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
Late August is the silly season in American politics, when politicians and pundits say willfully stupid things and political reporters work furiously to report about... really stupid and inconsequential stuff.
Now, normally this kind of trivia is great fodder for this blog during this time of year, because it's so hot in so much of the rest of the world that nothing else is going on. Europe is on vacation, so their crisis can't really get much worse, for example.
This August, however, the three largest countries in Asia seem to be seeing a lot of their own people to behave pretty badly. Let's start with Japan, where one politician has been acting in a far more subversive way than any American member of Congress:
In a move likely to further inflame tensions with Beijing, Japanese nationalists raised Hinomaru flags on one of the islets at the heart of a corrosive territorial row with China on Sunday.
Around a dozen members of the rightwing group Gambare Nippon (Hang in There Japan) swam ashore from a 20-boat flotilla carrying activists and lawmakers.
The landing comes just days after Tokyo deported pro-Beijing protesters who landed on the same islet, which is part of the Senkaku Islands.
The chain is administered by Japan but claimed by China, which calls it the Diaoyu, and Taiwan, which calls it the Tiaoyutai.
China, which fiercely claims the archipelago, had warned against acts "harming" its territorial sovereignty.
Eiji Kosaka, a politician from Tokyo and one of the men who made it to the islet, said the group planted Japanese flags on the mountainside and on shore.
"It is very sad that the Japanese government is doing nothing with these islands," he said, adding the expedition had been "a great success."
Well, I'm sure this won't trigger any kind of reaction among the Chinese population. Oh, wait...
The biggest anti-Japan protests in seven years flared across China yesterday deepening a diplomatic crisis over disputed islands in the resources-rich East China Sea.
The demonstrations occurred after a group of 150 Japanese activists arrived at the islands early on Sunday to take part in a ceremony commemorating the nation’s war dead....
Chinese protestors gathered in dozens of cities, in some cases vandalising Japanese-made cars and retail outlets. About 1,000 people marched in the southern city of Shenzhen, overturning a Japanese-made police vehicle and attacking a Japanese restaurant, according to Xinhua, the Chinese state news agency.
In the western city of Chengdu, a branch of Uniqlo, the Japanese clothing store, had to close due to the protests. Demonstrations were also reported in a dozen other Chinese cities including Shanghai, Guangzhou, Xian, Jinan and Qingdao. In Beijing, a few protesters appeared outside the Japanese embassy on Sunday morning amid heightened security, but there was no other sign of unrest in the capital.
Meanwhile, Time's Krista Mahr reports on the nasty effects of one rumor in Bangalore:
Tens of thousands of people from Assam and other Northeastern states have fled Bangalore since Thursday despite authorities’ attempts to stamp out rumors of pending attacks on their communities. On Friday afternoon, some 1500 workers and students were camped out in the city’s railway station, waiting for specially scheduled trains that have been arranged to ferry people back to their homes in India’s Northeast. Railway authorities told the Hindustan Times that at least eight trains carrying as many as 30,000 people had left for that part of the country in the last three days.
For the last week, rumors have been circulating by SMS of an attack on Eid, the last day of Ramadan which falls on Monday, on people from Northeastern India, allegedly in retaliation for riots that broke out in the state of Assam last month. More than 70 people were killed and some 400,000 displaced in clashes between the ethnic Bodo group and Muslim settlers in a conflict alternately cast as a battle over illegal immigration, religion, and the struggle for limited resources in a poor and remote part of the country....
D’Souza said that by Friday afternoon his office had received 4000 calls in 48 hours from frightened citizens and their relatives trying to figure out whether the threat was real. “This happened. That happened. Nobody knows what happened actually,” D’Souza said. “Parents and relatives have been asking people from Bangalore to come back to their hometowns.” Armed forces have been deployed on the streets and authorities have held several meetings with community members around the city to try and calm the panic and assure that they will be protected.
