relationship. trust and an increasingly competitive Deputy Secretary of of the early pro-China policy, In this context, the architects elaborated at the SED session held later that year. Although these talks were cordial Although these talks were cordial that year. at the SED session held later elaborated Americans remained skeptical about implementation. and mutually appreciated, the of dialogue ironically coincided with a deterioration an apparently constructive Thus Promoting Strong, Sustainable, and Balanced Growth and Economic Cooperation,” Economic Cooperation,” and Sustainable, and Balanced Growth Promoting Strong, 2011 to be further Obama and Hu in January agreed in principle in talks between issues as cyber-security and maritime security. The first round of the “US-China first round of the “US-China The and maritime security. issues as cyber-security The most significant 2011. June in convened was Asia-Pacific” the Consultation on for Framework “US-China Comprehensive the was track outcome of the economic discourse remained cordial and even multiplied quantitatively into a host of into a host multiplied quantitatively cordial and even discourse remained a military-civilian SED mentioned above, Alongside the and dialogues. exchanges intractable such in 2011 to tackle launched (SSD) was Security Dialogue Strategic heightened popular American apprehensions about China’s rise as great power. rise apprehensions about China’s American heightened popular bilateral The discourses. three separate into to diverge began American diplomacy South China Seas). Meanwhile, Western journalistic coverage of these developments of these developments coverage journalistic Western Seas). Meanwhile, South China 32 The Forum

2011 reaffirmingtheUS-PhilippinesMutualDefense Treaty. South Korea resumed the Air-Sea BattleConcept),andtheManilaDeclaration was signedinNovember it would hostthe forward deployment ofUSNavy Littoral CombatShips(partof Vietnam openedCamRanhBay tovisitsby USnaval vessels, Singaporeannounced Yellow Sea]andtheSouthChina Seainjointnaval exercises withKorea and Vietnam. powered aircraft carrierGeorge Washington was deployed tothe West Sea[i.e.,the China, Asia, andthe‘AmericanPivot’ have clearlynotbeenconvincing toChineseears. theory.” Although China’s public responsehasthusfarbeenmild,theseassurances with professionsofsupport forChina’s “peacefulrise,” forswearing any “Chinathreat The American leadershipaccompaniedthisconcertedreorientationofits Asia policy Japan, andPearl Harbor, HI. and destroyers tothePacific—and homeportingsomeofthoseshipsat Yokosuka, 4. assigningmostoftheNavy’s ballisticmissiledefense(BMD)-capable Aegis cruisers WA); forces submarines(SSGNs,orcruisemissilesubmarines)inthePacific (atBangor, 3. basingtwo oftheNavy’s fourconverted Trident cruisemissile/specialoperations heavily armedSSNs—inthePacific Fleet(atKitsap-Bremerton, WA); 2. basingallthreeSeawolf (SSN-21)classsubmarines—theNavy’s largestandmost Guam; three Pacific FleetLos Angeles(SSN-688) classSSNs(nuclearattack submarines)to 1. increasingantisubmarinewarfare (ASW)training forPacific Fleetforces; shifting resistance. Sea BattleConcept(ASBC),expresslydesignedtoprojectpower against“A2AD” released 12days laterby thePentagon. Panetta onJanuary 5,2012;andtheJoint Operations Access Concept(JOAC), Priorities forthe21stCenturyDefense”introducedby ObamaandDefenseSecretary documents, thedefensestrategic review“SustainingU.S.GlobalLeadership: November 2011visitanditwas thensetforthinJanuary 2012intwo official ButthecoreofUS“pivot” isstrategic. Obamaforeshadowed itduringhis to southeast Asia, directlyathwart theSouthChinaSea. Marines inyears ahead. This deployment signalsashiftofUSforces fromnortheast in 2012,startingwithsome250personnelandgrowing toatargetnumberof2,500 that USMarineswould beginrotationstoDarwinonthenortherncoastof Australia engagement onChina’s peripherywas theNovember 2011Obama announcement Chinese criticism.ButthemostsignificantsignalofenhancedUSsecurity construction ofajointmilitary-civilian portfacilityonChejuIsland,notwithstanding

3 This would entail,interalia: 4

2 The newstrategy was setforthinthe Air-

Summer 2012 33

5 China’s Worldview and Ambitions and Worldview China’s 6 proposal setting a date for settlement of negotiations by the next APEC summit the next proposal setting a date for settlement of negotiations by announced Canada and Mexico have Japan, 2011. More recently, in November and Singapore that was negotiated in 2005 and entered into force May 2006. At the 2006. May and entered into force negotiated in 2005 and Singapore that was Brunei, Chile, APEC summit the leaders of nine negotiating countries (Australia, 2010 endorsed Obama’s Vietnam) Singapore, the US and New Zealand, Peru, Malaysia, stronger labor and environmental standards and investment protection requirements) standards and investment stronger labor and environmental for China will make it difficult that, perhaps not coincidentally, as well—provisions Brunei, Chile, New Zealand TPP is the descendant of an agreement by The to join. The new economic component of the Obama pivot is the Trans-Pacific Partnership, or Trans-Pacific is the new economic component of the Obama pivot The agreement designed to deal with trade TPP is a “high-quality” multilateral The TPP. (intellectual property rights, and investment behind-the-border impediments to trade China. (Applause.) There will be more inspections to prevent counterfeit or unsafe counterfeit will be more inspections to prevent There China. (Applause.) goods from crossing our borders.” trade cases against China at nearly twice the rate as the last administration –- and it’s –- and it’s as the last administration the rate cases against China at nearly twice trade Enforcement Trade I’m announcing the creation of a Tonight, made a difference. . . . in countries like practices unfair trading with investigating Unit that will be charged investors to share technology with Chinese competitors and using illegal techniques with Chinese competitors and using illegal techniques to share technology investors with the results of Reflecting frustration to appropriate proprietary technology. brought Obama emphasized that: “We’ve diplomatic complaints alone, however, manipulator nor has this been emphasized in the SED. Complaints now focus on Complaints now in the SED. manipulator nor has this been emphasized complicated is alleged to have which program, “indigenous innovation” China’s procurement policies, forcing government US access to domestic markets with The old policy has been to complain to the Chinese about the bilateral trade deficit trade about the bilateral has been to complain to the Chinese old policy The its threat to do so during the Notwithstanding practices. and alleged unfair trading has not cited China as a currency the administration 2008 presidential sweepstakes, the world, while saving nearly half a trillion dollars in our budget.” saving while the world, one old, one new. policies, consists of two economic foundation for the pivot The oops to 490,000 in 10 570,000 troops to 490,000 strength from approximately reduction in its total fleet. Obama claims, carrier in the navy’s no reduction time, Obama vows years’ we maintain the finest military in that ensures dictu: “a new defense strategy mirabile and Afghanistan in 2911 and that further forces would be withdrawn—mechanized be withdrawn—mechanized would that further forces Afghanistan in 2911 and and will see a the army While well. Europe as Western from ground combat forces ill be strengthening that the US “will be strengthening of 2012). But Obama promised slated for the end come at the expense and budget reductions will not Asia Pacific, our presence in the from Iraq 90,000 troops had been removed pointing out that of that critical region,” strategy and the budgetary constraints faced by a heavily indebted US government. indebted US government. a heavily faced by constraints and the budgetary strategy $1 trillion ($486 defense cuts of is facing draconian department of defense The billion under the sequestration next decade and an additional $500 billion during the een the envisaged new een the envisaged the disjuncture betw pointed to critics immediately Domestic 34 The Forum

The now virtuallycertainRepublican challenger toPresidentObamainthe2012 The RepublicanResponse establishment ofthe TPP was set. was highlighted,abroadframework announced,anda12monthdeadlinefor negotiations tojoinaswell. At theNovember 2011Honolulusummit;progress China, Asia, andthe‘AmericanPivot’ join the WTO’s Government Procurement Agreement, andsoon. World Trade Organization(WTO), intenseborderinspections,pressure onChinato the value of itscurrency. impose “countervailing duties”onChineseproductsshould Chinanotquickly raise department tolabelChinaa“currency manipulator.” initsbiannualreportandto an executive order(notrequiringcongressionalapproval) directingthetreasury competing nationssuch asours.” manipulation ofitscurrency toreducethepriceofitsproductsrelative tothoseof world hasnever seenbefore.’ China’s unfairtrade practices extendtothecountry’s consider thesepractices tobe‘ablueprintfortechnology theftonascalethatthe by theU.S.ChamberofCommerce reportsthatinternationaltechnology companies proprietary technology asaconditionoftheirdoingbusinessinChina. A recentstudy Chinese government facilitatesthisbehavior by forcing American companiestoshare of intellectualpropertyrightsthatarecrucialtoourown economicwell-being. The engineered American products,with no regardforthepatentsandotherprotections economic policy: “Onmany occasionsChinesecompanies, have simplyreverse- But themostconsistentandfullyarticulatedRomneycritiqueisofObama budget strains credibility, Romney’s doessoeven more. Obama’sIf billion. $720 its about whilecutting to military vow spending growthe to overalland more, or billion $600 military to spending defense wouldannual increase GDP.of percent 4 at maintained Thisbe must spending defense weaponry.US Core must so do to and primacy, strategic increase defense retainspending, including shipbuilding, national must missile defense, and US space the simple: relatively is it but The Republican critique of Obama’s security policy is subordinate to domestic politics Lehman economicmalaiseandrestore American growth andcompetitiveness. campaign narrative, which emphasizeshisdeterminationtoovercome thepost- competition. Thus theChinacritiqueisthematicallyintegrated intoRomney’s central focusing hisattack noton human rightsorsecurityissuesbutontrade and“unfair” the incumbentonChinaissueisfarfromunprecedented,Romneyunusualin China policy, formerMassachusetts governor MittRomney. While achallenge to election isalsothecandidatewho hasarticulatedthemostcoherentandarticulate

9 Romney’s planalsopromises moretrade cases atthe 8 Thus Romneypromiseson“Day one”toissue 7

Summer 2012 35 China’s Worldview and Ambitions and Worldview China’s “ The 2012 US election looks looks US election 2012 The “ polarize Sino- as if it will not because US relations, differences but of partisan underlying because of partisan agreement 10 In 2010, a poll by the Pew Research Center found that 61 percent of respondents thought somewhat over time, rising after 9/11 before gradually declining again. . Asked in another 2010 another in Asked . again. declining gradually before 9/11 after rising time, over somewhat survey (by Chicago Council on Global Affairs), whether China practices “fair trade,” only 29 the United States was in decline, and only 19 percent trusted the government right to most do of what is the time. In 1964, by contrast, three-quarters of the American varied numbers have public trusted to The do the government federal the right thing most of the time. said they Noter 1 policy of “onconfrontational assertiveness.” policy best interest. Thus although Beijing remains unhappy about what they view as being they view as being about what although Beijing remains unhappy Thus best interest. they have rights in territory to which mineral out of the quest for subsurface crowded to a 2011 shifted back since June has “undisputable” claim, Chinese diplomacy Southeast Asian countries. But the response of China’s neighbors has made a definite neighbors has made a definite countries. But the response of China’s Asian Southeast new trade China’s atmosphere in which A polarized political-strategic impression. orbit is definitely not in China’s strategic Washington’s into back partners all move has been surprisingly mild. This is not because Beijing has any sympathy at all for sympathy is not because Beijing has any This has been surprisingly mild. about the pivot, makers and analysts alike are furious Chinese policy the pivot. and various from Japan they hold responsible for the escalating resistance which Yet paradoxically, despite the rise of nationalism in China during the runup to the despite the rise of nationalism paradoxically, Yet the reaction to this hardening US stance Congress in the fall of 2012, 18th Party has applauded Obama’s TPP initiative, promising to execute if Obama “stalls” TPP to execute if Obama “stalls” promising TPP initiative, has applauded Obama’s a distinction without a this is the Chinese perspective until after the election.) From anti-China policy. difference, confronting a bipartisan on the military-strategic dimension while dimension while on the military-strategic on his opponent places greater emphasis economic competition. (Indeed, Romney Obama outflank him on the right. In a Obama outflank policies are contending sense the two with Obama focusing complementary, critique with a tough security policy, security policy, critique with a tough not to let Romney is determined while of partisan differences but because of partisan differences agreement: of underlying partisan the GOP to preempt Obama has moved The 2012 US election looks as if it will 2012 US election The relations, not because polarize Sino-US Conclusions 36 The Forum

for-21st-century-defense/, accessedMarch 10,2012;“JOINTOPERATIONAL ACCESS 2012), http://fulltextreports.com/2012/01/05/sustaining-u-s-global-leadership-priorities- 2 Foreign Affairs, Nov/Dec2010, Vol. 89,Issue6. growth as negative for the United States. See Joseph S. Nye, “The Future of American Power,” China’sviewed percent 53 economic Mexico; for percent 41 and Japan for percent 58 Union, percent of Americans agreed, as opposed to 81 percent for Canada, 68 percent for the European China, Asia, andthe‘AmericanPivot’ International Studies,Singapore. Developments,” RSIS Working Paper no.239,May 17,2012,Rajaratnam School of 10 9 BelieveInAmerica-PlanForJobsAndEconomicGrowth-Full.pdf, accessed March 6,2012. for President,Inc.,2011),http://www.mittromney.com/sites/default/files/shared/ 8 and Ideals policy,” (March 6, 2012),in fighting forthefreedomsweenjoy.” Romneydelivers speech to AIPAC, “hopeisnotaforeign cooperation .MittRomneywillseektoengageChina,butalways standupforthose administration would notletU.S.concerns aboutChina’s humanrightsrecordinterferewith place, asSecretaryofStateClintondidin2009when shepubliclydeclaredthattheObama 7 6 politics/state-union-address-2012/p27182, accessedMarch 3,2012. Obama, “StateoftheUnion Address” (January 24,2012),http://www.cfr.org/us-strategy-and- the PresidentonDefenseStrategic Review,” The Pentagon, 11:00 A.M. EST; andBarack 5 Chinese submarines. viewed, atleastinpart,asareferencetoChineseballisticmissiles(including Navy’s referencestoballisticmissilesandsubmarinesoperating inbluewaters canbe China’s maritimeanti-accesscapabilities;thoughChinawas never mentionedby name,the viewed ashaving beenpromptedinlargepartby Navy concernsover itsabilitytocounter destroyers andresumeprocurementof Arleigh Burke(DDG-51)class Aegis destroyers canbe 4 phase. Office hadbeensetupandthatdevelopment ofthisconcept would entertheimplementation power projectionoperations.” InNovember 2011,thePentagon announcedthatan ASB with “sophisticated A2/AD capabilities”andtodevelop “capabilitiesneededforeffective February 2010,where itwas rationalized intermsofaneedtodefeatadversaries equipped 3 Jan%202012_Signed.pdf; accessed April 1,2012. CONCEPT (JOAC) VERSION 1.0(17January 2012),http://www.defense.gov/pubs/pdfs/JOAC_ However: “We certainlyshouldnothave relegatedthefutureoffreedomtosecondorthird Obama,StateoftheUnionaddress,January 24,2012. OfficeofthePressSecretary, For ImmediateRelease(January 05,2012),“Remarks by The Navy’s July 2008proposaltostopprocurementofZumwalt (DDG-1000)class The ASBC madeitsfirstappearance intheUSQuadrennialDefenseReview(QDR) “SustainingU.S.GlobalLeadership:Prioritiesfor21stCenturyDefense”(J

Believe Bellieve in America: MittRomney’s Planfor Jobs andEconomic Growth LiMingjiang,“ChineseDebatesofSouthChinaSeaPolicy: ImplicationsforFuture , p.6. , http://www.mittromney.com/collection/foreign-policy, accessedMarch 8,2012 An American Century: A Strategy toEnsure America’s Interests (n.p.:Romney anuary 5, ASBMs) and

Summer 2012 37 1 AUSTRIA 1908? China’s Worldview and Ambitions and Worldview China’s University of Applied Sciences of University Dr. Anis H. Bajrektarevic Anis H. Bajrektarevic Dr. – Chinese strategic mistake) strategic – Chinese n the eastern, ascendant flank of the Eurasian continent, the Chinese the Eurasian n the eastern, ascendant flank of petrodollar in the and too-well integrated is overheated economy vertigo contemplate or afford to allocate any cannot system. Beijing, presently, is low-wage- Sino economy (The for an alternative. in a search resources (Gunboat diplomacy in the South China Sea the South China Sea in diplomacy (Gunboat

What China Wants in Asia: 1975 or 1975 or Asia: in Wants China What

Hence, the Chinese grab for fossil fuels or its military competition for naval control for fossil fuels or its military competition for naval Hence, the Chinese grab American military presence in the Asia-Pacific, especially in the South China Sea. Asia-Pacific, American military presence in the It perfectly adds up to the intensified demonization of China in parts of influential media. Western the US – as nowadays in Asia, none wants to be a passive downloader. Ultimately, it Ultimately, downloader. passive to be a Asia, none wants in the US – as nowadays would create a politico-military isolation (and financial burden) for China that may cheapen the bolder reinforced consequently justify and (politically and financially) In effect, the forthcoming Chinese military buildup will only strengthen the existing security deals of neighboring countries, primarily with and open up new bilateral picture, Beijing (probably falsely) believes that lasting containment, especially in the believes picture, Beijing (probably falsely) available are fossil-fuels – time same the at – that and unbearable, is Sea, China South of warships. with the help cheaper and the Gulf), and even Africa (e.g., in equalizer (and inner cohesion solidifier), China seems to be turning to its military equalizer (and inner cohesion solidifier), investments Tech energy/Green the resolute alternative than towards rather upgrade of a broader do both at once. Inattentive to – as it has no time, plan or resources Domestically, the demographic-migratory pressures are huge, regional demands are pressures the demographic-migratory Domestically, Considering its best external energy dependency high, and expectations are brewing. and Chinese reserves are predominantly a mix of the USD and US Treasury bonds.) Treasury a mix of the USD and US are predominantly and Chinese reserves economic sustain itself as a single socio-political and formidably performing To energy and less external dependency. Republic requires more the People’s entity, O on exports dependent are heavily centered. Chinese revenues and labor intensive- 38 naval controlisnot competition for fuels oritsmilitary grab forfossil ...the Chinese “ The Forum “ the US Asia Pacific rather aboostfor a challenge but

What ChinaWants in Asia: 1975or1908? breakthroughs), itisonly Japan thatmay seriouslyconsideraGreen/Renewable- infrastructure, tradition ofandknow-how toadvance thefundamental technological Within theOECD/IEAgrouping,orclosely;G-8 (thestateswithresources, only benefittheUSand the closestofitsallies. constellations, thistypeofconfrontationissowell masteredby andwould further the following fewdecades.Given theplanetarypetro-financial-tech-military causal the USinpetro-security, petro-financialandpetro-military globalplayground in quo. With itspresent configuration, itishardtoimaginethatanybody canoutplay armament inthe Asia-Pacific theatre would onlystrengthenthe hydrocarbon status technology builds(andaccumulates)! At thispoint,any eventual accelerated new technology –attracts neighbors.Finally, armiesconquer(andspend)while theatre. However, themessagesarediametrical: An assertive military–alienates, Opting foreitherstrategic choice willreverberate inthedynamic Asia–Pacific process of1975. Consequently, what Chinaneeds in Asia isnotanaval race of1908,buttheHelsinki to seriouslyevolve andemergeasaformidable, lastingandtrustedgloballeader. in Asia, which areIndonesia,IndiaandJapan, thereisnoenvironment forChina multilateralism. Without agrand rapprochement tothechampions of multilateralism of Chinatowards greentechnology, coupledwiththefirmbuildupof Asian meeting thenationalstrategic objectives. Inthiscase,itwould bearesoluteturn

the (moral politicalandfinancial)costsin A realchallenge isalways tooptimize up tothenorthwest–central Pacific.) Indian Ocean,MalaccaandSouthChinaSea Asia thatarches fromthePersian Gulftothe to maintainpivotal onthemaritimeedgeof military presenceby thelocal partners,as benefit, includingthecostssharingofits dispute andotherfrictionstoitsown security the USwillexploitany regional territorial though theSouthChinaSea. Therefore, half oftheworld’s merchant tonnagepasses – theUSdoesnotfailtonotethatnowadays call itmanagingthedeclineofanempire projection andcommitments–somewould (Calibrating thecontraction ofitsoverseas US Asia-Pacific –even an overall –posture. is notachallenge butrather aboostforthe 2

