Without Economic Changes, America Can’t Contain China

The problem with military planners is that all they know is military stuff. The Pentagon may harbor some of the best strategists who ever gazed at a globe, but they seldom have much grasp of economics or demographics or cultural trends. So when a new threat arises, their natural inclination is to figure out how military force can be applied to deter or defeat it.

Thus it is with the growing challenge posed by a rising China in what used to be called the “Far East.” The arc of countries stretching from Singapore to the Korean Peninsula has become the industrial heartland of the new global economy, and it is essential to U.S. national security that those nations not become dominated by China as Beijing’s influence grows.

Secretary of Defense Leon Panetta said as much in his first major speech on security policy in October. In Panetta’s word’s, “The rise of China will continue to shape the international system, and we will have to stay competitive and reassure our allies in the region.” Panetta went on, “That means continuing to project our power and maintaining forward-deployed forces in the Asia-Pacific region.”

The defense secretary was right to emphasize America’s commitment to the region, a commitment some nations in the area had begun to doubt after a decade of American military distractions in Southwest Asia. However, incremental increases in the U.S. military presence aren’t going to do much to slow the growth in Chinese influence due to geography and economic trends. The geographical asymmetry between China’s and America’s circumstances in the Western Pacific is stark: we are operating thousands of miles from home, and they are literally the Middle Kingdom.

U.S. leaders cannot change the geography favoring creeping Chinese hegemony in the region. But there are many things they could do to reverse the economic trends fueling China’s rise, and to date Washington has done little. The simple truth is that America’s economy has been in steady decline since the new millennium commenced, while China’s economy has rapidly expanded. When the asymmetry in economic performance is combined with the geographical asymmetry, China’s dominance becomes inevitable over the long run, given its vast population.

The U.S. intelligence community warned President Obama this might happen even before he took office. A multi-agency global trends assessment that was briefed to the president-elect stated, “In terms of size, speed, and directional flow, the global shift in relative wealth and economic power now under way — roughly from West to East — is without precedent in modern history.” Nothing has happened since Mr. Obama was inaugurated to alter that outlook. In fact, David Ignatius of the Washington Post reported on December 11 that the latest version of the intelligence community’s long-term forecast is more pessimistic than the assessment briefed to Obama three years ago.

If you spend most of your time following military affairs, then you may not realize just how far China’s economy has come over the last 11 years. In 2001, China’s economy was only one-third as big as America’s, even though it had four times as many people. Today, the International Monetary Fund is predicting that it will surpass the purchasing power of the U.S. economy in 2016. In 2001, U.S. exports to the rest of the world were three times greater than those of China; today, China’s exports are 50 percent greater than those of America.

The key turning point in China’s economic development came only weeks after the 9-11 attacks, when it became a member of the World Trade Organization. The bargain that China made in return for unfettered access to overseas markets was that it would abandon mercantilist policies such as export subsidies and currency manipulation that distorted trade flows. We now know that China took full advantage of its new-found market access without eliminating discriminatory trade practices. By the end of the Bush years, the United States had accumulated a trillion-dollar deficit in its merchandise trade balance with China and Beijing was holding vast currency reserves America needed to borrow to cover federal debts.

But as that latter point implies, the economic chronicle of the new era wasn’t just about China’s rise, it was also about America’s decline. Policymakers in Washington failed to foster conditions in which the U.S. economy could keep up with the rest of the world, and thus the U.S. share of global output slid from 32 percent the year President Bush took office to 24 percent today. After increasing jobs by 20 percent in each of the two preceding decades, the economy produced no net additional jobs at all during the first ten years of the new millennium. An average of over 40,000 manufacturing jobs disappeared every month for ten straight years, due in no small part to the flood of cheap Chinese goods inundating the market.