Your humble blogger would strongly prefer to opine on the trivialities of the American media for the rest of his vacation week, but unfortunately this stuff kinda seems more important.
I see that The Powers That Be at FP are highlighting my
unconventional wisdom about China's rise on their splash page.
Given the Hu-Obama summit and subsequent flurry of China commentary this week, it's worth highlighting the most absurd data point I cited in that article -- Forbes' magazine's decision to name Chinese President Hu Jintao the world's most powerful individual. Their explanation:
Paramount political leader of more people than anyone else on the planet; exercises near dictatorial control over 1.3 billion people, one-fifth of world's population. Unlike Western counterparts, Hu can divert rivers, build cities, jail dissidents and censor Internet without meddling from pesky bureaucrats, courts.
With these two sentences, the editors at Forbes managed to demonstrate an even shallower analysis of domestic politics than their Dinesh D'Souza cover story on Obama, which I didn't think was possible.
Let's review just a smattering of coverage about Hu Jintao's current ability to exercise iron-willed control over the Chinese bureaucracy, shall we? First, Gordon Chang in The New Republic:
Hu is sometimes called the world's most powerful person -- Forbes magazine gave him that accolade in November -- but he is a weak leader back home. Just how weak was revealed in two startling incidents within the past three weeks. On Tuesday, after the state-run Chengdu Aircraft Design and Research Institute performed the first flight test of the J-20 stealth fighter -- an unmistakable slap in the face of Defense Secretary Robert Gates, who was visiting Beijing at the time -- Hu professed not to know that the test had occurred....
If the Chinese leader was telling the truth, the test flight reveals a remarkable defiance of civilian authority by the flag officers of the People's Liberation Army, an obvious attempt to undermine the military cooperation Hu said he wanted to foster. Or if, as is more likely, Hu did in fact know about the timing of the test, he nonetheless said something that made himself appear inept. One has to wonder about a political system that creates incentives for its top leader to publicly imply that he is both ignorant and weak.
Either way, the unmistakable impression is that Hu seems to have much less influence than is often assumed. This could be due to the fact that China is in the middle of a transition to the next generation of political leaders -- led by Xi Jinping -- who are gaining in power as Hu loses his in the long run up to the actual handover.
Next, the Economist:
China's new raw-knuckle diplomacy is partly the consequence of a rowdy debate raging inside China about how the country should exercise its new-found power. The liberal, internationalist wing of the establishment, always small, has been drowned out by a nativist movement, fanned by the internet, which mistrusts an American-led international order.
Then there's Drew Thompson in -- hey, it's FP!!
China's national security decision-making process is opaque, and so this worrisome disconnect -- who knew what when -- is difficult to ascertain with certainty. It is highly improbable that Hu was unaware of the development of this major military advancement. His role as chairman of the Central Military Commission ensures that he is well briefed about major programs, and he doubtlessly approves their large budgets. What is not known is how much oversight and control the central government leadership in Beijing had over the PLA's decision-making process that lead to highly visible tests at the Chengdu air base just as Gates was visiting China.
And, finally, David Sanger and Michael Wines in the New York Times:
China is far wealthier and more influential, but Mr. Hu also may be the weakest leader of the Communist era. He is less able to project authority than his predecessors were -- and perhaps less able to keep relations between the world's two largest economies from becoming more adversarial.
Mr. Hu's strange encounter with Defense Secretary Robert M. Gates here last week -- in which he was apparently unaware that his own air force had just test-flown China's first stealth fighter -- was only the latest case suggesting that he has been boxed in or circumvented by rival power centers....
President Obama's top advisers have concluded that Mr. Hu is often at the mercy of a diffuse ruling party in which generals, ministers and big corporate interests have more clout, and less deference, than they did in the days of Mao or Deng Xiaoping, who commanded basically unquestioned authority....
