While your humble blogger
remains jet-lagged out of his gourd adjusts back to the Western hemisphere, he strongly encourages you to read this fantastic David Barboza story in the New York Times on the predilection in China to use cash for ... well ... everything:
Lugging nearly $130,000 in cash into a dealership might sound bizarre, but it’s not exactly uncommon in China, where hotel bills, jewelry purchases and even the lecture fees for visiting scholars are routinely settled with thick wads of renminbi, China’s currency.
This is a country, after all, where home buyers make down payments with trunks filled with cash. And big-city law firms have been known to hire armored cars to deliver the cash needed to pay monthly salaries.
For all China’s modern trappings — the new superhighways, high-speed rail networks and soaring skyscrapers — analysts say this country still prefers to pay for things the old-fashioned way, with ledgers, bill-counting machines and cold, hard cash.
Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa (emphasis added).
Now you should definitely read the whole thing, but a few thoughts here:
1) From a personal perspective, as the occasional visitor to China, I can confirm the wads of cash thing -- but it's a bit more complicated than Barboza suggests. First of all, for U.S. academics at least, the payment isn't in renminbi, but in U.S. dollars. Renminbi is sometimes dispensed for things like per diem reimbursements, but not for honoraria. After all, officially, the RMB is still not convertible to dollars outside of the country, so it wouldn't be very nice to get paid in a currency that is technically useless outside the People's Republic.
There are two other qualifiers here. First, at least with respect to academic honoraria, it's not just China that pays in cash -- so does Japan, for example. Second, speaking as an academic who's received the occasional honorarium, it's friggin' awesome. At some point, someone takes you aside and gives you an envelope stuffed with bills. I know it's impolite to say, but every time it happens, I feel like I'm an earner in Tony Soprano's crew. It's soooooo much more satisfying than getting a check (as is the norm in the U.S.) or receiving a bank transfer
three months later than it should be and only after haranguing someone a few times (as is the norm in Europe).
2) The more substantive point of Barboza's story is how the cash-based system reflects the degree of distrust between the government, Chinese citizens, and the financial system. From a global political economy perspective, this cuts in two directions. On the one hand, it suggests that the effects of a real estate bubble popping in China might have a muted effect on the broad mass of Chinese. After all, if they're holding their assets outside the financial system, then their bigger fear will be currency-gnawing rats (read to the end of Barboza's story) than banks closing.
On the other hand, it's worth reading articles like this whenever someone suggests that the renminbi will soon be a challenger to the U.S. dollar as an international reserve currency. For that to ever truly happen, China's capital account will have to be one hell of a lot more transparent and liberal than it is now. As it turns out, even China's Superbank isn't actually that super once one digs into the numbers. And if Chinese citizens are trying to avoid dealing with China's financial system and the renminbi, then I seriously doubt global capital markets are going to embrace the RMB as a rival to the dollar.
Your humble blogger has spent the better part of his trip to Seoul at a conference co-sponsored by the Republic of Korea's Ministry of Foreign Affairs and the East Asia Institute. The topic was "New Strategic Thinking: Planning for Korean Foreign Policy," and I got invited because I edited this a few years ago. I hope that the Korean Foreign Ministry benefitted from it. I certainly learned a few things:
1) No one knows what the f**k the North Koreans are doing. There were representatives from the United States, United Kingdom, China, Japan and South Korea on the panels. I talked to a lot of them informally during breaks and meals as well. No one had any clue why Pyongyang had ratcheted up tensions to the extent that they did over the past two months. About the only thing approximating a consensus was the belief that the North Koreans were in fact bluffing about starting outright hostilities -- which makes their behavior all the more puzzling. In triggering the shutdown of the Kaesong Industrial Park, the North Koreans cost themselves about $90 million a year that they can't afford to lose.
2) Chinese academics are getting more interesting. As recently as five years ago, my eyes used to glaze over whenever a Chinese academic started speaking at a policy conference. The reason was that there was a 100 percent certainty that the academic would simply repeat standard PRC boilerplate that didn't deviate from official government positions. An academic agreeing with one's government is not a sin, but only parroting official discourse is pretty friggin' useless.
Something has changed in recent years, however. Maybe I'm being invited to a better class of conferences, but I don't think that's it. Chinese academics are more willing to openly discuss ongoing debates within the Chinese foreign policy community about the wisdom of a certain course of action. At this conference, Qingguo Jia asserted that the Chinese really were rethinking their relationship with North Korea. Now one can debate whether the Standing Politburo is really entertaining such thoughts, but the fact that there's a public conversation about it is pretty interesting.
3) The best-laid foreign policy plans get destroyed by real-world events. The conference was devoted to how the South Korean government could implement Park Geun-Hye's concept of Trustpolitik that she articulated during her campaign for the presidency. The general consensus was that, at this point, there are very limited ways of building trust with Pyongyang. Furthermore, the likelihood of any confidence-building measures getting scrubbed during the next crisis are very high.
It is to Park's credit that she seems to recognize this and has yanked ROK workers from Kaesong as a signal of South Korea's resolve. Trustpolitik is a great phrase, but I'm dubious of whether it will accomplish anything.
4) It's the little things that matter to build mutual goodwill. That's a fancy way of noting the following: if you are a Caucasian academic in South Korea, can use chopsticks proficiently, and actually like kimchee, your South Korean counterparts will treat you like a god.
A. Iain Johnston has the lead article in the latest issue of International Security. It's available for free right now, and it's quite the doozy. Entitled "How New and Assertive is China's New Assertiveness?", Johnston picks apart the claim made by many (including your humble blogger) that China's post-2008 foreign policy represented anything all that much out of the ordinary. From the abstract:
There has been a rapidly spreading meme in U.S. pundit and academic circles since 2010 that describes China's recent diplomacy as “newly assertive.” This “new assertiveness” meme suffers from two problems. First, it underestimates the complexity of key episodes in Chinese diplomacy in 2010 and overestimates the amount of change. Second, the explanations for the new assertiveness claim suffer from unclear causal mechanisms and lack comparative rigor that would better contextualize China's diplomacy in 2010. An examination of seven cases in Chinese diplomacy at the heart of the new assertiveness meme finds that, in some instances, China's policy has not changed; in others, it is actually more moderate; and in still others, it is a predictable reaction to changed external conditions. In only one case—maritime disputes—does one see more assertive Chinese rhetoric and behavior.
Johnston has forgotten more about Chinese foreign policy than I will ever learn, so I'd encourage you to give the whole piece a read. My take is that I'm actually not that far apart from Johnston. As he notes, China's foreign policy had its share of belligerent episodes prior to 2008. He also acknowledges that there has been some movement by China on a couple of issues, including the maritime disputes. He also omits any discussion of some of the cases that I've highlighted on the blog, including the reaction to Liu Xiaobo's Nobel Peace Prize, as well as the kerfuffle with Google.
What's really interesting, however, is the second part of that abstract:
The speed and extent with which the newly assertive meme has emerged point to an understudied issue in international relations—namely, the role that online media and the blogosphere play in the creation of conventional wisdoms that might, in turn, constrain policy debates. The assertive China discourse may be a harbinger of this effect as a Sino-U.S. security dilemma emerges (emphasis added).
Whoa there!! Bloggers are constraining policy debates?
Here's the relevant passage from the article itself (p. 46-47):
The conventional description of Chinese diplomacy in 2010 seems to point to a new, but poorly understood, factor in international relations—namely, the speed with which new conventional wisdoms are created, at least within the public sphere, by the interaction of the internet-based traditional media and the blogosphere. One study has found, for instance, that on some U.S. public policy issues, the blogosphere and the traditional media interact in setting the agenda for coverage for each other. Moreover, on issues where this interaction occurs, much of the effect happens within four days. Other research suggests that political bloggers, for the most part, do not engage in original reporting and instead rely heavily on the mainstream media for the reproduction of alleged facts. The media, meanwhile, increasingly refers to blogs as source material. The result is, as one study put it, “a news source cycle, in which news content can be passed back and forth from media to media.” Additional research suggests that the thematic agendas for political campaigns and politicians themselves are increasingly influenced by blogosphere-media interaction.
Together, this research suggests that the prevailing framework for characterizing Chinese foreign policy in recent years may be relevant for the further development (and possible narrowing) of the policy discourse among media, think tank, and policy elites. As the agenda-setting literature suggests, this is not a new phenomenon. What is new, however, is the speed with which these narratives are created and spread—a discursive tidal wave, if you will. This gives first movers with strong policy preferences advantages in producing and circulating memes and narratives in the electronic media or in high-profile blogs, or both. This, in turn, further reduces the time and incentives for participants in policy debates to conduct rigorous comparative analysis prior to participation.
And here I'm going to have to disagree with Johnston a bit. On a day in which the mainstream media demonstrated a truly excellent ability to spread its own misinformation -- and, in response, said mainstream media blamed Twitter -- I'm highly dubious that the blogs play that much of a causal role. To be sure, I do think blogs can sometimes perpetuate falsehoods. That said, most of Johnston's evidence for blog effects comes from domestic policy, and methinks the foreign policy media ecosystem functions a wee bit differently.
If I had to wager why the misperceptions about China that Johnston enumerates have emerged, I'd hypothesize, in descending order of importance, the following reasons:
1) Foreign affairs columnists and international relations analysts who hadn't paid that much attention to China prior to 2008 had no choice but to pay a lot of attention to Beijing after the financial crisis;
2) Interest groups in the United States that were traditionally predisposed towards a more dovish view of China started feeling burned by Beijing on matters unrelated to security.
3) The media likes a trend, and a lot of the incidents that Johnston chronicles took place in rapid-fire fashion from the end of 2009 to the middle of 2010.
4) The Obama administration's rebalancing strategy validated the perception that China was doing something different.
5) Blogs acted as an amplifier for all of these other trends.
What's ironic about this is that in the article, Johnston properly takes a lot of the conventional wisdom to task for ahistoricism and problematic causal arguments in assessing Chinese behavior after 2008. I'd wager, however, that Johnston has done the exact same thing with respect to the foreign policy blogosphere.
What do you think?
An out-of-control shadow banking system that's been barely reformed. A housing sector that's been booming but seems primed for a bust. And despite a recent election that seemed to make it clear who was in charge, gridlock and short-term thinking appear to be hobbling the country's political elite.
I'm talking, of course, about ... China. Well, not me so much as Fitch Ratings, which has turned just a bit bearish on Chinese debt. Why did Fitch downgrade their debt?
China's growth since the re-launch of market-based economic reform in 1992 has been globally as well as domestically transformative. However, the investment-led growth model faces tightening constraints as the share of investment in GDP approaches the level of domestic savings. The process of rebalancing the economy towards consumption could lead to the economy's performance becoming more volatile.
Some underlying structural weaknesses weigh on China's ratings. Average income at USD 5,988 in 2012 and the overall level of development remain well below 'A' medians despite China's phenomenal growth. Standards of governance lag 'A' range norms according to the World Bank's assessment framework....
Risks over China's financial stability have grown. Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012. The stock of bank credit to the private sector was worth 135.7% of GDP at end-2012, the third-highest of any Fitch-rated emerging market.
Fitch believes total credit in the economy including various forms of "shadow banking" activity may have reached 198% of GDP at end-2012, up from 125% at end-2008. Only 55% of new social financing took the form of bank lending in the 12 months to February 2013, down from 76% in 2009. The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective....
The ratings assume there is no significant deterioration of geopolitical risk, for example a conflict between China and Japan or an outbreak of war on the Korean peninsula.
China has faced concerns over debt levels since 2009 when state-owned banks unleashed a surge of loans to power the economy through the global financial crisis. The credit wave succeeded in keeping Chinese growth on track, but it led to bubbly housing prices and also saddled local governments with mountains of loans that they are still struggling to repay.
Beijing has spent the past three years trying to manage these problems. It has waged a long campaign to rein in the real estate sector, raising mortgage downpayments and barring people from buying second homes in the hottest markets. Partly as a result, China recorded its lowest annual growth rate for a decade last year.
