China: Three Challenges and One Surprise

China: Three Challenges and One Surprise
Remarks to the Committee for the Republic

Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
October 19, 2006 in Washington, DC


Since 9/11, without public debate, most Americans have – either enthusiastically or passively – supported a militaristic and ideologically domineering approach to managing our international relations.   The salons sponsored by the Committee for the Republic are a forum dedicated to examining the consequences of this sort of approach for our nation.  Tonight’s topic fits that framework.

If enforcing global military and ideological dominance is indeed what America is all about, it’s not surprising that we should view China with apprehension.  Two questions arise.  Should we worry about China?  If so, are we worried about the right or the wrong things?

With China returning to wealth and power, it does seem to be the only country that might have the ability, should it choose to do so, to dislodge us from our position as the greatest military and economic power.  The Chinese are thus our preferred cure for “enemy deprivation syndrome,” the sickening feeling of disorientation we experienced when our longstanding enemy irresponsibly dropped dead.  China may be struggling to revive its millennial traditions of social humanism but it remains committed to Leninist forms of political organization.  Its stubborn refusal to accept our human rights doctrines as its own makes it a significant holdout – and hence a threat – to our global ideological monopoly, even if it no longer has an ideology it can persuasively explain to its own people, still less an alternative to ours.

Given the national mood at present no one should be the least surprised that most Americans see the rise of China as a zero-sum game.  The Left in our country, such as it now is, whines that Chinese are stealing American jobs.  Meanwhile, the Right, which controls our government, growls about China as a military threat.  And both appear to agree that the only approach that works with troublesome foreigners is coercion: sanctions, followed up, when these fail – as they invariably do – by military assault.

So Senator Schumer of New York has intermittently threatened to impose a contemporary version of the Smoot-Hawley tariff on China.  (The signal, filtered through the roughly 2 percent of our GDP accounted for by turnover at Wal-Mart, is: “surrender – or we’ll blow our brains out!”)  And the F-22 and Sea Wolf nuclear attack submarine, though conceived for use against a different enemy in a completely different geopolitical and military context, obviously need new targets.  Where are such targets to be found, if not in China?  (It’s hard to calculate how many F-22s and Sea Wolves we need to pacify Fallujah, but it’s become clear that we don’t have enough to do the job.)  Threat analysis is the highest form of budget justification and China, faute de mieux, is the justification du jour.  (Pardon my French.)  And, in the face of our huge and growing trade deficit with China, our Commerce Department is focused less on boosting Chinese imports of American products than on imposing new export controls on US companies seeking to sell their products to China.  Go figure!

We have clearly arrived at a national consensus that the main challenges we face from China are bilateral and either employment-related or military in nature – or both.  For various reasons, I think these judgments are too facile.  China is less a bilateral problem than a long-term challenge to our global ascendancy in terms of its economic stature, scientific and technological achievement, and even political influence.  To meet these three challenges as well as others from a rapidly changing world, we need to get our national act better together.   That’s what I really want to talk about tonight.  I will also explain – very briefly – why Taiwan, the only credible flashpoint in Sino-American relations, is rapidly fizzling out as an issue with the potential to ignite a war between the Chinese and ourselves.  That’s a mostly pleasant surprise.

But before I talk about this and the challenges I mentioned, I want to point to two fundamental ways in which we are misconstruing the problems the return of China to wealth and power presents.

First, declining employment in manufacturing here – however potent a tool of demagoguery it may furnish – is not, as is widely believed, a case of China gaining jobs at our expense.  The fact is that China is also losing manufacturing jobs, and it’s losing them both faster and on a much larger scale than we are.  Between 1995 and 2002, for example, 2 million factory jobs disappeared in the United States, while China lost 15 million.  Moreover, the losses in both countries have been in the very same industrial sectors.  Over that period, for example, we lost 202,000 textile jobs; China lost 1.8 million.

