Publications
Partners
Cambridge, Massachusetts - After rating agency Standard
& Poor's downgraded America's long-term debt, China said that Washington
needed to "cure its addiction to debts" and "live within its
means".
It must have been a delicious moment in Beijing, accustomed
over the years to lectures from Washington about its management of the yuan.
But actions speak louder than words. The real test will be
whether China moves away from the dollar in any significant manner. While it
makes modest adjustments to its reserve holdings, there are few good
alternatives to the dollar.
And while it calls for an international basket of currencies
to replace the dollar, there are few takers. Of course, China might move
towards opening its currency and credit markets in an effort to make the yuan a
reserve currency, but the authoritarian political system is unwilling and
unprepared to move to that degree of economic freedom.
Many commentators see the downgrading of American debt as a
great shift in the global balance of power between the United States and China.
Some wags have warned the American navy not to sail too close to China, because
if the Chinese captured its ships, it would no longer have enough money to
ransom them.
But such jokes misunderstand the nature of power. Analysts
point to China's seemingly unstoppable growth and its holdings of United States
dollars. But as I show in my latest book, The Future of Power, they fail to
take into account the role of symmetry in interdependence in creating and
limiting economic power.
If I depend on you more than you depend on me, you have
power. But if we both depend equally upon each other, there is little power in
the relationship.
Some observers claim that China could bring the United
States to its knees by threatening to sell its dollars. But in doing so, China
would not only reduce the value of its reserves as the price of the dollar
fell, but it would also jeopardise US willingness to continue to import cheap
Chinese goods, which would mean job loss and instability in China.
If it dumped its dollars, China would bring the United
States to its knees, but might also bring itself to its ankles. The situation,
analogous to the Cold War's balance of terror, where the price of aggression
was the inevitable destruction of both sides, has both sides eager to maintain
the balance of interdependence even as they continue to jockey to shape the
structure and institutional framework of their market relationship.
Hubris and unnecessary fears
In 2010, when the United States angered China by selling
arms to Taiwan, some People's Liberation Army generals suggested that China
punish the United States by dumping its dollars. The Chinese leadership wisely
rejected their advice.
On American power relative to China, much will depend on the
often underestimated uncertainties of future political change in China. China's
size and high rate of economic growth will almost certainly increase its
relative strength vis–à–vis the United States.
This growth will bring it closer to the United States in
power resources, but doesn't necessarily mean that it will surpass the United
States as the most powerful country. Even if China suffers no major domestic
political setback, many current projections are based simply on gross domestic product
growth.
They ignore US military and soft power advantages, as well
as China's geopolitical disadvantages. As Japan, India and others try to
balance Chinese power, they welcome an American presence.
The United States faces serious problems regarding debt,
secondary education and political gridlock, but one should remember that they
are only part of the picture. In principle, and over a longer term, there are
solutions to American problems.
Given the challenges they face, China and the United States
have much to gain by working together. As the largest and second-largest
economies in the world, the two countries have a responsibility to provide such
international public goods as financial stability and less carbon-intensive
growth.
But hubris and nationalism among some Chinese, as well as
unnecessary fear of decline among some Americans, make it difficult to assure
this future. Extrapolating the wrong long-term projections from short-term
cyclical events like the recent financial crisis or the S&P downgrade can
lead to costly policy miscalculations.