Reuters tells a similar tale on China's shadow banking system.
China's banks are feeding unwanted assets into the country's "shadow banking system" on an unprecedented scale, reinforcing suspicions that bank balance sheets reflect only a fraction of the actual credit risk lurking in the financial system....
But the key question is no longer how much risk banks are carrying. Rather, it's how many risky loans have been shifted to the lightly regulated shadow banking institutions - mainly trust companies, brokerages and insurance companies.
The risk to the overall financial system is not clear, because of insufficient data about the quality of credit in the shadow banking sector.
To be fair to Chinese authorities, they're quite aware of what they're going through. Indeed, the entire China 2030 exercise, as well as last month's China Development Forum, is predicated on the notion that China's growth model needs to change. But as Martin Wolf notes in his column, as China enters "middle income trap" territory, there are significant problems with such reforms:
First, if expected growth falls from over 10 to, say, 6 per cent, the needed rate of investment in productive capital will collapse: under a constant incremental capital output ratio the fall would be from 50 per cent to, say, 30 per cent of GDP. If swift, such a decline would cause a depression, all on its own.
Second, a big jump in credit has gone together with reliance on real estate and other investments with falling marginal returns. Partly for this reason, the decline in growth is likely to mean a rise in bad debts, not least on the investments made on the assumption that past growth would continue. The fragility of the financial system could increase very sharply, not least in the rapidly expanding “shadow banking” sector.
Third, since there is little reason to expect a decline in the household savings rate, sustaining the envisaged rise in consumption, relative to investment, demands a matching shift in incomes towards households and away from corporations, including state enterprises. This can happen: the growing labour shortage and a move towards higher interest rates might deliver it smoothly. But, even so, there is also a clear risk that the resulting decline in profits would accelerate a collapse in investment.
I'd add only two things at this point. First, as far as I'm concerned, one of the great mysteries in comparative political economy is why it's so bloody difficult for countries like Germany, Japan, and China to change their growth models. High-saving export-oriented economies don't change their ways all that much. To be fair, neither do low-saving, high import countries like the United States. This could be a "varieties of capitalism" story, but that seems ... inadequate as an explanation.
Second, it's worth remembering that the conventional wisdom about China's government was that annual growth below eight percent a year would spell trouble for the government. The implicit contract over the past three decades was that the Chinese Communist Party would supply the growth in return for political quiescence. The end of high growth would imply that this social contract is in trouble.
Except that China's growth has been below that rate for the last two years and running. During that time, Beijing has weathered one major political scandal, a raft of minor political scandals, and a leadership transition without a hint of regime collapse. So while China's economy does seem to merit greater attention, I'm not sure that China's political economy will trigger the kinds of instability that have been predicted for so long.
What do you think?
Zaki Laïdi has a fascinating op-ed in the Financial Times blasting the current state of global governance. It's fascinating because of the mix of not-entirely-accurate observation and breathtakingly naïve prescription. The good parts version:
In principle, the emergence of a multipolar world, in which the US is no longer the only very powerful country, should boost “multilateralism” – institutionalised co-operation among states in pursuit of shared objectives. It should boost efforts to achieve free trade via the World Trade Organisation, poverty reduction through the World Bank, and international security through the UN.
Yet the reality is different. Countries are seeking to extricate themselves from global agreements in order to extract concessions from partners on a bilateral basis or to protect national sovereignty.
Take the case of the WTO. A conflict between India and the US over agricultural subsidies derailed a final compromise in the summer of 2008. This would have – finally – concluded the Doha round of trade talks, which were launched in Qatar in 2001. Negotiations have stalled since the US-India spat. The main responsibility for this failure falls on the US, which believes the system of multilateral trade no longer offers the advantages it used to. The priority for the US is to secure access to markets through enhanced bilateralism. Hence the Obama administration’s drive to agree the trans-Pacific Partnership for Asia and, more recently, to conclude the Transatlantic Trade and Investment Partnership for Europe.
In each case, the strategic objective is to contain China’s rise by setting a high bar for regulatory standards. The novelty is that Europe, which has long defended multilateralism, is now succumbing to the temptation of bilateralism even while it remains completely incapable of assuming political responsibility for its trade policy...
It is important to understand that the collapse of multilateral trade we are witnessing today is far from being an isolated case. Climate talks since the 2009 Copenhagen conference have challenged the multilateralism heralded by the Kyoto protocol of 1997. The idea then was to move forward on the basis of a shared objective – the reduction of greenhouse gas emissions. Today countries only make commitments on climate change on the basis of a very narrow assessment of their national interests. The idea that shared commitments – rather than individual interests – shape behaviour is now dead....
Since the end of the cold war, Europeans have believed deeply in the existence of a global commons – and the declining importance of national sovereignty. The conduct of both the US and emerging countries suggests the opposite. Power politics is back. Multilateralism is dying.
OK, a few things here:
1) It was a lot easier to take this "Europeans don't really believe in national interests anymore, we're so above all that, so the rest of the world should listen to us" guff prior to the Eurozone crisis. Watching Germany and other Northern European nations make sure that their national interest gets executed through EU institutions, however, makes this canard a bit harder to swallow.
2) I hate to break it to Laïdi, but during the 1990s the Europeans could afford the luxury of believing in the growing power of multilateralism. That suited their beliefs and seemed to accord with the facts on a surface level. In point of fact, however, it was the growing power of the United States -- along with the strong support and coordination of its European allies -- that made multilateralism work. The idea that multilateralism should work better when power is more dispersed is an ... odd notion.
3) If Laïdi is really gonna go there on trade, let's ask blunt question -- exactly which jurisdiction triggered the explosion in bilateral free-trade agreements and preferential trade agreements? Hold on, I'll wait ... but I bet everyone already knows the answer.
4) As I've argued at length elsewhere, focusing on Doha and Copenhagen will lead to Laïdi's conclusions -- but those cases are not necessarily representative of global governance writ large. On a raft of other dimensions, the multilateral system has worked surprisingly well.
5) Finally, the real problem with Laïdi's argument is that it fosters a spectacularly naïve narrative about how multilateral arrangements are created in the first place. This is hardly the first moment when great powers have created club-like arrangements in an effort to move the multilateral status quo. In fact, I'm pretty sure that some big books have been devoted to this topic.
The reason the European Union has had success in pushing its version of global rules has little to do with its love of multilateralism and a lot to do with its market power and institutional capabilities. The sooner that European international relations commentators appreciate this, the better.
Am I missing anything?
Maybe Moscow thought this would tilt its client state toward the pro-Russia choice in that binary, but it appears to have be having the opposite effect....
Russia is not in the process of losing a client-state, exactly — the political and cultural ties are likely still too deep for something that drastic to happen that quickly — but Moscow certainly isn’t doing itself any favors. As [Felix] Salmon wrote today, “If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the E.U.”
Moscow’s aggressive, all-or-nothing approach appears to have only pushed Cyprus further toward Europe.
Now, far be it for me to question Russia's motiva--- oh, screw it, I'm totally going to question Russia's motivations here. Because what happened in Cyprus is emblematic of an interesting trend since 2008 -- the great powers that analysts have lazily defined as "revisionist" don't seem all that interested in collecting allies.
This is not the first time a weak Western ally has sought out either China or Russia as a way of avoiding onerous financial strictures. Iceland begged Russia for financial assistance during the depths of the 2008 financial crisis. At one point, the Icelandic President allegedly offered Russia the use of Keflavík Air Base. This possibility caused some mild consternation in Foggy Bottom. In the end, the Russians said they didn't need the base and proffered only a fraction of what Iceland wanted, leaving Reykjavik little choice but to cut a deal with the IMF.
One can tell a similar story with Pakistan and China. During the fall of 2008 Islamabad was facing a balance of payments crisis and sought out China as a benefactor. In the end, China was unwilling to offer Pakistan enough money to substitute for IMF support, forcing the Pakistani government to take out an IMF loan.
Both the Iceland and Pakistan outcomes were surprising enough in 2008 that I bothered to blog about them back then. The interesting thing is that nothing much has changed. Sure, through the Forum on China-Africa Cooperation, China has enhanced its role outside its region, but even FOCAC is more about commercial interests than geopolitical interests. At the same time, China became estranged from one of its most loyal allies when Myanmar started embracing the United States. It also alienated a lot of neighbors that might otherwise have been more willing to defer to Beijing. And as I blogged earlier this year, China continues to be standoffish towards Pakistan despite the latter country's eagerness to ally itself with Beijing. Ironically, the only countries that Russia and China have really stuck their neck out for in recent years have been the allies that have given them the most agita -- Syria for Moscow, and North Korea for Beijing. [Gee, it's almost as if this phenomenon of small allies that are strategic deadweights is not unique to the United States or something!!--ed. This is a blog post, so stop your subtweeting.]
To be sure, China and Russia have , on occasion, engaged in some revisionist efforts to change the status quo. See: Russia's 2008 war with Georgia; China's border disputes with the rest of the Pacific Rim. What's striking, however, is that neither Moscow nor Beijing seems terribly interested in collecting client states. Hell, for all the rhetoric involving closer Sino-Russian cooperation, it seems as though the actual bilateral relationship amounts to little more than empty rhetoric and cooperation at the U.N. Security Council.
Why is this? I'm honestly not sure. Back in 2008, I spitballed the following:
For all their aspirations to great power status, both countries lack the policy expertise necessary to take on greater leadership roles. This leads to profound risk aversion, which leads to inaction. On the flip side, the U.S. is accustomed to talking to the countries in crisis, which both provides it with more information and allows Washington to act more quickly.
Four and a half years later, I don't think that's a sufficient explanation. Spitballing now, I think there are three possible explanations.
1) Pure buckpassing. Why should Moscow or Beijing spend their hard-earned cash on marginally useful client states? Let the West exhaust itself with these aid packages.
2) Internal balancing. Realists like to think that external balancing (forming alliances) and internal balancing (augmenting national capabilities) are substitutable strategies. Maybe China and Russia prefer to focus on national capabilities rather than coalition-building.
3) Outside their own neighborhood, neither Russia nor China is really revisionist. As great powers, Moscow and Beijing will do what they gotta do in their near abroads. Globally, however, they have neither the ambition nor the interest in altering the current system of "good enough" global governance. After all, the current rules of the global game have benefited both of them pretty well over the past decade or so.
You can guess which of these explanations I gravitate towards, but I'm hardly convinced.
What do you think?
Your humble blogger has been too hard at work
trashing his diminished reputation for seriousness working on other projects to blog about North Korea as of late. Now, the situation on the Korean Peninsula has been such a predictable cycle of DPRK provocative action, measured response, and more provocative action that I've been tempted to automate these posts the same way I have with Iran.
Still, as one reviews recent behavior, it's necessary to acknowledge that this cycle looks a little different. When Nick Kristof tweets that "I've been covering North Korean pugnacity and brinksmanship for 25 years, and I'm nervous about what might happen," the rest of us snap to attention.
1) There was the novel threat from a North Korean general to launch a pre-emptive nuclear strike against the United States, causing Washington to "be engulfed in a sea of fire."
2) North Korea has also declared that the 1953 armistice with South Korea is now "invalid," cutting off the direct phone link with South Korea at Panmunjom.
3) North Korea's propaganda machine has ramped up against new South Korean leader Park Geun-hye in a rather sexist fashion, decrying the "venomous swish of skirt" coming from the Blue House. In Korean, this language implies an "overly aggressive" woman.
4) Something something Dennis Rodman inanity something.
5) North Korea has dramatically ramped up the number of air force sorties, from 100 a day last summer to at least 550 a day now -- a number that comes close to matching the South Korean daily number.
So, seriously, WTF, Kim Jong Un? Is this simply a more severe version of typical DPRK brinkmanship, or is this something altogether new and destabilizing?