Summer 2012 39 China’s Worldview and Ambitions and Worldview China’s century…” of the Mandarin bureaucracy in 1433, China has never recovered its pivotal naval status in the naval its pivotal recovered in 1433, China has never of the Mandarin bureaucracy Asia-Pacific. Asian No diplomacy: “Preventive 2011 work: in my 2 More on the pan-Asian architectures 1 Since the glorious Treasure Fleets of Admiral Zhèng Hé have been dismantled by the order been dismantled by Zhèng Hé have Admiral Fleets of Treasure 1 Since the glorious other two Asian heavyweights, China and India. That indicates the Far East as a indicates the Far That China and India. Asian heavyweights, other two Asians for many excellence and a place of attraction probable zone of the Green-tech in the decade to come. has clearly learned from its own modern history, all about the limits of hard power all about the limits of hard power history, modern has clearly learned from its own that come in aftermath from the neighbors. forces projection and the strong repulsive not offer a similar experience to pre-modern and modern history does own Their Tokyo is well aware that the Asian geostrategic myopias are strong and lasting, are strong myopias Asian geostrategic that the aware is well Tokyo regionalisms or/and up in their narrow Asian states are either locked as many Asian country that only is the Japan in their economic egoisms. Finally, entrenched military/naval noise, Japan will inevitably rethink and revisit its energy policy, as well rethink and revisit its energy policy, will inevitably noise, Japan military/naval energy mix. as the composition of its primary An important part of the US–Japan security treaty is the US energy supply lines security treaty is the of the US–Japan An important part After the recent Tokyo. demilitarized) to (the post-WWII given security guaranty as well as witnessing the current Chinese armageddon, earthquake-tsunami-radiation emancipate. is repeatedly brutalized by devastating natural catastrophes (and dependent on catastrophes (and dependent natural devastating by is repeatedly brutalized be that a decisive oil), it might Arab – external influence another disruptive yet to and eventually revive, to survive, only way green energy is the shift towards the recent nuclear trauma, Japan will need a few years to (psychologically and and to (psychologically will need a few years Japan trauma, the recent nuclear impresive an such For – but it will learn a lesson. the shock economically) absorb on a small land-mass which situated demography, and considerable economy tech U-turn. Tokyo’s external energy dependencies are stark and long-lasting. After After stark and long-lasting. dependencies are external energy Tokyo’s U-turn. tech 40 The Forum

East asagrowing source ofhydrocarbon imports tomeetitsescalatingenergyneeds. proven oil reserves willbedepleted by 2018. of energy. Chinaisaconsumer, notaproducerofenergy. ItisestimatedthatChina’s and risingliving standards.LiketheUnitedStates,China alsostruggleswiththeissue demand, fuelinganexpandingindustrialbase,burgeoning commercial enterprises, China’s market-orientedeconomicreformssparked exponentialincreasesinenergy to thecountry’s NationalBureauofStatisticsChina”National BureauofStatistics. nominal GDP, totalingapproximately47.2 trillionyuan(US$7.47trillion)according also beinganattempttoincreaseChina’s globalmilitary presence. the coastofLibya, thejournalistandauthorFareed Zakariaviewedthemissionas capabilities. a newsubmarine-launched nuclearICBMwithMIRV”multiple-warhead delivery 2011, thePentagon reportedthatChinawas believed tobe testingtheJL-2missile, constituting theworld’s second-largestmilitarybudget,aftertheUnitedStates. China’s militaryexpenditurein2010totaledUS$114.3billion(808yuan), Republic ofChina)”Central MilitaryCommission(CMC). military force intheworld, commandedby theCentral MilitaryCommission(People’s 2.3 million active troops,thePeople’s Liberation Army (PLA)isthelargeststanding C of 9.5%between2011and2015. was 10.5%,andtheChineseeconomy ispredictedtogrow atanaverage annualrate Annual average GDPgrowth”annual average GDPgrowth between2001and2010 China isobviously animportanteconomicplayer. According totheIMF, China’s China-Getting Ahead orLosingGround? “absorb” othercountries,theirmilitaryaspirations cannotbedenied. With sometimes inthe21stCentury. While China hasnottriedtocolonizeor Northern Pacific Oceanseemdestinedtoaclashofcompetingambitions hina andtheUnitedStates,bothlittoral statesontheoppositesidesof 3 On13March 2011,thePLANmissilefrigate Xuzhouwas spottedoff China-Getting Ahead orLosing Student Writing Competition Winner 5 As of2012,Chinahastheworld’s second-largest 7 Hence,Chinalookstothe Middle 1 According toSIPRI, Jadavpur University Abhismita Sen Ground? 4 INDIA 2 In 6

Summer 2012 41

9 China’s Worldview and Ambitions and Worldview China’s in commoditized - mass produced products “ “ China has made strides tremendous in gaining market share in India’s import market The Chinese drive for energy is already a source of tension in a source is already for energy drive Chinese The 8

The first thing to note is that the data The 10

conclusions. As a member of the United conclusions. Nations (UN) Security Council, the People’s the tremendous complexity of China’s Given definite any it is quite difficult to draw reality,

that has emerged from China’s military modernization has been the closer ties it military that has emerged from China’s has made has established with Russia. China role it will is important to understand what it As China emerges as a global power theme One Asia and the world. it has of both perceptions and the security play

from agricultural activities to nonagricultural activities. According to Angang Hu of Angang to According activities. to nonagricultural activities from agricultural be about 820 would population employed total Institute’ China’s China Policy ‘The from but also its laborers are moving a huge pool of labor, China not only has that is to sectors with higher labor productivity, productivity labor sectors with low club of recognized great powers. It is involved It is involved club of recognized great powers. in more than 1000 international governmental Republic of China (PRC) belongs to the elite China have provided enormous opportunities for provided China have supplying countries, but most of these primary Africa. America and products come from Latin net exporter of manufactures to countries in Asia in net exporter of manufactures to countries of that are potential competitors as producers products to manufactures. Exports of primary (GDP) and India would overtake Japan by by Japan overtake (GDP) and India would 2020. is a massive do not support the idea that China India’s import market in commoditized -mass import market in commoditized India’s to overtake produced products. China is likely aggregate the United States in terms of economic tremendous strides in gaining market share in tremendous strides in gaining market China’s success has been primarily due to manufacturing as a low-cost producer. producer. due to manufacturing as a low-cost success has been primarily China’s high relatively good infrastructure, labor, is attributed to a combination of cheap This rate. exchange and a possibly undervalued policy, government favorable productivity, million in 2020, with 65% of them in nonagricultural employment, i.e. 533 million. employment, in nonagricultural million in 2020, with 65% of them genocide and are currently complicating Washington’s attempts to persuade the IAEA attempts to persuade Washington’s currently complicating genocide and are obligations Council for violating its nonproliferation to the Security to refer Iran from the Middle East. from the Middle with Middle Eastern energy efforts to establish influence relations. China’s bilateral the Darfur sanctions on Sudan over U.S. efforts to impose thwarted producers have According to the IEA, by 2010 as much as 80 percent of China’s oil imports came oil imports came of China’s 80 percent as much 2010 as to the IEA, by According 42 The Forum

50 formalmilitaryallies,while Chinahasnone.NorthKorea andPakistan areonly the world thanChina intermsofbothquantityandquality. America hasmorethan minimal nucleardeterrence. America enjoys much betterrelationswiththerestof headway intermsoflimitingUnitedStatesunipolarpre-dominanceexceptforsome this growth. At thegloballevel, China,sofarhasbeenunsuccessfultomakeany While China’s performancehasbeenimpressive, italsohasthepotentialtomaintain organizations thatdealwithissuesranging fromdrugtrafficking totheenvironment. China-Getting Ahead orLosingGround? 8 FlyntLeverett andJeffrey Bader,’ ManagingChina-U.S.EnergyCompetitionintheMiddle Street Journal Europe,18November 2004,p. A3 7 Robin Wright, ‘Iran’s New Alliance withChinacouldUndermineU.S.Leverage’, The Wall 17,2012 6 ChenLidan,’ China’s GDPhits47.2trillionyuan in2011’,People’s DailyOnline,January 5 BBC World Service,16June 2011),accessedon21stapril2012 4 CNNnews,March 13,2011),accessedon21stapril2012 3 BillGertz,n.2 2 The SIPRIMilitaryExpenditureDatabase(,accessed on21stapril2012 26, 2005 1 MarkMagnier, ‘ChinaSeeksto Allay U.S. Fears asSummitNears’,Los Angeles Times, August operates, ifever itdid,asazero-sumgame. - mustconcerttogetherasmuch ascompete. Unfortunately, theworld nolonger - indeedglobalpowers withunprecedentedeconomicandsecurityinterdependence on preservingitself,contentionismatched withconcertingbehaviour. Greatpowers also contenders. Viewed froma‘society ofstates’perspective, thatis,asystemintent innovative America, anintegrating Europe,andpossibly arevitalisingRussia,are China hashadaheadstart.Intermsofworld powers, onecannotforgetthatan state-controlled economy isleaving thevast majorityofcitizensbehind. censored by thegovernment. will beusedtoserve thepeople.” Despitehisstatus, Wen’s commentswerelater election systemsothatstatepower willtrulybelongtothepeopleandstatepower Premier Wen JiabaostatedthatChinaneeds“togradually improve thedemocratic relaxed inChinasincethe1970s,politicalfreedomisstilltightlyrestricted.In2010, ‘force projection’capability. While economicandsocial controlshave beengreatly Chinese Navy isyet toemergeasa‘bluewater’ navy andChinalacks significant Asia, (otherthanthedubiousNorthKorea) withwhom itcouldforgealliances. The quasi-allies ofChina.Chinaalsoisunfortunatethatithasno“natural allies”inEast 11 Double-digitgrowth can’t hidethefactthatChina’s

Summer 2012 43 China’s Worldview and Ambitions and Worldview China’s 10 Angang HU,n.13 10 Wind power in the People’s Republic of China, Wikipedia, accessed on 21st april 2012 Wikipedia, of China, Republic in the People’s power Wind China WORLD’, THE RISE ON EFFECTS OF CHINA’S FIVE MAJOR SCALE Angang HU,’ 9 ,April 2007 Institute Policy East’, The Washington Quaterly, April 21, 2012 Quaterly, Washington The East’, 44 The Forum

eligible forpublicationinour next issueof The STUDENT WRITING Invited toParticipate Collegiate Students COMPETITION www.ia-forum.or Be oneofourwinnersandbe Announced Soonat The BRICS Countries Fall 2012 Topic: Forum g

Summer 2012 45 - y , Henry A. A. Henry , y China’s Worldview and Ambitions and Worldview China’s , Wilson Center for International Scholars, Scholars, International for Wilson Center , s t, Wang Jisi, Brookings Intitution Brookings Jisi, Wang t, s , International Aid Architecture, Debrorah Brautigam De Debrorah Architecture, Aid International , e REPORTS, PAPERS AND ARTICLES AND PAPERS REPORTS, Other Resources Other Addressing U.S.-China Strategic Distru U.S.-China Addressing The Future of U.S.-Chinese Relations: Conflict Is a Choice, Not a Necessit Conflict Is a Choice, Relations: of U.S.-Chinese The Future The Rising of Modern China: Comprehensive National Power and Grand Strateg National Power Comprehensive China: The Rising of Modern International Aid Architectur Aid International Strategic Challenges for US-China Relation US-China for Strategic Challenges

Affairs Foreign Kissinger, Brautigam brorah Tsinghua University China Studies at Center for Men Honghua, Angang and Dr. Hu Prof. , Roy Stapleton Ambassador J. SECURITY POLICY

Summer 2012 47

-

Security Policy Security

Words Words H. Bajrektarevic Ground? Roy Dale Roy Dale Roy Relations Relations David Axe David Axe David Dr. Ali Wyne Ali Dr. Wyne Ali Dr. Dr. Harsh Pant Harsh Dr. Pant Harsh Dr. 1975 or 1908? Absimenta Sen

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Amb. David Shinn Amb. David Roy Dale Roy Relations Sino-Indian Rivalry David Axe David Sino - Indian Rivalry Dr. Carla P. Freeman Carla P. Dr. Freeman Carla P. Dr. Chinese Foreign Policy - Policy Foreign Chinese Dr. Harsh Pant Harsh Dr. Stealth Fighters are Hard Stealth Fighters are Hard Stealth Fighters Dr. Anis Dr.

What China Wants in Asia: in Wants What China Chinese Foreign Policy - In Policy Foreign Chinese Amb. David Shinn Amb. David The Growing Potency of the Potency Growing The of the Potency Growing The Ambassador David H. Shinn Ambassador David The Challenge of U.S.-China Challenge The terpreting the Recent War of of War Recent the terpreting The Challenge of U.S - China Challenge of U.S The China-the Next Superpower? Arsenal Encounters Obstacles Arsenal Encounters Problems) STUDENT AWARD WINNERS AWARD STUDENT Sino - Indian Rivalry Dr. Carla P. Freeman Carla P. Dr. China - The Next Superpower? The China - and the Western Indian Ocean Western and the Indian Ocean Western and the Interpreting the Recent War of War the Recent Interpreting China-Getting Ahead or Losing China-Getting Modernization of China’s Aerial Modernization of China’s (Student Writing Award Winner) Award Writing (Student China’s Security Policy in Africa in Policy Security China’s Africa in Policy Security China’s (Modernization of China’s Aerial (Modernization of China’s Chinese Foreign Policy - Policy Foreign Chinese Stealth Fighters are Hard Stealth Fighters The Growing Potency of the Potency Growing The The Challenge of U.S - China Challenge of U.S The Arsenal Encounters Problems) China - The Next Superpower? The China - and the Western Indian Ocean Western and the Interpreting the Recent War of War the Recent Interpreting (Student Writing Award Winner) Award Writing (Student China’s Security Policy in Africa in Policy Security China’s (Modernization of China’s Aerial (Modernization of China’s # # # # # # # # 58 62 40 45 50 54 70 58 62 66 48 53 POLICY SECURITY 48 The Forum

Chinese ForeignPolicy-InterpretingtheRecentWars ofWords closely scrutinizedandeven challenged by other countrieshasalsogrown. A result and influencehave becomeglobal, the chance thatitsinternational actionsare China’s increasinglyfar-reaching internationalties. As China’s internationalreach An alternative explanation characterizes thephenomenonas natural outcome of can beexpectedinthenearfuture. is willingtomoreactively useitseconomicandmilitarypower toassertitsinterests, rhetorical pushinpursuitofitsintereststoday isseenasaharbingerofChinathat early 1990sthatfocusednationalenergiesoneconomic development. Beijing’s “low profile”approach tointernationalaffairsintroduced by DengXiaopinginthe resilience throughtheglobalfinancialcrisis,has abandoned its international policy. According tothisperspective, China,emboldened by itsrelative tough languageemanatingfromBeijingasevidence ofasignificantshiftinChina’s questions; butthreeviewsseemtogetthemostplay. The firstoftheseassessesthe arena andwhat areitsimplications? There isnoshortageofopiniononthese How shouldweinterpretBeijing’s greaterrhetoricalassertiveness intheinternational among otherexamples. proceed with Taiwan armssalesinlate2009,anditsrecalcitrance onIran sanctions, Administration’s decisiontohave thepresidentmeetwithDalaiLamaand Change ConferenceinCopenhagen,itsconfrontationalreactiontotheObama commentators have alsotakennoteofBeijing’s hard-lineposition attheUNClimate to itsinterestsintheSouthChinaSeahasdrawn particularattentionoflate,but I policies morethanthreedecadesago.China’s harshrhetoriconchallenges international arenathanatany timesinceitintroduceditsreformandopening with theUnitedStatesand American allies over areasofdisagreementin the n thepastfewyears, China hasseemedmorewillingtoengageinwars ofwords Chinese Foreign Policy-Interpreting Johns HopkinsSchool of Advanced International the Recent War of Words Dr. CarlaP. Freeman UNITED STATES taoguang yanghui Studies(SAIS)

Summer 2012 49 Security Policy Security US policymakers is to promote cooperation, not confrontation, toward this end, not confrontation, toward is to promote cooperation, US policymakers As China’s power grows, if current powers, most importantly the US, wish to if current powers, grows, power As China’s its rise in the absence of enable the international system to adjust to incorporate goal of mutual understanding is critical. If a foreign policy conflict, improved unpredictability in the bilateral dynamic with a lots of opportunity for miscalculation, dynamic unpredictability in the bilateral boding ill for a stable relationship based on mutual trust. does suggest that US policy makers have the potential to enhance US-China relations the potential to enhance makers have does suggest that US policy affect may interpretation of US policy recognizing that the Chinese public’s by and this view also implies a high degree of fragility response to it; however, China’s skeptical of China’s ability to assume the responsibilities that accompany its growing growing its the responsibilities that accompany ability to assume skeptical of China’s and therefore makes and is not a team player influence. China prefers to free-ride the third view Finally, international partner. an unlikely and unreliable prospective confrontational dynamic, with power relations between the two countries a zero- the two relations between with power confrontational dynamic, between for cooperation limited potential sees very perspective This sum calculus. is second perspective The dimension of international policy. China and the US in any is much of a guide, if cooperation between China and the US in the international between China and the US in the international a guide, if cooperation of is much by they are likely informed view, makers adopt the first arena is a goal. If policy and that sees it as an inherently competitive a model of the US-China relationship These assessments of Chinese foreign policy behavior all argue for different behavior assessments of Chinese foreign policy These their merits. But none of them --and all have China the US toward by approaches freedom of action in the foreign policy arena at best or at worst lead it to develop lead it to develop at best or at worst arena freedom of action in the foreign policy not be the most prudent sentiment but may and act on policies that satisfy nationalist international interests and international stability. support of China’s in choices The West’s talk of international responsibility and partnership is a sop aimed at talk of international responsibility and partnership is West’s The analysts have Western is unprepared for. in commitments it bogging China down China’s domestic and social insecurity in China could constrain argued that such which sees it contributing to an atmosphere of insecurity and driving Chinese leaders Chinese of insecurity and driving sees it contributing to an atmosphere which West the idea that the includes propagation of This up nationalist rhetoric. to ratchet of containment. rise through a policy China’s to thwart is engaged in a conspiracy A third view sees Chinese rhetorical assertiveness in the context of Chinese domestic in the context Chinese rhetorical assertiveness A third view sees in this assessment, a key factor, is current leadership transition country’s The politics. its rapidly expanding influence, a capacity they see few signs of Beijing acquiring a capacity they see few expanding influence, its rapidly soon. anytime ts national interests in for its national interests past-- and also sees greater significance more than in the harsh rhetoric share this view contend that analysts who western doing so. Many and limited capacity to manage inexperience symptom of Beijing’s from Beijing is a s international policies its international of defending itself in the position that China finds has been 50 The Forum

the roleofpublicopinionasaChineseforeignpolicy driver, generally, littleissaid treat Chinaasaunitaryactor. For example,althoughthethirdviewgives weightto One limitationoftheviewssummarizedabove isthattovarying degreestheyall limitations. Ofthese,therearetwo inparticularthatdonotgetadequateattention. the assessmentsofChineseforeignpolicy behavior notedabove have significant Chinese ForeignPolicy-InterpretingtheRecentWars ofWords misinterpretation thataPLA majorgeneral who frequentlyairshishawkish viewsin position-- namelyterritorial integrityandsovereignty, werebriefly fanned by a interest,” thusjoiningasetofissueson which Chinahasassertedanonnegotiable in USpolicy circles over whether theSouth ChinaSeahadbeenredefinedasa“core ties tobranches of the Chinesegovernment. For example,theflames ofspeculation distinguish betweenopinionsofscholars andotherpundits,even thosewithclose make assessingthedirectionofChinesepolicy morecomplex,itisimportantto making processifpluralized remainsopaque. What isclearthatwhile thismay in theinternationalarenaextremelychallenging, particularlybecauseChina’s policy of influenceintheforeignpolicy arenamakesinterpretingandrespondingtoChina including weighinginpublicforumsoninternational issues. The fragmentation other partsoftheChinesegovernment, allseektoadvance theirown policy agendas, Finance, aswellthePeople’s Liberation Army andlocalgovernments, among Development andReformCommission,People’s BankofChina,andMinistry Affairs asactorsinChina’s foreignaffairs. The MinistryofCommerce, National In addition,amyriad ofgovernmental actorshave joinedtheMinistryofForeign fellow citizensinthatcountry. internet by Chinesenationals abouttheprotectionoftensthousandstheir may have beenshapedinpartby thewidespreadexpressionofconcernthrough vetoing aSecurityCouncilresolutiontoapprove theuseofforce inLibya lastyear to thesevoices, buttheymay beafactorinitspolicies. The decision torefrain from well asaround7millionChinesecitizensoverseas. Beijingmay notalways respond viewpoints ofanewclasscelebritypunditsandhyper-nationalistic netizens,as now] triggerafloodofmany differentstreams ofpublicopinion. These includethe 500 millioninternetusers. Any internationalissueaffectingChina WILL [may for mediainChinaisenormous,withmorethan1.2billiontelevisionviewersand of cablechannels, allheavily dependentoncommercial revenue. The audience of formalmediaoutlets,hundredsradio andtelevisionstationsthousands Chinese mediaremainsheavily censuredand regulated,buttoday therearedozens In reality, ithasbeenalongtimesincetheChinesemediaspokewithonevoice. events. Party-State thattakestheleadinshapingopinion-makingChinaaboutinternational about thesource of thatpublicopinion,enablingtheargumentitisChinese