What is happening is that technology and capital are everywhere rapidly replacing labor in the manufacturing sector, just as technology and capital earlier replaced labor in the agricultural sector.  A hundred years ago, 41 percent of our workforce was in agriculture; now the figure is 1.9 percent.  The transition was very painful for farm families, but few claim that Americans as a whole are worse off as a result.  Between 1930 and 2000, even as farm employment fell dramatically, output quadrupled and farmers’ incomes rose proportionately.  Similarly, in 1980, about 20 percent of our workforce was in manufacturing; today the figure is less than 10 percent but our industrial production has more than doubled.

Productivity gains, not foreign workers, are what’s causing increasing numbers of Americans to leave the factory floor, much as their grandparents left the farm.  Cluelessly blaming this on the Chinese or the Indians or immigrants may be a good political tactic, but it is not a strategy to cope with our problems.  It simply changes the subject, without offering anything whatsoever to ease the pain of American blue collar workers displaced by accelerating structural changes in our economy.  (And, whatever the answer may be to easing their pain, surely it is not to repeat the Smoot-Hawley experience.  That experiment in protectionism helped take unemployment from 9 percent in 1930 to 16 percent in 1931 and 25 percent in 1932.)

Second, while I appreciate the utility of inventing bogeymen to justify continuing investments in advanced weaponry and tactics, China is simply not up to the role of peer competitor we’ve assigned to it, even if it were interested in such a role – which it shows no sign of being.  We need to keep China’s large but relatively backward and defensively deployed military in perspective.  That’s a bigger topic than I can deal with tonight but let me offer a few thoughts on it.

Our Defense Intelligence Agency rightly doubts that the Chinese defense budget is a full accounting of China’s military spending.  China’s published defense budget is $35.1 billion.  DIA’s median estimate of actual Chinese military spending is $70 billion.  This includes spending on what we would call homeland security functions.  These are relevant if one is thinking about attacking a place like China, as we might in response to Taiwan contingencies.  DIA’s high estimate of Chinese military spending is $105 billion.

DIA doesn’t just make these figures up; it has a sophisticated methodology for extrapolating them.  DIA takes the published Chinese defense budget and multiplies it by 2 to get its median estimate, and by 3 to get its high estimate.  Why?  Because 2 is more than 1, and 3 is more than 2, of course.  This is the methodology by which we estimate the “Chinese threat,” which is now the primary driver of our requirements for F-22s and other major weapons systems.

Let’s assume that DIA’s ballpark estimate is right, and that China is actually spending twice as much as its stated defense budget on its military – $70 billion, or around 2.8 percent of its GDP.  Is this deception or duplicity or what?  Before you jump to the obvious conclusion, reflect for a moment on our own defense budget and its relationship to our military spending.

This past fiscal year, the US defense budget was about $441.5 billion (about $40 billion more than the previous year) and 3.7 percent of GDP.  This doesn’t, of course, include about $120 billion in combat operations in Afghanistan and Iran, which are provided outside the budget through “supplementals.”  It doesn’t include benefits for veterans, another $70 billion or so; nor nuclear weapons, which are in the Department of Energy budget; nor the Coast Guard and other homeland security programs; nor various military-related programs in space.  And so forth and so on.  US military spending now is not – as our media commonly state – $441.5 billion but more like $750 billion.  That’s about 6.2 percent of GDP, not the published 3.7 percent.

To put all this in further perspective, military spending has been rising as a percentage of our national budget but falling as a percentage of China’s.  In absolute terms, the annual increases in our defense budget in recent years have been larger than the published Chinese defense budget.  Our intelligence budget, which we don’t publish, is also considerably larger.  Our annual expenditures on research and development of new weapons systems ($71 billion) and on acquisition of existing weapons ($86.5 billion) each exceed our estimates of total Chinese military spending, fast-growing as that is.  This, despite the fact that, by startling contrast with China, we have no great powers or traditional enemies on our borders, no territories in dispute with foreign powers, and no enemy fleets or air forces probing our defenses.  Who is threatening whom?   It’s not as clear as many suppose.

China hasn’t designated us as its enemy and, in most respects, doesn’t behave as if we were.  That’s smart of the Chinese because they just aren’t in our league militarily.  They have yet to do much to suggest that they aspire to be.  One problem we face is this: branding China an enemy could prove to be a case of self-fulfilling paranoia.  Another is that, much as some in our military-industrial complex would like to fight the Cold War all over again, we aren’t going to get to do this if we make an enemy of China.  China would be a vastly more formidable peer competitor than the late, unlamented USSR.  War with China would likely be hot, rather than cold.  It could involve many battles and last a very long time.

