Overselling China

American strategic analyst Dan Twining argues that the American economy is still the most powerful in the world.

Wen Jiabao and Barack Obama, photo/Getty Images

The threat to the euro is not the ideal backdrop with which to argue that Western economic supremacy hasn’t run its course, but that is the thesis of Washington-based strategist Dan Twining.

His mission is to challenge what he describes as the “conventional narrative” that the era of American supremacy is on the wane, to be replaced by China as the global superpower of the 21st century. Yes, he says, there has been a phenomenal rise in the prosperity of such countries as the so-called Brics – Brazil, Russia, India and China – and everyone should celebrate that. But he says that doesn’t mean any of them are about to usurp the US.

“Polling shows that 65% of Americans think China has the world’s largest economy. It doesn’t. It’s only a third the size of the US’s, but this narrative of Western decline, because of our economic crises and the success of the emerging powers, has taken hold at a psychological level. In a way these projections for China’s greatness are a mirror image of our own worries about ourselves and our own future,” Twining says in an interview at his Wellington hotel during a speaking tour.

“This is more the realm of sociology than strategy, but there’s a yin and yang to this. Ten years ago, we all thought the US was going to run the world. We [Americans] were free to do whatever we liked, there were no competitors in sight – it was hubristic. Since the end of the Cold War we had all bought into this, but now it’s swung in a different direction, and I think it will probably swing back again.”

The son of a US diplomat, and married to a British diplomat, Twining is Senior Fellow for Asia at the German Marshall Fund of the United States. He believes the China story has been oversold and that China’s tremendous success is largely a function of scale. “The China thing can’t continue. China has followed a path that Japan started in the ’50s,’60s and ’70s before Korea, Taiwan and the Asian tigers became the second wave.

What’s different about China is not the rates of economic growth, which are actually quite similar, it’s just the scale. The scale is enormous. It’s like nothing that’s happened in 500 years of world history, but in the same way that Japan slowed down, Taiwan slowed down, etc, the Chinese are now bumping up against many of these natural limits of growth. This isn’t just my thesis, this is the thesis of Chinese Premier Wen Jiabao and others debating this issue publicly within the Chinese system.”

Twining says the question is whether China can make its growth sustainable, which he doubts. “From 1945 to 1970 Brazil grew at almost Chinese rates of growth and then it stopped. Most of those countries get caught in this middle-income trap and they don’t stop and fall apart, but nor do they grow at 10% for the next 60 years.”

Twining’s argument that US strength has been underestimated, and China’s overestimated, finds support in other analysis. Last month the Boston Consulting Group (BCG) released new research predicting a tipping point would occur in about 2015 from where manufacturing would move out of China and back to the US, creating “two to three million jobs and an estimated US$100 billion in output”.

“A surprising amount of work that rushed to China over the past decade could soon start to come back – and the economic impact could be significant,” says Harold Sirkin, lead author of the analysis. BCG calculates that with Chinese wages rising at up to 20% a year and the value of the Chinese currency appreciating, the gap that has until now made it advantageous for US companies to manufacture in China has closed considerably. On top of that, some US companies have found delivery responsiveness and the ease of design revisions are enhanced by manufacturing at home.

BCG says the change is already occurring. “From 2001 through 2004, imports [to the US] from China grew by around 20% per year. That growth rate has slowed dramatically, to only around 4% in the past few years. US imports from other low-cost nations also have flattened, and actually declined in 2009,” the company says.

However, the decline in imports isn’t only about lower output in China; adding to it are reduced consumer confidence and spending power in the struggling US economy where unemployment is high, confidence is low and the national debt is burdensome. US President Barack Obama alluded to some of the problems when he was at the Asia-Pacific Economic Cooperation (Apec) forum’s leaders’ meeting in Hawaii this month. Apec countries account for 44% of world trade and Obama said China’s currency is undervalued by up to 25%, making imports to China more expensive, and Chinese exports cheaper.

Twining acknowledges America’s problems, but argues that apart from the economic aspects of China’s rise and the United States’ decline, there is another important reason China will not replace the US as the only global superpower – nobody wants it to.

“There’s no consent for Chinese leadership in the world. Every country, maybe with the exception of China itself, actually wants more of America, not less. Everywhere you go in the shadow of this extraordinary Chinese story – economic, military, political – what you’re finding is a greater demand for US presence and leader­ship, which is why all these countries are doing these quite interesting things.

“There’s this phenomenon going on where countries want to get rich from the China trade, but continue to want their security to be provided through their relations with us and increasingly with each other. The Chinese really have a problem because there’s no consent for their leadership the way there is consent for American/Western leadership in the international system.