Well … I think it's the former. First, let's just ignore the DPRK's rhetoric, because it's always over the top -- or, as with Rodman, completely disingenuous. Let's look at the DPRK's actions. Here, even the cancellation of the armistice doesn't necessarily mean much, as McClatchy's Tom Lasseter points out:
Pyongyang is infamous for issuing dramatic but empty threats, like turning its enemies into an apocalyptic "sea of fire." The North has also announced on several previous occasions that it was pulling out from the armistice, most recently in 2009.…
The last time North Korea disconnected the hotline, in 2010, was a year when the North killed four South Koreans when it shelled an island and was accused of torpedoing a South Korean naval ship, killing 46 sailors.
But Yonhap also reported that the North had not severed another North-South communication line, this one related to a North Korean industrial zone where South Korean companies operate.
So … nothing much new here. Beyond that there's the ramping up of air sorties, which does seem like a more powerful signal, if for no other reason than that it's actually a costly act. And beyond that … a lot of hot air.
So does that mean I can automate my North Korea posts? Well, Fareed Zakaria has a different spin:
No one knows for sure what is going on. It is highly unlikely that these moves are being conceived and directed by Kim Jong Un, the young leader who succeeded his father, Kim Jong Il. North Korea’s military dictatorship has wedded itself to the third generation of the Kim dynasty, which now seems to serve mostly as a unifying symbol for its people. But it is unlikely that a 28-year-old with almost no background in politics or experience in government is conceiving and directing these policies. (He does appear to have free rein on basketball policy in the hermit kingdom.)
The most likely explanation for North Korea’s actions is that it is trying to get attention. In the past, its provocations usually led to international (especially American) efforts to defuse tensions. Then came negotiations, which led to an agreement of sorts, which the North soon cheated on, which led to sanctions, isolation and, finally, North Korean provocation again.
The pattern may be repeating — but it’s a high-stakes game, with nuclear weapons, brinkmanship and hyper-nationalism all interacting. Things could go wrong. The most important new development, however, is China’s attitude change. In a remarkable shift, China — which sustains its neighbor North Korea economically — helped draft and then voted last week for U.N. sanctions against Pyongyang.
For decades, Beijing saw Pyongyang as a historical ally. But now, a senior Obama administration official told me Wednesday, “We are clearly hearing increasingly levels of frustration and concern” from Beijing about North Korea.
Zakaria is correct to point out Beijing's growing disenchantment with Pyongyang. But I tend to share Jennifer Lind's assessment that this disenchantment won't necessarily lead to any dramatic changes:
One shouldn't exaggerate the significance of these recent developments. After all, in the U.N. negotiations over sanctions -- this time as before -- the Chinese have consistently played the role of watering down the degree of punishment imposed against Pyongyang. And in the past Chinese firms have helped North Koreans evade sanctions. It remains to be seen whether Beijing intends to enforce the new measures.…
Because the specter of North Korea's collapse could potentially destabilize the Korea peninsula, Beijing may continue to shield Pyongyang. But the two country's [sic] increasingly divergent interests suggest that China's dissatisfaction with North Korea is only likely to grow.
I'd be even more skeptical. Obviously, China's leadership would prefer North Korea to act in a less provocative manner -- but they really don't want a disintegrating North Korean state. So even if they're disenchanted, they won't apply the necessary pressure to foment regime change or regime collapse. Which means that Pyongyang will still have carte blanche to provoke everyone else.
So my take is … not much has changed. I suspect that the reason for all of the amping up has to do with domestic politics on all sides. On the one hand, Kim Jong Un is playing to his own military base. On the other hand, North Korea is also trying to suss out the policy preferences and resolve of the new leadership in both South Korea and China.
Unless and until Beijing gets fed up enough to desire a strategic shift on the Korean Peninsula, I'm dubious that anything will change.
Am I missing anything?
William Wan has a story in the Washington Post that made me burst out laughing just one paragraph in. Wan is tackling an important story -- how much we can trust China's economic statistics. But here's the lede:
When China announced better-than-expected trade numbers last month, the statistics were met with outright suspicion from international powerhouses such as Goldman Sachs, Swiss financial firm UBS and Australian bank ANZ. The disbelieving scoffing only mounted days later, when the government unveiled numbers showing yet another positive trend — a narrowing income gap between China’s rich and poor.
Numbers in China have long faced suspicion, from optimistic recordings of visibly hazy air to the age of its Olympic gymnasts. But the credibility of its economic data is now coming under particular scrutiny, at a time when China’s growing global role weighs on investors, analysts and governments worldwide, even as the country’s economy is slowing after years of unbridled growth.
Now, on the one hand, there is no doubting the suspect nature of Chinese data (see the IMF staff discussion here). As Wan demonstrates well in the story, this is partly due to political machinations. There is scholarly evidence that political incentives shape the data reporting at times. To be fair, it might be due to the difficulty of data-gathering in a still-developing country, a fact that Chinese officials are willing to acknowledge.
No, what made me start laughing is that it was Goldman Sachs and UBS that are accusing China of data manipulation. This is like Lance Armstrong blasting the NFL for not having a more rigorous drug-testing regime. Goldman Sachs played a supporting but crucial role in cooking Greece's books well enough to get it into the eurozone. Meanwhile, UBS traders had great fun manipulating the key LIBOR interest rate -- when they weren't busy laundering money for corrupt politicians.
So, really, props to Goldman and UBS for expressing justified skepticism about the veracity of Chinese economic statistics. I'd just feel better if they couched it as follows:
As organizations that have developed expertise in cooking the books to evade national regulators as well as our investors, we know when numbers look fishy -- and China's numbers look fishy.
For the past few years, a low level theme that occasionally pops into my news feed is the idea of greater Sino-Pakistani cooperation. Now this has a certain amount of realpolitik sense to it. The United States and Pakistan are not exactly on the best of terms, China is a rising power, they share a comon interest in containing India, yadda, yadda yadda. As a result, there has been the occasional press story about closer ties, which begets the inevitable U.S.-based blog posts about China expanding its "string of pearls" strategy of more deepwater ports in the Asia/Pacific region.
There's just one thing. The more closely one reads these stories, the less clear it is that China wants a string of pearls. Most of these stories talk about great Pakistani enthusiasm for more Chinese involvement. That enthusiasm is not really reciprocated by China, however. Consider Jane Perlez's New York Times story from October 2011:
A rising China with global ambitions is unlikely to supplant the United States in Pakistan, according to Chinese experts on Pakistan, as well as Pakistani and American officials. And while Pakistan’s latest flirtations with Beijing have been received cordially, Pakistani officials have walked away from their junkets with far less in hand than they might have hoped....
China’s core interests lie elsewhere — in its competition with the United States and in East Asia, experts say. China has shown little interest in propping up the troubled Pakistani economy, consistently passing up opportunities to do so.
Despite China playing it cool, Pakistan has continued to fall all over itself to attract greater Chinese engagement in their country. Which leads us to today's headline in the New York Times: "Chinese Firm will Run Strategic Pakistani Port." Sounds ominous for U.S. interests... until one reads Declan Walsh's actual story:
Pakistan is handing management control of a strategic but commercially troubled deep-sea port to a Chinese company, the information minister confirmed Thursday....
The fate of Gwadar, once billed as Pakistan’s answer to the bustling port city of Dubai, United Arab Emirates, has been a focus of speculation about China’s military and economic ambitions in South Asia for the past decade. Some American strategists have described it as the westernmost link in the “string of pearls,” a line of China-friendly ports stretching from mainland China to the Persian Gulf, that could ultimately ease expansion by the Chinese Navy in the region. Gwadar is close to the Strait of Hormuz, an important oil-shipping lane.
But other analysts note that Gwadar is many years from reaching its potential, and they suggest that fears of creeping Chinese influence might be overblown. “There may be a strategic dimension to this, where the Chinese want to mark their presence in an important part of the world,” said Hasan Karrar, an assistant professor of Asian history at the Lahore University of Management Sciences, referring to the management transfer at Gwadar. “But I wouldn’t go so far as saying this implies a military projection in the region.”....
Pakistan has failed to build the port or transportation infrastructure needed to develop the port, the property bubble has burst and, according to the port management Web site, the last ship to dock there arrived in November. “The government never built the infrastructure that the port needed — roads, rail or storage depots,” said Khurram Husain, a freelance business journalist. “Why would any shipping company come to the port if it has no service to offer?”
According to reports in the Pakistani news media, the Port of Singapore Authority sought to withdraw from the management contract after the Pakistani government failed to hand over land needed to develop the facility. (emphasis added)
This greater Chinese involvement, it should be noted, also comes after Beijing rebuffed Pakistani requests to turn Gwadar into a naval base.
So, to sum up: despite Pakistan prostrating itself before China, Beijing has been extremely leery of getting too enmeshed in that country. It has rejected repeated requests for military basing, and only now has a commercial Chinese company agreed to manage a port that appears to be the Pakistani exemplar of "white elephant."
So please, no "strong of pearls" posts from the national security blogosphere today. These pearls are about as fake as you can get.
Am I missing anything?
One of this blog's
annoying tics persistent themes has been its insistence that the 2008 financial crisis did not, in fact, doom the United States to a future of inevitable decline. Indeed, there are many reasons to be optimistic about America's future, and there are many reasons to be skeptical about claims that China will be able to exercise leverage over the United States.
Now, one of the counterarguments to this thesis over the past five years has been the explosion of U.S. debt and Washington's need for Beijing to continue to buy that debt to finance America's current expenditures. This was a running theme of financial writers in 2009. Four years ago, there was a particular concern that "China is also trading long-term Treasuries for short-term notes." If the United States could only borrow overseas by issuing more short-term debt, that ostensibly gave China some kind ov leverage as Washington needed to continually roll over those debt obligations.
I bring this up because Daniel Altman highlights a fascinating data point in his Foreign Policy essay about the shifting composition of the federal government's debt:
In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.
Huh. So it turns out that desite a surge in borrowing by the U.S. government and China's desire to keep the arrangement on a short-term basis, Washington has managed to borrow in a relatively efficient manner at historically low interest rates.
Oh, and by the way, how has China altered its purchases of U.S. debt? Well, besides a general slackening of such purchases (which partially explains the appreciation of the yuan) and a general lack of complaint in response to QE3, it has also changed the composition of those U.S. debt purchases:
China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.
In other words, contrary to the fears of debt hawks in 2009 -- including, it should be noted, Hillary Clinton -- China has not exercised an iota of influence over the United States via its debt holdings. Indeed, the shifting pattern of their debt purchases strongly suggests that the Chinese have recognized the futility of such an approach.
While Beijing has recognized this truth, certain Very Serious People who write Very Serious Columns persist in being afraid of China's mythical debt leverage. So, on occasion, as a public service, this blog will continue to remind its readers that U.S. remains clothed in immense financial power.
Every five years or so the National Intelligence Council releases a Global Trends report about what the world will look like a generation from today. The Global Trends 2030 report is now out, and if my Twitter feed and Thom Shanker's New York Times story are any indication, well, there's gonna be some freaking out inside the Beltway:
A new intelligence assessment of global trends projects that China will outstrip the United States as the leading economic power before 2030, but that America will remain an indispensable world leader, bolstered in part by an era of energy independence....
“There will not be any hegemonic power,” the 166-page report states. “Power will shift to networks and coalitions in a multipolar world.”
It warns that at least 15 countries are “at high risk of state failure” by 2030, among them Afghanistan and Pakistan, but also Somalia, Burundi, Rwanda, Yemen and Uganda.
The study acknowledges that the future “is malleable,” and lists important “game-changers” that will most influence the global scene to 2030: a crisis-prone world economy, shortcomings in governance, conflicts within states and between them, the impact of new technologies and whether the United States can “work with new partners to reinvent the international system.”
The best-case situation for global security to 2030, according to the study, would be a growing political partnership between the United States and China. But it could take a crisis to bring Washington and Beijing together — something like a nuclear standoff between India and Pakistan resolved only by bold cooperation between the United States and China.
The worst-case situation envisions a stalling of economic globalization that would preclude any advancement of financial well-being around the world. That would be a likely outcome following an outbreak of a health pandemic that, even if short-lived, would result in closed borders and economic isolationism.
