Wednesday, November 21, 2007

China Economic And Security Review Available: Wanna Play Connect The Dots?

The US-China Economic And Security Review Commission made its full report to Congress available to the public today. Executive Summary-like announcements were made earlier in the week and picked up and commented on by a number of blogs, etc. Here are some highlights of the report (all italics are mine and the points are listed in the order I found them in the report. I will talk about the color coding in my comments after the quotes):

"China’s economy remains heavily dependent on manufactured exports to sustain its rapid
economic growth and to provide jobs for a rural population moving to urban areas in search
of higher pay and benefits. Chinese authorities have not been willing to alter this pattern,
even if pushing exports means violating WTO rules or free market principles."

"China’s mercantilist policies are taking a huge toll on small and medium sized manufacturing
facilities and their workers in the United States. While U.S.-based multinationals can transfer
and have transferred much of their production to China to serve that market, small and
medium-sized manufacturers in the United States are not as mobile. They face the full brunt
of China’s unfair trade practices, including currency manipulation and illegal subsidies for
Chinese exports. This is significant because small and medium enterprises (SMEs) represent
60 percent of the manufacturing jobs in America."

"China’s economic policies violate the spirit and the letter of World Trade Organization
membership requirements. The United States is not limited to countering China’s industrial
policy tactics through the WTO, however. It can use other WTO-sanctioned trade remedies to
protect itself, such as Countervailing Duties (CVDs) and antidumping cases."

"At the present time, U.S. officials are neither carefully tracking the persistent attrition of the
U.S. defense industrial base as more and more manufacturing is outsourced offshore, nor
identifying and justifying on national security grounds an irreducible minimum defense
industrial base that the United States should retain regardless of the cost or effort required to
do so."

"Chinese military strategists have embraced disruptive warfare techniques, including the use
of cyber attacks, and incorporated them in China’s military doctrine."

"The Chinese defense industry, while still lagging far behind that of the United States, has
begun achieving noteworthy progress over the past ten years."

"China is supplementing the technologies that its defense industry obtains through
commercial transfers and direct production partnerships with an aggressive and large-scale
industrial espionage campaign. Chinese espionage activities in the United States are so
extensive that they comprise the single greatest risk to the security of American technologies."

"A major objective of Chinese S&T policy is to acquire technology that will strengthen the PLA
while it also realizes commercial benefits."

"China is pursuing an energy diversification strategy that seeks to find cleaner alternatives to
coal. However, as long as the environmental costs of burning coal are not built into coal’s
price, the degree of diversification into natural gas, nuclear power, and renewable energy
sources will have little impact on the complexion of the fuel supply, and China will continue to
rely on coal as its primary energy source and increase its reliance on oil."

"If China’s underlying environmental problems are not addressed effectively, this could
become another source of unrest that could challenge the Chinese Communist Party’s
control of the country."

"The bilateral relationships China is building around the world—many if not most of them
largely motivated by its quest for energy supplies and other resources—have resulted in an
increase of its global economic, political, diplomatic, and cultural influence that has the
potential to challenge U.S. interests."

"Although India does not want to be perceived as “ganging up” against China, it will seek to
expand its multilateral relationships to hedge against China’s growing influence and military
strength. In part because of this, opportunities exist for U.S.-India cooperation on economic
and security matters and in the promotion of democratic values and governance throughout

"Through its media control regime, the Chinese government has been able to manipulate and
influence the perspectives of many Chinese citizens. While the majority of the Chinese
people understand that the information provided by Chinese state-owned media
organizations may not be free of censorship and propaganda, they have little choice but to
rely on it when forming their opinions about the outside world. Beijing has used this capacity
to create deep feelings of nationalism inside China and can use it to incite strong antiforeigner
sentiments among the Chinese people when it wishes to do so."

"The strong nationalism Beijing has fostered may constrain its options to respond to
international incidents. This could result in exacerbating tensions in a sensitive situation and
turning a misunderstanding into a conflict."

Comment: There seem to be three themes that cut across the boundaries laid out in the report that are worth exploring. In an effort to help connect the dots, I am experimenting with color coding the facts above as a way of linking them to the themes.