"There is a remarkable amount of chaos in the system, more than you ever saw dealing with the Chinese 20 years ago," Brent Scowcroft, the former national security adviser and Mr. Gates's mentor, said Saturday. "The military doesn't participate in the system the way it once did. They are more autonomous -- and so are a lot of others."
Now, to be fair, it's possible that China is learning how to play the authoritarian equivalent of the two-level game. Even if that's true, however, China is playing that game very badly -- and they're playing it in policy arenas that are guaranteed to trigger a balancing coalition rather than accommodation.
OK, contest for readers -- name the award that I want to give to writers who vastly exaggerate China's rise!
Pssst… international relations majors and masters students. Having a hard time coming up with a BA or MA thesis topic? Worried that too many of your friends are writing about Wikileaks?
Here's a fun little project, courtesy of the Financial Times' Andrew Ward and Geoff Dyer:
China's campaign to boycott this year's Nobel Peace Prize was shown to have had some success after 18 countries joined Beijing in declining invitations to Friday's award ceremony for Liu Xiaobo, a jailed democracy activist.
Russia, Saudi Arabia, Colombia and Pakistan are among 19 countries, including China, that have declined invitations to the prize-giving.
The Norwegian Nobel committee has accused Beijing of applying "unprecedented" pressure on countries to boycott the Oslo ceremony, amid Chinese anger over the award to the jailed dissident.
The other absentees are expected to be Kazakhstan, Tunisia, Serbia, Iraq, Iran, Vietnam, Afghanistan, Venezuela, the Philippines, Egypt, Sudan, Ukraine, Cuba and Morocco, according to the Norwegian Nobel Institute, which is organizing the ceremony....
Ambassadors from all countries with embassies in Oslo are invited to the ceremony each year. As of Tuesday, 44 countries had indicated they would be represented on Friday.
Two countries - Algeria and Sri Lanka - had not replied.
It was not clear that all 19 absentees were staying away because of China but the Nobel Institute said the number of expected no-shows was higher than usual.
In 2008, for example, when the prize was won by Martti Ahtisaari, a relatively uncontroversial Finnish politician, 10 embassies were not represented at the ceremony for various reasons (emphases added).
OK, here's your thesis topic: what were the key factors that determined a country's decision not to attend Lu's Nobel ceremony? How much of this was due to Chinese pressure, how much was due to ideological affinity with the Chinese regime, and how much was due to the ambassador's spouse renting The Expendables on Netflix and absolutely needing to watch it that night?
The obvious variables to consider are alliance patterns, regime type, trade with/aid from China, proximity to Beijing, and maybe a corruption measure. That said, if you look at the list of all foreign embassies in Oslo, there are some interesting questions to ask. Why is Thailand attending but not the Philippines? Why is Colombia joining Venezuela in not attending? Why is Vietnam, an enduring rival of China, allying with China on this issue?
Go to it, students! And check out the lively comments that I'm sure will be posted down below that provide additional hypotheses. And remember, "A day without social science is like a day without sunshine."
UPDATE: Reuters does some preliminary field work. The most interesting and candid admission:
Embassies are not required to explain why they accept or decline a Nobel invitation, but a senior Filipino diplomat spoke candidly, underlining China's growing power, especially in Asia.
"We do not want to further annoy China," he said.
You know, as insults go, this one is pretty bush league:
China's credit-rating agency on Tuesday downgraded its rating for U.S. sovereign debt and warned of further cuts, in a pointed move ahead of this week's Group of 20 major economies meeting.
Dagong Global Credit Rating Co. Ltd., the only wholly Chinese-owned rating agency, cut its rating on U.S. debt to A from AA, citing the Federal Reserve's move last week to initiate another round of asset buying, worth $600 billion. It also placed the U.S. sovereign credit rating on negative watch.
"The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar and the continuation and deepening of credit crisis in the U.S.," Dagong said.
"Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government's intention of debt repayment," the agency said.