Summer 2012 51 Security Policy Security “ “ this is a critical time in relations between China its and the US and allies “Coast Guard Missing Piece of Naval Strength,” Global Times, (March 8, 2012), available at perspective is important to doing this. perspective Further Reading This is a critical time in relations between China and the US and its allies when the when is a critical time in relations between China and the US and its allies This in informed of words war stakes for getting relations right are high. Putting China’s with greater discretion for a better outcome to more open the extent that that is possible by societies. by China; however, its real meaning should not its real meaning should not however, China; by offer may be dismissed and understanding this issues opportunities to manage certain bilateral involvement in the case of blind Chinese in the case involvement International policy Guangcheng. Chen activist formulation clearly cannot be hostage to this efforts to diminish its national standing. The The efforts to diminish its national standing. the Chinese by invoked recently was phrase American foreign ministry in response to redemption. Humiliation and the loss of face redemption. Humiliation and the often most requires an audience, and the phrase as deliberate is applied to acts that China sees deliberately humiliated China and caused humiliated China and caused deliberately both it to lose face, an injury that requires the victimizer at punishment and an effort by That the phrase offers a vehicle for the Chinese government to reinforce Chinese reinforce to for the Chinese government offers a vehicle the phrase That is certainly one of its purposes. But it also world national unity against the outside has the view that the perpetrator conveys on an understanding of China’s past that casts the Chinese people as having suffered Chinese people as having past that casts the of China’s on an understanding powers. at the hands of foreign Chinese history and its use of history in contemporary policy, as well as to the very as to the very as well policy, its use of history in contemporary Chinese history and heavily identity rests This actor. identity as an international construction of China’s of the Chinese people.” This is also a challenge for westerners who may not grasp not grasp may for westerners who a challenge is also This of the Chinese people.” Beijing other harsh language by meme, frequently connected to the nuance of this that speaks to It is a phrase actions of other countries it opposes. in response to the Second, none of the three views gives attention to what is conveyed by the Chinese by is conveyed attention to what the three views gives Second, none of feelings “hurt the actions of a foreign country as having in criticizing the government the Chinese media was speaking in an official capacity for the Chinese government. for the Chinese in an official capacity speaking media was the Chinese 52 The Forum

http://books.sipri.org/files/PP/SIPRIPP26.pdf. 26, Stockholm International Peace Research Institute,(September2010),available at Linda Jakobson andDeanKnox,NewForeign Policy Actors inChina,SIPRIPolicy Paper No. theatlantic.com/technology/archive/2008/12/annals-of-agitprop/9171/. James Fallows, “Annals of Agitprop,” The Atlantic, (December 8, 2008), available at http://www. =99&tabmoduleid=94&articleId=699279&moduleId=405&PortalID=0 http://www.globaltimes.cn/DesktopModules/DnnForge%20-%20NewsArticles/Print.aspx?tabid Chinese ForeignPolicy-InterpretingtheRecentWars ofWords http://www.du.edu/korbel/docs/ADM-Zhao_european_financial_review_article.pdf. Financial Meltdown,” The EuropeanFinancial Review,( December-January, 2011),available at Suisheng Zhao,“UnderstandingChina’s Assertive Foreign Policy Behavior duringtheGlobal http://www.brookings.edu/research/opinions/2011/12/13-china-public-opinion-sun. Brookings Northeast Asia Commentary, No.20,(December2011),available at Yun Sun,“ pdf. (May 11,2010),available athttp://media.hoover.org/sites/default/files/documents/CLM32MS. Michael D. Swaine, “Perceptions ofan Assertive China,” ChinaLeadershipMonitor, No.32, http://muse.jhu.edu/journals/harvard_journal_of_asiatic_studies/v071/71.2.barme.html. org/files/CLM34MS_FINAL.pdf. Leadership Monitor, No.34(February 22,2011),available athttp://www.carnegieendowment. Michael D. Swaine, “China’s Assertive Behavior Part One:On‘CoreInterests,’” China humiliation-the-olympics/?pagination=false. 14, 2008),available athttp://www.nybooks.com/articles/archives/2008/aug/14/china- Orville Schell, “China:HumiliationandtheOlympics,” New York ReviewofBooks,(August 33887422.html. 2011), available athttp://online.wsj.com/article/SB100014240527487032923045762124318 Brian Spegele,“Chinatakesnewtack inLibya Vote,” The Wall StreetJournal, (March 20, 2008), available athttp://www.danwei.org/foreign_affairs/a_map_of_hurt_feelings.php. Joel Martinsen,“MappingtheHurtFeelings oftheChinesePeople,” Danwei,(December11, Chinese PublicOpinion:ShapingChina’s Foreign Policy, orShapedby It? ”

Summer 2012 53

Security Policy Security d told an s propose the term that China has e d Relations UNITED STATES Dr. Ali Wyne Ali Dr. introduc conclude Richard Haas Richard Harvard University Harvard The Challenge of U.S.-China of U.S.-China Challenge The

China to be a “responsible stakeholder”: “All nations conduct diplomacy to conduct diplomacy nations “All China to be a “responsible stakeholder”: audience at the Harvard Kennedy School that he “see[s] some things not that School Kennedy audience at the Harvard conditions are not to be fixed, but…to as problems, but as conditions, and ast October, while discussing the intractability of certain foreign-policy of certain foreign-policy intractability discussing the while ast October, Relations President Council on Foreign challenges, d

a new one for China to adopt for this decade, “global convergence of interests,” of interests,” a new one for China to adopt for this decade, “global convergence of interests of all “‘expand and deepen the convergence China would whereby of this century: it would lift “its people out of poverty by embracing economic embracing by lift “its people out of poverty of this century: it would Last spring, relations with the rest of the world.” globalization and improving Zheng to be “concretized,” arguing that that doctrine needed however, Interestingly, the same month that Zoellick delivered his address, influential Chinese delivered the same month that Zoellick Interestingly, to Affairs Zheng Bijian took to the pages of Foreign strategist official doctrine for the first decade become China’s would which “peaceful rise,” developing one. She urged it to become a “full stakeholder” that, “for the long run, one. She urged it to become developing and prosperity.” stability, enhance security, role that will a positive play[s] y, so they work to sustain so they work their peaceful prosperity, that the international system sustains Secretary of State Hillary Clinton March, This that system.” and a as a great power capitalizing on its dual status stakeholder,” been a “selective Zoellick famously Secretary of State Robert Zoellick In September 2005, then-U.S. Deputy advise recognize They promote their national interests. Responsible stakeholders go further: struggling to articulate an overarching framework to define their interactions. framework struggling to articulate an overarching relationship between the United States and Pakistan when he rendered this judgment, he rendered this when States and Pakistan relationship between the United the better been discussing that between the U.S. and China. For he could easily have been in both countries have and commentators part of the past decade, policymakers L discussing the he was Although can.” managed as best as you with and be lived 54 The Forum

exhibited acomparable degreeofeconomicinterdependenceorplayed ascentral a is likelytoprove elusive. Never beforehave asuperpower anditschief competitor relationship evolves, theirrelationshipissufficientlycomplexthataguidingconcept While theU.S.andChinawilldoubtlesscontinuetorefinetheseconceptionsastheir different areasandatvarious levels.” parties’ andfoster‘communitiesofinterests’withothercountriesregionsin The ChallengeofU.S.-ChinaRelations discussed, itisthepsychological challenges thatmay prove morevexing. Only two While thegeopoliticalchallenges thatChina’s riseposes totheU.S.arewidely while strengtheningourabilitytocompete.” others. Ouressentialchallenge istobuildarelationship thatbroadenscooperation first century. We [theU.S.] willcompetewithChinainsomeareasandcooperate in growing power—to helpleadinaddressingthecommonproblemsoftwenty- Foreign Affairs: hepledgedto“encourage Chinatoplay aresponsible roleasa Or considerthen-SenatorBarack Obama’s guide ourcooperation onissuessuch asterrorism,proliferation, andenergysecurity. challenges ofglobalizationandothertransnational concerns.Mutualinterestscan international systemthathasenableditssuccess…China sharesourexposuretothe fulfills itsobligationsand works withtheUnitedStatesandothersto advance the As Chinabecomesaglobalplayer, itmustact as aresponsiblestakeholderthat Strateg growing importance,notanascendantsuperpower. Take the mainstream judgmentsatthattimeheldChinatobeanemergingpower ofrapidly framework: North America, Europe,andJapan—or even five years earlier. Most strategic outlookwas rootedinconsiderable partinthestrength ofthetrilateral it would bedifficulttofindsuch aconsensus adecadeearlier—when America’s singular importanceofU.S.-Chinarelationshave now assumedaxiomaticstatus, certainly notChina—couldhave expected.Indeed,while argumentsaboutthe the questiondecadesinadvance. Inreality, itemergedwithrapidity thatnoone— meet.” Writing such ananswer would bechallenging even iftheyhadanticipated the age-oldquestionofwhat happenswhen anestablishedpower andarisingpower trying todosomethingthatishistoricallyunprecedented,writeanewanswer to U.S.-China Strategic andEconomicDialogue:“The UnitedStatesandChinaare Secretary Clinton The Challenge joint roleinsustaininginternationalorder. y : capture d theenormityofchallenge atthefourthroundof essa y intheJuly/August 2007issueof 2006 NationalSecurity

Summer 2012 55 Security Policy Security vexing. “ “ ...it is the psychological that challenges more prove may : “China’s : “China’s r answe is not about vying with any other country for the other country is not about vying with any At the other end is the no. 1 spot in the world.” Foreign Minister Cui Tiankai’s Tiankai’s Minister Cui Foreign goal is just one thing: to allow developmental It better lives. ordinary Chinese people to have that assessment change over time? over that assessment change Vice At one end of the spectrum is Chinese - What long-term geopolitical objective does the What long-term geopolitical objective - will and how that China can achieve, U.S. believe - What does the U.S. believe China’s long-term China’s the U.S. believe What does - to be, if indeed it believes geopolitical objective one? China to have China believe that it can achieve, and how will and how that it can achieve, China believe time? over that assessment change - What is China’s long-term geopolitical objective, if indeed it has one? if indeed long-term geopolitical objective, What is China’s - does geopolitical objective What long-term - uncertain. Notwithstanding a prodigious volume of analysis on Sino-U.S. relations, of analysis on Sino-U.S. volume uncertain. Notwithstanding a prodigious remain unanswered: that will shape their evolution some of the most basic questions Unanswered Questions Unanswered that are future U.S. policy and China’s future China policy America’s It is not only assessment of American decline: the past decade of U.S. foreign policy demonstrates demonstrates American decline: the past decade of U.S. foreign policy assessment of favor. trends appear to be in one’s strategic when the peril of overreaching various measures it is taking to hedge against China’s rise do not add up to a de facto rise do to hedge against China’s measures it is taking various part, must not proceed from an exaggerated of containment. China, for its strategy to prove doubly difficult. to prove must ensure that the countries continues, the U.S. the two between As this calibration any others. Ceding them to any country would be difficult to accept; ceding them be difficult to accept; ceding would country to any others. Ceding them any as different as China’s—and are and worldview governance, ideology, to one whose to be obsolete—is likely believed were widely War, in the aftermath of Cold which, it will, before the likelihood: that it will, before the concede an uncomfortable preeminence, it must of largest economy replacement the titles cede to its putative middle of this century, define “number 1” more than spender—the titles that arguably and largest defense decades after the Soviet Union’s implosion seemed to usher in uncontested U.S. U.S. to usher in uncontested implosion seemed Union’s after the Soviet decades 56 The Forum

Interview withDr. Viral V. Acharya The ChallengeofU.S.-ChinaRelations Chinese government’s permissionorsupportcouldtriggera U.S. militaryresponse. a concernthatdamaging cyberattack thatisbelieved tohave occurredwiththe U.S. economicsecurity.” Absent clear, enforceable cyber rulesoftheroad,thereis will continueatahighlevel andwillrepresent agrowing and persistentthreatto espionage. ChineseattemptstocollectU.S.technological andeconomicinformation “Chinese actorsaretheworld’s mostactive andpersistentperpetrators ofeconomic - The DepartmentofDefense’s latest territorial disputebetweenChinaandthePhilippines. in thePacific.” Ontheotherhand,U.S.insiststhatittakesnopositionon obliges ittorespondanattack on“islandterritoriesunder[Filipino] jurisdiction would respond.Ontheonehand,itsmutualdefensetreatywith Philippines sovereignty over the ScarboroughShoalthroughforce, itisunclearhow theU.S. it isthesiteofanemerging - Tensions intheSouthChinaSeacontinuetoescalate, withsomesuggestingthat U.S. tointervene. attendant possibilityofamilitaryresponseby Chinathatwould, inturn,pressurethe that thelatterwillpushforindependence,onecannotruleoutmove, andthe - Although China’s gradual economicintegration of Taiwan reducesthelikelihood war: Given thatmistrust,thereisconsiderable concernaboutthepotential forSino-U.S. The Next40 Years strategic mistrustbetweenthem. or dominate.” That such commonsensehastobeexplicatedevincesthedepthof to impingeoneach othershould notbeequatedwithaconsciousdrive tocontain international lifeandnotinthemselves asacauseforalarm. The inevitabletendency sides shouldbeopentoconceiving ofeach other’s activities asanormalpartof than insight,becomesthebasisofpolicy. HenryKissinger toward each otheronthebasisofunfoundedinterpretations.Conjecture,then,rather the gapinmutualunderstanding,morelikelyitisthattheywillformulatepolicy realities: forexample,thebalanceintheirpower-projection capabilities. The greater transparent, their relationship would principallyevolve inaccordancewithobjective If bothcountries’objectives anddecision-makingprocesseswerecompletely Pacific andultimatelyinthe world. judgment thatChinaseekstodisplacetheU.S.aspreeminentpower inthe Asia- great gam appraisa e .” IfChinaweretoattemptestablishits l ofChinesemilitarypower assertsthat explain s that“[b]oth

Summer 2012 57 Security Policy Security ation between them is ation between them China into the international system, the central challenge of the next 40 will be to of the challenge system, the central China into the international close that gap. concerning. It is, instead, the reality that the basis for cooper instead, the reality that the basis concerning. It is, If the that it must address. as the global challenges as quickly nearly not developing to integrate was in the past 40 years diplomacy of Sino-U.S. signature achievement And yet, it is not the prospect of a military conflict between the two that is most that between the two military conflict the prospect of a it is not And yet, 58 The Forum

Monetary Policy intheEUandUS China’s SecurityPolicyin Africa andtheWestern IndianOcean Small armsandlightweapons donotcontributesignificantlytothedollarvalue of are difficulttotrack butfor which Chinaisamajorsupplier. about 15percent. These percentages excludesmall armsandlightweapons,which of conventional militaryequipment,itincreaseditstransfers toSub-Saharan Africa to total. Sincethelate1990s,asChinaproducedhigher qualityandawiderselection arms deliveries to Africa by dollarvalue varied between3and5percent oftheglobal African governments. From the1960sto1990s,China’s shareofconventional modest supplierofmilitaryequipment,especially smallarmsandlightweapons,to it refocusedChinesesecuritystrategy in Africa. Chinabecameanearlyalthough in the1970sitssupportforrebelgroupsopposing independent African governments, As African countriesunder colonialruleobtainedindependenceandChinaended globally forwars ofnationalliberation. This earlypolicy was partofChina’s doctrineofrevolutionary warfare andsupport number of African rebelgroupsthatopposed independent African governments. independence fromcolonialrule.Duringthe1960s,Chinaeven supportedasmall assistance andtraining foravariety of African liberation groupsfightingfor China’s security-relatedinterestsin Africa beganinthelate1950swithmilitary significant Chinesepresence. political ideology, especiallythosethataremajorexportersofraw materialsorhave a premium onstrengtheningthestabilityof African countries,irrespective oftheir A China’s SecurityPolicy in Africa and raw materialsthatsupportChina’s economy. As aresult,Chinaputs are threatenedorthereinterruptionsintheflow from Africaofcritical only totheextentthatChinesenationalsandinvestments intheregion frica andthewesternIndianOceanhave securityimplications forChina the Western Indian Ocean Ambassador David H.Shinn George Washington University UNITED STATES

Summer 2012 59 Security Policy Security “ “ China and Western countries have...a different understanding of the ultimate goal of UN peacekeeping operations. military personnel, China’s military personnel, China’s military strategy in Africa. in military strategy By all accounts, including American those from interests in Africa. Support interests in for UN peacekeeping is to China’s central now more about African security, African security, more about and put it in a position to help protect Chinese as a way to increase its as a way test standing in the world, learn its military ability, seven UN missions in Africa, more than any other permanent member of the Security other permanent Africa, more than any UN missions in seven specialists and medical units. transport Council. China sends primarily engineers, China sees this contribution election monitoring operation in Namibia, its first military deployment with the UN. its first military deployment in Namibia, election monitoring operation increase of support for UN peacekeeping operations. a steady by followed was This troops and police assigned to six of the has about 1,500 non-combatant China now UN peacekeeping operations in Africa have increasingly become a significant increasingly become a significant Africa have in UN peacekeeping operations in 1989 to a UN twenty military observers It deployed policy. component of China’s have defense attachés assigned to their embassies in Beijing. China has some sixteen assigned to their embassies in Beijing. China defense attachés have countries, a surprisingly Africa accredited to about thirty offices in defense attaché interests. security growing number in view of China’s low Liberation Army (PLA) and Navy (PLAN) are constantly visiting African countries and (PLAN) are constantly visiting Navy (PLA) and Army Liberation is a relatively This guests of the PLA and PLAN. African military leaders are frequent African countries twenty-eight with a potentially high return. Some cost policy low From the beginning, China’s military strategy has relied on a steady stream of has relied on a steady strategy military the beginning, China’s From of the People’s African military counterparts. Members visits with exchange the allied Janjaweed rebel organization with Chinese arms for use in Darfur even in Darfur even with Chinese arms for use rebel organization the allied Janjaweed embargo had taken effect. after a United Nations’ has provided them directly to rebel groups. In some cases, African governments have have governments African to rebel groups. In some cases, them directly has provided on the international organizations or they are purchased them to rebel transferred that Sudan supplied Experts concluded, for example, of A UN Panel arms market. as Darfur, Somalia, Liberia, Chad and the eastern Congo have, together with weapons eastern Congo have, Somalia, Liberia, Chad and the as Darfur, to transfer policy It is China’s contributed to the loss of life. from other countries, that China years and there is no evidence in recent governments weapons only to Chinese arms transfers, but those that have made their way into African conflicts such conflicts such African into way made their that have but those arms transfers, Chinese 60 The Forum

political stabilityinconflictcountries, Western governments emphasizeanoutcome ultimate goalofUNpeacekeepingoperations. While bothcampsseekareturnto China and Western countrieshave, however, adifferentunderstandingofthe Somalia undertakenby the African Unionandsub-regional African organizations. UN peacekeepingoperations andmademodestcontributionstooperations such as peacekeepers have performedwell.Chinahasalsoincreaseditsfinancialsupportfor Monetary Policy intheEUandUS China’s SecurityPolicyin Africa andtheWestern IndianOcean carrier beganseatrialsin 2011butwillnotbeoperational until2013.In2008,fifty There issignificantevidencethatChina is working todevelop acarrierforce. Itsfirst may seekmorepermanent naval supplyarrangements intheregion. PLAN visitsto African andIndianOceanportsraised thequestionwhether China the MiddleEasttoChineseports. This naval presencehasresultedinmorefrequent the safetransit ofoilandminerals onothernations’flagged vessels from Africaand to protectingChineseshippinginterests,thenaval force isintendedtohelpensure effort. Chinacontinuestomaintainthisnaval presenceintheregion.Inaddition frigates andasupplyshiptotheGulfof Aden tohelptheinternationalanti-piracy first ever outofregiontacticaldeployment, thePLANsentatendof2008two the westernIndianOceanhasimpactedChinese-owned vessels andcrews.Inits The outbreakofSomalipiracy intheGulfof Aden and subsequently throughout its nationalsin Africa. caused Chinatoreassessthelevel ofriskitiswillingtotakeanditsabilityprotect 35,000 Chineseworkers fromthatcountryin2011. These andotherincidentshave Islamic Maghreb. The collapseoftheregimeinLibya requiredtheevacuation of Chinese workers, who numberasmany as50,000,in Algeria by al-Qaedainthe in XinjiangUygur Autonomous RegionofwesternChinaresultedinthreatsagainst Ogaden NationalLiberation Front. China’s 2009crackdown ontheMuslimUighurs workers diedinanattack ontheirbaseinthe OgadenregionofEthiopiaby the Kordofan regionby forces thatopposeSudan’s government. NineChineseoil the area.Chinesepersonnelhave beenkidnappedandkilled inSudan’s Southern MEND orsimilarorganizationskidnappedmorethantwentyChineseworking in Emancipation oftheNigerDelta(MEND)warned Chinatostay outoftheregion. has becomesubjecttomoresecuritychallenges. The NigerianMovement forthe As Chinaincreaseditsengagementwithandphysical presencein Africa, it priority list. infrastructure creation. The establishmentofaliberal democratic regimeislow onits economic development thatincludespoverty reduction,increasedemployment and that resultsinaliberal democratic government while China’s primarygoalis

