Wednesday, April 1, 2009

Reverse China Hedge

For the past five years or so, the common wisdom in Washington was that the best way to deal with China's uncertain future was for U.S. policymakers to employ a "hedging strategy" toward Beijing. The logic was elegant: Warriors at the Pentagon should dissuade China from acting aggressively while diplomats in Foggy Bottom should persuade China to act responsibly and peacefully.

This hedging approach was clearly articulated in 2006 in President Bush's National Security Strategy, saying it would "encourage China to make the right strategic decisions for its people while we hedge against other possibilities." Earlier that year, the Pentagon's Quadrennial Defense Review Report similarly spelled out that while it would focus on "encouraging China to play a constructive, peaceful role in the Asia-Pacific region” it would also aim to create "prudent hedges against the possibility that cooperative approaches by themselves may fail to preclude future con´Čéict."

While the United States has been trying to create more policy coherence and be more consultative in its posture toward the world, China has been displaying some elements of a hedging strategy against what some might see as an uncertain future for U.S. power. Several factors might explain China's more multifaceted approach toward the United States, including domestic demand for an external scapegoat for economic woes, uncertainty about how the financial crisis will play out, and an overall more intertwined relationship between China and the world.

When Chinese asked me five years ago whether China was a friend or a challenge to the United States, I would say both. I called this seemingly dissonant approach toward China the result of a complex democratic process of policy making. Similarly, as China's middle class grows and its social stability becomes more worrisome, its own posture is becoming less monolithic.

This is one of the main findings from a trip to China I took last week with China scholar Josh Eisenman. The trip, which was a follow up to a delegation we led last September to Beijing, took us to four Chinese cities (Beijing, Qingdao, Nanjing, and Shanghai) and one farming village in Shandong. In my view, our conversations revealed more ambivalence about China's approach to the United States. As some have said, China may "seize" perceived U.S. weakness to reconfigure its position in the global pecking order. There was no question that China benefited from good relations with the United States and everyone preferred a healthy U.S. economy. But the doubt over U.S. economic health relative to Chinese economic growth has opened the door to a deeper debate.

On one hand, China benefits from the U.S. security, markets, and financial arrangements. On the other, however, China is naturally, almost mechanically, reconsidering its place as it grows.

This theme emerged during a long conversation we had with a senior Chinese scholar. It went something like this:

"Does China feel that the United States is a threat?"


"So why does China feel the need to expand its power projection and build its military?"

"It is in response to U.S. military power."

In other words, China may not feel that the United States is a threat per se, but the very fact that the United States is powerful is driving China to grow its power and act more like a "great nation." It is like international relations balance of power theory is a natural law.

My message to our Chinese hosts was simple: If China would like to act more assertively in the South China Sea, for example, it needs to provide global public goods as well. As it stands, China's opaque and increasingly powerful military is starting to scare its neighbors. The international system is predicated on safe sea-lanes that are guaranteed by the U.S. navy; the safe sea-lanes facilitate open trade and foster global peace and prosperity. If China wishes to challenge this arrangement, it will have to offer something.

Another area in which this theme has turned up is in the U.S-China economic relationship. Just before we left for our trip to China, Prime Minister Wen Jiabao said he was worried about his dollar assets. "We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," he said. His statement masked China's dilemma: It needs the United States to stimulate its economy with loser fiscal and monetary policies, which could drive down the value of the dollar, hurting China's dollar assets. Complicating the relationship, a weaker dollar could also lead to a lower volume of Chinese exports to the United States at least in the long run.

Fortunately, this week at the G20 meeting in London, Presidents Hu Jintao and Barack Obama found common ground on shared interests of stabilizing the global economy, cooperating in addressing climate change, and creating a high-level strategic and economic U.S.-China dialogue, which could help build trust between these two powerful nations. Out of a common sense of fairness, there seems to be agreement that the governance of the IMF must be restructured as well. The China hedge may be reversing but so far longer-term, strategic interests have prevailed.

Photo of Tiananmen Square taken by the author during the trip.


Anonymous said...

hi devin,

thanks for this insightful piece. You're right, of course, that the US is pursuing a "hedged" strategy on china. although distinguishing between hedging and incoherence can sometimes be a challenge. and, even while there's some balance in actually policy, there's little in rhetoric and among the demogogues.

on the other side, I'm not sure you're right that china has hedged against the USA. there's lots of dark rumbling about Chinese military budgets, but I think there's a fair amount of interested alarmism in this. It serves military interests here to do scaremongering on china. i think that there's actually less there than meets the eye. Although big, china's army is smaller, per capita, than many countries, including the USA. And at $50b annually (officially) it's still a small fraction of ours. China's ability to project force beyond its borders and immediate neighbors seems very slight.

In fact, I think China hasn't hedged well against the US. To do a better job, they really ought to diversify away from the dollar - in a careful and orderly way. They should be identifying and cultivating potential counterbalances against US power - namely Europe, Russia, and India. And they might dabble in global solidarity politics (a la Chavez, or perhaps more elegantly like Lula).

Lastly, as you say, they should be articulating a vision for leadership and order that clarifies their intentions and reassures potential partners.

For each of these, you can find some movement from China, but surprisingly little. Instead, I feel like they've been running out the clock on a generally successful, but declining strategy work laying low politically, and growing - and developing - their economy. But that will have to change as the environment is changing.

They'll have to start hedging against the potential of poor economic performance in the US, against more volatile US attitudes toward China, and unclear US intentions militarily.

The US/China trade and finance interdependence has been enormously reassuring politically. They buy our Treasuries and we by their exports. It's quite evident that we need one another. This helps dampen our paranoid fears. But this can't last, and the sooner each takes steps toward hedging, the better. But there are risks in hedging. The game-theory outcomes are pretty simple right now - lose-lose/win-win. But there will be more possible outcomes when we are each pursuing hedged strategies, which will itself introduce more complexity and additional risks.


Devin Stewart said...

Gawain, thanks for your great comments. Another way to say what I am trying to argue is that China is getting more "nuanced" in its approach to the United States. This is from the Nelson Report last night, commenting on the DPRK's intention to launch a rocket as early as this weekend (according to the New York times). Here is Nelson:

...informed sources confirm that Russia, explicitly, and China, implicitly, have told the US they will not support the US contention that a satellite launch violates 1718.

That's because, both countries have argued, the DPRK has given the required formal notification of date, time, and planned path for the missile, to both international aircraft and shipping authorities...

...China's response, in private, is described as "nuanced", since Beijing has very clearly told Pyongyang that it does NOT want to see a missile of any kind, and that any such test would be "unhelpful" to the situation on the Korean Peninsula.

Anonymous said...

"nuanced" is a very nuanced way to say something. Or perhaps not to say something.


Devin Stewart said...

It is certainly more subtle than "foreign devil."