Sounds very, very serious, until we get to this part of the story:
The downgrade of the U.S. rating by Dagong comes just over a month after the U.S. Securities and Exchange Commission denied the firm's application to officially rate bonds in the U.S.
At that time, Dagong called the SEC's move discriminatory and said it was considering legal action.
The SEC said in denying the application that "it does not appear possible at this time for Dagong to comply with the record keeping, production and examination requirements of the federal securities laws."
Indeed, even the New York Times' now-thrice-weekly story about rising Sino-American tensions observes:
In the rest of the world, the United States is still the strongest of credit risks, and the Chinese downgrade is not expected to have much real impact....
[T]hose critics, mostly countries that fear that recent American policy will devalue the dollar and undercut their competitiveness, do not appear poised to offer an alternative to an economic order that has been led by the United States since the end of World War II, or to the role the dollar has played for decades as the de facto world gold standard.
The Chinese, who have protested that the Federal Reserve is trying to unilaterally manipulate the dollar for the purpose of creating jobs at home, have been accused of doing exactly that for years - the root of many of the world's economic tensions today, in the eyes of Mr. Obama and his economic aides.
Look, clearly China is suffering from... an insult gap. Americans have been leading the world in trash-talking for decades now. China is trying hard to catch up, but I think the authorities in Beijing need some assistance in their game of catch-up.
I hereby call on all readers to offer, in the comments, ways that Chinese authorities can really sharpen their rhetorical jabs at the United States. In the spirit of kicking off the conversation, here are a few suggestions:
"Chinese Halitosis Institute Downgrades American Fresh Breath Index to BB: 'Seriously, What's The Deal With All The BBQ,' Asks Agency Head"
"Chinese Election Monitors Accuse Obama Administration of Rampant Ballot Fraud During Midterm Elections: 'It's No Myanmar, I'll Say That' According to Chief Monitor"
"Chinese Dietary Institute says American Food Leaves Them Hungry After Only 12 Hours"
Go to it.
Keith Bradsher reports on the latest move in Chinese economic statecraft:
China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week.
The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.
"The embargo is expanding" beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.
They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions....
The signals of a tougher Chinese trade stance come after American trade officials announced on Friday that they would investigate whether China was violating World Trade Organization rules by subsidizing its clean energy exports and limiting clean energy imports. The inquiry includes whether China's steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, are illegal attempts to force multinational companies to produce more of their high-technology goods in China.
Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.
Industry executives and analysts have interpreted that official denial as a way to wield an undeclared trade weapon without creating a policy trail that could make it easier for other countries to bring a case against China at the World Trade Organization.
So far, China seems to be taking a similar approach in expanding the embargo to the West.
Hat tip to Will Winecoff, who asks, quite reasonably, "What in samhell is China thinking?"
Assuming that the New York Times story is accurate, there are three ways to think about what Beijing is doing. First, this could just be all about domestic politics. Bradsher notes that the decision was made after a Central Committee meeting. It's possible that as the currency wars heat up, and as the U.S. starts complaining to the WTO, there was a need to assuage some nationalist outrage. Of course, no one really knows what Chinese domestic politics looks like, so who the hell knows how much validity to give to this argument.
The second way to look at it is that China's leaders have been reading The Sanctions Paradox. I argued in that book that high expectations of future conflict between the sanctioning and the sanctioned state would lead to frequent episodes of economic coercion, but each attempt would yield only minimal concessions. So far, this model holds up: the past month of China's rare earth export controls have yielded them exactly one returned fishing boat captain. Maybe they are hoping that extending the ban to the United States will force Washington to back down in their WTO complaints. Given rising conflict expectations, that's about the most they're going to get from this action.
The third way to think about it is that China is being ridiculously short-sighted in their use of economic coercion. As Patrick Chovanec notes at Seeking Alpha:
[China] really shot itself in the foot. By flexing its muscles so eagerly, over a relatively minor incident, it alarmed its customers and possibly frightened them off, when a softer approach might have lulled them into continued and deepening dependence. There's no question that China can extract rare earths at the cheapest price, in purely monetary terms. But now China's trading partners must be seriously wondering, what could the real price amount to, when the bill eventually comes due?