Like most of you, I live here in Washington.  In this town, facts are viewed as potential contaminants of the policy process.  Armies of spin-doctors are paid to centrifuge them away and consign them to political slag heaps somewhere outside the Beltway.  As part of the national project to create a fact-free policy environment, there are a growing number of congressionally mandated commissions and reporting requirements devoted to documenting a military threat from China.  So, for purposes of our military-industrial complex, there now is such a threat – at least in the bubble universe defined by the Beltway.  Going for fact-based rather than faith-based discussion in this environment is pretty much an exercise in futility.  Still it never hurts to try.

In this connection, there is one very real, if still latent, casus belli between the United States and China – the Taiwan issue.  For a time, we and the Chinese were quite clearly heading for a war over it.  We seemed to want to test which side could out-annoy or alarm the other with respect to Taiwan.  I was ready to bet a bunch of money – and told my friends in China so – that US forces would prevail if it came to war between us, even if we couldn’t prevent Taiwan from being destroyed as we saved it from conquest.  Much to my pleasant surprise, given the trends from mid-1995 through early-2005 that favored conflict, it doesn’t look now as though I’ll ever get to collect that bet.  Even better – Taiwan pretty clearly has increasing prospects of a future as something other than smoking rubble.

What’s behind this change?  Last year’s establishment of party-to-party ties between Taiwan’s major opposition parties and the Chinese Communist Party and their joint inauguration of a partial cross-Strait political entente has reversed the trend toward war in the Taiwan Strait.  Cross-Strait interaction is replacing Taiwan separatism with a process of political integration that parallels the economic integration and cultural rapprochement that have been underway for more than a decade.  Meanwhile, Taiwan’s political establishment has rejected massive purchases of American weapons on three score occasions.  The island’s elite quite sensibly doubt that they could win an arms race with 1.3 billion Chinese across the Strait.  And they seem to have come to the conclusion that their differences with those more numerous Chinese should not be addressed by military means.

The leadership in Beijing, for its part, now sees peaceful reunification as the likely result of trends that are increasingly well established.  Renewed confidence that time is on the side of reunification has enabled China to resume its default position, which – as demonstrated in its approach to the peaceful recovery of Hong Kong and Macau – is to be patient and forbearing.  The last chapter in Taiwan’s excursion into an identity separate from the rest of China has, of course, yet to be written; and Chinese leaders do not rule out the possibility that they might have to use force to deter efforts by independence advocates in Taiwan to alter the legal status quo.  But, they see this as a diminishing possibility, and almost no one in Beijing now expects reunification itself to involve the use of force.  In this context, frankly, American concerns about Chinese aggressiveness in the Taiwan Strait seem increasingly delusional.

Some of my best friends both here and in China are military planners.  They’ve all, without ever meeting each other, chosen a bilateral US-China conflict (over the question of Taiwan’s relationship to the rest of China) as their high tech war of choice.  I feel the pain of their surprise.  They’ve worked so hard to plan a war that, though not fault of their own, is now being called off due to an unexpected outbreak of commonsense on both sides of the Taiwan Strait.

In sum, in worrying about bilateral challenges from China, we’re very likely focused on the wrong things.   And we’re missing at least three of the main challenges China presents to our domestic complacency, specifically to our complacency with regard to our global economic, scientific and technological, and – ultimately – our political leadership.

The notion that China could possibly displace the United States at the pinnacle of world affairs may seem preposterous.  China is starting from way behind, and no one looks to China as a political model.  But China is trying very hard to excel.  And it has registered truly astonishing progress over the past 28 years by demonstrating the capacity for introspection, self-correction, and openness to change.  These are not qualities we now exemplify.

For most of human history, China was the wealthiest, socially most tranquil, scientifically most advanced, and – arguably – best governed society on the planet.  It is determined eventually to restore itself to all these acmes.  The possibility that China can achieve global leadership should not be lightly dismissed, especially if we collaborate in that enterprise by undermining our own current preeminence.

