I've decided, after much thought and some (probably irrational) resistance, to experiment with a new means of disseminating my work and research.
So, to start, I want to summarize a talk that I've given twice in the last few weeks -- and am developing for a written piece, as soon as I can.
I’ve been thinking a lot the past year about the evolution of the relationship between the US and China. As 9-11 recedes (a little bit) into the background, China is returning to where it was in the summer of 2001 – first on the list of American foreign policy concerns.
The core argument of my talk is painfully simple: the Sino-American relationship is now central to the health of the global political economy, but it is not a healthy relationship. Stories about globalization and economic interdependence are important but they distract people's attention from the core of the relationship -- which is political.
I discuss three problems that need to be managed between the US and China -- urgently. They are conflicts over currency, over energy, and over property rights. How these issues are managed will tell us a great deal about the future character of what is now a bipolar relationship.
In fact it is a co-dependent, but asymmetrical, bipolar relationship – which makes it more unstable than the bipolarity we became familiar with between the US and the Soviet Union during the Cold War.
This relationship is threatened by attempts that each side will make to leverage asymmetrical interdependence. In simple language, the US is dependent on Chinese purchases of dollar assets to sustain the crazy yield curves of low long-term interest rates. The Chinese are dependent on continued US household spending (driven by low interest rates, the housing bubble they produce, and the resultant wealth effect on homeowners who now save almost nothing and spend the proceeds of their home equity loans on Chinese – made goods at Ikea). That’s codependency, but it’s asymmetrical in a profound sense. Break the relationship, and the US risks recession and stagflation. The Chinese risk revolution – after all, 9% growth keeps the middle class on the track toward wealth and farm workers coming into the Chinese industrial economy employed. A recession in the US is a nuisance. A recession in China could mean the end of the communist party rule. If you are sitting in Beijing and watching John Snow pressuring you to float your currency, wouldn’t you wonder if this is a low-cost non-military US strategy aimed at regime change in China?
Sino-American bipolarity is also threatened by the ability of lots of third parties to free-ride to their hearts content on the co-dependence. The US put up with a significant amount of free-riding on the dollar and on US defense expenditures during the Cold War. Of course, it was our allies that were free-riding back then, and in a real sense we saw it as something of an investment in their economic and political recovery. So Cold War free-riding was mainly about our NATO allies not paying their ‘fair share’ for defense.
My point here is not only that the US was willing to tolerate some of this. It’s that this kind of free-riding had a downside limit. Countries can’t put their defense budget below zero and impose more costs on the US that way.
Today, free-riding on the US-China currency bargain has essentially no boundaries. Are you a third party that wants to take advantage of the situation? You can multiply your bet to an unprecedented degree through financial leverage--- crazy negative amortization mortgages, hedge fund investments, and all sorts of other exotic financial instruments. There’s really no limit to what people can do here that impose costs on the bilateral bargain.
And people get smart about this very fast. I think the single biggest boost to innovation in the financial sector the last few years has been the opportunity to find new ways to arbitrage against the dollar - renminbi standard.
So it’s not just that Washington and Beijing have guns to each other’s heads, it’s that everyone else is running around emptying our pockets while we stand there.
This is as much a power game as a wealth game. That doesn't have to be bad news, but the sooner we get serious about it, the more likely we are to navigate through more successfully. History provides some examples of what NOT to do -- after all, the American record of managing bipolar relationships with a peer competitor in the 20th century is not a good one. More on that point later.