Summer 2012 61 Security Policy Security its interest in expanding its military reach and ties with countries in Africa and the and ties with countries in reach its interest in expanding its military western Indian Ocean. rely on the U.S. Navy to protect the sea lanes that transport so much of its imported so much to protect the sea lanes that transport rely on the U.S. Navy already concerns have These Africa and the Middle East. from oil and minerals certainly increase will almost forward, and, moving security strategy China’s changed n Africa and the western Africa and its military presence in China has been careful so far to limit and second largest economy the world’s is today Indian Ocean, but the fact that it to want not does certainly China equation. the changes place first over take soon will operation. Several senior retired PLAN officers have recently commented publicly on senior retired PLAN officers have Several operation. base in the region to support Chinese ships. the need to obtain a permanent resupply is in discussion with Kenya on building a major port facility north of Mombasa, on building is in discussion with Kenya Said, Egypt, and is considering in Port container facilities has interests in two taking part in the anti-piracy as a resupply port for PLAN vessels the Seychelles no matter how its economy develops.” China has no bases in Africa and insists that China has no bases in develops.” its economy no matter how formal military and it has not entered into any it has no intention to establish any, it On the other hand, African or western Indian Ocean country. alliance with an China’s 2010 white paper on national defense states that it “will never seek “will never on national defense states that it paper 2010 white China’s or in the future, expansion now of military nor will it adopt the approach hegemony, navy and signal to the world its aspiration to become a blue water navy. Some Indian navy. to become a blue water its aspiration and signal to the world navy of India. encirclement” goal is the “strategic that China’s analysts worry strong candidate. Both the U.S. and Indian navies are following this issue closely. A closely. this issue are following Both the U.S. and Indian navies strong candidate. in the Gulf of PLAN ships in 2010 that deployment wrote Navy captain in the Indian water” as a “brown the Chinese desire to shed its image Aden is a manifestation of of an aircraft carrier. The U.S. Department of Defense believes the PLAN is considering PLAN is considering the Defense believes Department of U.S. The carrier. an aircraft not be the western Indian Ocean will While 2020. carriers by building multiple it will certainly be a force, priority for a Chinese carrier task the highest operational students began training as naval pilots capable of operating fixed-wing aircraft from aircraft fixed-wing of operating pilots capable as naval began training students 62 The Forum

The GrowingPotencyoftheSino-IndianRivalry no longerhave thewillandability tocarrytheburdensofaglobalpower. a powerful democratic partneratatimewhen America’s traditional alliesinthe West understood. The US today welcomesitsriseasabalancerin the Asia-Pacific andas widely consideredaresponsiblenuclearpower andthelogicofIndia’s testsiswell landscape andthedistanceUS-Indiatieshave travelled inthelastfewyears. Indiais very instructive ofthechanging geopolitical realitiesshapingthe Asian strategic The reactionoftheUS,underliningIndia’s “solidnon-proliferation record”isalso dedication oftheIndianscientificcommunity. international technology sanctionsandthelatestachievement isatestamenttothe missiles ofthisclass.” The DRDOhastowork onitsmissileprogram infaceof entire world thatIndiahasthecapabilitytodesign,develop, buildandmanufacture (IGMDP). As theDRDOchief underlined,“thelaunch hasgiven amessagetothe that startedin1983aspartoftheIntegrated GuidedMissileDevelopment Program Development Organization(DRDO)andaculmination,inmany ways, ofefforts The successof Agni-V isasignificantachievement forIndia’s DefenseResearch and with every passingday. bigger storyshapingupin Asia –aSino-Indian rivalry thatisbecomingmorepotent its own travails. Nooneactuallydidbecausetheworld isnow moreinterestedina intermediate range ballisticmissile,almostdemandingtheworld topay attention to a fewdays laterby test-firingan“improved version” ofitsnuclearcapableHatf-4 I China, France andIsrael –have this capability. Predictably, Pakistan responded entry intoaneliteclubofnations.Onlyfive otherstates–theUS,Russia, nuclear capable,5000kilometer-range Agni-V ballisticmissileandgained ndia grabbed globalheadlineslastmonthwhen itsuccessfullytest-firedthe The Growing Potency oftheSino- Indian Rivalry King’s CollegeLondon UNITED KINGDOM Dr. HarshPant

Summer 2012 63 Security Policy Security moves unsettle China which views India’s growing engagement in East Asia with Asia with engagement in East growing views India’s unsettle China which moves warship had demanded that the INS an unidentified Chinese suspicion. In late July, India’s bold move is aimed at asserting India’s legal claims in the international waters waters legal claims in the international is aimed at asserting India’s bold move India’s Both Vietnam. of the South China Sea as well as strengthening its relationship with meanwhile had underlined the 1982 United Nations Convention on the Law of the on the Law Nations Convention had underlined the 1982 United meanwhile being explored. India decided to blocks the two rights over Sea to claim its sovereign objections. claims and ignore China’s Vietnam’s go by to stay away from the South China Sea, China had issued a demarche to India from the South China Sea, China had issued a demarche away to stay 127 Blocks in permission should be sought for exploration underlining that Beijing’s Vietnam, be considered illegal. would activities and 128 and that without it, OVL’s year snubbed China and made it clear that India’s ONGC Videsh Ltd (OVL) would would Ltd (OVL) Videsh ONGC China and made it clear that India’s snubbed year in the blocks Vietnamese in two exploration gas continue to pursue oil and natural Asking countries “outside the region” criticism. South China Sea despite Chinese be accommodated into the global political order. This has led New Delhi to adopt a This political order. be accommodated into the global most significant has been The posture vis-à-vis Beijing in recent times. more assertive Affairs Minister last Indian External The into the South China Sea waters. move India’s now amidst a growing consensus in New Delhi that not only does China remain consensus in New Delhi amidst a growing now China Indian security concerns, but that, among major powers, to core insensitive that should accept India as a rising global player remains the only one that does not the larger Indian strategy towards China. towards the larger Indian strategy been unstable for some time relations have Despite all the rhetoric, the Sino-Indian India “should be clear that China’s nuclear power is stronger and more reliable,” and is stronger and more reliable,” nuclear power India “should be clear that China’s arms race in an overall stand no chance would that “for the foreseeable future, India China is just one part of But a credible second strike capability vis-à-vis with China.” been predictable, underscoring once again the disdain sections of the Chinese elite been predictable, underscoring once and China are not officially China just emphasised that India Though feel for India. of Indian claims arguing that dismissive openly was Times the state-run Global rivals, China is already at a much advanced stage in its missile capability. China’s nuclear China’s stage in its missile capability. advanced at a much China is already and it continues to warheads estimated 100 double India’s arsenal is more than reaction has ballistic missiles. China’s both land and submarine launched deploy India, boosting its confidence to deal with China as an equal. confidence to deal with China India, boosting its strike capability. Now for the first time India has demonstrated missile capability that for the first time India has demonstrated Now strike capability. in the military planners greater flexibility Indian will give This China. is able to cover important for test is also psychologically This arsenal. of their missile deployment nuclear capability. The Agni-V, by bringing Chinese heartland into India’s missile into India’s Chinese heartland bringing by Agni-V, The nuclear capability. Agni-III before. India’s more stable than Sino-Indian nuclear dynamic orbit, makes the India a credible second Chinese border to give close to the very had been deployed India’s no-first use nuclear doctrine relies fundamentally on a credible second strike on a credible second fundamentally doctrine relies use nuclear no-first India’s 64 The Forum

The GrowingPotencyoftheSino-IndianRivalry own claimsinEast Asia. and the Indian Ocean region, India is staking its With China expanding its presence in South Asia basis ofthereport. vessel asreported by London’s Financial Times, itdidnotcompletelydeny thefactual the IndianNavy promptlydeniedthataChinesewarship hadconfronteditsassault completing ascheduled portcallin Vietnam andwas ininternationalwaters. Though South ChinaSeaafterthevessel left Vietnamese waters. The Indianwarship was Airavat, anamphibiousassaultvessel, identifyitselfandexplainitspresenceinthe opposition toChina.But what theyarecertainlyinterested inisleveraging theirties nor theregionalstatesin East Asia have any incentive todefinetheirrelationshipin live uptoitsfullpotential, aswelltotheregion’s expectations.Neither India as anattractive engineforregionalgrowth. Itremains to beseenifIndiacanindeed anticipated retrenchment fromtheregioninnear future,while largerstates seeit to IndiaactasabalancerinviewofChina’s growing influenceand America’s to otherregionalandglobalpowers. Smallerstatesintheregionare now looking that regionalstatesarenow seekingtoexpandtheirstrategic spaceby reaching out China istoobigandpowerful tobeignoredby theregionalstates.Butitisclear with helpinbeefingupitsnaval andaircapabilities. powers asadisputedterritory. With thisinmind,Indiahasbeenproviding Vietnam China todothesameinPakistan OccupiedKashmir, anarearecognizedby allmajor entering thefray soastorespectChinesesensitivities, thenIndiacanrightfullyask that iftheSouthChinaSeaisadisputedareaforandIndiashouldrefrain from to buildstateslike Vietnam asstrategic pressurepointsagainst China. They argue has usedstatesinIndia’s peripherytocontainIndia,many inIndiawould likeDelhi player andIndiaiswellplacedtohelpHanoiachieve thatobjective. Just asChina China Sea.Indianstrategic interestsdemandthat Vietnam emergeasamajorregional while theyalsoshareconcerns aboutChineseaccesstotheIndianOceanandSouth Hanoi have significantstakesinensuringsealanessecurity and preventing sea piracy partnership with Vietnam giving IndiatherighttouseitsportofNha Trang. Delhiand a regularIndianpresenceintheregionaspartoflargerDelhi-Hanoisecurity engagement with Vietnam. Indiahasdecided towork with Vietnam toestablish is stakingitsown claimsinEast Asia. Mostsignificant in thisregardisIndia’s growing With Chinaexpandingits presence inSouth Asia andtheIndianOceanregion,India

Summer 2012 65 Security Policy Security makers, and how they manage this very complicated bilateral relationship would would relationship complicated bilateral manage this very they makers, and how landscape. Asian strategic future but also the larger shape not only India’s their relationships. their relationships. Indian policy challenges for one of the most significant rise of China poses The blance of equality in a semblance of and to bring from China states to gain benefits with other 66 The Forum

Stealth Fighters Are Hard more practical. if anything, scariertothe American defense establishmentthantheJ-20,foritwas the J-16,reportedlyindevelopment inShenyang innortheastern China. The J-16was, F-117, F-22andF-35fightersB-2bomber. Amongthese rumored warplanes was at work onseveral otherradar-evading fighterssimilarinphilosophy tothe American Not onlydidChinapossesstheJ-20,itsaviation companieswerealsosaidtobehard Australia, anindependentthinktank. technology withRussiaandthe West,” wroteCarloKopp, ananalystwith Air Power fighter was animportantmilestoneinChina’s LongMarch toward parityinmilitary military withitsstealthfightersandbombers.“China’s newChengduJ-20stealth advanced Chineseaircraft mightchallenge thedecades-longdominanceofU.S. inaugurating what somehave describedasanewera ofaerialwarfare, inwhich The J-20“MightyDragon” tookoffforitsapparentfirsttestflighton January11, testing inChengducentral China. China’s very first,andpreviouslyunseen,stealthfighterprototypeundergoingground observers when itallowed civilian photographers tosnapandpublishphotosof In December2010,theChinesePeople’s Liberation Army Air Force shocked pockets cannotperformaerospace miracles. Beijing withitstightcentral control,extensive manufacturing baseandapparentdeep C effort tobuildaworld-class airforce –andaremindertooutsidersthateven speculation, representsasurprisingtwistinChina’s morethandecade-long The emergenceofthemuch-touted Shenyang J-16,following years of hina hasabrand newjetfighter. Onlyit’s notreallybrand newatall. Modernization ofChina’s Aerial Arsenal Stealth Fighters Are Hard Encounters Obstacles UNITED STATES David Axe Wired

Summer 2012 67 Security Policy Security “ Dragon Mighty The a decade is likely frontline from away service “ ong Kong’s Kanwa Kanwa flew at least one of the new fighters before a press audience. Hong Kong’s T-10 of the of the Su-30, a version magazine described the J-16 as a direct copy analyst with Defence Aviation. analyst with Defence when the PLAAF April, in occurred in Shenyang first public appearance J-16’s The opposed to revolutionary) J-16 could be ready for combat in just a few years – and in just a few years for combat J-16 could be ready opposed to revolutionary) American- older jets and better prospects against over still offer big improvements Dsouza, an commented Larkins of the stealth fighters,” the race “It’s made warplanes. it promised to provide Beijing a more harmonious new fighter – and much sooner Beijing a more harmonious new fighter – and much it promised to provide is likely a decade away Mighty Dragon The be possible with the J-20. – than would (as evolutionary The in that capacity. meant to serve even from frontline service, if it’s sometime in the 2020s. T-50, to the Russian development as the Chinese J-16 represented a parallel Inasmuch many important ways,” Bill Sweetman, a highly regarded aviation journalist, wrote aviation Bill Sweetman, a highly regarded ways,” important many there are Today January 2010. fighter first flew in new Russian The T-50. about the of the jet full production version a possible undergoing testing towards T-50s three In essence, the J-16 was thought to be equivalent to the Russian T-50, an adaptation T-50, to the Russian thought to be equivalent In essence, the J-16 was for its low optimized with the same basic engines but a new airframe T-10 of the not an F-22 in as the U.S. F-22. “It’s a signature signature – though not as low radar AL-31 engine was designed specifically for the Flanker. Russian T-10 derivatives still T-10 derivatives Russian designed specifically for the Flanker. AL-31 engine was as do most J-11s and J-15s. AL-31, use the existing J-11 and J-15 fighters, themselves both reverse-engineered models of Russia’s models of Russia’s both reverse-engineered existing J-11 and J-15 fighters, themselves but has since has its roots in the late 1970s which “Flanker,” T-10 twin-engine The plane. and ground-attack interceptor heavyweight highly-effective into a evolved Dragon appeared in the spring of 2012 but by summer still hadn’t flown. flown. summer still hadn’t but by appeared in the spring of 2012 Dragon of China’s version upgraded rumored to be a heavily was contrast, J-16, by The A year after its debut the first J-20 had after its debut the A year confirmed testing flights completed only 60 the Mighty of A second copy design. a new warplane of the thousands required by likely poorly-suited for the airframe. for the airframe. likely poorly-suited Moreover, the twin-engine J-20 apparently the twin-engine Moreover, and could be purpose-built engines lacked AL-31F engines Russian-made seen flying with experimental aircraft incorporating design incorporating experimental aircraft not seen on Chinese elements typically weapons bays. including internal warplanes, The Mighty Dragon was clearly an clearly was Mighty Dragon The 68 The Forum

Stealth Fighters Are Hard In thatsense,the“new”Chinesefighterisn’t newatall.Insteadofrepresenting made AL-31 engine. carry Chinese-madeweapons.BoththeJ-16andSu-30usethestandard,Russian- between theChineseJ-16andRussianSu-30it’s copiedfromisthattheJ-16can enhancements, such ascanbefoundonthe T-50. Apparently, theonlydifference dating fromthelate1990s. The J-16infactdoesn’t featureany oftherumoredstealth $70-billion development oftheF-22:thatinventing stealthfightersishard. Beijing islearningthelessonthatU.S.government learnedduringthe15-year, capable versions ofeven moderately stealthy warplanes anytime soon.Perhaps purchase onlyunderscoresChina’s apparent inabilitytoproduceitsown combat- with Russiatopurchase copiesoftheSu-35, thenewest T-10 model. The proposed As theJ-16was makingits firstpublicappearance, Beijing was alsonegotiating service. military willlikelyhave broughtpotentiallyhundredsofnew F-35stealthfightersinto achieve operational readiness. That couldtakeadecade,by which timetheU.S. generational leapinfront-linefightertechnology willhave to wait fortheJ-20to is developing any othernewwarplanes –andthat’s certainlypossible–atrue new warplane holdstheline atlate’90s-early2000stechnology. UnlessChina an immediatesteptowards astealthy fighterforce rivaling America’s, Beijing’s

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Summer 2012 69 Security Policy Security —Abdullahi A. An-Na`im, Emory University Studies & International Relations, Nairobi, Kenya addresses one of the most crucial issues con —Paulin Manwelo, SJ, director, Hekima College Institute of Peace Refugee Refugee Rights David Hollenbach, SJ, Editor SJ, Hollenbach, David David Hollenbach, SJ, Editor SJ, Hollenbach, David tive responsibility vis-à-vis the refugee problem; and there is spectives: theological, ethical, legal, political, economic, and study in the attempt to understand our individual and collec tives. This bold and intellectually honest, clear, and acces sible analysis of one of the most pressing moral and political 978-1-58901-202-8, paperback, $26.95 paperback, 978-1-58901-202-8, 978-1-58901-646-0, paperback, $29.95 paperback, 978-1-58901-646-0, no doubt that this book will become a magnum opus for NGOs, for opus magnum a become will book this that doubt no Refugee Rights visionary yet pragmatic responses from a range of perspec Driven Driven from Home cerning the plight of Africa since the 1980s. We warmly wel come the to effort explore the refugee issue from different per cultural. Such a holistic approach makes this book a seminal Ethics, Advocacy, and Africa questions of our time is for students and scholars, national activists, and many centers and institutes of peace Africa.” in engaged engaged citizens everywhere.” and international policymakers, opinion leaders, and ethically about forced migration with providing profoundly thoughtful, Protecting the Rights of Forced Migrants “ “Finally the book that matches asking the right hard questions PROFOUND Getting the PIIGS (and Europe) off the Ground the off Europe) (and PIIGS the Getting China-the Next Superpower?

Student Writing Competition Winner

China–the Next Superpower? Roy Dale Victoria University of Wellington NEW ZEALAND

hina, since the end of the Cultural Revolution in 1968, has embarked on a number of actions which have led to a stage where it can now be regarded as a very powerful nation with a large global footprint. It maintains a high profile in the UN Security Council where it has recently allied itself Cto its one-time rival, Russia, in vetoing UN action in Syria. China has dispensed disproportionally large amounts of development aid to Africa, in particular, in the same period, giving it ideological leverage in significant areas of the continent. More recently it has been engaged in the process of modernising its domestic economy and armed forces. As a consequence, the world should keep a watch on the current military build-up by both America and China in the Asia-Pacific region.