The first challenge comes from China’s growing weight in the global economy.  The “socialism with Chinese characteristics” that Deng Xiaoping and his political heirs have sponsored is derided by some as “bandit capitalism.”  It has worked wonders at the expense of a growing gap between rich and poor, corruption and the continuing absence of protective mechanisms for disadvantaged social groups.  Despite such Dickensian manifestations at home, however, China is now a huge success in many respects, lauded – and feared – here and elsewhere abroad as both the workshop and potential leader of the capitalist world.  The challenges from China’s economic success lie less in its role as a producer of goods sold throughout the world than in its probable emergence as the world’s largest consumer and capital market.

China’s foreign exchange reserves are around $1 trillion.  Its currency is steadily appreciating and moving, with all deliberate speed, toward full convertibility.  Many central banks and private investors would hold large amounts of Chinese Yuan now, if they could.  The minute the yuan becomes fully convertible, it will join the euro as an alternative reserve currency.  We are likely on the verge of a very different world monetary system, one in which Europe and China play roles commensurate with their economic clout and in which we no longer enjoy the privileges of economic dominance but must share financial power with others.

The yuan also seems likely to become a unit of account for trade in energy and other commodities currently traded solely in dollars.  China already consumes 25-40 percent of the world’s crude coal, iron ore, steel, alumina and cement.  Its energy imports are growing at 6 – 7 percent per year.  Rising demand means rising prices for all.  China’s investments in natural resources are rapidly making it the most influential foreign economic actor in Africa and a significant alternative to the United States and Europe as an economic partner elsewhere, for example, in Latin America.  Its capital markets are just beginning to open up but its potential to emerge as a very competitive center of global finance is high, given its  openness, dynamism and size, not to mention its spectacularly high savings rates,.  China is a capital-exporting, creditor nation.  Chinese institutions will soon own a lot more than a heap of Treasury bills.  Last week’s initial investments in global equity markets by the China National Social Security Fund are just the beginning.

I suspect we will be very grateful that our Secretary of the Treasury, unlike our Secretary of Defense, chose to cultivate relations with the Chinese rather than give them the cold shoulder.

The second challenge comes from China’s drive to excel in science and technology.  Americans have become accustomed to dominating S & T as well as global trade and finance.  But only 15 percent of our undergraduates now receive their degrees in natural science or engineering.  In China, 50 percent graduate in these fields.  In the US, 34 percent of doctoral degrees in natural sciences and 56 percent of engineering PhD’s are awarded to foreign students.  A good many of our best in these fields have been Chinese.

Changes in our society and visa policies after 9/11, however, have greatly reduced both our appeal and accessibility to foreigners, including Chinese.  There are now more Chinese students in Britain than here and more in the rest of the EU.  Unable to hire Chinese or Indian engineers here as readily as in the past, US firms are relocating their R&D facilities to China or India.  And Chinese inventors and entrepreneurs are now proving just as successful in China as they were when they felt truly welcome here.

Again, China is coming from far behind.  Only three out of 10,000 Chinese enterprises have intellectual property rights for their core technologies.  99 percent of Chinese firms have no patents and 60 percent do not have their own brands.  But China is determined to correct these weaknesses.  Its strategic investment plan for S&T lists dozens of areas where it hopes in time to become the world innovation leader.  If it can harness market forces to its objectives, it has a fair chance of achieving many of them.

Let me give you one practical example of what this might mean.

Later this year, China will overtake the United States as the world’s largest user of the internet.  But, under the system we pioneered and which we still control, 30 percent of the world’s internet addresses are allocated to Americans; Chinese have only 2 percent.  To put it a different way, under the current system, every American is entitled to six internet addresses while in China a single address must be shared by twenty-six users.  This resource allocation has given China ample incentive to innovate.

Back in 1994, someone – almost certainly Al Gore – came up with a way to expand the number of addresses to a level that is, for all practical purposes, infinite.  This new system, called IPv6, theoretically allows every electrical device in the world to be monitored and controlled through the internet.  IPv6 is still a theoretical possibility here.  But, in China and elsewhere in northeast Asia, it is a rapidly consolidating reality.