“Even if you look at Asia – let’s talk about which countries are actually China’s allies, right? It’s North Korea, Burma and it kind of stops there. Maybe you throw in Laos, but this is not the coalition of the future, is it? It’s a coalition from the past. Even countries like Vietnam, which share China’s political system quite directly, are moving much closer to us. They’re just intensely aware of Chinese power.

“So, the Chinese have this problem of consent and legitimacy and it’s partly because they’re not rising in a vacuum the way the US did after the wars and in the 20th century when we could fill all the space in the world. Now there’s not a lot of space to fill and the Chinese have a problem because their political system incites people to fear them rather than to want more of them.

“You contrast it with India. There’s this famous Lee Kuan Yew question: “Why does every country in the world want to encourage India’s rise while at the same time all these countries fear China’s rise?” The answer is that they have such different political systems and different levels of transparency.” The upside of a changing world, in Twining’s view, is that it will be one in which power is more diffused. That will also make it harder for China to be dominant.

“India is looking to be the world’s second- or third-largest economy. Countries like Indonesia and Mexico are projected to have bigger economies than any country in Europe in about 30 years. The story is about power diffusion and the question is whether this is good for America and the West, and I would say it’s not that bad. It’s a different kind of world, and a different kind of role for us and a different kind of leadership, but a lot of these countries are our friends.” Many countries are now economically stronger than they were a couple of decades ago, Twining says, and many of them, including Korea, Taiwan and Indonesia, are now better governed, too.

“The great story of our time is this convergence between the 15% of us who live in the West and who for 200 years have basically monopolised about 85% of the world’s wealth, and these countries like China and India that were historically the dominant economies in the world.

“Until about 1820 it was China and India at the top and we should all be celebrating that literally billions of Chinese and Indians over the last 20 years, and in the next 20 years, will enter the middle class, and in theory these people will vaguely want the same things we do. We should not assume that Chinese people don’t want the same things we do. China is exceptional in scale, but I doubt it will be exceptional in the long term in having a completely different set of values and outlook on basic things.

“The worry about it is Chinese revisionism. You’ve got an unelected coterie running the country and claiming a chunk of India the size of Switzerland, and claiming the South China Sea. There is no basis under international law for claiming an international body of water. It would be like Spain claiming that it owned the Mediterranean. A third of all global trade passes through the South China Sea. A third! People have an idea that there’s some little dispute about reefs between the Philippines and Vietnam and China, but we’re talking about a third of global trade. Think about the economic impact – including on China itself – of China basically shutting down that body of water.”

But surely there is no evidence China would do that? “Is there no evidence? They just intercepted an Indian warship coming out of a Vietnamese harbour in international waters and said India has no right to be in the South China Sea. Every day China is harassing Japanese ships and submarines in Japanese waters. Every day. I am shocked if people think there’s no evidence. Everyone in Asia sees the evidence. When challenged, the Chinese foreign minister said, ‘China is a big country, you are small countries’, and this is the way these guys think. New Zealand is a small country and China is a big country, and do you want to live in a world in which big countries have different rights to small countries?” Twining also doesn’t think that China can simply buy its way to power, despite its new wealth.

“The argument of China owning people is oversold. People are wrapped up in this idea of China owning all these US Treasury bonds; they own 8% of American Treasury bonds but Americans own about 70%, and people like the Japanese and others own the rest, so it’s slightly oversold. Also, there are problems for China in the European Union and in the US with foreign investment. Because of security concerns we block a lot of Chinese acquisitions, like when they try to buy a telecom company or whatever, and this goes back to the nature of China’s system. There’s a political pushback on China’s economic reach.” Like many China-watchers, Twining is wary about its militarisation and rejects any assertion China is simply doing what the US has already done.

Dan Twining

“We’ve actually built a liberal order in the world since 1945 with our friends around the notion of sovereign equality. The Chinese don’t talk about sovereign equality. These guys are developing a host of weapons systems that are developed for no other reason than to target unique American vulnerabilities to exclude us from the Western Pacific, and New Zealand’s future looks radically different if the US doesn’t have freedom of movement in the Western Pacific. China has had borders with 14 countries for the past 60 years and they haven’t before developed tools of protection going out 5000 or 10,000 miles.

“So, the question now is what’s changed? And what has changed is China’s power of trajectory, and its ambition. That’s not something to be upset about. When countries grow into aspiring super­powers, they want to shape their environment, and their sphere of interest expands and they suddenly take great interest in the Middle East and Latin America because they are resource-dependent on these regions. It’s all entirely understandable, but some of it does threaten our friends and allies, and us, to the extent that the Chinese see things, like the South China Sea, in exclusive terms.

“Yes, big countries do throw their weight around, but as far as I know the US has never said we don’t believe in the rights of small countries. We do things with our friends and allies.”