China’s investment in Africa dates back at least four decades. In 1973, when most of southern Africa was white-ruled, China had reached the midway point in building a railway from the copper belt of Zambia to the Tanzanian port of Dar es Salaam. Described by Rettman1 as a means of bypassing the stranglehold imposed on Zambia’s mainly copper exports, the Tanzam railway project was, at the time, the third largest foreign aid project ever undertaken and the largest aid project ever financed by a single nation. The hoped-for return on this investment, Rettman argues, was to establish China as a Third World leader and increase its influence throughout Black Africa.2 Rettman contends that China’s drive to build the railway at an estimated cost of $400 million3, at a time when it had a pressing need for domestic investment and technically skilled manpower, could only be justified on political and ideological factors. In addition to building the railway, China provided two major locomotive repair workshops, all rolling stock and locomotives, as well as staff training. The total cost of the railway was to be financed by an interest-free loan,

m repayable in thirty years commencing in 1983.4 All considered, it was an offer that u r the governments of Zambia and Tanzania could ill afford to refuse. o F

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Summer 2012 71 Security Policy Security , 8 reported, reported, Chinese 5 SIPRI 7 considers that China The Economist The The Economist The

6

USA after 2035. Until recently, the main strategy of the 2.3 million-strong People’s People’s of the 2.3 million-strong the main strategy USA after 2035. Until recently, by crushing them face-to-face, (PLA) has been to fight an enemy Army Liberation has almost certainly experienced double digit growth for two decades. for two has almost certainly experienced double digit growth defence expenditure in 2012 well amount to $160 billion. On estimates that China’s that of the defence spending will overtake present trends, SIPRI forecasts that China’s If aid projects illustrate China’s soft-power drive, then the world’s biggest military then the world’s drive, soft-power China’s If aid projects illustrate Asia- in the hard-power the build-up of China’s demonstrates expansion forcefully budget defence China’s rapidly modernising its armed forces. region. China is Pacific an environmental catastrophe for which the government was blamed could lead to was the government catastrophe for which an environmental protests in major cities. publish no information about their vast loans to poor countries, some of which are to poor countries, some of which loans vast publish no information about their Harding argues that the emergence of serious likely to default on their repayments. or (especially inflation and unemployment) and widespread economic problems of Africa of China is no longer regarded as a saviour in much much in saviour a as regarded longer no is China private Chinese investment in Africa. Infrastructure deals alone are worth more deals alone are worth Africa. Infrastructure in Chinese investment private African farming, China has earmarked in investment For than $50 billion a year. Bank) main lenders (China Exim Bank and China Development two The $5 billion. views Africa as a stepping stone to a greater global commercial presence. Beijing, as a stepping stone to a greater global commercial Africa views Africa, notwithstanding the antithesis of in more activity yet it holds, is encouraging recent Africans. Construction accounts for three-quarters of an increasing number of However, African consumers have benefitted from cheaper Chinese imports. cheaper Chinese imports. from benefitted African consumers have However, ports. Africa with free-trade China intends to ring before years for two to work Chinese-run copper belt mines have Sudan. Miners in by managers. been fired Protesting miners have they are issued with a safety helmet. its walls. Matching standards in mainland China, scant attention is paid to rules and China, scant attention is standards in mainland Matching its walls. in a Gabonese has taken place Oil exploration local sensitivities. regulations, and of crude oil in Southern has created lakes a Chinese oil company national park and road from Lusaka, the 130km road from Lusaka, standards are slipping: Africa. Chinese construction Chinese-built A rains. by away swept quickly to Chirundu was capital, Zambia’s appeared in cracks to close when forced Angola, was capital of hospital in Luanda, in 2011, that China is no longer regarded as a saviour in much of Africa. of in much is no longer regarded as a saviour in 2011, that China are practices manufacture; business as examples of shoddy goods are held up into mainland China, is being imported Corruption, endemic in described as poor. Forty years later, attitudes to China in Africa have changed. changed. have Africa in attitudes to China later, years Forty Should Germany be the Pillar of the Euro-Zone to Save Europe? Save to Euro-Zone the of Pillar the be Germany Should China-the Next Superpower?

sheer force of numbers. US military planners now see China’s military strength lies in destroying targets, such as aircraft-carrier groups, from afar using a variety of methods including anti-ship missiles, cyber, and anti-satellite weapons. The American government, recognising this threat, has committed itself to a build-up of its forces in the Asia-Pacific region at a time of cutbacks and withdrawals in other areas of the world.9

There are many locations in the Asia-Pacific region which could serve as flashpoints in any future conflict involving China. One example is the Scarborough Shoal in the South China Sea, currently disputed by the Philippines and China; both nations are maintaining a naval presence. Unstable governments can turn a stand-off into regional warfare very quickly. A determined but unstable China, with a modernised PLA, could yet be the twenty-first century version of 1941 Japan.

REFERENCES “Trying to pull together. Africans are asking whether China is making their lunch or eating it.” The Economist, 20th April 2011, reporting from Nairobi. “China’s military rise. The dragon’s new teeth. A rare look inside the world’s biggest military expansion.” The Economist, 7th April 2012. Harding H. ‘China’, Foreign Policy, No. 159 (Mar. – Apr., 2007), pp. 26-28, 30, 32. Rettman R.J. ‘The Tanzam Rail Link: China’s “Loss Leader” in Africa’, World Affairs, Vol. 136, No.3 (Winter 1973-1974), pp. 232-258. Rettman R.J. ‘The Tanzam Rail Link: China’s “Loss Leader” in Africa’, World Affairs, Vol. 136,

1 Rettman R.J. ‘The Tanzam Rail Link: China’s “Loss Leader” in Africa’, World Affairs, Vol. 136, No.3 (Winter 1973-1974), pp. 232. Accessed via http://www.jstor.org/stable/20671520 on 15th April 2012. 2 Previous surveys made by Western governments to test the viability of such a railway had dismissed it as uneconomic. 3 In 1973 terms 4 Rettman p. 34 5 “Trying to pull together. Africans are asking whether China is making their lunch or eating it.” The Economist, 20th April 2011, reporting from Nairobi. Accessed via www.economist.com/ node/18586448 on 15th April 2012. 6 Harding H. ‘China’, Foreign Policy, No. 159 (Mar. – Apr., 2007), p. 27. 7 “China’s military rise. The dragon’s new teeth. A rare look inside the world’s biggest military expansion.” The Economist, 7th April 2012. Accessed via: http://www.economist.com/ node/21552193 on 17th April 2012. 8 The Stockholm based military research institute. 9 A token of this build-up has been shown by the recent decision to base some 2,500 American

m troops on Australian soil. u r o F

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, , RUSI , y , Prepared for The for Prepared , s , Nina Hachigian, Center for Center for Nina Hachigian, , a CSIS ? , Brookings Institution, Kenneth Lieberthal and Kenneth Institution, Brookings , s VIDEO REPORTS AND ARTICLES AND REPORTS :Miltary and Security Develoments Regarding the People’s the People’s Regarding :Miltary and Security Develoments s Other Resources Other t Cybersecurity and U.S.-China Relation Cybersecurity and U.S.-China Japan’s Security Strategy toward China: Integration, Balancing, and Deterrence in the and Deterrence Balancing, Integration, China: Security Strategy toward Japan’s Interest U.S. Implications for Capabilities: Space Evolving China’s Sino-Indian Relations: Partners, Rivals, or Both Rivals, Partners, Sino-Indian Relations: China’s Rise Is a Big Reason to Ratify the Law of the Se Is a Big Reason to Ratify the Law Rise China’s Annual ReportAnnual to Congres Stanford’s Eikenberry discusses the future of China’s national security strategy of China’s discusses the future Eikenberry Stanford’s Roundtable Report: China’s Engagement in Non-Traditional Securit in Non-Traditional Engagement China’s Roundtable Report:

Singer W. Peter with Dean Cheng Stokes A. Mark Commission; Economic and Security Review U.S.-China Shif Era of Power China Security Report, The National Institute for Defense Studies, Defense for The National Institute Report, China Security

American Progress 2012 Republic of China, THETHE EXCHANGEEXCHANGE RATE RATE CONUNDRUMCONDUNDRUM

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75 The Chinese Yuan-US Dollar Exchange Rate: What Are the Issues? Not Your Mother’s Central Bank

The Chinese Yuan-U.S. Dollar Exchange Rate: What Are the Issues? Prof. Richard T. Froyen University of North Carolina, Chapel Hill

UNITED STATES

he mood in the United States is one of disquietude. Two complex wars, a financial crisis and deep recession have unsettled confidence. Where has the “great moderation” gone, not to mention the three trillion dollar budget surplus that was projected at the start of this century? Such a mood creates Ta climate for books with ridiculous titles such as: After America: Get Ready for Armageddon and Becoming China’s Bitch, the latter by a former senior partner at Goldman Sachs. Even a sensible commentator, a former Washington bureau chief of the Financial Times, Edward Luce, judges it Time to Start Thinking: America and the Spectre of Decline.

This colors the current view of U.S.-China economic relations, including the question of the yuan/dollar exchange rate. Reasonable projections indicate that China’s GDP will surpass that of the United States sometime prior to 2030. At that point, per capita Chinese GDP will reach one-fourth of that in the United States. If that sounds to you like Armageddon see the above cited book, otherwise read on.

The Broad Context

The Chinese economy has grown by 9.6 percent per year since 2008, while in the United States, growth has averaged less than 1 percent. The Chinese growth model is investment- and export-led. Investment in China is twice the fraction of GDP relative to that in the United States; consumption about one half. The recent disparate growth rates heighten U.S. anxiety about being overtaken by China. An undervalued Chinese yuan is seen as an element, perhaps an unfair one, in the Chinese growth strategy. This broad context raises two questions: Should the growth of the Chinese economy

m be a concern to the United States, and what role does the exchange rate play in u r Chinese economic growth or other areas of concern to the United States. o F

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Summer 2012 77 The Exchange Rate Conundurm Rate Exchange The two countries has fallen only slightly. A misaligned exchange rate is a plausible rate A misaligned exchange has fallen only slightly. countries two of thirds approximately two cause. Our current account deficit with China is now the yuan/ dollar exchange rate. The U.S. current account deficit has fallen in recent U.S. current account deficit has fallen in The rate. the yuan/ dollar exchange current in 2011. China’s of GDP in 2006 to 3.1 percent from 6.1 percent years deficit between the trade bilateral The account surplus has also fallen substantially. The Narrow Context Narrow The concerning question of the U.S. current account deficit brings us to the real issue The have grown rapidly. But rapidly. grown account deficits. Chinese holdings of U.S. treasury securities have as long as the United States runs large deficits, the debt must end up somewhere. appetite for other more complex predominately housing backed securities. predominately housing backed appetite for other more complex investment U.S. overseas overall The clear. link to U.S accumulating debt is less The little since 2007 in spite of large cumulated current very position has in fact changed in the world financial system. The bilateral U.S.-China current account imbalance is U.S.-China current account imbalance The bilateral financial system. in the world of is that large purchases A possible direct channel certainly a part of the problem. yields and increased the down Asian countries bid China and other U.S. treasuries by The role of China in U.S. large current account deficits and accumulating foreign role of China in U.S. large current The have Large global current account imbalances may debts is another area of concern. cause future instability financial crisis of 2007-09 and may a role in the world played delay the date when it became the world’s largest but would also hurt the U.S. also hurt largest but would it became the world’s when the date delay economy. the yuan/dollar exchange rate doesn’t seem highly relevant to these concerns. More to these concerns. seem highly relevant doesn’t rate the yuan/dollar exchange to be beneficial Africa are likely Asia and in stable prosperous economies generally, would for the Chinese economy A “hard landing” or worse prospects. to U.S growth GDP will be twice the current level well before mid-century, which would scarcely scarcely would which before mid-century, well GDP will be twice the current level of the recent distribution are reasons for concern about the uneven There be austere. or more specifically Chinese growth growth. and about future U.S. gains from growth metric for evaluating these concerns is our own GDP. Real GDP in the United States Real GDP in the United States GDP. is our own these concerns metric for evaluating between 1963 and 1984. Even 1984 and 2008, and before that doubled between lead us to expect that between 2008 and 2012, this would for a “bad patch” allowing The United States seems worried about a coming age of austerity. But surely the about a coming age of austerity. worried United States seems The recent range of 20 percent to 22 percent? How should one think about a “spectre of should one think about a How 22 percent? to of 20 percent recent range and designed output seems both wrong share of world A metric of absolute decline?” to promote disquietude. for somewhere near one third of the world’s population, Africa for something over over Africa for something population, of the world’s near one third for somewhere should it be In this context, States for perhaps 4 percent. the United 20 percent, substantially from the GDP will likely fall U.S. share of world a concern that the By the middle of the 21st century, the population of India and China will account and China will account of India the population century, of the 21st By the middle The Chinese Yuan-US Dollar Exchange Rate: What Are the Issues? Not Your Mother’s Central Bank

To“ brand China the value of our overall current account deficit. It has been known since the time of Malynes, Misselden and Mun in the a “currency 17th century that the focus should be on the overall balance of trade but with one manipulator” and bilateral balance so large it rightly attracts respond with a attention. What should be done? To brand China tariff on Chinese a “currency manipulator” and respond with a tariff on Chinese products isn’t a products isn’t a good idea. The definition of manipulate is “to influence of manage shrewdly good idea or deviously.” This is different from the meaning of “fix.” Germany and the Netherlands have fixed their exchange “ rates at a level where they run persistent trade surpluses and accumulate financial claims on chronic deficit countries within the euro area. They are hardly currency manipulators. Retaliatory tariffs such as those proposed by prominent U.S. senators would set off a trade conflict that would hurt both economies and cause difficulties in broader aspects of U.S.-China relations.

To an extent, the problem of an undervalued yuan is receding. The yuan has risen from 8.1 yuan to the dollar in 2005 to 6.3 in May 2012. Chinese inflation has been running at 1 percent to 1.5 percent above that of the United States increasing the real appreciation of the yuan since 2007. In April 2012, the band within which the yuan is allowed to fluctuate on a daily basis was widened. As the Chinese economy does move toward being the world’s largest, Chinese policymakers will want their currency to assume more international importance. That will require more freedom of capital flows and most likely more flexibility in the yuan’s value. U.S. policy is correct in pushing these processes along to the degree possible.

An important caveat here is that progress in this area must continue. The bilateral trade deficit with China is an issue for the United States. If the dollar strengthens as a currency, against the euro, for example, China mustn’t let the yuan fall relative the dollar to promote its exports. Perhaps the rise in the value of the yuan will pause but a Chinese policy to depreciate the yuan relative to the dollar in the near term future would constitute currency manipulation and should be resisted. m u r

o Shortly after his election. U.S. President John F. Kennedy told one of his economic F

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Summer 2012 79 The Exchange Rate Conundurm Rate Exchange The and U.S. balance of payments. Rather than 1 and 2, the ranking should have been have should Rather than 1 and 2, the ranking of payments. and U.S. balance rate yuan/ dollar exchange The Prioritizing concerns is important. closer to 1 and 10. economic concerns. not near the top, of the list of U.S. should be on, but advisors that the two problems which worried him the most were the hydrogen bomb the hydrogen the most were him worried which problems that the two advisors Internationalization of the Renminbi: What Does History Tell Us About the Precedents? Monetary Policy in the United States and the ECB

Internationalization of the Renminbi: What Does History Tell Us About the Precedents? Dr. Jeffrey Frankel Harvard University UNITED STATES

ll of a sudden, the renminbi (RMB) is being touted as the next big international Acurrency. Just in the last year or two, the Chinese currency has begun to internationalize along a number of dimensions. A RMB bond market has grown rapidly in Hong Kong, and one in RMB bank deposits. The currency is starting to be used to invoice some of China’s international trade. Foreign central banks have been able to hold RMB since August 2010, with Malaysia going first.

Some are now claiming that the renminbi could overtake the dollar for the number one slot in the international currency rankings within a decade1. The basis of this prediction is, first, the likelihood that the Chinese economy will surpass the US economy in size and, second, the historical precedent when the dollar overtook the pound sterling as the number one international currency during the period after World War I.

It used to be said that international currency status was subject to much inertia (e.g., Krugman, 1984). There was said to have been a long lag between the date when the US economy had passed the UK economy with respect to size (1872, by the criterion of GNP) and the time when the dollar had passed the pound (1946, by the criterion of shares in central banks’ holdings of reserves). The “new view,” represented in particular by Eichengreen, is that the lag was in fact rather short. It took until World War I for the dollar to fulfill the criterion of an international currency. And the date when the dollar is said to have come to rival the pound as an international currency has now been moved up to the mid-1920s. The first point

m is right. If trade is the measure of size, the US first caught up with the UK during u r World War I. The other important criteria came soon thereafter: creditor status for o F

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Summer 2012 81 The Exchange Rate Conundurm Rate Exchange The three earlier currencies in an interesting historical from way circumstance of the earlier currencies three “ “ RMB The current differsphenomenon The second point seems a matter of whether a matter of whether second point seems The . 2 s financial market indifference or hostility to such a project in the nation at large. These individuals, led individuals, These the nation at large. a project in indifference or hostility to such who Fed, were the same ones York the New Benjamin Strong, the first president of by In the case of the mark and yen after 1973, internationalization came despite the after 1973, In the case of the mark and yen In the case of the United governments. reluctance of the German and Japanese of the dollar despite the elite promoted internationalization States after 1914, a tiny Switzerland.) One would expect the same fears of a stronger currency and its effects expect the same fears of a stronger currency Switzerland.) One would on manufacturing exports to dominate the calculations in China. who stood to lose competitiveness if international demand for the currency were if international demand for the currency stood to lose competitiveness who supported might have which sector, stronger than the financial to rise, were much more weight in the UK and financial sector carried much internationalization. (The circumstances of the rise of the three earlier currencies. The Chinese government is government Chinese The currencies. of the rise of the three earlier circumstances nor Japan, Neither Germany the international use of its currency. promoting actively first. In all three cases, export interests, the US, did that, at least not at nor even reserves were peaking as the 1990s began. reserves the historical from in an interesting way current RMB phenomenon differs The relative role has diminished since then and role has relative retrospect, the mark has been superseded. In bank currencies’ shares in central the two early 1990s, both were spoken of as potential as of spoken were both 1990s, early the number one slot. of the dollar for rivals because Japan’s It is easy to forget that now, international currencies after the breakup of international currencies after the system in 1971-73. (The Woods the Bretton In the euro, of course, did so after 1999.) to have attained international status during attained international to have were the other two The the 20th century. major became mark, which and the yen until 1913. dollar is one of three national currencies The once the conditions were in place. The US The were in place. once the conditions bank a permanent central have did not even “displacing” the pound (1945). Under either “displacing” the initial rise as an dollar’s interpretation, the indeed rapid, was international currency deep, liquid, open deep, liquid, open / “catching to rival” between the concept of “coming to distinguish or not one wants ahead” / “pulling definitively the phenomenon of (1920s) versus up with” the pound the country; the perceived prospects for the currency to remain strong in value; and value; strong in to remain for the currency prospects the perceived the country; Internationalization of the Renminbi: What Does History Tell Us About the Precedents? Monetary Policy in the United States and the ECB

had conspired in 1910 to establish the Federal Reserve in the first place. It is not yet clear that China’s new enthusiasm for internationalizing its currency includes a willingness to end financial repression in the domestic financial system, remove cross-border capital controls, and allow the RMB to appreciate. Perhaps a small elite will be able to accomplish these things, in the way that Strong did a century earlier. But so far the government is only promoting international use of the RMB offshore, walled off from the domestic financial system. That will not be enough to do it.

Notes:

1 Subramanian (2011a, p.19 l; 2011b): “Applying the historical experience of broader economic dominance to today’s situation, it appears that the renminbi could actually surpass the dollar towards the middle or early part of the next decade.” Eichengreen (2011) is a bit more circumspect. Both recognize that China’s financial markets will have to develop much further if the RMB is indeed to take on this role. 2 The criteria are discussed and econometrically evaluated in Chinn and Frankel (2007), which also gives further references.