The chief author and manager of the project, Mathew Burrows, who is counselor for the National Intelligence Council, said the findings had been presented in advance in more than 20 nations to groups of academic experts, business leaders and government officials, including local intelligence officers.
As one of those academic experts, let me say three things. First, the NIC puts a lot of effort into these reports, and they're important because they're consumed globally and not just nationally. Not a lot of other countries have either official or unofficial institutions trying to do this kind of long-range analysis, so they devour the NIC reports just as much as Americans.
Second, as Michael Horowitz and Philip Tetlock pointed out in Foreign Policy just a few short months ago, these NIC reports are hardly a perfect crystal ball:
The reports almost inevitably fall into the trap of treating the conventional wisdom of the present as the blueprint for the future 15 to 20 years down the road. Many things the early reports get right, such as the continued integration of Western Europe, were already unfolding in 1997. Similarly, predicting that "some states will fail to meet the basic requirements that bind citizens to their government" or that information technology will have a large impact on politics was hardly going out on a limb.
Looking carefully at the first two Global Trends reports reveals how the reports have struggled to make accurate non-obvious predictions of big-picture trends....
The reports also engage in extensive hedging. For every prediction, there is a caveat. The reports lean heavily on words such as "could," "possibly," and "maybe." The lead-in to Global Trends 2025 uses "could" nine times in two pages, and the report as a whole uses the word a whopping 220 times. The report also uses "maybe" 36 times. Global Trends 2020 uses "could" 110 times. Add all of the caveats and conditionals, and a harsh critic might conclude that these reports are saying no more than that there is a possibility that something could happen at some point -- and it might have a big effect.
Third, that prediction of the end to U.S. hegmony will be an interesting litmus test of the maturity of America's foreign policy community. Sure, other institutions have made this kind of prediction about rising Chinese power, but it's different when a U.S. government body does it. Despite the wide variance contained within these kind of predictions, it's gonna be easy for threat-mongers to screech at the headline statements.
Furthermore, whenever the topic of waning American hegemony comes up in public discourse... well, the conversation doesn't go well. Admitting a relative decline in American power is not something American's political and policy elites like to do -- see 2012 campaign, Mitt Romney.
So pay close attention to who freaks out and who doesn't from the NIC report, and feel free to discount the future statements of those who choose to freak out today.
It would be safe to describe the Chinese government as having been "peeved" at Norway for the Nobel Peace Prize that Liu Xiaobo was awarded back in 2010. More than two years later, Beijing is still pissed off at Oslo, according to the Financial Times' Jamil Anderlini and Clare MacCarthy:
China is offering visa-free visits to Beijing for visitors from every European country except Norway, in what appears to be the latest in a string of punishments for the Nordic country since it gave a jailed Chinese dissident the Nobel peace prize in 2010.
The Nobel Peace Prize is awarded by a committee of five appointed by the Norwegian parliament, and committee members have always been Norwegian nationals.
On Wednesday, the Beijing city government unveiled a list of 45 countries whose citizens will be allowed to enter the city while in transit for 72 hours without a visa, starting from January 1.
Visitors from all 27 EU member states, as well as Iceland and Switzerland, will enjoy the new visa-free treatment, as will those from the US, Russia, Japan, Australia and most major Latin American countries.
When asked why Norway was left off the list, Wang Qin, a senior official at the Beijing government travel administration, did not respond directly but said that some countries were not eligible because their citizens or government were “of low-quality” and “badly behaved”. (emphasis added)
Yeah!! I've taught a few Norwegians in my day, and the whole lot of them are low quality and badly behaved, with their inscrutable fjords and smug blondness and their vague association with herring and their very specific association with lutefisk!!
In fact, I'm glad Wang Qin brought this up, because in the past couple of months a whole bunch of country rankings have come out, and they're an excellent way to bolster Wang's assertion of low Norwegian quality and bad behavior, especialy as compared with a peacefully rising China.
Why, just yesterday, Transparency International released their 2012 Corruptions Perception Index, and Norway ranks 7th and China ranks 80th!! Who's dirty now??!! [Ahem!--ed.] Oh.... Norway's the 7th least corrupt economy and China is... way more corrupt.
Well, there's more than one ranking system! A few weeks ago the World Justice Project released their 2012 Rule of Law Index. I bet that shows how dirty Norway really is!! [Ahem!--ed.] Oh... Norway is actually pretty good on rule of law issues, including ranking first among all 97 countries in civil justice. Whereas China is.... um... not as good, ranking 94th out of 97 countries on fundamental rights.
Well, even if Norway's government is pretty good, I bet their low quality, badly behaved people make the country an unlivable hellhole compared to Beijing. [Ahem!!--ed.] Oh... so based on Legatum's 2012 Prosperity Index, Norway is actually the most prosperous country in the world, whereas China ranks.... 55th.
[But that's just because Norway's rich!! What have they done for the rest of the exploited developing world??!!--ed.cn] Excellent point, oh great and glorious Beijing-based editor!! Why, when we go to the Center for Global Development's 2012 Commitment to Development Index, we find that... that... Norway is the second-most supportive country for assisting the developing world. Son of a....
Look, it kills me to write this. I use to have great fun teasing my Norwegian students about the whaling and the high agricultural import barriers, just so they wouldn't think they were all that and a bag of chips. But if China thinks Norway is a country of low quality and bad behavior, then China would be what happened if Lindsay Lohan hooked up with Kid Rock at 4 AM after a two-day coke bender and three bottles of Patron.
In other words, Wang Qin wins this week's Vizzini Award.
So China has not been shy over the past few months in expressing its territorial aspirations, going so far as to imprint them in new passports. Now on the one hand, this is a predictable reaction to the U.S. pivot from last year. On the other hand.... well, for a country that ostensibly thinks a lot about realpolitik, they sure haven't internalized the notion of cooperating under a security dilemma. Indeed, two recent stories suggest that Chinese behavior is disrupting long-held norms in the Pacific Rim.
In the South China Morning Post, Greg Torode reports that much of ASEAN is getting fed up with Beijing:
China is set to face mounting challenges from the grouping over the South China Sea as Cambodia's controversial year as Asean host and chair comes to an end. As difficult as it may have been, Cambodia's year may be as a good as it gets for Beijing - in the short term at least....
An announcement on Sunday from host Cambodia that Asean's leaders had formally agreed not to internationalise the issue "from now on" sparked a flood of questions. Asean-China talks would be the sole forum, spokesman Kao Kim Hourn added.
Given that leaders - including US President Barack Obama and allies from Japan, the US and Australia - were converging on Phnom Penh determined to raise the need to lower South China Sea frictions, it was a remarkable agreement, and a victory for Beijing's backroom lobbying.
But the consensus hailed by Cambodia lasted less than a day. The Philippine delegation, led by President Benigno Aquino, cried foul, warning there was no such deal and insisting on its rights to seek international redress if it felt that its national sovereignty was threatened.
In the rhetoric of Washington, its re-engagement across Asean is part of an effort to "shape" China's rise, forcing it to conform to international norms. With considerable discretion, it has buttressed efforts among Asean countries to co-ordinate and organise diplomatic responses to Chinese challenges.
While the Philippines stood up publicly this week, others were helping in the background, for example. ....
Just four years ago, China had successfully kept Asean nations officially quiet on the subject. The events of the last week have shown that, despite considerable efforts, the calculations are now much more complex.
If ASEAN is known for anything, it's for developing bland consensus statements. That's a key component of the ASEAN way. If that norm is breaking down, then China is having a serious impact on the behavior of member countries -- and not in a way that benefits Beijing's interests.
The other interesting story is Martin Fackler's story in the New York Times about Japan's naval activities in the Pacific Rim. Shorter Fackler: Japan is getting more active in the region. Now what's interesting about this isn't Japan's behavior; one would expect Tokyo to counter Beijing. No, what's interesting is how other countries in the region -- most of whom had a very bad experience with Japan during the Second World War -- are reacting. Which is to say, they're pretty cool with Japan exercising their naval muscle:
In a measure of the geopolitical changes roiling the region... concerns about any resurgent Japanese militarism appear to be fading in some countries embroiled in their own territorial disputes with China, like Vietnam and the Philippines, the scene of fierce fighting during the war.
Analysts there and elsewhere in the region said their countries welcomed, and sometimes invited, Japan’s help.
“We have already put aside our nightmares of World War II because of the threat posed by China,” said Rommel Banlaoi, a security expert at the Philippine Institute for Peace, Violence and Terrorism Research in Manila.
On a recent morning, 22 coast guard officials from a dozen Asian and African nations joined a training cruise around Tokyo Bay aboard a sleek, white Japanese Coast Guard cutter. The visitors snapped photos of the engine room, the electronics-studded bridge and the 20-millimeter cannon. Before the cutter left port, the foreign contingent and the Japanese crew stood at attention on deck facing each other, then bowed deeply.
“Japan is joining the United States and Australia in helping us face China,” said Mark Lim, an administrative officer from the Philippine Coast Guard who joined the cruise.
Japan is widely viewed as being the only nation in the region with a navy powerful enough to check China....
The Japanese Navy took a big step toward opening up in 2009 by holding a joint military drill with Australia — its first such exercise with a nation besides the United States. It has since joined a number of multinational naval drills in Southeast Asia, and in June held its first joint maneuver with India.
Hostility towards any Japanese great power behavior has been another longtime diplomatic staple of the Asia/Pacific. That norm also appears to be eroding fast.
Does this make any difference? Well, yes. As Fackler notes, Japan has the 6th largest defense budget in the world. India, Australia and South Korea aren't exactly defense midgets either. The more that Beijing pushes the rest of the Pacific Rim into the arms of the United States, the more Washington's job becomes one of policy coordinator rather than policy provider. In other words, China's policies are making the pivot cheaper. To repeat a point I made earlier this year:
In [Wang Jisi's essay about how the Chinese leadership views the U.S.], the United States is the chief architect of any misfortune or policy reversal that affects the Middle Kingdom. Wang notes the U.S. "pivot" without speculating why countries like South Korea, Vietnam, or even Myanmar might be so eager to welcome Washington with open arms. If Chinese policymakers truly believe that the U.S. is solely to blame for these turn of events, then they will likely continue to act in ways that alienate their neighbors in the Pacific Rim, thereby exacerbating the geopolitical straight-jacket that they disliked in the first place.
Am I missing anything?
The latest issue of The Washington Quarterly is just lousy with China essays -- it's like there's a theme or something. Andrew Scobell and Andrew Nathan tackle China's (apparently overstretched) military, and Guoyou Song and Wen Jin Yuan review China's response to the burgeoning Trans-Pacific Partnership.
James Reilly has an essay on China's use of unilateral economic sanctions that really caught my eye, however. The overwhelming bulk of economic sanctions that have been threatened and used during the past century have been from the United States. From a scholarly perspective this is somewhat disturbing, as general theories about economic statecraft become tough to distinguish from theories of U.S. foreign policy. If another great power starts being profligate with its economic statecraft, there's the promise of a lot of new data.
China has deplored the use of economic sanctions in the past, but as Reilly notes, "Over the past few years, Chinese experts have begun to clear some of the legal, moral, ideological, and practical hurdles to Beijing’s use of unilateral sanctions."
So... how effective are they? Well, at best, it's a mixed bag. Here's Reilly's key paragraph:
Ultimately, China uses sanctions for the same reasons other countries do: they are a relatively low-cost, low-risk way to signal dissatisfaction, increase the costs to those who take undesired actions, and satisfy domestic demands to respond to those actions. Sanctions can assuage domestic criticism while not undermining broader economic and diplomatic interests. For all these reasons, China has increasingly resorted to unilateral sanctions in recent years on issues like Taiwan, Tibet, human rights, and maritime disputes.
If you read the article, it's pretty clear that any concessions made by other countries have been pretty modest --more modest than Reilly seems willing to admit (compare Reilly's take on the 2010 Nobel Prize sanctions with, for example, Erik Voeten's).
