China and the Awkward Embrace

Beijing is neither enemy nor friend. It is both an economic partner and a security rival.

After a first term and a reelection campaign that dwelled on the ills China has caused the U.S. economy, President Barack Obama now must turn to the more difficult business of engaging with China’s new leadership and translating rhetoric into policy. Given the weak economy of the past four years, a preoccupation with harmful Chinese trade practices ahead of the election was understandable. But China is neither enemy nor friend. It is both an economic partner and a security rival.

Beijing views Washington with profound suspicion and does not appear to understand the global impact of the blundering steps it takes outside its own borders. Dealing with this dynamic is an immense challenge for American statecraft. The United States and China are locked in an awkward embrace—on the one hand enmeshed in common economic causes, while on the other hand holding a knife, just in case the ties unravel.

The challenge for U.S. policy is to help bring about fundamental change in both Chinese behavior and in how China sees the world. Altering China's geopolitical and economic calculus is a long-term project. It will require both strategic thinking and military might.

While China needs the United States as an economic partner, it has also been steadily sharpening its knife. The People’s Liberation Army has enjoyed two full decades of double-digit budgetary growth. The result is the most lethal missile force and the most active submarine program in the world. This means it has the capability to project power, keep U.S. forces at bay, and intimidate its neighbors. The United States will need many different classes of ships and submarines to maintain a favorable balance of power in Asia, working together with a preeminent Air Force.

At the same time, the overall economic relationship has considerable benefits: low prices on imported products mean that American families see their paychecks go further, and American businesses prosper by turning China into the world's factory (even if these companies sometimes face competition from their own pirated goods). And American businesses can benefit even more in the future if China continues to grow as an export destination. The U.S. government finds in China a ready buyer of Treasury securities, leading to lower interest rates and a more manageable debt burden (though perhaps also giving a false sense of economic security and allowing a worse fiscal imbalance to build).

A dispute that upended this web of trade and financial ties would have serious negative consequences for both nations. For the United States, this would lead to higher prices for everything made in China—which at times feels like nearly everything—and steeper interest rates on debt for business and government. These negative impacts would be felt by every American. For China, the loss of the United States as a major export market would mean weaker growth and slower job creation, and thus undermine political and social stability. This instability is the ruling party’s nightmare and thus the source of leverage for the United States.

Three Scenarios

China’s future will not look like its past. As China’s export growth model sputters, its calcified political system will struggle to govern a dynamic and energetic population. Dissatisfaction will increase exponentially if the Party does not continue to deliver jobs and growth. Three plausible scenarios can be envisioned.

In a benign scenario, China broadly succeeds in taking on economic and social pressures. The economy shifts over to domestic-driven growth, with China’s three-trillion dollar horde of foreign currency reserves spent to smooth over any hiccups, including necessary financial sector bailouts. As part of the adjustment, China opens up to greater inbound trade and investment, thereby forcing domestic firms to boost their productivity in competition with imports. To maintain strong growth, China will increasingly find it necessary to relax controls on information flows, as the Great Firewall and aggressive censoring of the Internet stand in the way of economic development. Given the dominance and reactionary nature of the Communist Party, it is overly optimistic to expect political transformation to follow close on the heels of economic liberalization. But it may come gradually, since so many Chinese citizens are fighting for more freedom.

For the United States, these changes would mean a China that is more open and fully integrated into the global economic system. With further economic growth and political liberalization, China will be more likely to accept the current liberal global economic and political order, notably including an acceptance of international norms of respect for the rule of law and peaceful resolution of disputes. Chinese military efforts could evolve to promote international stability rather than to project power.

But for this optimistic scenario to play out, China must deal head first with its domestic economic and social challenges. This inevitably will absorb Chinese energies. The great hope in this scenario is that China liberalizes its polity and economy, since these moves likely would alleviate strategic concerns for the United States. Indeed, the U.S. role in this scenario is to provide a supportive global environment for a transition, while guarding against accompanying bouts of aggression.