References:

Chinn, Menzie, and Jeffrey Frankel, 2007, “Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?” in G7 Current Account Imbalances: Sustainability and Adjustment, edited by Richard Clarida (University of Chicago Press: Chicago). m u r o F

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Summer 2012 83 I think they The Exchange Rate Conundurm Rate Exchange The UNITED STATES Repercussions George Mason University George Mason believe the impact of these exchange the impact of these exchange believe believe a wider trading band, coupled a wider trading believe impact on internationalizing use positive rate developments will be on their developments rate trillion dollars in foreign exchange trillion dollars in foreign exchange Professor Gianturco: Professor Gianturco: of non-U.S markets. Adding to Chinese of non-U.S markets. of the yuan. rates, is the fact that they own over one over is the fact that they own rates, cash is in U.S. of which much reserves, strengthening the yuan against a majority strengthening the yuan against a and thus also strengthening of the dollar, currencies. This has the effect of further This currencies. control confidence, and a rising sense of country? and government instruments. Chinese and government and sell parts of this ability to purchase with a gradually rising yuan, will have a rising yuan, will have with a gradually in the field of international exchange in the field of international exchange to the immense portfolio has contributed What do you think Chinese leaders What do you Hon. Delio E. Gianturco Hon. Delio

Recently, Recently, There There The New Trading Band and Its and Band Trading New The Interview with bands is part of this belief. Another bands is part of this belief. part of the Chinese of the importance of part of the Chinese of the importance tied, has strengthened considerably tied, has strengthened considerably from .5 to 1 percent. What factors from .5 to 1 percent. exchange rates are in line with supply rates exchange triggered this action? the Chinese increased their trading band band the Chinese increased their trading rate and thus the trading band are thus the trading and rate raise the value of the yuan vs. the U.S. of value the raise Professor Delio Gianturco: Professor Delio Gianturco: during the same period vs. most other dollar, to which the official exchange the official exchange to which dollar, dollar, and since 2010 the yuan has been and since 2010 the dollar, and demand considerations. Growing Growing and demand considerations. a greater feeling of confidence that their a greater feeling of confidence that appears to be a growing sense on the appears to be a growing International Affairs Forum: Affairs Forum: International liberalization of exchange rate trading trading rate of exchange liberalization increased by eight percent in this regard. in this regard. eight percent increased by indicator of this is China’s action to indicator of this is China’s international economic cooperation, and and international economic cooperation, Not Your Mother’s Central Bank Central Mother’s Your Not Also, we should remember that the U.S. The New Trading Band and Its Repurcussions

of the yuan, making it more attractive as There’s also the ongoing issue of China’s an international currency and opening balance of payments surplus… the way to have new financial services headquartered in China. They see such Professor Gianturco: Actually, China broadening and deepening of the capital had a current balance of payments deficit markets as serving their best interests in earlier this year, but it looks as if that the international balance of payments was a very temporary situation unlikely and the pace of domestic economic to be repeated in the near future. So I development. think that shouldn’t prevent the Chinese from continuing to liberalize exchange rate policy. Again, the long term goal U.S. manufacturers and many is to make the yuan a fully acceptable economists have been critical of China’s international currency, which brings exchange rate policy; principally that with it expanded access to international

...we should press [China] to expand the acceptable band of rates in ways that will accommodate normal supply and demand pressures

it’s had a negative impact on U.S. jobs. capital, a more developed internal Do you think this new rate will have a banking system, and other private positive impact? market improvements. It should change the nature of the Chinese economy to Professor Gianturco: I think that an increasingly significant exporter of remains to be seen. If recent actions are capital and a greater recipient of earnings followed up with continuing measures to on foreign direct investments, loans, and strengthen the yuan, it should definitely portfolio investments. encourage growing U.S. exports to China with associated employment benefits to our country. It should also make our Do you envision a free floating Chinese goods more competitive with Chinese currency in the future? products and thus increase our share of our own market and of third country Professor Gianturco: Yes, I do. I think markets. Recent Chinese exchange rate they will get there in stages. Rather than policy is certainly a movement in line continuing to encourage the Chinese with free market ideology and this is to revalue their official currency rate, something we should welcome. we should press for them to expand m

u the acceptable band of rates in ways r

o that will accommodate normal supply F

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Summer 2012 85 The Exchange Rate Conundurm Rate Exchange The to a wide range of developing nations, nations, of developing range to a wide of welcomed the results the latter have Chinese exchange rate policy in recent policy rate Chinese exchange years. years. Because the yuan by many in the World Bank and the World in the many by products. This has been welcomed has been welcomed This products. promoting smooth system performance promoting smooth system performance principles of free markets and assure that principles of free markets and assure band couldn’t be gradually expanded expanded be gradually band couldn’t rate policy had on developing countries? had on developing policy rate foreign exchange policy has had a policy foreign exchange to lend money on very favorable terms favorable to lend money on very that are incorporated in Chinese export that are incorporated that compete with China, but much more more that compete with China, but much temporary dislocations in daily activity dislocations in daily activity temporary to 3 percent, 5 percent, 10 percent 10 percent 5 percent, to 3 percent, this system, there’s no reason that the this system, there’s major favorable impact on developing impact on developing major favorable movements in exchange rate, thereby thereby rate, in exchange movements Professor Gianturco: Professor Gianturco: or even higher, and then removed and then removed higher, or even a system go well. Such entirely if things reserves, a portion of which are used a portion of which reserves, has produced huge foreign exchange has produced huge foreign exchange upward with regard to the dollar, China’s China’s regard to the dollar, with upward recent trend, in which the band has the band has recent trend, in which so for those developing country exports so for those developing countries’ exports. This is both for goods is both This countries’ exports. do not produce catastrophic short-term do not produce catastrophic short-term grown from .3 percent to .5 percent to percent to .5 from .3 percent grown IMF. Also, because the Chinese system IMF. and because the yuan has been revalued and because the yuan has been revalued activity. and greater assurance of currency of currency and greater assurance authorities grow comfortable with comfortable authorities grow and demand pressures. Moving in this pressures. Moving and demand would be more compatible with basic would way, the Chinese could build upon their Chinese could build upon their the way, liquidity and rates of return from foreign of return from foreign liquidity and rates is tied to the strengthening U.S. dollar is tied to the strengthening U.S. dollar What impact has the Chinese exchange What impact has the Chinese exchange 1 percent at present. As the monetary As the monetary at present. 1 percent America’s Hammering China’s Rmb Makes Little Sense Interview with Joseph E. Gagnon

America’s Hammering China’s Rmb Makes Little Sense Dr. Yukon Huang Carnegie Institute of Peace UNITED STATES

n a close election year, the easy option for politicians is to blame America’s economic woes on China. America’s bilateral deficit with China hit a record $295 billion for last year. Protectionist sentiments are running high with recent complaints filed with the WTO that China does not follow the rules. Passage of a Icountervailing tariff bill exemplifies the skirmishes that are coming. These efforts are bolstered by repeated calls for the renminbi to be revalued upwards to offset China’s alleged currency manipulation.

The problem is that this isn’t the real story.

From China’s perspective, admonitions that the renminbi is significantly undervalued seem devoid of logic. China’s current account surplus has declined from 10 percent of GDP five years ago to less than 3 percent last year and many project even further declines. Moreover, Beijing finds it perplexing that after steadily appreciating the renminbi by nearly 40 percent in real terms since 2005, critics say that the renminbi is still undervalued by the same 20 percent or more as if nothing has happened over the past five years.

Much of the confusion comes from focusing on the still huge US-China bilateral trade imbalances rather than looking at it from a global perspective.

Chinese policy-makers are reminded that the US took a similar approach in complaining decades ago that an undervalued yen was the major reason for Japan’s sustained trade surpluses. That the Japanese yen appreciated from 240 to 80 to a dollar in response to the 1985 Plaza Accord and yet continued to run a surplus until

m its recent nuclear disaster reminds the Chinese leadership that factors other than the u r exchange rate are far more important in shaping trade balances. o F

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Summer 2012 87 The Exchange Rate Conundurm Rate Exchange The Southeast Asia decades ago. China’s central role took off only with its accession central Asia decades ago. China’s Southeast supported was This markets. Western it easier access to in 2001, giving WTO to The role of the Asian production sharing network did not just surface in the mid- did not Asian production sharing network role of the The portions of its production base to moved earlier as Japan 2000s. It began much exacerbated by growing fiscal deficits and together led to the excessive demand for fiscal deficits and together led to the excessive growing exacerbated by part of the story has little to do with This and still unresolved. imports is well known Washington. in China but reflects the political gridlock The story of the origins of the decline in US household savings rates which was then was which rates story of the origins of the decline in US household savings The emergence of China’s trade surpluses: surging US consumption that fueled import surpluses: trade emergence of China’s centered on China, Asian production sharing network of the East demand, maturation rates. savings up of China’s and ratcheting The driving force behind the US deficits and China’s surpluses lies not in exchange surpluses lies not in exchange the US deficits and China’s behind force driving The factors largely explain the Three time. factors that built up over but in structural rates appreciation would likely not have reduced US trade deficits but only transferred deficits but only transferred reduced US trade likely not have appreciation would Asian countries as long as the US to other some of the China specific surpluses continued to run major fiscal deficits. One could argue that China’s reluctance to allow the renminbi to appreciate even the renminbi to appreciate even to allow reluctance One could argue that China’s more rapid However larger. grow surpluses to after 2005 allowed more rapidly factors that built up over time. over factors that built up The driving force behind the US deficits and China’s and China’s behind the US deficits force driving The but in structural rates exchange surpluses lies not in as the renminbi began to appreciate, did China’s surplus increase. surplus to appreciate, did China’s as the renminbi began Clearly “manipulating” the value of the renminbi had little to do with the emergence of the renminbi had little to the value Clearly “manipulating” And only pegged to the dollar until 2005. was since its value surplus trade of China’s around 2005. China’s trade surpluses began increasing around 2005 and peaked in surpluses began increasing trade around 2005. China’s surpluses are not directly China’s suggests that US deficits and pattern This 2008. circumstances. global shifts and country specific related but reflect The truth is that China’s surpluses are not driving America’s deficits. This is illustrated This is illustrated deficits. America’s are not driving surpluses China’s truth is that The balances to both countries’ trade changes for when the differences in timing by 1998 and peaked rapidly around deficit began increasing US trade The occurred. America’s Hammering China’s Rmb Makes Little Sense Interview with Joseph E. Gagnon

by a massive infrastructure construction program that strengthened its competitive position.

Thus despite substantial real wage increases of around 12 percent annually, labor productivity increased even more rapidly at an estimated 15-20 percent, making it profitable for multinational firms to use China as the assembly plant for the world. Thus the US trade balance with China is really a regional rather than a bilateral issue and one which has been substantially shaped by the interests of firms like Wal-Mart in driving costs down.

Processing exports account for about half of China’s trade volumes but generate the entirety of its surplus. This trade – often exemplified by China’s exports of Apple’s I-Pads to the US – typically depends on the import of high technology components made elsewhere and then brought into China for assembly and export to the West. Eighty percent of the value added for these components is generated elsewhere with China’s contribution concentrated in the lower technology components and labor assembly.

The particular country mix in processing trade is shown by the jump in the trade surpluses of South Korea, Japan and Taiwan with China which went from $30 billion to over $200 billion in the decade up to 2010. Thus China’s trade surplus with the US originates largely from this North Asian trio. And rather than complain about China’s exports of low tech – labor intensive products, the real question is why America is not able to produce the high tech- capital intensive components coming to the US via China from the North Asian trio. These activities command the skills and salaries that would be more appropriate for American workers.

When President Obama welcomed his counterpart from South Korea to Washington last year, he commented approvingly that South Korea’s trade with the US was in balance – “as it should be”. What Obama should’ve done was congratulate Lee by noting that South Korea along with several others has been able to avoid US criticism by hiding its trade surpluses behind the Great Wall of China.

Studies such as one done recently by a Federal Reserve Bank have shown that appreciation of the renminbi by itself would do very little to curb China’s trades surplus with the West, since much of the impact is negated by the lower cost of imports into China. Since exchange rates for the major East Asian countries are now closely aligned in their movements, it would take a more coordinated approach of the major East Asian countries to a make a difference. Only the domestic labor m

u content is affected and this is typically only a few percentage points of the cost. r o F

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Summer 2012 89 The Exchange Rate Conundurm Rate Exchange The renminbi and actions that push both sides toward more protectionism. renminbi and actions that push both sides toward trade prospects. But in doing so they miss the power of these kinds of structural shifts of these kinds of structural But in doing so they miss the power prospects. trade that are far more beneficial imbalances in ways trade global moderate would which focus on appreciating the to both China and the US than the politically charged years. years. and in analyzing China growth rates markets typically focus on exchange Financial if migrants were given formal residency rights. Since their abnormally high savings high savings rights. Since their abnormally formal residency were given if migrants in consumption that would lead to a surge this would of GDP, amount to 2-3 percent decline in the coming rates as investment surpluses even trade eliminate China’s opportunities, this is also boosting consumption. opportunities, this is also boosting a big boost given be of more consumption would process of rebalancing in favor This faster than urban. Since savings rates are lower for rural relative to urban households to urban households relative for rural are lower rates faster than urban. Since savings In addition, as a share of GDP. the historic decline in consumption this is reversing costs and better job living inland because of lower move workers as migrant This has already begun. In the last two years there has been a modest increase years begun. In the last two has already This up in the official shown yet has not (which in the share of consumption to GDP been increasing incomes have has occurred because recently rural This accounts). consumption needs to increase as a share of GDP. For this to happen, the key is For a share of GDP. consumption needs to increase as rates. savings household urbanization and lower more rapid These trade surpluses began to decline when China’s stimulus program drove up drove stimulus program China’s surpluses began to decline when trade These are not sustainable, thus rates high investment after 2008. But such rates investment savings rates are as much as twice that of established residents in some cities, and as as twice that of established residents are as much rates savings and this has led to a sharp increase in household savings soared, their incomes have surpluses. large trade in turn amplified China’s workers into the major coastal cities have changed the savings dynamics in China. in China. dynamics the savings changed coastal cities have into the major workers formal residency from being given these migrants prevented policies have Restrictive workers migrant instincts. Consequently, rights and thus repressed their consumption because of welfare concerns and demographics, the major factor has gone the major concerns and demographics, because of welfare 250 million migrant of some urbanization and the movement unrecognized. Rapid trade surplus during 2005-08. surplus during 2005-08. trade rose rates household savings suggested that Chinese studies have While many savings rates. Accounting identities tell us that the trade balance is the difference trade identities tell us that the Accounting rates. savings savings surge in China’s The it invests. and what saves an economy between what huge explains the emergence of the in investment growth in excess of the rapid rates More significant in its impact on trade balances has been the rise in household has been the rise balances on trade in its impact More significant Competition Matters: China’s Exchange Rate and Balance of Trade

Competition Matters: China’s Exchange Rate and Balance of Trade Dr. Anwar Shaikh New School for Social Research UNITED STATES

he US has run a massive trade deficit for over 30 years. In recent times there has been a growing chorus of commentators who seek to place the blame on our trading partners, most notably China, just as in an earlier time others had targeted Japan and Germany. It is said that the problem stems not from our Treduced international competitiveness, but rather from the manipulation of exchange rates by our more successful trading partners.

This claim is not based on any direct evidence, but rather on an inference derived from standard international trade theory which predicts that free trade will automatically lead to balanced trade. From this particular theoretical perspective, our large and persistent large trade deficit must be rooted in some obstacles to free trade. The large surpluses of our trading partners such as China then make them natural candidates for our opprobrium. Of course, if the standard theory is incorrect, this line of inference collapses. I wish to argue that the standard theory is wrong, on both theoretical and empirical grounds, and that free trade does not automatically eliminate trade imbalances. On the contrary, free trade reflects international competitiveness, and persistent trade deficits are symptoms of persistent competitive weakness.

The theory of international trade is actually a subset of the general theory of competition. In a business driven world, international trade is largely conducted by businesses. Domestic exporters sell to foreign importers who in turn sell to their residents, while domestic importers buy from foreign exporters and sell to us. At each step in the chain, it is profit that motivates the business decision. Standard (comparative cost) theory rests on the proposition that a trade deficit in a country will

m drive down the real price of its currency, which in turn will reduce the deficit, until at u r some point both the balance of trade and the balance of payments are automatically o F

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Summer 2012 91 The Exchange Rate Conundurm Rate Exchange The . As long as neither side does As long as neither . 1 He too explicitly links his inference to the 3 because “the huge demand for Chinese because “the huge demand for Chinese 2 (1957), the eminent Oxford economist Roy Oxford economist Roy (1957), the eminent International Economics It is precisely this tenet that Harrod disputed. He was well aware that the absolute well aware It is precisely this tenet that Harrod disputed. He was otherwise bring about automatic balance. – a will automatically lead to balanced trade underlying expectation that free trade called a ‘sacred tenet’ of standard theory. he has elsewhere proposition which assume that balanced trade is the normal outcome of free trade. The renowned trade trade renowned The is the normal outcome of free trade. assume that balanced trade Krugman takes the same stance, accusing China theorist and Nobel Laureate Paul would which of international trade of obstructing the “automatic mechanisms” intervening to prevent that”. Note that this explicitly relies on the standard theory. relies on the standard theory. that”. Note that this explicitly to prevent intervening is rate exchange China’s Leonhardt also cites estimates of the extent to which from models that estimates are also derived all such Yet supposedly undervalued. China’s currency remains undervalued” currency China’s large trade Since China’s up the price of its currency”. goods should be driving “Beijing has been he concludes that rate, up its exchange surplus has not driven times, it has been that of Japan, South Korea, and China. South Korea, times, it has been that of Japan, is … no question that that “there Leonhardt says In a recent article on China, David international competitiveness are maintained. This is why successful countries have countries have successful is why This are maintained. international competitiveness In earlier competitiveness. that one must first build up a country’s known always and the US. In more recent France of the UK, Germany, the policy times this was and offset trade surpluses through international lending surpluses through international and offset trade balances arising from differences in the differences in trade to intervene, anything from the low interest (trade surplus) country. Such a process will continue until the Such surplus) country. interest (trade from the low the In other words, country is in equilibrated. in each balance of payments overall with international debt, deficits trade to cover of free markets tend normal operations the normal reactions of financial markets. Neither of these substantially alters the normal reactions of financial are highly which short term capital flows, balance. Instead, they induce the trade deficit) country (trade differentials, into the high interest rate rate to interest sensitive Harrod came to a rather different conclusion: in a trade deficit country, the resulting country, deficit different conclusion: in a trade a rather Harrod came to while in the trade rates, increase interest decrease liquidity and money outflows decrease – all through obtains and interest rates surplus country the opposite effect until the trade deficit has been eliminated. deficit until the trade In his book been since the collapse of the Bretton Woods agreement in the early 1970s, a trade a trade agreement in the early 1970s, Woods of the Bretton been since the collapse the country more once again making to depreciate the currency, deficit is assumed to operate either case, the process is supposed market. In on the world competitive was during the Bretton Woods era, a trade deficit generates a money outflow, and a money outflow, deficit generates a trade era, Woods during the Bretton was goods making the country’s thereby the national price level, lower this is assumed to flexible, as it has is rate When the exchange scale. on a world more competitive reduced to zero. A trade surplus would have the opposite initial effect, bringing once initial effect, the opposite have would surplus A trade to zero. reduced as it is fixed, rate nominal exchange When the double balance. to this again back Monetary Policy in the United States and the ECB the and States United the in Policy Monetary Competition Matters: China’s Exchange Rate and Balance of Trade

level of a country’s trade balance is also affected by (domestic and foreign) output levels, and vice versa. But this feedback does not imply that trade will be automatically balanced through output effects alone. Indeed, in the real world, persistent trade balances are perfectly normal even in the post Bretton Woods era of flexible exchange rates. A central implication of this argument is that competitiveness matters. A country’s terms of trade is a relative price, the price of its exports relative to the price of its imports expressed in common currency. On the argument of standard trade theory this will adjust automatically to ensure trade. But within the alternate framework I propose, a country’s terms of trade is regulated by relative real costs – in much the same manner a relative price within a country. This can be demonstrated at an empirical level, and it explains several patterns which appear puzzling to standard theory. Most importantly, it provides an empirical benchmark for the real exchange rate which could be highly relevant for policy purposes.4

The foregoing argument does not exclude the possibility that China pegs its exchange rate below the free market level. What it does tell us is that we cannot simply make any such inference from the mere existence of China’s trade surplus and our trade deficit. And then, having consulted different stars, we may find that some part of the fault lies in ourselves.