China's foreign economic policies with respect to raw materials suggests that Beijing doesn't think market forces matter all that much -- what matters is physical control over the resources. This is a pretty stupid way of thinking about how raw materials markets function, and it's going to encourage some obvious policy responses by the rest of the world. Non-Chinese production of rare earths will explode over the next five years as countries throw subsidy after subsidy at spurring production. Given China's behavior, not even the most ardent free-market advocate will be in a position to argue otherwise.
More importantly, China's perception of how economic power is wielded in the global political economy is going to have ripple effects across other capitals. If enough governments start reacting to China's economic statecraft by taking similar steps to reduce interdependence with that country, then China will have created a self-fulfilling prophecy in which geopolitics trumps economics. Another possibility is that the rest of the world will operate as before in dealing with each other, but treat China differently, developing CoCom-like structures and fostering the creation of explicit economic blocs.
That really would be the worst of both worlds for Beijing. China is growing, but the economic weight of countries that prefer market-oriented ways of doing business is still much, much larger.
In going for the short-term gain, China is inviting a long-term containment policy. That might allow for some rally-round-the-flag support at home, but it's going to be a massive net loss for their economy.
The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China
pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.
If you need to read one article on why things are going down the way they are, it's Alan Beattie's excellent survey in the Financial Times of how countries as responding to this situation:
Washington is looking for allies -- particularly among the emerging economies, who complain about their own competitiveness and volatility problems -- in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…
Yet despite U.S. claims of broad support, backing appears sporadic…
[S]ome U.S. policymakers privately complain that European backing is patchy and tends to go up and down with the euro. In the first half of the year the euro was pushed lower by the gathering Greek crisis, by early summer falling 17 per cent below its January level. Focused on local difficulties, and with the German export machine powering ahead, European officials saw little need to take on Beijing over currencies and had little energy to do so…
Across the emerging economies, the plan of attack seems to be to keep quiet and pass the ammunition. Despite widespread recognition of the distortions China’s exchange rate policy appear to be causing, governments have generally preferred unilateral intervention to a public slanging match.
True, in April the governors of the Reserve Bank of India and the Central Bank of Brazil complained that Beijing was hurting their exporters.
But recently Celso Amorim, Brazil’s foreign minister, told Reuters: "I believe that this idea of putting pressure on a country is not the right way for finding solutions." Significantly, he added: "We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer…"
With the prospect of diplomatic progress limited, currency policy in the U.S. and Europe may end up being conducted through domestic monetary policy. If, as seems possible, the U.S. Federal Reserve, the Bank of Japan and the European Central Bank return to quantitative easing in order to boost growth, their currencies are likely to weaken -- as the yen briefly did after the Bank of Japan’s announcement of looser monetary policy this week.
So, to sum up:
1) Every country is free-riding/buckpassing on this issue, hoping that the United States can dislodge China on its own.
2) The international regimes designed to prevent free-riding like this -- namely the G-20 and the IMF -- are not up to this task. [What about the WTO? -- ed. Fuggedaboutit.]
3) The source of China's rising power is not its hard currency reserves or its command over scarce rare earths, but its burgeoning domestic market.
4) Ironically, the United States and other countries want China to accelerate the growth of its domestic market, which would in turn give it more power. Even more ironically, China doesn't want to do this right now.
5) The sum effect of all of this will be a series of uncoordinated interventions into currency markets that will increase market volatility, political posturing, and eventually lead to the erection of capital and/or trade controls.
Developing… in a very disturbing manner.