The first theme (color coded red) seems to be about a slow-motion economic death spiral. It goes something like this: China depends on manufacturing for its growth and it is growth that, to a certain extent, legitimizes the Chinese Communist Party's rule. The manufacturing depends on coal and oil for energy and this is unlikely to change. Coal and oil use cause terrible pollution and environmental degradation which could (will likely?) lead to unrest that could (will likely?) challenge the Chinese Communist Party's control over the country. Finally, if the CCP gets pushed to the wall, its hole card is to allow the government controlled press to drum up nationalist sentiment that essentially blames foreigners for China's problems -- sentiment which it may not (will likely not?) be able to control.

Yoikes! That is a pretty bleak picture of the future of China and, since so much of the US's and the rest of the world's stuff is now made in China, it is actually a pretty bleak picture for all of us.

If it is true.

What is maddening about this report is that it outlines lots of possibilities but makes few real estimative calls and provides no real time frame. As any battalion commander, CEO or Ambassador worth his salt will tell you, "Son, anything is possible. I need to know what is likely." The authors of the report should have read more Kent (or, if you don't like Kent, then

The second theme (color coded in blue) seems to have to do with China's impact on the US economy. As I read it, they are saying that what China is doing is unfair, particularly to small and medium enterprises, but that there is something the US can do about it. As a corollary to this, there seems to be some genuine concern that our defense industrial base has eroded to a point where we are essentially dependent on China.

This dependence seems to me to be due to the networked nature of a globalized economy. If globalization is about anything, it is about efficiency. It achieves this efficiency at the cost of robustness, however. This is not to say that the global economy is fragile; rather, it is overly concentrated. Imagine if the scenario described by the red quotes above comes to pass and we are faced with a China at some point in the future where the Communist Party has collapsed and has been replaced by any number of xenophobic strongmen, where western factories have been trashed by outraged Chinese tired of the pollution the factories bring. Where will you buy your TV? This is not as trivial as it may sound. The US, to the best of my knowledge, does not have the ability to manufacture CRTs, LCDs or Plasma screens anymore. We are wholly dependent on foreign companies, mostly Chinese, for these type products as well as many, many other products we need. You might be able to live without a computer screen but the US military can't.

I am reminded of Chapter 4 of Machiavelli's The Prince where he describes a similar situation involving the Sultan of the Ottoman Empire and the King of France (Yes, Machiavelli was the world's first network theorist...). The Ottomans, because their system was centralized around the Sultan, could move very quickly but, if the Sultan were removed, the system would collapse (or rapidly acquiesce to the new ruler). The French, on the other hand, had a largely decentralized system where it was relatively easy to conquer a single baron or what have you but to control all of France was nearly impossible. Modern scientists like Laszlo Barabasi have explored a middle ground where networks are more or less optimized -- mixing the best of robustness and efficiency. It seems like it would be possible to extend this same logic to the global economy and make a more rational and better informed judgment about the " irreducible minimum defense industrial base that the United States should retain regardless of the cost or effort required to do so."

The final theme (color coded in green) seems to have to do with the military threat represented by China. It doesn't seem to be much at present which means that the primary approaches will likely be asymmetric in the highly unlikely case of near term direct conflict. Over the medium to long term, though, the Chinese are going to try to steal any sort of technology they can (particularly if it has a military use), in order to try to catch up. Interestingly, the report all but anoints India as the strategic counterbalancing piece in this latest round of the Great Game.

Oldtimers used to say that the Soviets play chess while Americans play football as a way of highlighting the cultural differences between the two super-powers with regards to strategy. Well, the Chinese play Weiqi/Go. Anyone who has ever played this game knows that it requires a very long-term strategy. This, in turn, implies that the Chinese will view their defense strategy as a game of inches -- of small gains that accumulate; not big, flashy wins. I know that this is simplistic but it seems to track with the statements coming out of this third theme in the report.

Beyond all this idle speculation comes another interesting but apparently overlooked report suggesting that the Chinese economy is actually much smaller than most people think raising interesting concerns about the timing for all these possibilities.

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