1 Roy Harrod, International Economics, pp. 90-96, 112-116, 130-138 2 David Leonhardt, “The Long View of China’s Currency”, New York Times, September 21, 2010) 3 Paul Krugman, various articles in the New York Times, 2007, 2009, 2010. See for instance “China, Japan, America” in 2010. 4 Shaikh, Anwar and Rania Antonopoulos. 2012. “Explaining Long-Term Exchange Rate Behavior in the United States and Japan “ In Alternative Theories of Competition: Challenges to the Orthodoxy, ed. J. Moudud, C. Bina and P. L. Mason. Abingdon: Routledge. m u r o F

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Summer 2012 93 That’s That’s The Exchange Rate Conundurm Rate Exchange The UNITED STATES, GERMANY UNITED STATES, Slow Float to China Float Slow George A. Pieler, Jens F. Laurson F. Jens A. Pieler, George overkill for Presidential aspirant Mitt Romney and other politicians for Presidential aspirant overkill

s the yuan (renminbi to the cognoscenti) artificially undervalued to boost artificially undervalued s the yuan (renminbi to the cognoscenti) China measure up to modern standards Chinese exports? Is the dollar? Does consensus is tentative The Does the US? and investment? of openness to trade When it comes to US-China relations but.” “no”, and “yes, “somewhat”, “yes”,

why it seems emphasis on formally labeling China and commentators to keep putting so much Fluctuated relative to what, you ask: Relative to gold, the euro, and (until recently) ask: Relative you to what, Fluctuated relative Asia playing and geopolitical factors in the US, Europe so many With the yuan. into this, it becomes hard to isolate the artificial-currency-management. During the same period the dollar has fluctuated too: a significant decline during the 2007-2008 recession; strengthening more recently. some 12% according to the US Congressional Research Service. Although the Service. Research some 12% according to the US Congressional a flight-to- to the dollar as of late (helped by has declined relative Chinese currency 20 percent. over safety as the Euro threatens to implode), since 2007 it has risen by The yuan has been overvalued by as much as 40% relative to the idealized (but to as 40% relative much as by yuan has been overvalued The by It remains overvalued based on its economic fundamentals. calculable) value US exports to China “have almost doubled in the past five years” (Bloomberg). That years” (Bloomberg). almost doubled in the past five US exports to China “have but controlling its currency, is caused by imbalance trade the bilateral prove doesn’t consistent with that narrative. it’s currency. Instead it dictates a narrow trading band for buying and selling renminbi. band for buying trading Instead it dictates a narrow currency. huge market to imports, its own, in opening slow Although China has been very comes to this debate with clean hands. its value China does not let market forces Still, there is reason for US concern. I but neither country the rear, China is pulling up and trade, capital flows, on currency, Slow Float to China Interview with Hon. Delio E. Gianturco

a currency-manipulator and using that to impose compensatory tariffs on Chinese exports to the US. The Romney gambit echoes legislation passed by the Senate last October which directs the Treasury to make that currency-manipulator determination and impose countervailing tariffs.

The Obama administration meanwhile has been carefully triangulating on the issue of economic relations with China. The official US position is that China manipulates its currency (which should be allowed to float freely on global markets), but that the problem is under control right now and that China’s moves towards letting the yuan decline in value are most welcome.

Yet the Obama administration is hitting China in a more sensitive area: threatening it with penalties for selling solar panels and wind turbines below-cost on the US market. These moves play into the administration’s narrative that failing clean-energy subsidies are the result of forces beyond its control—Chinese dumping, not the consequence of its ideologically, rather than economically founded alternative energy schemes. Unsurprisingly China hit right back with a WTO complaint arguing the US is illegally subsidizing its clean-energy industries across-the-board. (Incidentally, they have a point.)

When economic times are tough, China-bashing becomes an inevitable election year activity. That isn’t surprising, but it begs the question whether it will be tempered by the US’ economic self-interest, and whether the Chinese response will be constrained by prudence.

In that regard, at least the new Chinese WTO complaint brings in an independent arbiter that can help avert all-out trade war. The US anti-dumping complaints— outgrowth of that election year dynamic—are different, and may be cause for concern. Not the least because so many US companies save money using Chinese imports as industrial inputs (including those cheap solar panels), meaning there is a serious blowback risk in going after China-trade for domestic political gain. Higher- cost industrial inputs from China may produce worse economic results for the US than any actual or real gains from restraints on Chinese dumping might offset.

Overlaying all these disputes is a larger issue: will the dollar survive as the world’s reserve currency and will the yuan supplant it (or supplement it) in that function? That is not a predictable event, and China has only begun to open up its capital markets and let the yuan trade more freely. As Gordon Chang points out, “as long as Beijing depends on investment fueled by cheap money to create growth, it must maintain its m

u controls [on yuan convertibility]”. Since China’s financial markets are considerably r o F

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supplement it)? currency currency and the the yuan supplant it (or ...will the dollar survive as the reserve world’s efforts to pressure China on human rights, strategic relations (e.g. North Korea), and relations (e.g. North Korea), efforts to pressure China on human rights, strategic much as the US wants China to buy its debt, China wants to buy that debt for its own to buy that debt for its own China to buy its debt, China wants as the US wants much purposes and it depends on the US as its primary export investment-diversification on US also something of a constraint market. It is a situation of mutual benefit. It’s keep running trillion-dollar annual deficits in a desperate pursuit of fiscal stimulus. keep running trillion-dollar annual deficits in a desperate though, It is not clear, 11 percent. of that debt, around China holds a big chunk Yes, As gesture of defiance. dump US debt to make a grand suddenly China would why Nor can the US forever maintain a zero-interest rate policy without suffering policy maintain a zero-interest rate Nor can the US forever of misallocation or massive consequences: either inflation, flight from the dollar, is made of US dependence on China to buy up its debt so that it can Much resources. ainty to foreign investors offering greater certainty to foreign investors without relaxing those limits or without finance. and on trade that the state will not clamp down No government, however aggressive in managing its economic relations with other in aggressive however No government, immune from the magic of the marketplace. China is investors, nations and private the global status it wants achieve of the yuan, but it can’t range limit the trading may Two lessons can be taken away from this. First: Governments do not make economic Governments First: from this. lessons can be taken away Two with economic consequences. Second: decisions—they make political decisions the global economy is rebalancing itself in a more Asia-centric direction. in a more is rebalancing itself the global economy economist Robert Mundell predicts a future reason Nobel Prize-winning Canadian and others. the yuan, the yen, the dollar, basket embracing currency reserve to keep interest rates low, regardless of the global economic consequences. The The consequences. regardless of the global economic low, to keep interest rates without easy to achieve made this goal relatively has conveniently turmoil in Europe though, and no one disputes preferred status. No crisis lasts forever the dollar losing The dollar’s future status is also unclear, as US domestic priorities trump reserve- as US is also unclear, future status dollar’s The is determined Reserve US Federal The future. concerns for the foreseeable currency from being a viable reserve currency with a stable and predictable store of value. store of value. with a stable and predictable currency reserve from being a viable and Shanghai however, Tokyo in trading of direct yen-yuan recent launch The for its currency. global aspirations increasingly China’s demonstrates less open than its goods and services markets. China’s yuan remains some distance remains some yuan China’s services markets. than its goods and less open Slow Float to China Interview with Dr. Jörg Bibow

economic openness, which may seem a nifty bonus for the Chinese government. But mostly it helps keep US-China disputes from getting wholly out of hand.

Until and unless global finance finds itself a new anchoring device (that currency basket, or gold, or some other agreed-on secure measure of value to govern currency and monetary relations), currency manipulation in a myriad of forms will be an unavoidable part of the political economy. In the meantime, the safety-valves provided by the WTO, the G20, and other forums for airing transnational disputes ought to keep the US-China friction at manageable levels where mutual dependence doesn’t. But really, given that close interdependence of the two nations it’s hard to avoid the slogan: US and China—perfect together. m u r o F

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Summer 2012 97 The Exchange Rate Conundurm Rate Exchange The FRANCE, UNITED STATES FRANCE, UNITED Global Imbalance Global Paris School of Economics, SUNY, Buffalo State Buffalo of Economics, SUNY, School Paris Dr. Jinzhao Chen, Dr. Xingwang Qian Xingwang Chen, Dr. Jinzhao Dr. Chinese Exchange Rate, the US the Rate, Exchange Chinese Current Account Deficit, and the and Deficit, Account Current he growth pace of Chinese current account surplus in the past few decades pace of Chinese current account he growth about 2.5% of Chinese GDP in 2002 to has been remarkable. It jumped from the current account surplus accounted for more than the peak in 2007 when global financial crises hammered 2008 - 2009 The 1). 10% of GDP (Figure

the US swelling current account deficit. One of the drivers of the US current account current account deficit. One of the drivers the US swelling This is certainly not the first time that people have raised similar questions. Since is certainly not the first time that people have This there has been vigorous debate on the association of the large and the early 2000’s, imbalance, and Chinese current account surplus, the global payment growing rapidly events have a causal relation. In other words, are large deficits in the US caused by the US caused are large deficits in a causal relation. In other words, have events the large surplus in China? These concurrently opposite runs on current account balance in China and the concurrently opposite runs on current These of current account balance in both countries, United States and the flash reversal these two lead people to question whether and incomplete, naturally albeit quick the US economy from “the great recession”, the rising pace of current account deficit from “the great recession”, the US economy up again. be likely to pick would 2.7% of GDP in 2009. But such a deficit contraction was short-lived. It started to short-lived. was a deficit contraction 2.7% of GDP in 2009. But such of recovery One can expect that, with the gradual expand again in 2010 and 2011. 6% of the total GDP of the US. The 2008 – 2009 financial crises wrecked the US wrecked 2008 – 2009 financial crises The 6% of the total GDP of the US. in the the US consumers, resulting in a sharp contraction and shocked economy bottomed at The US current account deficit subsequently current account deficit. In contrast, the United States ran in the opposite direction – consistent and rapidly direction – consistent and rapidly in the opposite the United States ran In contrast, about when the deficit reached up until 2006 increasing current account deficits T but it still hangs at about 4% in 2011. the current account surplus dramatically, down Chinese Exchange Rate, the US Current Account Deficit, and the Global Imbalance Interview with Dr. Jörg Bibow

deficit is the persistently large trade deficit against China. Many observers argue that, in addition to the rapid improvement of productivity in China, China arbitrarily undervalued its currency, RMB, to gain an unfair comparative advantage for its exports. This argument has been quite popular among the policy circle. Enormous political pressures have been sent from the U.S. lawmakers and government to push the Chinese government to revaluate the RMB. During the current time period when policymakers seek to establish the foundation for a sustained recovery from the world’s most serious financial crisis since “the great depression” in 1930, the pressure over the Chinese currency issue is mounting. The most recent one is a bill passed in the U.S. Senate in Oct. 2011. The lawmakers argue that China’s policy of holding down the value of the RMB benefits China’s exporters by acting as a trade subsidy. The U.S. therefore will impose extra tariff on Chinese exports to the US. Although it has been relatively quiet in the first quarter of 2012, one believes that, when the election of Nov. 2012 is approaching and the political debates are intensified, the Chinese currency manipulation issue will be emerging again.

Before one can validate the merit of the aforementioned argument that China uses its undervalued currency to subsidize its exports, causing the US trade deficit, it is useful to obtain a clear answer to the following questions: 1) Is RMB really undervalued? If it is, by how much it is undervalued? 2) Can the revaluated RMB exchange rate reduce the US current account deficit and rebalance the global economy?

There is a plethora of economic studies examining whether the RMB is undervalued. However, the findings are far from conclusive, particularly regarding to the extent to which the RMB value has been undervalued. Various studies yield a wide range of estimation for the RMB undervaluation from almost 0% to as far as 50%. Some find that the RMB is undervalued by from 20% to 50% (e.g. Coudert and Couharde, 2007; Goldstein, 2004; Frankel, 2004); others find that that the undervaluation of RMB is small, say, less than 5% (e.g. Lee et al. 2005; Wang, 2004). Cheung, Chinn, and Fujii (2007) find little statistical evidence that the RMB is undervalued. Professors Cheung, Chinn, and Fujii produced a series of studies to track down the critical reasons why there is such a wide range of estimation for the RMB undervaluation. They revealed three main sources - the choice of modeling approaches, the impact of data uncertainty, and the selection of econometric methods. Any modification in one of the above three could yield strikingly different results. For instance, many studies use the national price level data from International Comparison Program (ICP). A data revision in ICP would induce a wild change to the results of many studies on RMB undervaluation. As Cheung and Fujii (2011) point out that the new undervaluation estimate for 2004 using the revised ICP data turns out to be around 18%, which is m u r o F

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determined more flexibly “with reference to a basket of currencies”. But the daily of 0.5% in either direction band rate is limited in a narrow fluctuation of exchange account serve for China’s own interests and, in some sense, may help correct the interests and, in some sense, may own for China’s account serve July 2005 rate in imbalances. China abandoned its fixed exchange global payment rate is where the exchange and currently has adopted a “managed floating system”, Although a revaluated RMB may not resolve America’s deficit issues, a more flexible, America’s not resolve RMB may Although a revaluated RMB capital system and a fully convertible floating, RMB exchange free even deficits. Apparently, the RMB revaluation is not the only solution to the rebalancing is not the only the RMB revaluation Apparently, deficits. limited effect on the U.S. only have economies, let alone that it may of the world current account deficit. emerging Asian countries account for a significant share of global current account countries account for a significant share of global current account Asian emerging though the U.S. current account deficits even surplus as well. On the deficit side, peripheries are also in the trouble of deep are still dominant, the southern Europe a predominant role in causing the current financial crisis. To correct the global current financial crisis. a predominant role in causing the of the U.S. and China (Chinn, Eichengreen imbalances, it is not merely a matter other oil-exporting countries, and Gemany, and Ito, 2010). In fact, besides China, The United States and China are the two biggest economies in the world. The The economies in the world. biggest United States and China are the two The countries reflect, to imbalances in these two large and persistent current account were blamed for playing which payment, some extent, the imbalances of global and raise its own national saving rate, if it wants to significantly improve future U.S. to significantly improve if it wants rate, national saving its own and raise 2007). current account deficits (Roach, U.S consumers will probably turn to the imports from other countries, e.g. other East- U.S consumers will probably turn as making the U.S. deficit remain at the same level Asian countries, for substitution, spree, the spending some suggest that the U.S. should constrain Thus, it used to be. China, however, have been growing at a pace even faster than it was before 2005. faster than it was at a pace even been growing have China, however, revaluation the after expensive more are exports Chinese of prices the even Moreover, reduce their demands for imports from China, the of RMB and subsequently the U.S. U.S. dollar would only translate into 3 percent depreciation in the trade weighted trade depreciation in the into 3 percent translate only U.S. dollar would account deficit. Indeed, the current the overall hardly contributes to This U.S. dollar. U.S. imports from The 2005. than 20% since July RMB has been appreciated more U.S. deficit. Since China’s weight in the Federal Reserve’s trade weighted index for weighted trade Reserve’s Federal weight in the China’s U.S. deficit. Since of RMB against the appreciation a 20 percent about 15 percent, the dollar is only can a revaluated RMB alter the U.S. deficit and rebalance the global economy? There global economy? U.S. deficit and rebalance the RMB alter the can a revaluated One of the main circle. and policy debates in both the academic are again vigorous a limited effect on the will have that the RMB revaluation of thought argues schools It seems to be challenging to precisely estimate the degree of RMB undervaluation. of RMB undervaluation. to precisely estimate the degree It seems to be challenging RMB is undervalued, if we assume the second question – even let us turn to the Now only about one-third of the “old” estimate of 53%. “old” estimate one-third of the only about Chinese Exchange Rate, the US Current Account Deficit, and the Global Imbalance Europe, the United Staes, Central Banks, and “the Great Recession”

and the component currencies and their weights are still kept as a secret. According to a number of authors (e.g. Ogawa and Sakane, 2006; Frankel and Wei, 2007), China has a de facto peg to the U.S. dollar since July 2005.

Given the size of the Chinese economy and the growth perspective, it is widely seen that the RMB will eventually free float and be fully convertible, allowing China to operate a more independent monetary policy. The key is the timing of letting RMB freely float. Many think that it is for China’s good to do it now when both the economy and the RMB are “ strong, rather than waiting until the economy floating the RMB is cooling and the currency is under attack (the devastating experience of many East-Asian is much more countries in 1997 financial crisis). complicated than However, floating the RMB is much more complicated than a simple timing issue. The a simple timing RMB exchange rate system intertwines with all aspects of Chinese economy. A rush to issue liberalize the RMB exchange system could cause ill effects on the Chinese economy, particularly for the weak domestic financial “ system which may find itself hard to survive under the fierce competition from the incoming foreign capitals. Thus, in the process of liberalizing the RMB exchange system, China should put each step in a proper order – they are not necessary to be implemented simultaneously, but the cart should not be in front of the horse. As Prasad et al. (2005) point out that “a flexible RMB exchange rate system may go first, but a more stable and robust financial system should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account”.

In addition to freeing the RMB exchange rate and liberalizing the capital account convertibility, it is necessary for China to adjust its economic structure and rebalance its economy first. For instance, China may shift away from an investment-intensive and export-led growth model to a more domestically demand-driven economic structure, reinforce social safety network to reduce household precautionary savings, deregulate the service sector to encourage more private investments in non-tradable sectors, and promote a balanced and sustainable economic growth across regions and industrial sectors. m u r

o To sum up, the emergence of China in the 21st century as the second biggest F

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Summer 2012 101 Washington: Washington: The Exchange Rate Conundurm Rate Exchange The enett (Editor), The The enett (Editor), Ogawa, Eiji and Michiru Sakane. 2006. Chinese Yuan after Chinese Exchange Rate System after Chinese Exchange Yuan 2006. Chinese Sakane. Eiji and Michiru Ogawa, 14(6): 39–57. Economy, World Reform. China and International Monetary Fund). Institute for International Rate Policies. Exchange Adjusting China’s Goldstein, M., 2004. – 1. # 04 Paper Working Economics Economic Policy, 51(July): 575–614. 51(July): Economic Policy, 2005. Equilibrium Real Exchange L. Ricci, and S. Jayanthi, Lee, J., G. M. Milesi-Ferretti, Rates: Estimates for Industrial Countries and Emerging Markets. (unpublished; Rate and Adjustment Under a Flexible Rate. NBER Working Paper #11274 (Cambridge, Paper Working Adjustment Under a Flexible Rate. NBER Rate and National Bureau of Economic Research). Massachusetts: Rate Regime. Exchange Assessing China’s 2007. Wei. A. and ShangJin Jeffrey Frankel, Canuto, O and D. M. Leipzige, eds. Ascent after Decline: Regrowing Economic Growth. Ascent after Decline: Regrowing Leipzige, eds. M. Canuto, O and D. Rate in China: Is the Exchange and Cecile Couharde. 2007. Real Equilibrium Virginie Coudert, 568–594. Asian Economics 18 (4): of Journal Renminbi Undervalued? Exchange A Fixed Adjustment Under Between Choice The J., 2004. On the Renminbi: Frankel, Cheung, Yin-Wong, Menzie D. Chinn and Eiji Fujii, 2010b. Measuring Renminbi Chinn and Eiji Fujii, 2010b. Measuring Menzie D. Yin-Wong, Cheung, 11: 263-296. Economy World and the Stand? Korea We Where Do Misalignment: In 2012. Rebalancing Global Growth”. and Hiro Ito. Chinn, Menzie, Barry Eichengreen Estimates for the Chinese Renminbi, Chapter 10, 79-90, in Simon Ev Estimates for the Chinese Renminbi, VoxEU.org A and Law, Politics Dispute: New Insights from Economics, US-Sino Currency Publication. Cheung, Yin-Wong, Menzie D. Chinn and Eiji Fujii. 2009. Pitfalls in Measuring Exchange Rate in Measuring Exchange Chinn and Eiji Fujii. 2009. Pitfalls Menzie D. Yin-Wong, Cheung, and Other Currencies. Open Economies Review 20: 183–206. Yuan The Misalignment: Misalignment: Latest Chinn and Eiji Fujii, 2010a. Measuring Menzie D. Yin-Wong, Cheung, References: of Renminbi Overvaluation The Menzie Chinn, and Eiji Fujii, 2007. Yin-Wong, Cheung, 26, 762-85. of International Money and Finance, Journal Undervaluation. Footnotes: rate, China expanded the RMB RMB exchange As an effort to enhance the flexibility of 1 April 16, 2012. in either direction in band against US dollar to 1.0% daily trading and other international countries and other international of major industrial and emerging and coordination organizations. the United State, and in China, in the United State, the rebalancing process view of the complication, efforts one. It needs multilateral is likely to be an extended of the global imbalance imbalance. However, a more aligned and flexible RMB exchange rate may not may rate exchange a more aligned and flexible RMB imbalance. However, help the U.S. extent may itself, but also to some Chinese economy only benefit the In the trend of global imbalance. current account deficit and alter alleviate its huge make China increasingly influence the global markets. The large current account The large current account influence the global markets. make China increasingly reason is not necessarily the only built up in the last few decades surplus that China global in the United States and the current account deficit that caused the persistent economic power in the world and its great integration into the global economy the global economy into great integration and its in the world power economic Chinese Exchange Rate, the US Current Account Deficit, and the Global Imbalance

Prasad, Eswar, Thomas Rumbaugh and Qing Wang, 2005. Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China. IMF Policy Discussion Papers 05/1, International Monetary Fund. Roach, S., 2007. Save the Day, New York Times, September 25th Wang, Tao, 2004. Exchange Rate Dynamics. China’s Growth and Integration into the World Economy: Prospects and Challenges, ed. by Eswar Prasad, IMF. Occasional Paper 232 (Washington: International Monetary Fund).

