For Sri Lankans Who Are In Limbo Due To China & America Conflict

By Ernest Kithsiri –

According to Dr.Kishore Mahbubhani, until 1800 China and India were the biggest economies in the world. Since they were the countries with biggest populations, we can assume above statement has some validity. Since 1800, above status began to change due to the Industrial revolution in Europe and America, which he considers as an “aberration”. He further believes, this anomaly should correct itself with the rise of China and thereafter India. Will we ever see it?

In 1950, in PPP terms, Americas GDP share (as a percentage of world GDP) was 27.3% while China had only 4.5%. In 1990, America was 20.6% and China was 3.86%. However as of 2018, America’s GDP share percentage was 15 while China was at 18.6. 

With above trajectory, it seems Dr. Kishores Mahbubhani’s argument has a weight and validity. Yet the purpose of this article is to investigate the possibility of such an argument become reality, the behavior of other countries, behavior of China when it’s the global superpower. Let’s investigate it in number of fronts such as behavior of other countries when China rises.

Economic Reasons

America rose to the primacy by being an economic superpower. Economic superiority was achieved predominantly by following means:

* Scientific Innovations

* Vibrant markets

* Population growth

* Creating powerful institutes

* Best universities in the world

Those were the factors America had sole control within its boundaries. But there were external factors America manifested to its advantage

* Global currency

* Immigration

* Distribution of knowledge

* Investments

* Security agreements

Currently 41.27% of global transactions are carried out in USD while China’s Renminbi (RMB) makes up only 0.98%. America is the only country continued to develop despite a negative trade balance. The secret is the global currency. Every country should sell something to America to obtain US dollars to bolster the amount of reserve currency they should possess for international trade. For example, when a country buys oil from Saudi Arabia transactions are in USD but there’s no goods being shipped from America for the initial loan. Hence It is natural for America to maintain a negative trade balance with most of the countries. Donald Trump’s claim about trade deficit, hence the disadvantage to America lacks thorough understanding of American economy. When China was heavily importing raw materials in the period of 2006-2012, China obtained the largest amount of USD for import purposes. Transaction fees were the most important revenue source for American banks. As the former federal chairman Ben S Bernanke put it “A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies in more-formal less informal international transactions” 

Global Currency, as some analysts say, sometimes termed as the “Achilles heel” for America i.e the weakest chink in the financial system. Yet due to the American military might, nobody has been able to challenge it. The system is stable unless America itself recklessly spend the loan in non-value-added ventures such as recurring government expenditures.

America continued to maintain a healthy level of population growth which is quintessential for the economy. American population is projected to be 379 million in 2050 whereas Chinas population will stagnate around 1.74 billion despite relaxation of “One Child” Policy.

America also did not shy away from its obligation of sharing knowledge. American universities are the most attractive universities in the world. Millions of international students study there and depart to their countries. Throughout the long history of humanity, the most successful societies have always been those that fostered diverse school of thought emerge simultaneously. American universities have created the most powerful intellectual ecosystem. There is significant number of Chinese students studying in America and departed to china for high perk jobs. Some are closely working and supporting the Chinese Communist Party. Number of policy institutes in China are now run by American or Western educated intellects (Eg: Dr. Keyu Jin, Dr. Eric Li). The daughter of the Chinese President Xi Jingping is a Harvard Graduate too.

America also did not shy away from investing in other countries that helped build those countries. In addition to investments in China, America’s investments in Singapore is about US$274 billion which is 80% of US foreign investments in ASEAN (USD 328 billions). It’s investments in Australia amounts to approximately USD169 billion, and in Japan USD 129 billion, India USD 45 billion, South Korea USD 41 billion. Investments in those countries helped build their middle class hence most of them achieved developed status.

Soft Power

Dr. Joseph Nye of Harvard University introduced the concept of “soft power” in the late 1980s. For Nye, power is the ability to influence the behavior of others to get the outcomes you want. There are several ways one can achieve this: you can coerce them with threats; you can induce them with payments; or you can attract and co-opt them to what you want. This soft power – getting others to want the outcomes you want – co-opts people rather than coerces them.

America’s soft power is shaped by its strong institutions and foreign policies. Even though they have been fairly weakened in the recent times under Donald Trump administration, most people believe it will revert to its pre-Trump era under the forthcoming Biden Administration.