But there are three caveats to this observation. First, if China views the sanctions as mostly symbolic and for domestic consumption, then it wouldn't be surprising that they're ineffective. Symbolic sanctions aren't supposed to work, they're supposed to be for show. Second, Reilly notes that China likes threatening sanctions more than using them, and sanctions threats are more likely to work as a form of pre-emptive coercion and deterrence than actually compelling the actor in this particular case.
Third, as with its economic statecraft more generally, China is just beginning to understand this foreign policy tool. Indeed, as Reilly observes, the problem with issuing empty threats is that "the credibility of Beijing’s bluffs risk eroding over time." It will be veeeery interesting to see how China's approach to economic statecraft evolves over time.
The Wall Street Journal has two great stories on the Federal Reserve's decision to go for QE3 -- a third round of quantitative easing. First, Jon Hilsenrath documents how Fed chairman Benjamin Bernanke built a consensus among the Federal Reserve governors:
For weeks, Mr. Bernanke made dozens of private calls on days, nights and weekends, trying to build broad support for an unusual bond-buying program he wanted approved during the Fed's September meeting, according to people familiar with the matter....
Fed officials described the Fed chairman's phone calls as low-pressure conversations. Mr. Bernanke sometimes dialed up colleagues while in his office on weekends, catching them off guard when their phones identified his private number as unknown. He gave updates on the latest staff forecasts, colleagues said. He asked their thoughts and what they could comfortably support, they said.
The calls helped Mr. Bernanke gauge how far he could push his committee. It also won him trust among some of his fiercest opponents, officials said. Nearly all of Mr. Bernanke's colleagues described him as a good listener.
"Even if you disagree with him on the programs, you know your voice has been heard," said [Dallas Fed President Richard] Fisher, one of his opponents. "There is no effort to bully."
So Bernanke did a lot of hand-holding, a lot of listening... to the key Fed decision-makers. What's equally important is who he didn't talk to -- namely, other central bank heads in the rest of the world.
I bring this up because some of these central bank officials are pretty pissed. QE3 has caused the yuan to hit its all-time high against the dollar, for example. Which leads us to the other interesting Wall Street Journal story. Aaron Back and In-Soo Nam document how South Korea and China have reacted to QE3:
Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve's latest easing efforts and advocated reducing Asia's dependence on the U.S. dollar.
The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.
"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."
Chen Yulu, an academic adviser to the People's Bank of China, said Asia needs a "regional core currency" to reduce its dependence on the dollar. China's ultimate goal is for the yuan to be as important as the euro or the dollar, he said.
Whoa, this sounds pretty bad... until you get to the next paragraph:
But [Chen] acknowledged that will be a slow process, saying it would be possible for the yuan to be fully convertible by 2020, and that the overall yuan-internationalization process may last until 2040. China strictly controls its currency, though it has made small moves to broaden its use globally in recent years and has also allowed a little more flexibility in its movements (emphasis added).
Furthermore, it's worth noting that the international bitching and moaning about QE3 seems much less than the "currency war" rhetoric that QE2 triggered. Why? Based on my half-assed blog analysis I'd speculate that there are three reasons:
1) The global economy is in a more sluggish state in 2012 than in 2010, so it's hard to argue that expansionary monetary policy is inappropriate now.
2) The United States was not the only major economy to go the quantitative easing route in the past few months. Both the European Central Bank and the Bank of Japan have made similar -- if uncoordinated -- moves.
3) The central bank heads have learned frrom QE2 that the bitching and moaning won't accomplish anything. It didn't stop QE2 and it won't stop QE3.
Am I missing anything?
In today's paper the New York Times has two long stories on the two largest countries in the world: one on China and one on India. What's interesting is that both stories talk about the tensions between national and regional governments -- but their interpretation of the behavior of these local governments is very different.
Let's start with China, where Andrew Jacobs notes that political paralysis at the national level combined with the economic slowdown is causing regional governments to double down on their debt-driven growth:
Local governments, alarmed by a slowdown they fear could lead to mass unemployment and the kind of sluggish growth that can dent political careers, have decided to take matters into their own hands. In recent months, a number of cities have proposed extravagant infrastructure projects they hope will be financed in part by newly liberalized bank loan policies.
Tianjin claims $236 billion will be spent in the petrochemical, aerospace and other industries. Xi’an, home of the famed terra cotta warriors, plans to invest tens of billions of dollars on nine new subway lines. In Guizhou, one of China’s poorest provinces, officials said they hoped to funnel $472 billion into tourism-related development.
In Changsha, the provincial capital of Hunan, officials brag of 12.9 percent growth as they spend billions of dollars on a new subway system, a ring road, an intercity rail line and a pair of bridges to knit together its transportation system.
“We haven’t felt any impact from the crisis in Europe,” said Liu Maosong, chairman of the Hunan Economics Association and an adviser to the Changsha government. “Our guiding philosophy is ‘investment, investment, investment.’ ”
Even if many such projects turn out to be wishful thinking, economists have expressed alarm that municipalities are still chasing debt-financed growth. “It almost scares me to death,” said Mao Yushi, a prominent economist. “Local governments are using the people’s money for investment, but when they can’t repay the banks, the financial system will snap.”
And Liao Jinzhong, an economist at Hunan University, worries that much of the spending is misplaced. “What we really could use is a functioning sewage system,” he said, speaking from his sixth-floor apartment in a crumbling faculty building that has no elevator.
Mr. Liao said he gave frequent lectures at the local party school about the dangerous fixation on propping up growth figures at all costs. He said officials often congratulated him on his frank views.
“But then they admit they can’t change the way they do things,” he said. “Given that the whole system is oriented toward bolstering the careers of officialdom, I just don’t see things changing any time soon.”
Interesting... so because of the political incentives that exist within the Chinese Communist Party, provincial and urban leaders have an incentive to prime their pumps to seek advancement.
Now let's turn to India, where Jim Yardley notes that -- wait for it -- seeming paralysis at the national level and a sagging national economy are causing unaffiliated leaders at the regional and local level to muse about things like forming a third party and compete at the national level. Yardley notes that the likelihood of success is low. What's interesting, however, is the question of why these local leaders are so popular:
Regional bosses, once in decline, are becoming kingmakers again: the squat, sleepy-eyed Mulayam Singh Yadav, who oversees the powerful Samajwadi Party, is even publicly musing about himself as a future prime minister.
“The incentive for every single party from the opposition to the allies is to send a signal that the Congress can’t govern,” said Pratap Bhanu Mehta, president of the Center for Policy Research in New Delhi. “That’s the election plank.”....
“Indian politics will have to live with bargains and negotiations with regional parties,” Ashutosh Varshney, a political expert, said in an e-mail interview. “A third front may or may not emerge, but both national parties will have to negotiate and bargain. That also means that India will find it harder to make firm assertions of power on the international stage, à la China. Its power will grow, but more gradually.”....
In the meantime, India’s regional leaders will continue to press for advantage. Ms. Banerjee is planning a huge demonstration in New Delhi on Monday against the government’s new economic measures. Even as [Bengal Chief Minister Ms. Mamata] Banerjee is often criticized for being intemperate and unpredictable, her influence is undeniable: this week the American ambassador, Nancy Powell met with her privately, just as Secretary of State Hillary Rodham Clinton made a point of visiting her during a trip to India in May.
Other regional leaders are also increasingly powerful national figures. Nitish Kumar, the chief minister of the state of Bihar, has hinted that his regional party could join any coalition that granted his state special status. Naveen Patnaik, the chief minister of Orissa, has expressed support for a third-front coalition. Jayalalithaa, the chief minister of Tamil Nadu, has also spoken suggestively about a new political alliance.
Most of them have won political support by delivering economic growth and, to varying degrees, improved government. This is one reason that even as India’s politics is again fragmenting, some analysts believe that the country’s economic modernization can continue. In recent years, as policy logjams paralyzed the central government, many international and domestic business leaders shifted their focus to negotiating with individual state leaders.
So, if one buys both of these stories, there's an interesting contrast. Both countries appear to be dealing with feckless national leadership and a slowdown in their national economies. In China, regional leaders are pursuing reckless "growth now" policies that could harm the national economy in the long run. In India, it's the competent economic leadership at the regional level that's bailing out a dysfunctional national government (emphasis added).
The thing is, I don't know if I completely buy Yardley's story on India. I've read enough on China to know that Jacobs' assertion about bad regional policy seems to be pretty accurate (not to mention the out-and-out distortions in economic statistics coming from China's provinces) I wish he had pushed a little bit deeper to see exactly how these regional political bosses had delivered better economic growth. If they did it using variants of what China's leaders did -- short-term measures that accelerate growth now at the expense of growth later -- then what's interesting is that regardless of regime type, local leaders can make life hell for national economic policymakers. If, on the other hand, India's regional leaders have done a genuinely better job at governing, then it's a really interesting story.
What do you think? Psst... in this case, by "you," I mean India experts.
It appears that I owe Mitt Romney a partial apology. In yesterday's blog post I quoted from a video procured by Mother Jones' David Corn regarding Romney's perspective on the peace process between Israel and Palestine. The tape suggested that Romney had zero hope for peace. As Politico's Dylan Byers notes, however, the unedited version of the tape contained the following passage right after Romney had said that an ex-Secretary of State had told him that there was a prospect for a settlement between the Palestinians and the Israelis after the Palestinian elections. After Romney said he didn't "delve" into it, he then added the following:
But I always keep open: the idea of pushing on the Israelis to give something up to get the Palestinians to act is the worst idea in the world. We have done that time and time and time again. It does not work. So the only answer is show them strength. American strength, American resolve, and the Palestinians will some day reach the point where they want peace more than we’re trying to force peace on them. Then it’s worth having the discussion. So until then, it’s just wishful thinking (emphasis added).
OK, so it would appear that Romney does proffer a way of getting the two sides to talk. My deepest apologies to Governor Romney for only printing the part of the statement that Mother Jones initially released.
And yet... I have anothert question now. I fear that Romney's "more resolve" strategy -- a theme he's echoed since making these comments in May -- raises more questions than answers.
For exhibit A, let's go to the Financial Times' Najmeh Bozorgmehr, who interviewed Speaker of the Iranian Parliament (and possible future PM) Ali Larijani. Here's what he had to say to Bozorgmehr about Mitt Romney:
Military action against Iran would be “highly costly” for the US and threats issued by Mitt Romney as he tries to become the next American president are campaign rhetoric only and can be largely ignored, Ali Larijani, Speaker of the Iranian parliament, has told the FT.
Mr Romney has sought to portray himself as much tougher on Iran than President Barack Obama and more sympathetic to Israel’s concerns. But Mr Larijani is unimpressed, saying the Republican candidate has the “little bit of wisdom” needed to understand the consequences of waging war on the Islamic Republic.
So it would seem that Mr. Larijani doubts Romney's strength and resolve. This is a problem. Romney's Theory of Statecraft seems to be that all U.S. problems in the world can be soled with Extra-Strength Resolve and Strength. Now, even one accepts this premise, the failure of adversaries to believe Romney's promises means he's gonna have to display even more Extra-Strength Resolve and Strength to convince people that he is being strong... and resolute.
The thing is, though, even Romney's allies doubt his strength and resolve... at least, they doubt his strength and resolve with respect to his China policy:
Mitt Romney is hoping his tough talk on China policy will win him votes — but few of his big business donors or fellow Republicans support what he’s saying or believe he’d follow through if elected.
And if he did, many analysts say, he’d likely spark a disastrous and counter-productive trade war that would hurt both American consumers and the workers he says he’s trying to protect....
An actual Romney policy, many corporate executives believe, would have the same kind of focus on bringing cases before the World Trade Organization and negotiating behind closed doors — the same approach of Obama and George W. Bush.
“On his first day on the job, Romney is not going to put himself on the immediate defensive with the world’s second largest economy,” said one top financial industry executive who strongly supports Romney....
Romney hopes his tougher words will make Obama look weak. But the question remains whether Romney’s tough talk is just that: talk.
“It’s kind of a head scratcher,” said the senior financial services executive who supports Romney but questions his China policy. “Is this just rhetoric or is this really the view of the candidate?”
