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US and China want to make money, not war

26 May 2012

The Australian

By Geoffrey Garrett

Professor Geoffrey Garrett, Dean of the University of Sydney Business School, writes for The Australian.

And Australia needs only to continue the strategy that has served it well for decades

Foreign Minister Bob Carr reported after his recent trip to Beijing that his Chinese counterpart Yang Jiechi said: "The time for Cold War alliances has long since passed." A broadsheet editorial then declared that the new US marine rotations through Darwin "can only be seen in Beijing as a provocation".

This follows Paul Keating and Malcolm Turnbull both worrying aloud that embracing Barack Obama's Asia "pivot" risks aligning Australia too closely with a values-laden anti-China US policy.

The drumbeat says that Australia must rebalance its foreign policy away from the US and towards China.

This view assumes China soon eclipse the US as the world's most powerful country and that the transition will be bloody.

The problem with this line of thought is that we won't be living in a China-dominant world anytime soon but one in which China and the US will be twin superpowers.

And despite profound differences in their world views, China-US is not about to become another Cold War because the two countries are joined at the economic hip.

This economic codependence doesn't guarantee peace. But it does create overwhelming incentives for both countries to cool down incipient crises before they flame out of control.

The power of these incentives was apparent in the recent tensions surrounding blind activist Chen Guangcheng.

The big risk was that American and Chinese national pride would spiral out of control.

The US could have climbed on a human rights high horse. China could have re-arrested Chen the second he left the US embassy.

Instead, both sides helped Chen land in the US to study law.

The same basic dynamic held after the 1989 student protests and military crackdown in Tiananmen Square, when the US response was not sanctions but to facilitate China's integration into the global economy.

These Chen-Tiananmen parallels should comfort those who worry Australia must choose whether China or the US will be its "godfather", as a former senior Chinese People's Liberation Army officer recently said.

Instead Australia needs only to continue the strategy that has served it so well for decades: broaden and deepen the US alliance while developing stronger economic and cultural ties with China.

Welcome to Australia's G2 world, though neither China nor the US will describe their relationship in this way.

The speed of China's economic rise has been breathtaking. The Economist believes China will pass the US to become the world's biggest economy in 2018. Goldman Sachs thinks it will be more like 2027.

The day China becomes the largest economy will be momentous. But it will also likely herald something that will be far from people's minds that day: China's big economic slowdown.

Even China's economically bullish State Council projects that its annual growth rate by the middle of the next decade will be down to 5 per cent, half that of the past three decades. And this assumes China will deal effectively with the raft of shortterm problems that may pull growth down to 7.5 per cent this year.

Chinese growth must slow because of demography and development. These twin forces have turbocharged China's rise; they will soon put a brake on its future. China has risen on the backs of a rapidly growing working-age population earning very low wages. Because of the one-child policy, it will soon become the first country in history to get old before it is rich.

China is also transforming itself from being the world's low-cost producer of choice into an enormous middle-class consuming nation. Good news for countries salivating over the Chinese market, but bad news for China's headline growth rate.

In the background, the US economy belies the stereotypes associated with the made-on Wall Street global financial crisis. Unemployment is still above 8 per cent and house prices are still 30 per cent below their pre-global financial crisis peak. But as the record profitability of Apple and the Facebook initial public offering show, American multinational companies are raking in the cash. The US economy grew 3 per cent in 2010, 1.7 per cent last year and 2.2 per cent in the first quarter of this year. This is not only far better than Japan and all the big European economies outside Germany. It is also not so far below the American economy's average growth rate since the end of World War II of 3.25 per cent.

Given that the US remains the global engine for innovation and the global magnet for immigration, there is little reason to believe it won't return to its long-term growth trend once today's profound global uncertainty lessens.

Put all this together, and HSBC predicts that China's economy will be only 10 per cent larger than the US's in 2050, with the US streets ahead of India in third place.

The remarkable thing about the G2 is how interconnected the two economies are. Last year, total China-US trade was more than $US500bn, while China held more than SUS1.6 trillion in US debt taken together, twice the size of the Australian economy.

In contrast, the year before the Berlin Wall fell, US-Soviet trade amounted to $US2bn and the Soviet Union held no US debt. The Soviet Union was literally irrelevant to the US-led capitalist economy. Today, China depends on it just as much as the US and the world depend on China.

Economics may not be destiny. But it surely matters, a lot. Obama startled many Australians when he said in Canberra last November that "prosperity without freedom is just another form of poverty", a not-so-subtle reference to China.

No surprise that the Chinese leadership blanched. Its foreign policy is built on a simple premise: we don't tell you what to do, but you can't tell us what to do either. Hu Jintao famously defended this "harmonious world" approach by saying: "Diversity of civilisations is a basic feature of humanity and an important driving force behind human progress."

Fighting words. But largely words that are intended for audiences back home, and smoothed over behind the closed door of China-US summits.

Symbolism is the best way to understand both the decision to send more marines to Darwin and the truculent Chinese response. Does anyone really believe rotating 2500 more marines through northern Australia each year will alter the strategic balance in the South China Sea, much less the Taiwan Straits?

China and the US want to make money, not war, with each other. To do so, they know they will have to live with their radically different world views and manage their tensions over trade, Taiwan and Tibet.

Australia should follow their lead and focus on its position as one side of a win-win-win economic triangle.

Australia's Origin Energy decided with American oil and gas giant Conoco Phillips to build a $US20bn liquefied natural gas facility in Gladstone. But little of the gas is destined for the domestic market. What made the investment go was the Chinese para-statal company Sinopec's commitment to buy most of the gas for the next two decades.

Origin-Conoco-Sinopec better captures Australia's G2 world than a war of words over troops in Darwin.

And what it tells us is that Australia doesn't have to make invidious choices between security and prosperity, between an American past and a Chinese future. We can and will have both.

First published in The Australian




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