To highlight the importance of soft power than any other tool, Dr. Nye has put it in this way “ A country may obtain the outcomes it wants in world politics because other countries – admiring its values, emulating its example, aspiring to its level of prosperity and openness – want to follow it. In this sense, it is also important to set the agenda and attract others in world politics, and not only to force them to change by threatening military force or economic sanctions. This soft power – getting others to want the outcomes that you want – co-opts people rather than coerces them”

China’s Rise

According to a segment of Nationalists in China, they endured a century of humiliation despite being the largest population in the 18^th century. The humiliation by Japanese conquest, Handover of Manchuria to Russia, Western powers America, Britain, Germany etc. Major humiliations are summarized as follows.

* Defeat in the First Opium War (1839–1842) by the British

* The unequal treaties (in particular Nanking, Whampoa, Aigun and Shimonoseki)

* Defeat in the Second Opium War (1856–1860) and the sacking of the Old Summer Palace by British and French forces.

* Signed the Treaty of Aigun (1858) and Treaty of Peking (1860) during the Second Opium War, which ceded Outer Manchuria to Russia.

* Defeat in the Sino-French War (1884-1885), losing the suzerainty over Vietnam and the influence in Indochina peninsula.

* Defeat in the First Sino-Japanese War (1894–1895) by Japan

* The Eight-Nation Alliance invasion to suppress the Boxer uprising (1899–1901) and impose reparations in excess of the government’s annual tax revenue. 

* British expedition to Tibet (1903–1904)

* The Twenty-One Demands (1915) for loan advantage and local government control by Japan

* Japanese invasion of Manchuria (1931–1932)

* The Second Sino-Japanese War (1937–1945)

Even Mao Tse Tung’s communist movement failed to yield tangible economic results. By 1980 after decades of Mao’s economic mismanagement- Notable failures include “Great Leap Forward” and Cultural revolution – China was still a desperately poor, but by international standards a remarkably equitable and regionally balanced economy. 

Deng Xiaoping and Zhu Rongi are the equivalent Alexander Hamilton & Thomas Jefferson in America, says Dr. Patrick Mendis in his “Peaceful War”. Deng Ziaoping’s “unbalanced growth strategy” in simple terms is the capitalist model with a Chinese character i.e in simple terms “ to open China to the world”. It included W. Arthur Lewis’s model of economic development with unlimited supplies of labour put simply how the surplus labour from rural activities can be utilized to bolster the national economy. The other was Paul Krugmans principle of new economic geography which showed how the concentration of labour and economic activities in urban areas and regions could generate “agglomeration economies” or the additional productivity gains that come from specialization and economies of scale which then lead to rapid trade expansion. 

Even if China achieved its economic feat, Zhu Rongi’s societal reforms seem to have not progressed forward. In complete contrast, America has progressed from its civil war periods through slavery until it elects a black president.

Deng Xiaoping’s capitalist economic principles attracted American businesses to China. Currently most of such business’s profits are from the Chinese market.

In 1993 revenue of Boeing company in China was USD 1.2 billion and in 2017, it is USD 11.9 billion. In next 20 years Boeing forecasts a sale of 7690 new planes in China.

General Motors sold 3.64 million vehicles in China in 2018 and China accounted 42% of GM’s sale in 2017.

China enjoys the Most Favored Nation(MFN) status in the World Trade Organization(WTO) thereby enjoying many advantages than other peer developing countries. When President Bill Clinton tried the renewal of MFN status to China’s human rights issues in 1993 many American companies vigorously lobbied the white house and the congress citing billions of dollars of exports are at stake. Boeing and GM played a key role in defending China’s MFN status in WTO. 

China is enjoying all benefits of a developing nation while it is the 2^nd largest economy. Some allege, China is hiding behind WTO rules intended for poor developing countries. When China Joined WTO in 2001, per capita income was USD 2900 in PPP terms and was the 6th largest economy. By 2015 it’s per capita has grown to USD 14,400 in PPP terms and now the 2^nd  largest economy.

Hank Paulson, the former US treasury secretary says, 17 years after China entered WTO, China has not opened its economy to foreign competition while it uses technical standards, subsidies, licensing procedures, regulations as non-tariff barriers to trade and investments.

If America and China are following the similar paths in achieving its economic successes, why are they at Odds?

According to certain number of economists, China, like other many developing nations are reaching the middle-income trap i.e for further economic prosperity, China either should go for world changing breakthrough innovations or alternately need much more powers to write rules in favor of them. In short, China should engage in a battle to control the world.

