Cold War talk is hot air

15 July 2011

The Age

By Geoffrey Garrett

AUSTRALIA dodged the worst economic effects of the global financial crisis, but many now fear its geopolitical fallout. The increasingly conventional wisdom is that Australia is about to get sandwiched in the post-GFC collision course between waxing China and waning America. The key assumption underlying all the hand-wringing about Australia's future is that we are on the verge of a new Cold War, and this time it's on Australia's doorstep, not far away in Europe.

But China-US relations are nothing like last century's Cold War, and Australia will do well by continuing to balance its close relations with China and the US. When it comes to China-US relations, it's the economy, stupid - and this will create more opportunity than peril for Australia.

The US and the Soviet Union were fierce rivals, but their economies were hermetically sealed off from each other. The economic divide between US-led capitalism and Soviet-led socialism thus reinforced the political and security divide between the democratic and communist blocs.

Military strategists in China and the US no doubt spend much of their time worrying about each other. And the stark differences in their world views are unlikely to fade any time soon.

But the depth, breadth and intensity of economic ties between China and the US is staggering. Rather than reinforcing Sino-American geopolitical differences, these economic ties are a profound source of stability in relations between the world's two most powerful - by far - countries.

China's economy is infamously export dependent, and today the US is more than twice as big a market for Chinese products as its second biggest trading partner, Japan. China's strategy for moving from low-cost assembly to higher value added production hinges on borrowing and adapting Western technology and expertise, led by American innovation and business practices.

The US economy is notoriously consumer oriented and borrowing driven. Today, the US imports half as much again from China as it does from its second biggest source of goods, Canada. In turn, the US government has borrowed nearly twice as much from China as it has from its second-biggest lender, Japan.

China and America are, quite simply, each other's most important economic partner. From Immanuel Kant to the architects of Bretton Woods and the European Union, liberals have placed their faith in economic entanglements as the best antidote to geopolitical conflict. If they are right, China-US economic ties will be a powerful force against damaging geopolitical rivalry between the two top powers.

Sceptics say this logic is naive not only because of China's ambitions and America's decline. They also worry that the Sino-American economic relationship is so imbalanced that it only increases frictions.

The trade and lending statistics show China-US economic ties are probably the largest and most imbalanced in history, and things have become worse since the GFC. The crisis has made China consume more and the US save more. But the already gaping US trade deficit with China widened from a little over $US200 billion in 2007 to almost $US300 billion in 2010 while China's holdings of US government debt more than doubled over the same period to more than $US 1 trillion.

There are three reasons, however, why these imbalances are much less damaging than is often thought.

First, the US has gone quiet on perhaps its biggest beef against China - the under-valuation of the Chinese yuan. This is because even though China froze the yuan against the dollar during the depths of the GFC in 2009, its currency has risen about 30 per cent against the greenback since 2005 - about as much as most economists then thought it was undervalued.

Second, Chinese and American economic sniping seems mostly designed to appease political pressures at home. China worries aloud about the future of the dollar as a global currency and restrictions on its investments in the US. America voices concerns about access to the Chinese market and protection of its intellectual property. But these grievances are tightly managed and have never escalated to crisis point.

Finally, American multinationals are making out like bandits in China, and the Chinese government is happy about this. Take General Motors and Apple. GM sells more cars in China than in the US, but the cars its sells in China are made there not Detroit. This is great for GM's bottom line. It also works for China, because GM can operate in China only via its joint venture with Shanghai-based SAIC, giving SAIC the chance to become the kind of global quality car maker China is desperate to create.

Every iPad and iPhone in the world says "designed by Apple in California, assembled in China''. Hundreds of thousands of Chinese workers assemble them from parts made in Germany, Japan and Korea for export to the world. Fat profit margins make Apple shareholders rich, but China also gets an invaluable up-close look at how one of the world's great innovators works.

GM would like to be an independent player in China; Apple is worried about intellectual property theft. But for both, China is invaluable. China would love to have its own GMs and Apples. For now, having US companies in China and abiding by its rules is the best available option.

This world of massive trade, investment and multinational companies tying China and the US together was unimaginable during the Cold War. Australia's strategic thinkers should temper their worries about defence build-ups in the Asia-Pacific and focus more on the enormous economic opportunities these ties generate.

Professor Geoffrey Garrett is chief executive of the United States Studies Centre at the University of Sydney. His chapter Chinese-US economic relations after the GFC is published this week in a new e-book, Rising China: Global Challenges and Opportunities.

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