By the end of next year, there will be twice as many broadband users in China as there are here.  At the 2008 Olympics in Beijing, Americans will have a chance to see the extent to which Chinese and other Asians have become world information technology leaders.  Hotel dispatchers, traffic lights, electronic billboards, GPS navigation devices, police, and taxis will be networked to speed visitors to and from the Olympic sites.  The internet will also control all the facilities – everything from security cameras to the lighting and thermostats— and events will be broadcast live over it.  And so forth.  That’s nice, you might say.  You already knew that it was written that “the geek shall inherit the Earth.”  So what if “the geek” lives in China?

But the implications of the system China is designing and installing go much beyond just solving traffic problems and adjusting building temperatures.  It will, for example, affect freedom of speech on the internet – which is going to be much harder – and capabilities for information warfare – which is going to be much easier, at least for the Chinese People’s Liberation Army.  It’s fair to say, however, that these specifics are dwarfed in importance by the power shift implicit in our potential loss of the huge competitive advantages that our leadership of the information revolution has brought us.  It is now almost certain that the next phase of this revolution will be led by Chinese, Japanese, and Koreans.  This means that they, not Americans, will own and control the intellectual property and “killer apps” that power it and its evolving technology.  We will be paying royalties as we try to catch up with them.

Complacency is the enemy of both excellence and innovation.  As a nation, we have a bad case of it.  China is competing with other Asian nations and itself in a contest we don’t even appear to realize is underway.

The third challenge to our supremacy is in the realm of global political leadership.  The extent to which our behavior in recent years has disappointed our allies and alienated our friends abroad hardly needs discussion.  Alarming numbers of foreigners now hate our country, not because they have ceased to admire our traditional values but because they believe we are repudiating them or at least failing to honor them.

With a few important exceptions – like our own country and Germany – China has everywhere displaced the United States as the country that people most admire.  This is certainly not due to the Chinese political system, which is recognized by Chinese themselves to be highly problematic and in need of managed change.  It is because China, a culture once largely indifferent to the outside world and contemptuous toward diplomacy, has opened itself to foreigners and their ideas while emerging as one of the most diplomatically adept of all great powers.  China is not so much seeking leadership as the national security state we are creating is forfeiting it.  Others are turning to the Chinese both to fill the resulting vacuum and to offset the threats they now perceive from us.

Most strikingly, China, a non-Western nation that long headed an explicitly hierarchical state system, is now the staunchest defender internationally of once purely Western stipulations about the sovereign equality of states and the inviolability of their borders.  The People’s Republic of China was created in explicit opposition to the norms on which we and other Western nations built the world order we dominated.  It has now emerged as a stalwart defender of that order against American and other Western second thoughts about it.  We have new ideas about sovereignty, the authority of multilateral institutions, and the rule of law; China has taken up our old ones.  As China’s global influence continues to grow, I wouldn’t bet on Washington’s current radicalism prevailing over Beijing’s conservatism.  The east wind may indeed prevail over the west, not in a sudden squall of revolution but as a steady breeze forcing a return to norms of international law and comity we once championed but now repudiate.

Let me close by reiterating my main points.  China is not now and may never be a challenge to our global military preeminence; it ceased to emulate the Soviet Union almost half a century ago and the failure and disappearance of the USSR has not stimulated it to reconsider this decision.  China is experiencing the same stresses we are from the processes of economic restructuring that are downsizing industrial employment.  The solution to this and other global economic problems is more likely to be found in working with the Chinese than in attributing our problems to them.  Much of the momentum for China’s success stems from its emulating our past receptivity to foreigners and their ideas.  Much of our loss of preeminence stems from our new propensity for closing our ears and our borders to ideas and people that are strange to us.  We could still turn this around.

The major challenges to us from China are not, in fact, bilateral.  They are global in nature.  China’s return to wealth and power challenges us to reflect, to rediscover the angels of our better nature, to replace unilateralism with partnership, to return to the pursuit of excellence, and to reaffirm our traditional values.  I think we would be better off and the world would be a better place if we did.