That’s what Professor John Mearsheimer explains in his “Tragedy of Great Power Politics”

Tragedy Of Great Power Politics

John Mearsheimer says analysis of the behavior of “Great Powers (i.e countries with large populations and wealth) is the Tragedy of Great Power Politics. Great Powers would like to operate in an anarchical environment. That means they like to operate with no higher authority above them. They like to become regional hegemonies and then prevent a peer competitor. So why China is important, because it becomes a reginal hegemon. Not only that, it currently very closely forming a Quasi alliance with Iran, while building Blue Water navy. Therefore China, not only becoming a regional hegemon but also making alliances with another regional hegemon in the Middle East Persia. Also, regarding South China Sea, now it is a common area for every merchant to freely travel. But when China becomes so powerful, they are going to determine the borders between India and China on South China Sea.

This exactly coincides with Deng Xiaoping’s ideology of maintaining a low profile and building assets well enough. Dr Henry Kissinger on his “On China” book explains this as “Chinese strategy is guided by the Chinese game of wei qi i.e slowly and patiently build up assets to tip the balance of the game in ones favor – Emphasis is on long term strategy not short term gain.

 With the experience of century of humiliation, current administration of China is fully aware of the need to acquire “the power of writing rules”.

In fact, the western world and America also know the strategy very well. It is described very well in Monroe Doctrine i.e to not allow forming a threatening alliance in the backyard.

Analysts say, when China becomes a regional hegemon, the first thing they do prevent forming another hegemon in the same Asian region. Even before looking at America, the first country they would look at having capacity to do so will be India. Therefore, already a small-scale clash between India and China will escalate further. India’s preparedness is clearly indicated by the application of a seat at the UN security council. It will be backed by the western European countries and the upcoming Biden administration in America. India, for the first time has joined QUAD countries (Australia, Japan, America, India) to work against China becoming a hegemon.

Meanwhile, another school of thought is that since China has been benefitting from the western liberal democracy, it will not try to destroy it. Professor Mearsheimer debunks this argument stressing that future China is totally unpredictable even though current China seems peaceful. He brings number of cases such as the rise of Nazi Germany which didn’t show any sign of conquest.

How other countries such as Sri Lanka should decide?

Like it or not Sri Lanka will somehow gradually have to come to reality. We will have to pick a side. Sri Lanka is already a cash crunched, debt ridden country with heavy economic burden. Sri Lanka can stay non-aligned only if having any kind of controlling tools of these hegemons. Unfortunately, Sri Lanka doesn’t have any such tools. At least in 1970s Sri Lanka was a much better economy with self-sustainability than regional countries. Hence not only could stay nonaligned, even played a role of a mediator in number of global conflicts such as Indo-China conflict. It also was a significant voice in the global arena to lessen trade sanctions against Japan after WWII. We do not possess any such powers anymore. Hence, we do not have any control of any of the world powers. In one hand we need markets for our economic growth, on the other hand we do not want to fall into any of the camps. This will not work. If we become smart as Lee Kwan Yew, who fell into despair when Singapore disfranchised from Malaysian union in 1965. Communism backed by Russia and China was populism in Asia. Communism in Singapore alone was a threatening force. Yet the man with wisdom aligned with “matured democracies” for Singapore’s benefits. Everything happened to Singapore thereafter is the glorious history.

India & QUAD Countries

Sri Lanka should never discount the power and potential of India and now becoming more so a leading force in QUAD countries which will be the balancing force against China. Sri Lanka has historical ties with India and very well worked with China and the western liberal democracies bi-laterally and multi-laterally in international bodies. Yet Sri Lanka is mostly unfamiliar with China’s inherent structural weaknesses that could significantly change its course. Some of these weaknesses are such China may face the risk of derailments with collateral irreversible damages to the economy and the society. Sri Lanka should broadly discuss the obscure weaknesses of China since unexpectedly, China sunk into despair in four dynasties in the history. 

China’s Weaknesses

1) Limits of Chinse Soft Power

The limits of Chinese soft power – Harvard university professor Joseph S Nye is considered the theoretical guru who broached the subject of importance of soft power skills in international politics. It highlights the powers to exercise great diplomacy over coercion. His signature book “Soft Power” discusses the importance of states soft power skills in transnational politics.  He says “China has been making major efforts to increase its ability to influence other countries without force or coercion. In 2007, then-President Hu Jintao told the Communist Party that the country needed to increase its soft power; President Xi Jinping repeated the same message last year. They know that, for a country like China, whose growing economic and military power risks scaring its neighbors into forming counter-balancing coalitions, a smart strategy must include efforts to appear less frightening. But China’s soft-power ambitions still face major obstacles”.

