Will America Make the Same Mistakes as China?

October 21, 2015

Towards the end of September 2008, less than two weeks after the investment bank Lehman Brothers declared bankruptcy, an article in the Beijing Daily declared that Chinese governance was “superior to the capitalist political system.” America’s financial turmoil, it observed, was “a manifestation of the dead end of liberalism and the destruction of the myth of American institutions.” Three years later, another piece in that outlet called the downgrading of America’s credit rating from AAA to AA+ “an historic and symbolic event. It should be viewed as a major turning point in the decline of the country’s national development.”

These sorts of sentiments abounded in mainstream Chinese media following the 2008–09 global downturn, but they now appear premature. Developments in oil production and shale gas — which the National Intelligence Council believes constitute “a tectonic shift” — have significantly reduced America’s reliance on imported energy, even as China’s dependence rapidly increases. Volatility in the global financial system — exemplified by the ongoing exodus of foreign capital from emerging markets — has cemented the dollar’s preeminence. And former International Monetary Fund chief economist Simon Johnson argues that “it is the U.S. that is currently leading the push for freer trade across the Pacific and a substantial reduction in barriers to trade with Europe. … likewise, in terms of monetary policy, the major issue for the world over the next year is when and how much the Federal Reserve will raise interest rates.” In sum, the United States remains central to global commerce.

China’s analytical misjudgments have had policy consequences. By insisting upon the indisputability of its self-declared “nine-dash line,” conducting an aggressive campaign of land reclamation in the South China Sea, and challenging the legitimacy of the alliance system that has sustained the Asia-Pacific’s order for seven decades, China is compelling many of its neighbors to strengthen their diplomatic and military ties with the United States — most notably Japan, Australia, India, Vietnam, and the Philippines. China’s course is also prompting an increasingly forceful U.S. response: The U.S. Navy has announced that it will be operating eight littoral combat ships by next February, double its current fleet, and 12 by the end of 2016.  The U.S. Navy is also significantly increasing the number and sophistication of its joint exercises in the South China Sea with countries that are locked in maritime disputes with China. Most recently, the Pentagon has confirmed that the Pacific Fleet will soon send ships and/or aircraft within 12 nautical miles of Chinese-constructed islands in the Spratlys. And China must be concerned that the strength of the “engage but hedge” constituency that has guided U.S. East Asia policy for over four decades is diminishing in favor of those calling for a more confrontational posture. By underestimating the resilience of America’s economic power and attempting to weaken the country’s longstanding Pacific partnerships, China has contributed to the realization of one of its greatest fears: encirclement.

This outcome serves as a cautionary tale for the United States, which risks making comparable mistakes if it overstates the significance of China’s present economic woes. As one observer argued recently, “unlike the stock market, real activity [in China] isn’t in free fall.” Indeed, the centrality of China to the world’s economic balance is growing apace. While the IMF may not declare the renminbi a global reserve currency in its next review, the Economist notes that the Chinese currency’s “international use has grown rapidly in recent years, albeit from a low base.” In fact, the renminbi overtook the yen in August as the fourth most-used currency in cross-border payments. China is also the top trading partner for some 130 countries. And even if its rate of economic growth soon stabilizes below 7 percent, its gross domestic product will almost certainly overtake America’s well before the middle of the century.

China does, of course, confront daunting economic challenges: multifaceted and pervasive environmental degradation, one of the bleakest demographic outlooks among major powers, a financial sector whose oscillations are increasingly distressing to foreign investors, and the risks inherent in transitioning to a more consumption-oriented growth model in face of resistance from state-owned enterprises. But none of these difficulties obviates the linchpin role China plays in the global economy. As such, U.S. schadenfreude over the performance of the Shanghai composite index would be ill-advised. Should the United States make long-term strategic inferences on the basis of what is likely to prove a transient phenomenon — China’s disappointing stock market performance — it may be tempted to embark on various imprudent courses of action, whether by attempting to undermine the fledgling Asian Infrastructure Investment Bank, devise new Asian-Pacific trade and investment arrangements that exclude China, or weaken ties between China and its neighbors. While most of China’s neighbors are wary of its regional pretensions, most will also reject U.S. initiatives that suggest an abandonment of hedging in favor of containment.

The gap in comprehensive national power between the United States and China may continue to close, but it is improbable that the latter will neatly replace the former as the world’s preeminent power — the misguided implication of the oft-used phrase “power transition.” More likely is that the two countries will have to sustain a tense equilibrium indefinitely and ensure that the competitive dynamics built into their relationship do not overwhelm the cooperative ones. The sooner they accept each other as enduring pillars of world order, the less susceptible they will be to making strategic miscalculations.


Ali Wyne is a contributing analyst at Wikistrat, a global fellow at the Project for the Study of the 21st Century, and a Master in Public Policy candidate at the Harvard Kennedy School.  He is a coauthor of Lee Kuan Yew: The Grand Master’s Insights on China, the United States, and the World (2013).


Photo credit: faungg’s photos