Sector-by-sector, the impact of China’s economic rise seems even more staggering. In 2001, the year that Beijing joined the WTO, China and America both produced about 100 million tons of steel. Ten years later, China was producing 800 million tons annually and America was producing one-tenth that amount. China had become by far the biggest consumer of cement and copper in the world, and had constructed approximately half of global aluminum-smelting capacity. Chinese competition forced the closure of the last penicillin maker in the U.S. in 2006, and is now gradually wiping out the domestic solar-panel industry (where Chinese global market share has skyrocketed from 9 percent to over 50 percent in a mere six years). China surpassed the U.S. in electronics production in 2006, and a survey conducted the same year found that while U.S. chemical companies were planning to build only one new plant worth over a billion dollars, the Chinese were planning to build 50.

I could go on. But what’s really stunning about the Chinese surge is that so much of it was made possible by policies explicitly prohibited in trade treaties. China’s national government and its various provincial governments have steadily subsidized and protected exporters in direct contravention of trade rules. Beijing pegged the yuan to the dollar at an artificially low rate that by some estimates gave Chinese companies a 30 percent price advantage over their U.S. counterparts even before labor differentials were factored in. And Chinese authorities have done almost nothing to curb the rampant theft of U.S. intellectual property — theft which results in nearly 80 percent of U.S. computer software used in China being pirated.

So it isn’t hard to understand why China last year sold the U.S. $365 billion in goods and services, while America only sold $92 billion to China. With America gradually reducing its deficit in energy trade due to breakthroughs in extracting oil and gas, China has become the main reason why the U.S. still has a huge trade deficit. Not only has Washington failed to do much about China’s trade violations, but it has allowed itself to become dependent on Chinese loans as a way of sustaining federal borrowing without raising interest rates. As some observers have wryly observed, the U.S. will have to borrow money from China to cover its costs the next time Taiwan needs to be defended.

That brings me back to America’s military role in the Western Pacific. Although a renewed American defense commitment to the region will undoubtedly be welcomed by local friends and allies, it won’t alter the accumulation of power by Beijing because that is driven mainly by China’s economic expansion. If America cannot improve its own economic performance and start imposing penalties on Chinese mercantilism, then allies will have good reason to continue wondering how reliable U.S. military commitments are.

The Chinese military buildup that has regional leaders so concerned would not have been feasible in the absence of economic growth rates averaging 10 percent annually over the past decade. And the growth rates in turn would not have been sustainable were it not for easy access to the U.S. and other western markets. We shouldn’t penalize China for working hard and investing heavily unless its government becomes overtly aggressive, but there is copious evidence that the country’s economic success isn’t due solely to virtuous behavior. It is the biggest and most persistent violator of free-trade rules since the General Agreement on Tariffs and Trade was superceded by the World Trade Organization in 1995.

Among the measures Washington needs to implement are countervailing duties to combat illegal export subsidies, economic pressure to end currency manipulation, and systematic prosecution of intellectual-property theft. Beyond that, though, the United States needs to get its own economic house in order by balancing the federal budget and removing the regulatory burdens that drive U.S. manufacturers offshore in the first place. If Washington cracks down on Chinese trade abuses, that will not automatically bring jobs back to America unless the domestic tax and regulatory climate improves. The United States needs to be more welcoming to miners and manufacturers, otherwise it cannot benefit fully from its competitive advantages.

Obviously, military planners give little thought to such matters when they prepare to bolster the America’s defense posture in the Pacific. There is much to be said for developing a new land-based bomber and longer-range naval aviation assets that are suited to the vast distances and emerging military challenges in the Western Pacific. But the core of our problem in coping with China is that the Middle Kingdom has been growing at breakneck speed by breaking the rules, while America has been hobbling its own economic growth through political paralysis and excessive regulation. If the United States can’t break out of the cycle of debt and decline it has been in for the last decade, then a few more warships in the Pacific aren’t going to stop China from dominating the region.

Loren Thompson, a member of the Breaking Defense Board of Contributors, is a defense consultant, analyst at the Lexington Institute and author of the Early Warning blog.