According to some sinologists, China spends roughly $10 billion a year in “external propaganda.” By comparison, the US spent only $666 million on public diplomacy in recent years.

Joseph Nye further says “Yet the billions of dollars China is spending on its charm offensive have had only a limited return. Polls in North America, Europe, India, and Japan show that opinions about China’s influence are predominantly negative. The country is viewed more positively in Latin America and Africa, where it has no territorial disputes and human-rights concerns are not always high on the public agenda. But even in many countries in those regions, Chinese practices such as importing labor for infrastructure projects are unpopular.” In Sri Lanka’s context, there were many allegations against the Confucian institute in Sri Lanka exercising Chinese government intentions by donating and spending money in various ways to influence the powerful Buddhist monks, Marxist political parties etc.  

2) Lack of Progress in Zhu Rongi’s principles

Deng Xiaoping & Zhu Rongi, if born again may be concerned about China’s growth process, its debt problems, and trade frictions with the west originate from a transformation process that didn’t keep pace with the changing environment. Progress on societal reforms, value propositions have not progressed as Zhu Rongi expected. In fact, progress on the reform agenda slowed in the years after Premier Zhu left office as China’s continued rapid growth up to the Great Financial Crisis lulled the new team of President Hu Jintao and Premier Wen Jiabao into a false sense of confidence.

Currently Chinese communist party is the only central authority. It is spending a huge sum of money to stop public protests on various matters. Nearly 160,000 protests happen in China almost every year.

Commenting on how the Chinese communist party needs to eventually change, Dr. Yukon Huang says, “Ultimately China needs to move to a western Dining Table with four separate legs, creating a firewall between the government and the party and their influence on enterprises and banks both state owned and private. While on paper much of the economy has become more private, the influence of the state still permeates much of the major decision making among economic agents, regardless of their formal ownership arrangements.

Reshaping the economic system from Chinese Dining Table to American Dining Table with powerful institutions will be a gargantuan task. The societies turn upside down when such transformations happen. Further, president Xi Jingping doesn’t seem to even hint that he follows Zhu Rongi’s reforms for government structural changes either.

3) Innovation index

It is true for any rising economy to make efforts to maintain a high innovation index. Even though China is showing a rising innovation index, it still is in the 14^th place in the world ranking. In order to boost the innovation, China has started to exert pressure on foreign companies in China to transfer technology. It has moved further and started to curtail market access for companies that do not obey the condition.

In March 2019, Western CEOs candidly expressed the challenges American businesses face in dealing with China. Alienation of American business community due to the challenges in doing business with China and Chinese officials hubris displayed after the 2008-2009 global financial crisis.

4) No acquisition of foreign talents

America attracts foreign born talents significantly through its immigration policies. There are so many foreign-born heads who run companies in America. By contrast, no major Chinese company or institution is run by a foreign-born individual.

China will not be able to attract the best talent from India. America has done so and will continue to do so.

5) Suppress & Contain India

China is aware that the only country that one day will have a bigger population than China is India. According to some analysts India’s population has already surpassed China due to the fact that a large number of Indian people do not get registered anywhere and they are not counted in any of the census. Politically, as said above, China is aware of Monroe Doctrine where letting form another regional hegemon is always a threat. Hence China will do to cut India’s prospects on economic growth with all the tools they possess. One such tool is the south China sea. Developed and powerful future China can control all the vessels in south china sea. They can hamper, put restrictions or even apply charges on vessels passing through south China sea.

6) IPR Theft

IPR (Intellectual Property Rights) theft is unlikely to be curtailed at this stage in China’s development. In fact revisions to the policies requesting technology transfer in exchange of market access may negatively affect China.

Concluding Remarks

It is very important Sri Lanka broadly discusses above realistic issues before selecting its foreign policy in an era of a rising power challenging an established power, the prospects of rising power overcoming above all challenges, how Sri Lanka could learn a lesson from Lee Kuan Yew who had the same dilemma in 1960s and successfully navigated it to benefit Singapore. Non-Aligned foreign policies are good just only for political correctness. Aligned policies and perspicacity always yield tangible results.

References

Following books helped me in formulating the rationales of this article

• On China by Dr. Henry Kissinger
• Has China Won by Dr. Kishore Mahbubani
• The Tragedy of Great Power Politics by Prof. John J Mearsheimer
• The Peaceful War by Prof. Patrick Mendis
• Cracking the China Conundrum by Dr. Yukon Huang
• Power of Soft Power by Prof. Joseph S Nye
• The Shadow War by Jim Sciutto