Figure 1: The current account balance of China and the United States, in Billions US dollar (left scale) and in percent (right scale). Data source: CEIC. As an effort to enhance the flexibility of RMB exchange rate, China expanded the RMB daily trading band against US dollar to 1.0% in either direction in April 16, 2012. m u r o F

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The Exchange Rate Conundurm Rate Exchange The UNITED STATES University of Denver University Dr. Haider Khan* Haider Dr. *I would like to thank Ilene Grabel for helpful for Grabel Ilene thank to like would *I errors are mine. All remaining suggestions. of Yuan the Solution? Solution? the Yuan of

he debate on US-China exchange rate has been an almost constant has been rate he debate on US-China exchange reported in late 2010 that Times York New The feature during the 21st century. the critics of Chinese policy US-China Problems: Is Revaluation Is Revaluation Problems: US-China

politics- free jargon-ridden economic rhetoric. Even progressive critics in the US such critics in the US such progressive politics- free jargon-ridden economic rhetoric. Even certain charm in the non-hypocritical manner in which the Chinese acknowledge the the Chinese acknowledge manner in which in the non-hypocritical certain charm targets. in setting their policy of their internal---far from transparent---politics primacy supposedly there is a camouflage of technocratic, American side, however, On the Therefore, there should be an FEER for any pair of currencies. In the real world, of currencies. In the real world, pair there should be an FEER for any Therefore, these include but are not limited to political importantly, Most the frictions matter. that there is a is quite clear on the Chinese side and one might say This interventions. According to economic theory, the exchange rates are indeed a general equilibrium are indeed a general rates the exchange According to economic theory, without frictions. solution under stringent assumptions of a model economy of big capital in each roles of specific factions of big capital in each is largely a smokescreen to hide the there is no fundamental equilibrium exchange nation state. Does this mean that rate(FEER)? As experts have long recognized, debates about exchange rates are largely political. are rates recognized, debates about exchange long As experts have and manipulations by are results of both market forces rates existing exchange Even bank independence slogan of central The banks. including the central the big players stabilize the international economic system. (NYT Sep.18, 2010) stabilize the international economic world were that simple! in our largest economy If only fixing the problems of the years without adding a dime to the debt or deficit. And say it would also revive would also revive it say And adding a dime to the debt or deficit. without years deficit and help gaping trade the country’s moribund Rust Belt factories, reduce T next two the jobs over American to create a half-million a way was there “…[s]ay US-China Problems: Is Revaluation of Yuan the Solution?

as Robert Scott of the Economic Policy Institute seem to be seduced by the rhetoric and accept uncritically the results from models uncritically when they confirm the conventional wisdom regarding U.S.-China problems.

Economic modeling is worthwhile and much can be learned from both sectoral econometric models and economy wide models. Notwithstanding such attempts to model our complex economy for which I, too, plead guilty, the recognition of the imperfections of global markets and global politics will be vital for solving the problems of exchange rate issues between China and the US. More broadly, the issue of global exchange rate mechanism must be seen as part of building a new global financial architecture of which exchange rate mechanisms are a transparent part. But first let us take a close look at the actual situation of the yuan(more generally, renminbi or RMB)-dollar exchange rates.

Reading the popular press and accounts of Congressional debates, one could be forgiven for thinking that the evil character called China has forever fixed its exchange rate at a rate which is unfavorable to the US and favorable only to China.

The reality is more complex. Just to mention one set of contradictory forces, a revaluation of RMB upwards will ease inflationary pressures on China but will not be welcome to the powerful exporting interests particularly in Southeast China. The practical political question from the Chinese side is how far to revalue and how fast. The American jawboning as well as the frictions of the complex economies of the world have led to considerable fluctuations in the RMB-dollar rate. The overall tendency is towards revaluation of RMB. Recently, a report from the reputable Peterson Institute pointed out:

The latest semiannual estimates of fundamental equilibrium exchange rates (FEERs) by Peterson Institute researchers William R. Cline and John Williamson find that modest appreciation of the renminbi against the dollar, combined with higher inflation in China than in the United States, has narrowed the undervaluation of the Chinese currency from 16 percent in April to 11 percent in late October[2011]. However, the bilateral undervaluation of the renminbi against the dollar still amounts to 24 percent; this is the rise in the renminbi that would be required to achieve multilateral equilibrium if all currencies were to move to their FEERs.

Although my own estimates show an FEER that indicates a larger adjustment of RMB than does the Peterson Institute estimates, still the direction of the movement is the same in both exercises. The technical article by Cline and Williamson also reports m u r o F

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Summer 2012 105 also observe The Exchange Rate Conundurm Rate Exchange The “ ...the current is creating strategy an unequal society within China... “ Turning again to the exchange rate issues, let me conclude this short essay by by issues, let me conclude this short essay rate again to the exchange Turning observing that the global imbalances are largely a result of the demise of the Bretton architecture(GFA) of a new Global financial and lack financial architecture Woods by following a new egalitarian and eco-friendly following by part. on China’s strategy development powerful industrialized countries in a race for industrialized countries in a race powerful that will exacerbate global tensions resources can be avoided This lead to war. even and may the current strategy is creating an unequal society is creating an unequal the current strategy crisis. within China and a serious ecological other Internationally it will pit China against -United Nations University(WIDER-UNU) in -United Nations University(WIDER-UNU) Energy on China’s Helsinki and in a chapter that Strategy(2010) Security and Development development strategy is flawed in its own terms. in its is flawed strategy development written for an earlier essay pointed out in I have Economics Institute for Development World the others including the EU. the Chinese It is also proper to note here that any time soon. Thus the medium term outlook for the US and the World Economy Economy World outlook for the US and the the medium term Thus soon. time any political frictions will most likely result in more This is crisis- ridden and uncertain. in this conflictual scenario but so will many China will loom large internationally. The policy- induced weaknesses from the Bush-Greenspan era are still with us and era induced weaknesses from the Bush-Greenspan policy- The financialization and indebtedness of heavy problems will not disappear soon.The away of fundamental institutional reform in the US will not go including the lack obal financial instability factors, global financial instability imbalances are both political Underlying all these will not and rate term growth long- The weakness of the US . and the economic golden age of capitalism during the 1950s and 60s. perhaps can not equal that of the to resist appreciation. Because the yen had become overvalued but the franc remains but the franc had become overvalued Because the yen to resist appreciation. was not. but Swiss intervention justifiable was intervention Japanese undervalued, The Mexican peso has become more undervalued than the renminbi. The safe-haven safe-haven The than the renminbi. become more undervalued Mexican peso has The intervened and both countries and the Swiss franc, yen Japanese effect boosted the is needed(column 5 of their table 1).Furthermore, Cline and Williamson Williamson Cline and 5 of their table 1).Furthermore, is needed(column Thus: as well. issues with other countries rate exchange has bilateral correctly that US real effective exchange rates where a further adjustment of only about 10.6 percent about 10.6 percent of only a further adjustment where rates exchange real effective US-China Problems: Is Revaluation of Yuan the Solution?

to take its place. There have been many discussions since the Asian financial crisis in the late 1990s and-- needless to say-- since the great global recession more recently. As Barry Eichengreen correctly pointed out earlier, most proposals for ideal GFAs don’t have “a snowball’s chance in hell” to get implemented. Yet the discussions have been informative. The key asymmetries and imbalances have come to the fore. The neoliberal turn in general and of the IMF during late 1970s and 80s continuing almost upto now has been criticized to various degrees. Many alternatives have been suggested including some by the present author. Unfortunately, it must be admitted that until now not much has been done in terms of changing fundamental policy orientation of the international organizations and key national governments. But there is some possibility that as the debate opens up and dogmatism takes a backseat the chances of better policies and global and regional institution building will improve. My colleague Prof. Ilene Grabel has also recognized such possibilities in her recent work.Jose Antonio Ocampo and other progressive Latin American economists in particular, are also keen on exploring the possibilities for regional cooperation in financial matters.

In my working papers around 2001-2002 and my subsequent book, Global Markets and Financial Crises(Palgrave,2004), I proposed a Hybrid GFA(HGFA) which would crucially make room for effective regional financial architecture. A reformed IMF and the RFAs together, liberated from the straitjackets of monetarism and a simplistic long run equilibrium view where money is neutral can form an HGFA that can work--- not without inevitable frictions--- reasonably well. More recently, I have elaborated on these ideas in a report to the UNDP. The main point is to take seriously the unevenness of the global economy and address the emerging problems strategically through an enhanced, more democratic global economic governance system. From this perspective, making G-20 an effective economic forum is a step in the right direction. But more needs to happen. In particular, the voices of the poorer nations need to be heard. The US-China economic issues, including the exchange rate issues, need to be viewed within this broader perspective. The policy makers of the powerful economies in the world then would be able to perform globally the kind of necessary public service that the New Deal was intended to perform domestically in the US during the 1930s. m u r o F

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The Exchange Rate Conundurm Rate Exchange The UNITED STATES

Dr. David Phillips David Dr. Exchange Rate Exchange How to Deal with the Chinese the Chinese with to Deal How

address here a few important aspects of the long term problem of economic address here a few important aspects and has and China, something that deserves, relations between the United States and commentary. study been the subject of, extensive pressure on the dollar. exacerbates the US current account deficit and the longer term pressure on the dollar. twenty years partly resulting from this. While in the short term poorer economies partly resulting from this. twenty years from import pressure through a depreciation might be able to defend themselves this process of their currencies against the dollar, devaluation or competitive manufacturing industries of Africa, such as textiles and garment production, many as textiles and garment production, many Africa, such manufacturing industries of the relentless competition from Chinese been unable to survive suppliers have Africa for the past of de-industrialization in has been a process There imports. and its growing competitive disadvantage, at the receiving end of low priced Chinese end of low the receiving at disadvantage, competitive and its growing more consequences than those facing the US, are also imported products, with even incipient countries that face Chinese competition. In the developing poor, the many The debate on Chinese exchange rate misalignment has continued since the 1990s. rate debate on Chinese exchange The its debt obligations to the Chinese Government While the US is concerned about members of the IMF Executive Board (IMF, 2010) concurred with China. But at the Board (IMF, members of the IMF Executive the global financial crisis itself could be thought that extreme some US observers policies. rate Chinese monetary and exchange by blamed on the imbalances caused rapidly increasing Chinese trade surplus, to the detriment of competing economies. surplus, to the increasing Chinese trade rapidly interpretation of the evidence and some Chinese authorities disagreed on the The Governments concluded that the Chinese currency was substantially below the level the level substantially below was concluded that the Chinese currency Governments meant that it This consistent with ‘medium-term economic fundamentals’. that was Chinese imports, assisting in a large and overpriced underpriced Chinese exports and I IV Report based on its annual consultations with Country Article 2010 IMF The How to Deal With the Chinese Exchange Rate

In the US the debate about the Chinese Yuan gathered steam as a result of, for example, comments by Paul Krugman in 20091 in which he argued that exchange rate misalignment in China was damaging the US economy and that a proactive face-off with the Chinese Government was a low risk and justified strategy. He wrote that the pegging of the Yuan to the dollar gave Chinese manufacturing a large cost advantage over its competitors while the undervalued rate was supported by the Government’s controls on capital imports and at the same time the Government’s action in buying up dollars and investing them outside the country, in for example US Treasuries. This in turn had kept down US interest rates and supported the explosion of risky bank lending. (At the end of 2009, China was the top foreign investor U.S. government debt, with holdings of $900 billion in Treasury securities, which have now exceeded $ 1 trillion). Following the crisis, with interest close to zero as a result of the worldwide recession, the Chinese capital exports simply led to a buildup in liquidity, draining demand from a depressed world economy. Krugman suggested that the Chinese ‘mercantilism’ could reduce U.S. employment by around 1.4 million jobs by 2012. Later he repeated his argument, stating that China’s currency policy was depressing economic growth in the U.S., Europe and Japan. “If we could get some change in China’s currency policy, it would help the world.” 2

Despite the certainties expressed by some US and other commentators, and even the unusually single minded statement of the IMF, there does however remain much disagreement about what determines the correct equilibrium exchange rate on which to base a measure of exchange rate misalignment, if any.3 The estimate of misalignment is very sensitive to small changes in calculation assumptions such as time periods for estimation.4 Using various different approaches the estimates of currency misalignment have in fact ranged from significant undervaluation (33% or 49%)5 to significant overvaluation (33% to as much as 100%)6 and many points in between these extremes. When the World Bank revised downward the estimate of Chinese GDP to take into account Purchasing Power Parity the estimated undervaluation disappeared.

Even if it was possible to establish clearly whether and to what extent there is a misalignment, this is also not the end of the story for several reasons. First, the ‘appropriate’ exchange rate for targeting would need to be identified and it is not necessarily clear how to do this. Secondly, the international community would have to judge what should be done about it and which countries, if any, should be compensated.7 To complicate matters, over the past few years the Chinese have allowed their currency to appreciate slowly against the dollar in both nominal and real terms even as China’s current account surplus has still continued to widen. m

u There is a chicken and egg question. Were Chinese capital exports the inevitable r o F

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Summer 2012 109 , e The Exchange Rate Conundurm Rate Exchange The “ current ...the is creating strategy society an unequal within China... “ ineffective and counter-productiv ineffective last resort by piecemeal measures, such as selective import tariffs in clear cases of import tariffs as selective piecemeal measures, such last resort by just to ensure that focus is sustained, but remembering that some kind of unfair trade, on the exchange rate issue is likely to be both rate on the exchange is little There to this single problem. tactics are deployed and especially if aggressive up only as a and persuasion possibly backed for the US to diplomacy alternative Given the confusion about what constitutes an appropriate exchange rate parity, and parity, rate constitutes an appropriate exchange the confusion about what Given focus and aggressive the need to combine reforms on a systemic basis, exclusive they have to involve the shift of consumption to savings involving some lowering some lowering involving to savings the shift of consumption to involve they have be a rising and the result will are already Chinese real wages real wages. of relative reduction on their export surplus. rate regime and also domestic structural reforms in their respective countries. The The countries. in their respective reforms regime and also domestic structural rate the rebalancing of domestic demand to involve reforms in China have structural in the US consumption through boosting household incomes, and private toward than the vast majority of Chinese. Just on this basis it appears to be a very good idea on this basis it appears to be a very majority of Chinese. Just than the vast problem facing China, the US, and other the global imbalance to continue to resolve of the exchange reforms together to adopt comprehensive working countries by have a far more damaging effect (say in terms of increased unemployment) on the in terms of increased unemployment) effect (say a far more damaging have of about population consists in the US whose Chinese people than a similar mistake far more comfortable level at a about 90% live of whom one twentieth of humanity, sixth of humanity, of which a substantial part (approximately 200 million) still live 200 million) still live a substantial part (approximately of which sixth of humanity, A in the past 20 years. despite the economic progress achieved poverty in severe the Chinese authorities could potentially mistake by serious macroeconomic policy economies are intertwined in trade and monetary co-dependence, and that it is and economies are intertwined in trade At the same time it has to be remembered that the it. to remedy for ways searching of a nation that comprises about one is responsible for the fate Chinese Government of Chinese macro-economists trained in the in of Chinese macro-economists trained complex resolution is perfectly well understood US, that the entire problem and its the US and Chinese that the fate of it is also aware within the Chinese Government; Chinese mercantilism and apparent short- Chinese mercantilism it interdependent world, sightedness in an the number seems highly probable, given While some economic observers rail against rail observers While some economic of competitiveness and ensure an export and ensure of competitiveness is probably a bit of both, answer The surplus? become inextricably linked. and both have Chinese productive efficiency or did the efficiency Chinese productive exports as use capital Chinese Government to maintain a high level an economic device result of export surpluses arising from export surpluses result of How to Deal With the Chinese Exchange Rate

retaliation is likely.

Notes 1 Krugman, P. Chinese New Year New York Times, December 31, 2009 2 At a meeting of the Economic Policy Institute, Washington March 11, 2011 3 One of the many analyses is Yin-Wong Cheung Exchange rate misalignment –the case of the Chinese Renminbi CESIFO working paper no. 3797, April 2012 4 Steven Dunaway, Lamin Leigh, and Xiangming Li How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China IMF Working Paper 06/220 5 Plus 49% against the free trade equilibrium exchange rate according to the Economist Big Mac Index, July 2011 and plus 33% according to the economists Cline and Willamson. Lardy and Goldstein of the Peterson Institute of International Economics estimated an undervaluation of 12 to16% at the end of 2008. 6 Negative 36% (CCF(2010); negative 100%; Schnatz, Bernd, 2011, Global Imbalances and the Pretence of Knowing FEERs, Pacific Economic Review 16 (5), 604–615. 7 Maya Eden Ha Nguyen Correcting Real Exchange Rate Misalignment Conceptual and Practical Issues World Bank Policy Research Working Paper 6045, May 2012 m u r o F

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h The Exchange Rate Conundurm Rate Exchange The Peterson Institute for for Institute Peterson 2 Bruegel, Jean Pisani-Ferry Jean Bruegel, e NBER Working Paper, Jeffrey Frankel Jeffrey Paper, Working NBER e Cato Institute, Nicholas R. Lardy Nicholas R. Cato Institute, Brookings Institution, Arthur R. Kroeber Arthur R. Institution, Brookings y

Financial Times, Yukon Huang Yukon Times, Financial ? Institute of World Economics and Politics, Chinese Economics and Politics, World Institute of e REPORTS, PAPERS AND ARTICLES AND PAPERS REPORTS, Other Resources Other r Is China Running Out of Options Exchange Rate and Monetary Polic New Estimation of China’s Exchange Rate Regim Estimation of China’s New China’s Currency Policy Explained Policy Currency China’s China and the World Economy – A European Perspectiv A European – Economy World China and the Rebalancing: China’s Perspectiv China’s Rebalancing: Estimates of Fundamental Equilibrium Exchange Rates, May 201 May Equilibrium Exchange Rates, Estimates of Fundamental Peterson Institute for International Economics, China Economic Watc China Economic International Economics, Institute for Peterson China - Country the period 2006-201 for report partnership strategy progress The Case for Stabilizing China’s Exchange Rate: Setting the Stage for Fiscal Expansio for Setting the Stage Exchange Rate: Stabilizing China’s The Case for The External Impact of China’s Exchange Rate Policy: Evidence from Firm Level Dat Firm Level Evidence from Exchange Rate Policy: The External Impact of China’s Economonito

Ronald McKinnon and Gunther Schnabl IMF, Barry Eichengreen and Hui Tong and Hui Barry Eichengreen IMF,

HE Fan Prof. of Social Sciences, Academy Williamson and John Cline William R. International Economics,

Bank EconoMonitor