Now, to be fair, it's not just Romney supporters who don't believe Romney's resolve on China. A Bloomberg Global Poll of 847 "decision makers in finance, markets and economics" showed that 82% of respondents were skeptical that Romney would designate China as a currency manipulator, for example.
So we have a presidential candidate who thinks the way to get things done is to show resolve -- but neither his allies nor his adversaries believe Romney's own resolve. Which leads to the following question: is it possible that there is simply no amount of Extra-Strength Resolve and Strength that will allow Romney to bend the rest of the world to his will? And if that's the case, what's his fallback option?
Hey, remember when I said that China's debt holdings did not pose a serious threat to the United States? And remember when I banged my head against the desk because Very Serious People continue to insist otherwise?
I bring this up because, according to Bloomberg's Tony Capaccio and David Kruger, the Department of Defense has my back:
China's holdings of more than $1 trillion in U.S. debt and the prospect that it might “suddenly and significantly” withdraw funds don’t pose a national security threat, according to a first-ever Pentagon assessment.
“China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities,” given their extent, according to the report dated July 20 and obtained by Bloomberg News
China is the second-largest holder of U.S. government debt after the Federal Reserve. Acting at the direction of Congress, the Defense Department studied the rationale behind the investments and whether “the aggressive option of a large sell- off” would give China leverage in a political or military crisis. China’s debt holdings have been cited as a sign of U.S. vulnerability by Republicans in this year’s election campaign....
“Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to the report, which was sent to congressional committees by Defense Secretary Leon Panetta. “As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options” in a diplomatic, economic or military situation, the Pentagon found....
China decreased its Treasury holdings last year with little apparent impact in the market, Treasury data show. The world’s most populous country reduced its position in Treasuries in the first yearly decline since Bloomberg began tracking the data in 2001.
The holdings declined 0.7 percent, or by $8.2 billion, to $1.15 trillion last year. The decline was much steeper in the second half of the year when China’s stake plunged 12 percent, or by $163 billion, from an all-time high of $1.31 trillion in July 2011, the data show.
During that period, 10-year Treasuries rallied as the U.S. credit rating was reduced by Standard & Poor's to AA+ from AAA and the European sovereign debt crisis worsened, pushing the yield to 1.88 percent from 2.80 percent.
Foreign investors held 50.3 percent of the $10.52 trillion in outstanding Treasuries as of June, government data show. That’s down from April 2008, when they reached 55.7 percent of the $4.64 trillion in U.S. marketable debt....
The Pentagon said in its report that the Fed also is “fully capable of purchasing U.S. Treasuries dumped” by China and “reducing the economic impact.”
A Chinese move to “suddenly and significantly” reduce its Treasury holdings “would fundamentally change the international finance and business community’s perception of China as a reliable and respected economic and financial partner,” the Pentagon said.
This report isn't going to end the silly campaign rhetoric or the Niall Ferguson/Tom Friedman foreign policy community talking point, of course. But I thought it was worth posting here so I can link back to it the next time I need to bang my head against a desk.
If you're an American and want o worry about China, don't focus on the debt -- focus on the apparent disappearance of China's next leader.
I should be really pleased with Thomas Friedman's column today. Entitled "In MItt's World," Friedman pens a substantive column criticizing Romney's foreign policy rhetoric to date and wishing that Romney displayed the same analytic acumen about foreign policy that he displayed as CEO of Bain Capital.
So I should be happy, except that I passed out from banging my head against my desk after reading the first two paragraphs:
Mitt Romney has been criticized for not discussing foreign policy. Give him a break. He probably figures he’s already said all that he needs to say during the primaries: He has a big stick, and he is going to use it on Day 1. Or as he put it: “If I’m president of the United States ... on Day 1, I will declare China a currency manipulator, allowing me to put tariffs on products where they are stealing American jobs unfairly.”
That is really cool. Smack China on Day 1. I just wonder what happens on Day 2 when China, the biggest foreign buyer of U.S. debt securities, announces that it will not participate in the next Treasury auction, sending our interest rates soaring. That will make Day 3 really, really cool.
No. No, no, no, no, no, and no.
To elaborate a bit further:
First, it wouldn't be enough for China to stop buying Treasuries -- as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years -- with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well). No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.
So what if they do? Well, second, while Romney's stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn't dump its debt unless things got really bad between the two countries. Not even Stephen Roach thinks this would be the initial Chinese response -- and I think Roach is being way too gloomy about Sino-American relations under Romney.
The reason China won't respond with the nuclear option of dumping all its U.S. debt holdings is that -- to repeat a theme -- this move would hurt China way more than it would hurt the United States. The far more likely response by China would be to retaliate with trade measures. This would not be good, as China is now the third largest export market for the United States. Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis.
Now, for the record, I don't think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney's consequences-free foreign policy statements later in his column. But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics -- and yet Very Serious People keep trotting it out.
I really, really wish this would disappear from public discourse. But it won't. So, most likely, my desk is gonna get dented a few more times before Election Day.
For the past decade, Stephen Roach has been the Eeyore of global economic analysis -- gloomy about the U.S. economy, gloomy about Chinese economic policy, and in yesterday's Financial Times, very, very gloomy about what would happen to the Sino-American relationship if Mitt Romney became president. Here's how he closes:
By the autumn of 2013 there was little doubt of the severity of renewed recession in the US. Trade sanctions on China had backfired. Beleaguered American workers paid the highest price of all, as the unemployment rate shot back up above 10 per cent. A horrific policy blunder had confirmed that there was no bilateral fix for the multilateral trade imbalance of a savings-starved U.S. economy.
In China, growth had slipped below the dreaded 6 percent threshold and the new leadership was rolling out yet another investment stimulus for a still unbalanced and unstable Chinese economy. As the global economy slipped back into recession, the Great Crisis of 2008-09 suddenly looked like child’s play. Globalisation itself hung in the balance.
History warns us never to say never. We need only look at the legacy of U.S. Senator Reed Smoot and Representative Willis Hawley, who sponsored the infamous Tariff Act of 1930 – America’s worst economic policy blunder. Bad dreams can – and have – become reality.
Like Roach, I think Romney's stated policies towards China have been a wee bit over the top. And it's certainly true that China hasn't reacted terribly well to Romney. The key word here is "stated," however. In Roach's analysis, this is how things escalate:
Feeling the heat from [plummeting] financial markets, Washington turned up the heat on China. Mr Romney called Congress back from its Independence Day holiday into a special session. By unanimous consent, Congress passed an amendment to [a 20 percent tariff on Chinese products] – upping the tariffs on China by another 10 percentage points.
Call me crazy, but if a brewing trade war triggers economic contraction, which then triggers rising financial discontent, I don't see any president responding by accelerating the trade war. I certainly don't see bipartisan support for such a trade war.
If the 2008 financial crisis failed to spark a renaissance in protectionism, then Mitt Romney ain't gonna be able to do it all on his own. Stephen Roach's yarn is entertaining but not persuasive.
Am I missing anything?
Jason Kempin/Getty Images
As China gears up for its 18th Party Congress and the trial of Bo Xilai's wife Gu Kailai on charges of murdering a British business partner, there have been accompanying press stories (even from the Chinese press) about the opaque nature of the Chinese regime. For example, consider this Edward Wong and Jonathan Ansfield New York Times front-pager about the relationship between China's civilian leadership and the People's Liberation Army:
During a holiday banquet for China's military leadership early this year, a powerful general lashed out in a drunken rage against what he believed was a backhanded move to keep him from being promoted to the military’s top ruling body.
The general, Zhang Qinsheng, vented his fury in front of President Hu Jintao, according to four people with knowledge of the event. At the banquet, he even shoved a commanding general making toasts; Mr. Hu walked out in disgust.
The general’s tirade was one of a series of events this year that have fueled concerns among Communist Party leaders over the level of control they exercise over military officials, who are growing more outspoken and desire greater influence over policy and politics.
With China’s once-a-decade leadership transition only months away, the party is pushing back with a highly visible campaign against disloyalty and corruption, even requiring all officers to report financial assets.
“Party authorities have come to realize that the military is encroaching on political affairs,” said one political scientist with high-level party ties. “Although the party controls the gun, the expression of viewpoints from within the military on political issues has aroused a high level of alarm.” He, like others who agreed to discuss internal party affairs, spoke on the condition of anonymity because of fear of reprisals.
Now if you read the whole article, it's really not clear at all just how much of a problem this is. We learn that Hu Jintao's relationship with the PLA is weak, even though he has engineered promotions of his favored generals (including, apparently, Zhang). We learn Ju's likely successor Xi Jinping allegedly has better ties to the military, but that Hu might keep control of the Central Military Commission for the next few years anyway. Oddly, we also learn that some PLA hardliners want to see China adopt a more liberal political model -- like Singapore.
In other words, we know a bit more about the machinations than we do in, say, North Korea. But we don't know much.
Western readers are now likely clucking to themselves and thinking, "Man, am I glad that we don't have to live in a regime with that much political uncertainty and caprice." To those readers: Let's take a tour of Europe and the United States now, shall we?
In Europe, there was a long WSJ front-pager about Italian prime minister Mario Monti and his efforts to push back against Angela Merkel's austerity policies. The impresssion that was given in the beginning of the article is that Mnti was successful... and then we get to this:
Mr. Monti didn't want Rome and Madrid to suffer the stigma of applying formally for aid or signing a list of policy demands written in Brussels, fearing this would undermine his public standing at home, as well that of his ally, Spain's premier Mariano Rajoy....
The evening before the [June EU Summit meeting], Mr. Monti hatched a plan to hijack the summit. Unless Ms. Merkel accepted his proposal on bond-market intervention by Europe's bailout fund, Mr. Monti would veto the growth pact -- stymieing Ms. Merkel in her parliament.
Italy had previously lobbied for the growth pact, so Mr. Monti's threatened veto -- announced just before Europe's leaders were due to sit down for dinner -- was a bombshell....
Mr. Monti's blockade lasted until 4 a.m., when leaders finally agreed to a text hashed out by their aides. It promised that Europe's bailout funds would be used "in a flexible and efficient matter" to stabilize the bond markets of vulnerable euro members.
It didn't go as far as Mr. Monti had originally wanted: Italy and Spain would still have to apply for any aid and sign a policy memorandum. But by planting the need to stabilize bond markets in the declaration, Italy had convinced Germany to recognize Italian reform efforts and pushed its approach for tackling the crisis into the spotlight.
An ebullient Mr. Monti spoke to reporters, claiming satisfaction for Italy and for Europe. A tired Ms. Merkel slunk off to her hotel.
German media and lawmakers were convinced their chancellor had buckled under Mr. Monti's pressure, granting Italy and Spain unconditional access to Germany's treasury. Her protestations later that morning that the fine print preserved the existing procedure for aid went largely unheard.
So did Monti get what he wanted? Beyond political optics, I don't think so, but the article makes it unclear. Actually, to be fair, the summit declaration itself makes it unclear as well, as the Financial Times' Peter Spiegel explains:
Last week’s signal from Spain’s prime minister that he may be prepared to request assistance from the eurozone’s €440bn rescue fund to drive down his country’s borrowing costs has shifted the debate back to where it was more than a month ago: What strings will be attached to such aid?
Eurozone leaders had hoped to put the question to bed during an all-night summit in late June, where Mario Monti, Italy’s prime minister, thought he had won agreement that new aid from the bailout fund to buy a struggling country’s bonds would come with few additional conditions.
Indeed, Herman Van Rompuy, who chaired the summit as president of the European Council, publicly declared there would “not be any more countries” subject to full monitoring if they sought bond-buying assistance from the fund, the European Financial Stability Facility.
The only conditions, Mr Van Rompuy said, would be living up to existing commitments under EU budget rules.
Even before the summit wrapped up, however, that conclusion came into dispute. Indeed, the summit’s final communiqué appears to contradict itself.
