Asia’s Rise, the West’s Fall?

Editor’s Note: The following remarks are from a speech Lionel Barber delivered in Sydney, Australia on 11/17/2011, as part of the Lowy Institute for International Policy’s lecture series.

The fundamental question

On China’s rise

As China embarks on the convulsive shift from low-cost manufacturing champion to a more consumer-friendly economy, the impact will be felt well beyond China’s borders. The most obvious impact will be via the outward reach of China Inc. Propelled by waning competitiveness at home, China’s manufacturers are scouring the world searching for
markets, acquiring companies, upgrading technology and building brands.

Seminal moments have already taken place. In the first quarter of this year, for the first time, Chinese companies did more M&A deals in the manufacturing, distribution and retail sectors than they did in the resource and energy sectors, the former mainstay of the country’s outward push. The size of outward investment is also growing, and it is possible that this year, or maybe next, Chinese companies will invest more overseas than foreign companies invest in China.

Yet even as China’s embrace of the world proliferates and deepens, questions persist not only about what type of power it will be but also about how much power Beijing actually wields at home.

The rise of sina weibo – China’s version of Twitter – has punched a big hole in the party’s propaganda control. Some 200 million Chinese citizens now air opinions on events at home and overseas real time, and the sheer volume of comments is so large that the censors can no longer keep up.

What we are witnessing, therefore, is the emergence of fundamental contradictions in the Chinese political-economic model. In the past, with the exception of Tiananmen Square, the Chinese elite have proved exceptionally adept in modifying their model without surrendering
control of the levers of power.

On the United States

It now turns out that America was selling flawed goods. Financial engineering combined with cheap credit almost brought down the world’s banking system. We have come to understand that – sky-high remuneration levels aside – the financial services industry is similar
to nuclear power: an essential utility but one which requires close supervision. Nor has the American model responded well to the structural challenges facing its economy.

Political polarisation has exacerbated the paralysis in Washington, highlighting the weakness of a system biased toward inaction. Yet the scale of the crisis calls for action, not today’s stasis. In earlier times, a decisive president – Roosevelt, Truman and Reagan come to mind – has galvanised the legislature by invoking a sense of crisis and capturing the public mood. President Obama, for all his rhetorical skills, has not managed to do so.

On the eurozone crisis and the future of Europe

At one level, it is possible to sympathise with Germany. The most powerful economy in Europe gave up the D-Mark and joined a monetary union where several other members were unwilling or incapable of staying the course. But Chancellor Angela Merkel’s first instinct has been to treat all debtor countries as sinners deserving Lutheran retribution before salvation through good works.

When President Sarkozy is not lecturing the British about their semi-detached status in Europe, he is fixated about losing the triple A credit rating which could cost him next year’s election.

The EU faces an existential choice. Either it continues to muddle along in a loose arrangement which suits national sensitivities – a free-trade zone plus, if you like – or it moves toward tighter
integration, if necessary through the formalisation of a two-speed Europe in which an advance guard of countries led by France and Germany takes shape.

My guess is that the euro will just about survive, but a new system of economic governance will have to be introduced to keep the monetary union intact.

A warning

Throughout the ages, the failure to accommodate rising powers, or rather the failure of rising powers to accommodate the existing state system, has been a source of conflict. Germany’s search for a place in the sun at the end of the 19th century is one example; resource-hungry Japan’s quest for a co-prosperity sphere in the interwar period is another. In the case of China,
it is vital that all interested parties grasp the mutual interest in upholding and developing – rather than overturning – the rules-based system built up after World War II.

Of course, the West, principally the US, will have to adjust to accommodate China. But China will have to accommodate too, in particular in the fields of finance, money, trade and direct investment and energy. In coming years, this will have to cover the liberalisation of the banking system, the outflow of official capital resulting from massive intervention to support the Yuan and ensuring sterilisation, and the future convertibility of the RMB (though that prospect is not immediate). It will also cover intellectual property and foreign direct investment.

As Chinese power grows and its blue-water navy capability expands, and the search for security of supply for natural resources intensifies, the risks of tensions escalating are obvious. It cannot
be stressed enough that China’s interest is to preserve the stability which is the best guarantee that Beijing can continue to deliver the increasing levels of prosperity shared by its people. 

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