MANDEL NGAN/AFP/Getty Images
FP's own Steve LeVine has an essay at The New Republic that notes the Obama administration's efforts to dial down U.S. intervention in Central Asia. LeVine is clearly ambivalent about this policy shift:
President Obama's public rationale for this shift is clear. He wants arms control agreements, victory in
Afghanistan, and the denuclearization of Iran -- and Russia has a role to play in all three. Reset has lubricated new agreements with Russia that enable, for example, the speedy overflight of U.S. military planes across the North Pole and on to Kyrgyzstan, in support of the war in Afghanistan; the sale of Russian military helicopters, to be paid for by the Pentagon, to the Afghan government; and a tighter financial squeeze on Iran. Meanwhile, on the domestic front, absent any other fulfillment of Obama’s campaign vow to win hearts and minds abroad through civility, the "reset" is Exhibit Number One that good manners work.
In addition, Obama officials believe that, while the great-power-rivalry strain of geopolitics in the region may have been necessary in the 1990s, it is now obsolete. When Heslin's policy was initially drawn up, its concrete objective was to provide the Caucasian and Central Asian states with a financial channel independent of
Moscow's grip. That meant the construction of energy pipelines to alternative markets, especially the Baku-Ceyhan oil pipeline from the Caucasus to Turkey. But that policy has largely succeeded: The full flow of oil Baku-Ceyhan began in 2006. The Central Asian states of Kazakhstan and Turkmenistan are not linked in -- and given their cautious nature, they are unlikely to risk Russia’s ire by agreeing to be connected by pipeline with the West -- but they have also developed alternate export routes through China, which has constructed its own pipelines that serve precisely the same function....
President Obama must realize that his new policy ultimately represents a trade-off. While the geopolitical gains from deemphasizing the Great Game have been substantial, the local costs of
America's hands-off approach have been quite high. In Kyrgyzstan, which is still embroiled in ethnic strife, deferring to Russia has meant leaving a largely powerless government to its own devices. Azerbaijan has nervously struck up negotiations over natural-gas with Russia’s Gazprom in order to forestall any possible trouble of its own with Moscow. And the United States has adopted a far different approach toward local leaders, swallowing Kazakhstan's backsliding on what they believed was the country's private commitment to release imprisoned opposition political activist Yevgeny Zhovtis, and deepening relations with Uzbekistan's President Islam Karimov, probably the most brutal leader in the former Soviet Union. In other words, the reset has a serious downside: By deciding that the politics of Central Asia are what they are, Washington risks losing its justly earned reputation as the region's protector of political and economic independence.
From a U.S. perspective, this is fine. Let Russia and China jockey for influence. Geographic proximity and the 'stans' own geopolitical interests will prevent either great power from establishing hegemony over the region. This will allow them to maintain as much political autonomy as possible when bordering two civilizational entities.
I can't get too worked up about this. First, Central Asia is about as far away from the United States as one can get -- if there was any region in which a low U.S. profile was called for, this is the region.
Second, Central Asia is not being left to Russian hegemony. Indeed, my official U.S. sources tell me that the Russians don't care about the U.S. influence in the region. What freaks them out is China's growing regional influence. That's understandable. With a rapidly growing and energy-thirsty economy, China has a compelling interest in the 'stans.
Third, I'm not sure that the U.S. is sacrificing all that much. LeVine argues that the U.S. has played a constructive role by fostering human rights and political autonomy. I don't think the latter is going away. As for the former, to be blunt, the U.S. doesn't have all that shiny a track record. With the partial exception of Kyrgyzstan, the countries in this region have ranged from mildly authoritarian (Kazakstan) to wacky totalitarian (Turkmenistan). U.S. human rights interventions accomplished little in the 1990s, and have been even less effective since 9/11 -- indeed, Kyrgyzstan has backslid pretty dramatically.
There are a lot of regions in the world where I think a robust U.S. presence is a good idea. Central Asia is no longer one of them.