At one point, it asserts bond buying programmes would be executed “in a flexible and efficient manner” -- code words for light conditions sought by Mr Monti and his Spanish counterpart, Mariano Rajoy. But in another section it says such aid would only be granted under “existing guidelines” -- code words for the more onerous conditions that existed before the summit (emphasis added).
So I'm gonna say that the EU is not winning a lot of points in the transparency department right now.
Well, there's always the United States, right? Right? Oh, wait, what's this New York Times front-pager from Monday saying?
A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months.
Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill....
All told, the political gridlock in the United States, along with the continuing debt crisis in Europe, will shave about half a percentage point off growth in the second half of the year, estimates Vincent Reinhart, chief United States economist at Morgan Stanley.
More than 40 percent of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for their spending restraint, Mr. Reinhart said. He expects that portion to rise when the poll is repeated this month.
“Economists generally overstate the effects of uncertainty on spending, but in this case it does seem to be significant,” he added. “It’s at the macro- and microeconomic levels.”....
In Washington, powerful business lobbies like the National Association of Manufacturers, the Business Roundtable, and more specialized groups like the National Electrical Manufacturers Association have grown more vocal about their frustration with the inaction of Congress, and the possible dangers ahead.
“It’s totally irresponsible and absolutely insane,” said Evan R. Gaddis, the president of the electrical manufacturers’ group. “The two parties are really dug in. Companies see the writing on the wall and business decisions are now being made on this.”
Sure, China is an opaque mess when it comes to governance. Sure, praising China's governance in an uncritical fashion should trigger critical blowback. Let's face it, however -- 2012 is not a year for democracies to be crowing about how their governing model is more transparent.
For the past few days I've been getting emails asking whether I'm gonna comment on one of the most offensive and brutally effective campaign ads I have ever seen:
It's brutal because... well, let's face it, that Romney tic was always the most cringe-worthy aspect of the campaign. Anything negative that Romney did, contrasted with that song, would be powerful.
It's ridiculously offensive, however, because it baldly asserts that doing business with Mexico, China or Switzerland is un-American. Other idiocies like the Olympic-uniform controversy feed into the public perception that having the other countries make stuff is an abomination of the first degree.
So, does it matter for policy? Well.... no.
Mario Cuomo once said "You campaign in poetry. You govern in prose." Now, Mario Cuomo was clearly the world's worst poetry connoisseur. Still, to update his observation for our current needs, we can say, "You campaign as a mercantilist; you govern as a free-trader." The reason that Romney has seemed so discombobulated by the Bain attacks is that he's been China-bashing since Day One ofhis campaign, so it's tough to then
flip-flop pivot to a free trade stance. As for Obama, Matthew Yglesias noted the following last week:
[A]ll indications are that Barack Obama also doesn't think Bain was doing anything wrong. As president he's made no moves to make it illegal for companies to shift production work abroad and has publicly associated himself with a wide range of American firms—from GE to Apple and beyond—who've done just that to varying extents. And we all remember what happened to Obama's promise to renegotiate NAFTA after taking office, right?
Or, David Brooks today:
Over the years of his presidency, Obama has not been a critic of globalization. There’s no real evidence that, when he’s off the campaign trail, he has any problem with outsourcing and offshoring. He has lavishly praised people like Steve Jobs who were prominent practitioners. He has hired people like Jeffrey Immelt, the chief executive of General Electric, whose company embodies the upsides of globalization. His economic advisers have generally touted the benefits of globalization even as they worked to help those who are hurt by its downsides.
But, politically, this aggressive tactic has worked.
Brooks' colleague Nate Silver might quibble a bit with the "politically working" point, but that's a small quibble. Americans loooooooove mercantilism, so this kind of rhetoric makes tactical sense during a campaign. As stomach-churning as I find this kind of ad, I must reluctantly agree with Yglesias and Brooks that it doesn't matter all that much for governing. Even this Washington Post story that talks about Obama's "rethinking" of free trade doesn't really deliver the goods on significant policy shifts. And it appears that even the Chinese government recognize campaign bluster for what it is.
So -- to repeat a theme -- I don't think the mercantilist campaign rhetoric will amount to much.
Still, as someone who thinks offshore outsourcing is an unobjectionable practice, this is going to be a nauseating campaign.
Here's a more complete transcript of my interview with Peterson Institute for International Economics founder C. Fred Bergsten that Foreign Policy excerpted earlier in the week. I edited and abridged the transcript to clean up some of grammar. Have at it -- Bergsten's discussion of his role in the Trans-Pacific Partnership should make for interesting reading!!
DANIEL W. DREZNER: I guess the first question I would ask is, what do you think the [Peterson Institute for International Economics'] greatest accomplishment has been?
C. FRED BERGSTEN: I think our greatest accomplishment has been to educate Americans on the benefits of globalization. And the first calculation that tried to quantify the effects, namely a trillion dollar a year -- higher -- national income, the potential for further gains of another half-trillion a year could go all the way to reducing barriers to global trade. Um, it's been a tough battle. It started in earnest I'd say in the NAFTA fight in Congress, and it continued during every one of the trade policies at the time. It's of course come up repeatedly in the capital flows context as well with all the monetary crises going back to the 80s with the debt crisis, and the 90s with Asia, Russia, Brazil, Mexico, etc. And now, with the crises of the high-income countries...but I think, putting it in the broadest terms, we have been the people trying to expand understanding of globalization -- its benefits and costs, which there certainly are -- but how [on] balance, it's a positive force, both for the U.S. economy and for U.S. foreign policy. In doing that, we have never tried to cover up or short-change the costs, particularly the adjustment the cost to workers and [immobile] factors of production, but it's mainly workers. We've quantified that, about 50 billion a year to offset against the one trillion a year of gains --20/1 cost ratio -- pretty overwhelming but that is significant cost. So that has to be dealt with, and the U.S. has not dealt with it very well. Trade adjustment is miniscule -- one billion a year. We need to invest more to deal with the downside; the cost of losing, in order to keep the benefits of globalization on a stable basis. And we've argued that throughout, and I think our balance carried the day. But the battle rages on, as you know, so much work yet to be done.
DWD: Of course, I know you're a Fletcher alum, and I'm speaking right now from the Fletcher school, so I have to ask this question: In what ways did your Fletcher experience prepare you for going to DC and then sort of creating the Institute for International Economics?
CFB: Well, it prepared me really well because I learned really most of my international economics there, from the top professors of the day, [like] Charles Kindleberger.
DWD: Kindleberger was there when you were? Oh, I didn't know that.
CFB: Charlie taught a couple of courses -- a course on Europe, Europe Economy, an economics course on development with Humphry called the Don and Charlie show -- that was one of the highlight performances on the campus. But their teaching gave me most of my roots in international economics, and always -- obviously in a global context -- but also in a real world context; a political economy context that was, of course, really useful then for going into the policy world, which I did, most immediately into government, and then with that of most of my 20 years of career then to creating the institute.
DWD: Do you think America's foreign policy establishment has become more or less economically literate since when you first started IIE?
CFB: I don't think there's been much change. They were not very literate then, and they're not very literate now. My first big job -- I had a couple of lesser jobs -- my first big job was becoming economic deputy to Kissinger when he was National Security Advisor under Nixon.
Your humble blogger is not naive in the ways of punditry. He is keenly aware that the only way to move up the punditry food chain is to bemoan the crumbling state of America's infrastructure while pining for better high-speed rail, better schools, and ORDER, dammit!!
In the interest of serving the greater good, your humble blogger has decided to do the crucial pundit fieldwork necessary to adopt this position. I am therefore taking the Acela "hi speed" train from Washington, DC, to New York City, and shall chronicle every moment of import along the way in this blog post. So buckle your seat bekts -- it's going to be a bumpy ride:
8:10 AM: Part of the pundit code is getting into a local taxi and getting colorful quotes from them. Alas, my cabbie was not the chatty type. Also, despire the morning rush-hour time, there wasn't a lot of sitting around time. Oh, and his cab was clean too. Clearly, Washington DC is receiving favored treatment in its infrastructure.
8:35 AM: I get to Union Station to find much of it being renovated. There are cranes and construction equipment everywhere! What is his, Shanghai?! Of course, in the Far East, they're just building new things, whereas here in the decaying United States, we're trying to preserve our crumbling monuments to modernity [Oh, that is Pulitzer GOLD, baby!!--ed.]
8:40 AM: I want to get coffee from Starbucks, but the Acela line has already started forming. I bypass the coffee to make sure I get a good seat. Anger at stupid American regulations... rising!!
9:00 AM: On the train, I hold my breath as I try to access Acela's wifi. Many an expeletive has been tweeted in anger at this unreliable system. In my case, however, it opens with no difficulty. There is a warning page informing me that, for myriad reasons, the wifi might cut in and out and it can't access certain pages. Still, Amtrak's web service has jumped up a notch since the last time I took the Acela... or, again, the NYC-DC corridor gets preferential treatment compared with the Boston trains. Note to self: hire eager-beaver grad student to unearth Amtrak perfidy.
9:10 AM: I can't access YouTube. That's it, this is the worst f***ing WiFi service I've ever encountered. There's no WAY this would happen in China!!!
9:20 AM: Well, the Acela reveals itself to be erratic, as it starts to slow down from its pathetically low "hi speed" -- oh, it's stopoing st the BWI station. Never mind.
9:33 AM: Sure, I could have opted for the quiet car, but I wanted to mix with "the people," get a sense of what they're talking about amongst themselves. So far, they're talking about... PowerPoint presentations. There's a column in here somewhere...
10:00 AM: So far, the train has been on time, the WiFi has worked, and even the non-quiet car has been pretty sedate. Friedman's Rage is not building. [Bye-bye Pulitzer!!--ed.] No, wait, the train ride is kinda bumpy. Very bumpy at times. Kind of like... like... the American body politic!! [Atta boy! You're back in the game!--ed.]
10:20 AM: The WiFi cut out for, like 10 minutes south of Wilmington. How sad and pathetic for America. Why, if this had happened in, say, Chongqing, at least one train bureaucrat would have been executed and one British hedge-fund manager would have been poisoned to set an example for other trains.
10:39 AM: The WiFi is becoming erratic again, causing additional mutterings from other passengers in my car. One of them says "This would never happen in Michael Bloomberg's America!!" #notreally.
11:35 AM: The train has arrived in Newark. I look around. God, I miss China.
11:45 AM: Your pundit's long morning nightmare has come to an end on a gorgeous day in Manhattan. I learned a lot about America on this trip, but even more importantly... I learned a lot about myself. [Stick that in your pipe and smoke it, Aaron Sorkin!!--ed.]
Opening up my Gmail account yesterday, I saw the following announcement across the top encased in a pink banner:
We believe state-sponsored attackers may be attempting to compromise your account or computer. Protect yourself now.
As FP's Josh Rogin and others have reported, this is part of Google's new policy of warning users specifically of "state-sponsored attackers." It should be noted that Google's advice is essentially the same as it has always been -- follow good email hygeine and be careful about opening up attachments.
So, this warning doesn't really change things on my end all that much. I do wonder, however, if this will be yet another signifier that wonks inside and outside the Beltway will use to measure their "influence". I can all to easily imagine the following exchange taking place this morning at a DC Caribou Coffee:
WONK 1: So did you get the Gmail warning? Isn't that pink header a little creepy?
WONK 2: What pink header? What are you talking about?
WONK 1: You know, the Gmail notification saying that you account might be the object of a state-sponsored attack.
WONK 2: No, I didn't get that.
WONK 1: Oh.
[Long, awkward pause]
WONK 1: I'm sure it's just an oversight by the Chinese/Iranian/Russian/American authorities!
WONK 2: I can't believe this. My Klout score is higher than yours!
WONK 1: This just shows how inept the security apparatus is in Beijing/Tehran/Moscow/Washington.
WONK 2: Just you wait. After my Washington Post op-ed runs tomorrow, I'll be getting that pink banner!
WONK 1 [pats WONK 2 on the back]: Atta boy.
Of course, us academics would never have this kind of conversation. Now, if you'll excuse me, I need to polish my cv.
