China's soft power hits the brick wall of economics

Posted By Daniel W. Drezner Friday, December 11, 2009 - 5:08 PM Share

Lost in the Nobel hoopla yesterday was this fascinating New York Times story by Michael Wines about the ways in which China's economy and foreign economic policy are vexing its neighbors.

China has long claimed to be just another developing nation, even as its economic power far outstripped that of any other emerging country.

Now, it is finding it harder to cast itself as a friendly alternative to an imperious American superpower. For many in Asia, it is the new colossus.

“China 10 years ago is totally different with China now,” said Ansari Bukhari, who oversees metals, machinery and other crucial sectors for Indonesia’s Ministry of Industry. “They are stronger and bigger than other countries. Why do we have to give them preference?”

To varying degrees, others are voicing the same complaint. Take the 10 Southeast Asian nations in the Association of Southeast Asian Nations, known as Asean, a regional economic bloc representing about 600 million people. After a decade of trade surpluses with Asean nations that ran as high as $20 billion, the surplus through October totaled a bare $535 million, according to Chinese customs figures, and appears headed toward a 10-year low. That is prompting some rethinking of the conventional wisdom that China’s rise is a windfall for the whole neighborhood.

Vietnam just devalued its currency by 5 percent, to keep it competitive with China. In Thailand, manufacturers are grousing openly about their inability to match Chinese prices. India has filed a sheaf of unfair-trade complaints against China this year covering everything from I-beams to coated paper.

Read the whole thing -- Wines does a nice job of contrasting China's policy responses in 2008 to what it did a decade earlier. To sum up: those dogs that were not barking previously are starting to growl.

This problem is not going away anytime in the near future. The problem for the rest of the Asia/Pacific is that their comparative advantages (labor costs, process innovations) are also China's comparative advantages. Unless China starts acting as an important consumer market as well -- which admittedly might be happening as I type this -- then China's mantra of being a "responsible power" is going to meet a greater level of static very, very soon.

UPDATE: The Chicago Council on Global Affairs' Tom Wright has a report on how the financial crisis has affected China's soft power in the Asia/Pacific region that buttresses the Wines story.

EXPLORE:INTERNATIONAL RELATIONS, ASIA/PACIFIC, CHINA, ECONOMICS, GREAT POWER POLITICS, SOFT POWER

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BRETT

7:29 PM ET

December 11, 2009

That article was definitely

That article was definitely interesting. From what they said about the Chinese steel exports, it sounded like China was essentially dumping excess steel at near- or below- production cost.

This problem is not going away anytime in the near future. The problem for the rest of the Asia/Pacific is that their comparative advantages (labor costs, process innovations) are also China's comparative advantages.

I suppose that would still be true for a number of the south-eastern countries, like Thailand, Malaysia, and particularly Indonesia. I'm not sure how true it is for Korea and Japan, both of which have China as their largest trading partner (although it's fairly recent, and historically the US was the largest trading partner of both).

ZJIN

9:23 PM ET

December 11, 2009

Only difference between 1997

Only difference between 1997 and 2009 is that US dollar's value. Back then USD was strong, now it is weak. Chinese RMB just kept pegging USD and it actually appreciated against USD during this period.

I would suggest that the professor Drezner spends most energy on his comparative advantage: IR and politics. Let others who actually do research in economics make arguement on economy and trade.

DANIEL W. DREZNER

9:39 PM ET

December 11, 2009

Oh, please

The difference is that in 1997 China had a strong incentive to devalue its currency but chose not to -- a fact that earned it significant amounts of goodwill every other capital in the region. By actively undervaluing its curency this time around, China is playing a different game.

ZJIN

10:07 PM ET

December 11, 2009

There aer just one price

There aer just one price setter: US to set interest rate and then value of USD.

China and other SE Asian countries are all price takers. They made decisions whether adjust their exchange rates.

RMB/USD has been quite stable since the beginning of this recession, previously RMB appreciated against USD from 2002 to 2008 by about 20%.

Now in a game, China made adjustment based on what US did. Other smaller countries always adjust their strategies based on the positions of US and China. We could treat this as a sequential game.

In 1997, China chose to keep a stable exchange rate against USD instead of devaluing RMB. Today, China chose to keep a stable exchange rate against USD instead of appreciation. It is not like that China goes its way out to undermine other SE Asian countries. The position China takes is always mostly based on the position of US.

CENTRAL EUROPEAN

5:52 PM ET

December 13, 2009

It is too naive to see the US

It is too naive to see the US and China as separate powers. Economically and financially they are bound closely together. It is a strange and awkward marriage but marriage it is. China bashing is meaningless - they are part of you, at the moment. You may certainly hate your wife but usually you don't critize her openly...

The best solution would be a mutual decoupling (peaceful divorce) but the current obstacle is the US itself. Functionally bankrupt, lacking a strong industrial base and overburdened all around the world, ageing and unable to save.....it needs time.

Innovation can save America. Then, only then US intellectuals can restart the yuan mantra.

KEROL LUNDY

4:48 AM ET

December 15, 2009

China soft power

As China becomes an economic giant, the policy of using soft power to assert its interest is about to come to an end. Lately we have seen China aggressive military modernization and professionalization. China's navy is now in the Indian Ocean, the Red Sea, the Persian Gulf and any other point that China's economic interest is at stake. This is the beginning of a more assertive China that know soft power has it limit, therefore and combination of the two would work in this dangerous world.