Scott Olson/Getty Images
There's been a lot of oh-my-God-China-is-eating-America's-lunch-have-you-seen-how-pretty-their-infrastructure-is?-kind of blather among the commentariat. And, to be sure, China has had a good Great Recession. But one of the points I've been making on this blog repeatedly is that, for all of China's supposed deftness, "China's continued rise seems to be occurring in spite of strategic miscalculations, not because of them."
Now, I had also assumed that China's leadership would quickly move down the learning curve and practice a more subtle form of statecraft. After reading Keith Bradsher in the New York Times today, however, I guess I was wrong:
Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, win turbines and guided missiles.
Chinese customs officials are halting shipments to Japan of so-called rare earth elements, preventing them from being loaded aboard ships this week at Chinese ports, three industry officials said Thursday.
On Tuesday, Prime Minister Wen Jiabao personally called for Japan’s release of the captain, who was detained after his vessel collided with two Japanese Coast Guard ships about 40 minutes apart as he tried to fish in waters controlled by Japan but long claimed by China. Mr. Wen threatened unspecified further actions if Japan did not comply.
Is this effort at economic statecraft going to accomplish Beijing's objectives? In a word, no. True, according to Bradsher, "China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths."
It's also true, however, that Japan has been stockpiling supplies of rare earths. Furthermore, this kind of action is just going to lead to massive subsidies to produce rare earths elsewherein the world (including the United States) and/or develop rare earth substitutes. Oh, and one other thing -- given the spate of flare-ups between Japan and China as of late, the last thing Tokyo will want to do is back down in the face of Chinese economic coercion.
Don't get me wrong -- if China persists in this ban, there will be come economic costs to the rest of the world. Those costs just won't translate into any political concessions. [UPDATE: The Wall Street Journal has an excellent follow-up story suggesting that China is not imposing a ban.]
It is hardly surprising that (reported) actions like these are leading the entire Pacific Rim right to Washington's door:
[R]ising frictions between China and its neighbors in recent weeks over security issues have handed the United States an opportunity to reassert itself — one the Obama administration has been keen to take advantage of.
Washington is leaping into the middle of heated territorial disputes between China and Southeast Asian nations despite stern Chinese warnings that it mind its own business. The United States is carrying out naval exercises with South Korea in order to help Seoul rebuff threats from North Korea even though China is denouncing those exercises, saying that they intrude on areas where the Chinese military operates.
Meanwhile, China’s increasingly tense standoff with Japan over a Chinese fishing trawler captured by Japanese ships in disputed waters is pushing Japan back under the American security umbrella....
“The U.S. has been smart,” said Carlyle A. Thayer, a professor at the Australian Defense Force Academy who studies security issues in Asia. “It has done well by coming to the assistance of countries in the region.”
“All across the board, China is seeing the atmospherics change tremendously,” he added. “The idea of the China threat, thanks to its own efforts, is being revived.”
Asserting Chinese sovereignty over borderlands in contention — everywhere from Tibet to Taiwan to the South China Sea — has long been the top priority for Chinese nationalists, an obsession that overrides all other concerns. But this complicates China’s attempts to present the country’s rise as a boon for the whole region and creates wedges between China and its neighbors.
This latest rare earth ban is just going to accelerate this trend. The ironic thing about this is that it's not like U.S. grand strategy has been especially brilliant. The U.S., however, has two big advantages at the moment. First, it's further away from these countries than China. Second, Washington's actions and rhetoric have been far more innocuous than Beijing's.
In yet another New York Times story, David Sanger provides a small clue as to whether Beijing either knows or cares about the blowback from its recent actions:
Early this month Mr. Obama quietly sent to Beijing Thomas E. Donilon, his deputy national security adviser and by many accounts the White House official with the greatest influence on the day-to-day workings of national security policy, and Lawrence H. Summers, who announced Tuesday that he would leave by the end of the year as the director of the National Economic Council....
[O]fficials familiar with the meetings said they were intended to try to get the two countries focused on some common long-term goals. The Chinese sounded more cooperative themes than in the spring, when two other administration officials were told, as one senior official put it, that “it was the Obama administration that caused this mess, and it’s the Obama administration that has to clean it up.”