Your humble blogger is headed to Shanghai this week for the "12th Dialogue on Sino-U.S. Relations, Regional Security and Global Governance," co-organized by the CSIS Pacific Forum, the Asia Foundation, and Fudan University's Center for American Studies.
This trip has been planned for several months. I raise that because the fact that I'm leaving the country as this story makes the top of The Drudge Report is just a coincidence:
It was a scene as creepy as a Hannibal Lecter movie.
One man was shot to death by Miami police, and another man is fighting for his life after he was attacked, and his face allegedly half eaten, by a naked man on the MacArthur Causeway off ramp Saturday, police said.
The horror began about 2 p.m. when a series of gunshots were heard on the ramp, which is along NE 13th Street, just south of The Miami Herald building.
According to police sources, a road ranger saw a naked man chewing on another man’s face and shouted on his loud speaker for him to back away.Meanwhile, a woman also saw the incident and flagged down a police officer who was in the area.
The officer, who has not been identified, approached and, seeing what was happening, also ordered the naked man to back away. When he continued the assault, the officer shot him, police sources said. The attacker failed to stop after being shot, forcing the officer to continue firing. Witnesses said they heard at least a half dozen shots.
You know, I'd feel a lot safer if they confirmed that the guy who got shot a lot multiple times is... how to put this... no longer animated.
That this happens just when the Bilderburg group is meeting in the States is, I'm sure, also... just a coincidence.
Concerned readers should stock up on duct tape, water, and plenty of copies of this. I'm sure everything will be fine, however,
if by the time I return.
In the meanwhile, I feel the blog has been a bit top-heavy on the 2012 campaign and China as of late. What other topics, dear readers would you like me to blog about?
Periodically, Reuters' Emily Flitter files a story on the Sino-American financial relationship that contains great reporting. Unfortunately, analysts and pundits often take that reporting and misinterpret what it means. The hardworking staff at this blog hereby dubs this phenomenon The Flitter Warning.
Her latest story, which got the Drudge link and was widely linked to, reveals that China no longer has to go through Wall Street to buy U.S. Treasuries:
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.
The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world....
China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary.
The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.
China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.
The change was not announced publicly or in any message to primary dealers.
Now, this sounds like China is getting some kind of sweetheart deal, or at a minimum preferential treatment in its dealings with the U.S. Treasury, which ruffles the feathers of the easily ruffled. The Blaze, for example, suggests: "Considering the fact that China is America’s greatest creditor, as well as the fact that they are becoming increasingly antagonistic in cyber security attacks, maybe – just maybe – granting the Communist country a direct computer link to the treasury auction system isn’t the wisest decision."
A closer look at Flitter's story, however, reveals a more nuanced picture. First, China isn't getting a direct discount by bypassing Wall Street. As Flitter notes, "Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees." On the other hand, China is likely saving some money by keeping Wall Street a little more in the dark about its buying intentions (and thereby preventing traders from driving up the price of securities China intends to purchase).
Second, and this is really important -- Flitter fails to explain an important strategic reason why the United States might agree to this arrangement. She proffers two possibilities. First, that because this financial relationship is so politically sensitive, both sides have an incentive to keep the depths of it under wraps. Second, U.S. Treasury officials want to make the Chinese purchasers of U.S. debt happy.
I'd suggest a third -- through this arrangement, U.S. officials now have better data on just how much debt China is purchasing. For years, Beijing has tried to conceal the extent of its U.S. debt purchases by going through intermediaries in London and elsewhere (see this Setser and Pandey paper for more on the details). Flitter notes in her story that "in 2009, when Treasury officials found China was using special deals with primary dealers to conceal its U.S. debt purchases, the Treasury changed a rule to outlaw those deals."
This arrangement seems like a win-win deal to me. China, by bypassing Wall Street, saves a bit on its debt purchases by not moving the market so much. The United States, by dealing with Beijing directly, gets more accurate information on just how much U.S. debt China is purchasing. Flitter's reportage, in other words, simply confirms the existence of mutual interdependence between China and the United States, not asymmetric dependence. Which sounds... awfully familiar.
So, let the Flitter Warning go forth -- interesting new facts, but not much to worry about here.
Your humble blogger has been banging on about how China's weaknesses are significant and its strengths have been badly overestimated. So you would think I'd be happy to read this Edward Wong front-pager for the New York Times:
After the economies of Western nations imploded in late 2008, Chinese leaders began boasting of their nation’s supremacy. Talk spread, not only in China but also across the West, of the advantages of the so-called China model — a vaguely defined combination of authoritarian politics and state-driven capitalism — that was to be the guiding light for this century.
But now, with the recent political upheavals, and a growing number of influential voices demanding a resurrection of freer economic policies, it appears that the sense of triumphalism was, at best, premature, and perhaps seriously misguided. Chinese leaders are grappling with a range of uncertainties, from the once-a-decade leadership transition this year that has been marred by a seismic political scandal, to a slowdown of growth in an economy in which deeply entrenched state-owned enterprises and their political patrons have hobbled market forces and private entrepreneurship.
“Many economic problems that we face are actually political problems in disguise, such as the nature of the economy, the nature of the ownership system in the country and groups of vested interests,” said Zhang Ming, a political scientist at Renmin University in Beijing. “The problems are so serious that they have to be solved now and can no longer be put off.”
Wong didn't even delve into the state of China's big banks, which Bloomberg's Jonathan Weil examines and concludes that they're facing a world of hurt, or China's civil-military conundrum, which I blogged about earlier in the week.
So China is doomed, right? The bubble is gonna pop big time, right?
Well... maybe. Whenever I get too bearish on Beijing, two things drag me back from the brink: 1) China's sheer size means it can muddle through and still increase its relative power; and 2) it's possible for China to experience a severe downturn and still recover quite nicely. As I pointed out a few years ago:
[I look] at China and see the parallels with America's rise to global economic greatness during the late 19th and early 20th centuries. From an outsider's vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.
It is not contradictory for China to amass a larger share of wealth and power while still suffering from severe domestic vulnerabilities.
China-watchers tend to be divided between the Bubblers and the Extrapolators. I'm still more sympathetic to the Bubblers, but if the "China is doomed" meme goes mainstream, I might have to defect.
Yesterday your humble blogger attended a Hoover Institution conference devoted to China's evolving military and its implicatons for U.S. foreign policy. I can't say who said what, but I can say that atendees included several high-ranking military folk, multiple former policy principals, top China people from the academic and think tank communities, and at least one former presidntial candidate.
Chatham House rules prevent me from revealing who said what, but what was interesting was the areas of consensus among most of the attendees. In order:
1) China has bigger worries than the United States. It is easy to look at China's military modernization and interpret it as a dagger placed against the throat of the U.S. and its allies. It's worth remembering, however, that China currently spends more money on internal security than defense. Their actual capabilities in the anti-access/anti-denial area are... let's say a bit exaggerated (though growing). Sure, Beijing wants to expand its sphere of influence -- its a rising great power -- but it sees its greatest threats as internal rather than external.
2) If you want to worry about something, worry about China's civil-military relations. The U.S. defense establishment is quite keen on ramped-up military-to-military connections. It's the People's Liberation Army (PLA) that is not keen on this at all. The civilian leadership has... let's say limited control over numerous aspects of the PLA. Plus, the Chinese military has a corruption problem that makes the Bo Xilai scandal look like minor kerfuffle. Relations with the United States are difficult because of clashing interests... but also clashing styles. The PLA is quite transparent about intentions, but opaque about their capabilities. The United States is the reverse -- transparent about capabilities but ambiguous about intentions. This is not a recipe for comity.
3) The Chen case didn't really affect the Strategic and Economic Dialogue. This is not to say that the S & ED solved anything, but it did appear to be a productive meeting -- which is, after all, the point of a dialogue.
4) You know what would be super? The United States ratifying the U.N. Convention on the Law of the Sea (UNCLOS). There was unanimous consent the United States could do far more damage to itself than China ever could. Exhibit A on this front was the continued failure of the U.S. Senate to ratify UNCLOS. This is, in theory, the treaty that can provide the framework for resolving disputes in the South China Sea and East China Sea. It's a treaty backed by every president and secretary of state in the post-Cold War era. It's a treaty that the U.S. Navy desperately wants to see ratified. But because it hasn't happened yet, the U.S. always finds itself wrong-footed on these issues in negotiations. Well, I'm sure that in the current political climate, the Senate will eventually get around to it. Oh, wait...
There's a lot that's happened over the past week with respect to Chen Guangcheng's status, and your humble blogger could write a 5,000 word essay on it if
someone wanted to pay me gobs and gobs of cash because I'm remodeling my home I had the time. I don't however, so I have one big thought on the matter.
Before I begin, given the rapid real-time developments in the Chen case, I'm operating on the assumption that China's last Foreign Ministry statement suggests the denouement: Chen and his family will be able to go to the United States to study, and he then may or may not be allowed back into the country.
My Big Thought: contrary to just about every headline I've seen in the past three days, I think Chen's case demonstrates the surprising resilience of the Sino-American relationship. Recall what I wrote earlier in the week:
The fact that both Beijing and Washington have kept their mouths shut on Chen is a pretty surprising but positive sign about the overall stability/resilience of Sino-American relations. Bear in mind that according to the latest reports, much of the leadership in Beijing takesan increasingly conspiratorial view of the United States. As for the mood in Washington, well, let's just call it unfriendly towards China. Both sides are in the middle of big leadership decisions, making the incentive to cater to nationalist domestic interests even stronger than normal. With the rest of the Pacific Rim trying to latch themselves onto the U.S. security umbrella, this could have been the perfect match to set off a G-2 powderkeg.
Despite all of these incentives for escalating the dispute, however, it hasn't happened. Kurt Campbell was dispatched to Beijing, talks are ongoing, and neither side appears to be interested in ramping up domestic audience costs. That escalation hasn't happened despite massive political incentives on both sides to let it happen suggests that, contrary to press fears about Chen blowing up the bilateral relationship, there are powerful pressures in Washington and Beijing to find a solution that saves as much face as humanly possible for both sides.
Now, in the three days since I wrote that post, Chen has been released, calling every Chinese dissident, U.S. congressman and international reporter with a phone/recording device/Twitter account and is loudly and frantically describing the intimidation he and his family have experienced. The man has asked to be flown out on Hillary Clinton's plane as she departs from the Strategic and Economic Dialogue. In other words, everything that has transpired in the past three days has given a black eye to both the Chinese and American governments' handling of this case.
Despite the near-overwhelming incentive to ramp up bilateral tensions, however, it really hasn't happened. China's Foreign Mnistry has issued a couple of garden-variety press statements demanding a U.S. apology that won't be forthcoming. There have been no leaks or anonymous criticisms of the United States otherwise, despite the fact that this entire case is a burr in China's saddle at veery awkward moment. None of the U.S. State Department statements or press leaks have been terribly critical of the Chinese side either. Indeed, as the Washington Post observes:
Neither Clinton nor her Chinese counterparts mentioned Chen in their formal remarks at the end of their two-day meeting, saying instead that U.S.-Sino differences on human rights issues must not disrupt the broader relationship between the two world powers.
State Councilor Dai Bingguo, China’s top foreign policy expert, said his country and the United States still have “fundamental differences” on human rights issues. “Human rights should not be a disturbance in state-to-state relations,” Dai said. “It should not be used to interfere in another country’s internal affairs.”
Clinton promised to “continue engaging with the Chinese government at the highest levels” on the “human rights and aspirations” of all people.
This is pretty extraordinary. Even more extraordinary is the possiblity that despite Chen's outspokenness, he actually could be able to leave the country with his family.
Now, as the Post shrewdly observes, "China’s Foreign Ministry said the self-taught lawyer would have to apply 'through normal channels ... like any other Chinese citizen' — which would mean returning home to the village where he has been confined and beaten, in order to obtain a passport." Still, if the rhetoric between the U.S. and China on this boils down to Clinton asking the Chinese government to "expeditiously process" Chen's visa application, then this is a really big dog that didn't bark.
What do you think?
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.