Well, that is learning, but it's of a very modest kind.
Now, it is possible that Beijing has simply decided that its internal growth is so big that it can afford the friction that comes with a rising power. My assessment, however, is that they're vastly overestimating their current power vis-a-vis the United States, and they're significantly undererstimating the effect of pushing the rest of the Pacific Rim into closer ties with the United States (and India).
More significantly, and to repeat a theme, China is overestimating its ability to translate the economic interdependence of the Asia/Pacific economy into political leverage. With these misperceptions, however, China is risking some serious conflicts down the road.
Am I missing anything? I'm serious -- this problem ain't going away anytime soon.
This week Japan has provoked the ire of the United States and Europe by unilaterally intervening in currency markets to depreciate the yen against other major currencies. Japanese Prime Minister Naoto Kan has responded to these criticisms by
telling the US and EU to go suck a lemon stating that further "resolute actions" would be taken on this front.
This comes on the heels of mounting U.S. frustration with China's "go-slow" policy on letting the yuan appreciate against the dollar. [What do you mean by "go slow"?--ed. Let's put it this way: the tortoise thinks that China is being pokey on this question.]
So, is this the beginning of beggar-thy-neighbor? Will other countries start intervening in foreign exchange markets to gain a competitive advantage for their export sectors?
The New York Times' Hiroko Tabuchi thinks not, because Japan can't unilaterally devalue its currency like in the old days:
It is unlikely, though, that intervention by Japan alone will sway currency markets in the long term. The global volume of foreign exchange trading has grown rapidly in recent years, which prevents intervention by a single government from countering bigger market trends.
Other countries are unlikely to help Japan’s cause, because they need to keep their own currencies weaker to bolster exports. A weak currency makes a country’s exports more competitive and increases the value of overseas earnings.
Much of the yen’s weakening came from investors selling the currency on expectations that the Japanese government would be more active in keeping the yen in check. Japan did not disclose how much it had spent in currency transactions, but dealers put the initial amount at 300 billion to 500 billion yen ($3.5 billion to $5.8 billion).
But as Switzerland found this year, a single government’s efforts to weaken its currency can prove futile. Switzerland abandoned that effort, after its central bank had lost more than 14 billion Swiss francs ($14 billion) in foreign currency holdings in the first half of the year, after a fall in the euro’s value ate into the bank’s reserves.
The Swiss franc is also seen by investors as a relative haven and has also strengthened amid global financial unrest. This month, the franc hit a record high against the euro.
Hmmm.... maybe. Japan's economy is much larger than Switzerland, so I'm not sure the comparison holds up. The real problem, however, appears to be that countries perceived of as "safe havens" wind up with overvalued currencies.
This little parable also makes me wonder whether we might see beggar-thy-neighbor policies in a different guise this time around. This is going to sound a little crazy, but here goes: rather than explicit exchange rate intervention, what if countries decided to play fast and loose with Basle III and other measures to strengthen financial integrity?
This really does sound crazy -- it suggests that governments would be willing to tolerate a higher risk of domestic banking collapse in order to avoide being a "safe haven" status for capital. That said, think of how much Europe benefited from the depreciation of the euro due to the Greek crisis. Basle III, by taking so long for banks to meet standards allow those countries with more insolvent financial institutions **cough** Germany **cough** to take their own sweet time in having them meet new capital adequacy standards. This would allow Germany to have the euro stay relatively cheap without abandoning its anti-inflationary zeal.
Now, in all likelihood, not even the Germans would purposefully do this. This is crazy talk. What I'm suggesting, however, is that there is more than one way for a country to have its currency depreciate, and these policies are substitutable. Looking only at explicit exchange rate intervention might be just a bit too narrow. And if more countries find more ways of keeping their currency undervalued, well then, the days of beggar-thy-neighbor would have arrived.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.