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Is China the New America?

By Harold James

Posted March 2009

The Great Depression made the United States the world's unquestioned financial leader. The current
crisis can do the same for China.

I
n the Great Depression, as in the current economic crisis, the
downturn was particularly severe because of a lack of
leadership in the international order. The dominant financial
power of the 19th century, Britain, was financially exhausted by
the First World War. The new major creditor, the United States,
had emerged as a strong economic player, but did not yet have
leadership committed to the maintenance of an open
international economic order. The simple diagnosis was that
Britain was unable to lead, and the United States unwilling.

If the scenario sounds familiar, it should. The story from the

Great Depression has an uncanny echo in current debates about
international economic leadership, with the United States playing PAUL J. RICHARDS/AFP/Getty Images
the role of Britain -- the exhausted debtor economy -- and China Fear itself: Like the U.S. during the Great
taking the place of the United States as the world's largest Depression, domestic concerns are keeping China
creditor. But if China is the America of this century, can it do a from opening up to world markets.
better job than the United States did in the 1930s? The way in
which the emerging superpower takes to this role will determine in large part how the world will emerge from the
downturn and the shape of the new global economic order that will follow.

Charles Kindleberger, the late economist, argued that the United States should have acted as a lender of last
resort in the early 1930s, continuing to keep its financial markets open to investment and its market open to
foreign goods, rather than heading down the path of protectionism. It should also have stimulated the world
economy through countercyclical fiscal policy.

But at the time of the Great Depression, there were all kinds of convincing reasons why Americans did not want to
take on the burden of a worldwide rescue. Sending more money to Europe was seen as pouring money down the

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take on the burden of a worldwide rescue. Sending more money to Europe was seen as pouring money down the
drain, and after all, Europeans had fought the world war that had been the root cause of the financial mess.
Economically, helping Europe would have made a great deal of sense from a long-term perspective, but politically
it was a non-starter with no short-term payoff.

In the middle of the current financial crisis, a deep-pocketed China faces the same dilemma: swallow its pique and
help save the same countries that got us into this situation, or look to its own short-term interests first. Today,
there are increasing demands that China contribute more to internationally coordinated rescue packages through a
reformed International Monetary Fund (IMF). China is also one of the few economies still growing in 2009, though
most economists have reduced their estimates of growth rates. Finally, China and the United States are the only
countries that are large enough, and have sufficiently well-ordered government finances, to launch major efforts at
fiscal stimulation.

Beijing's leaders might feel like they have already taken their best shot. The initial stages of the credit crunch in
2007 were managed so apparently painlessly because sovereign wealth funds (SWFs) from the Middle East, but
above all from China, were willing to step in and recapitalize the debt of U.S. and European institutions. Between
November 2007 and March 2008, the SWFs provided $41 billion of the $105 billion injected into major financial
institutions. Had this process continued, the events of 2008 would have included problems with U.S. real estate
and a severe stock market decline, but no meltdown of financial institutions.

But after March 2008, the availability of funds to prop up the global financial system shriveled up. The pivotal
moment in today's events came when the state-owned China Investment Corp. (CIC) was unwilling to go further
in its exploration of buying Lehman Brothers. CIC's turning back will be held up in the future as a moment when
history could have shifted in a different direction.

Today there may be plenty of reasons why the Chinese will be tempted to pull back from their engagement with
the world economy, and the external political logic sounds very much like the U.S. case of 1931. Some of the
economic arguments reverberating around Beijing are very reasonable: There is a great deal of uncertainty, and
the SWFs have lost a lot of money already and might lose more. China's investments in U.S. securities in 2006
proved to be a huge costly mistake. Clearly the CIC would have initially lost further billions had it tried to rescue
Lehman. Other lines of thought are more emotional and political: Might not 2008 be a righteous payback for the
U.S. bungling of the 1997-1998 Asian crisis? Trying times tend to heighten paranoia.

There are also many domestic reasons why China might be wary about opening up to the global economy. The
Chinese banking system is still quite opaque and might still have to wrestle with the legacy of problems of the
1990s, in particular, bad loans to big state-owned corporations that were the consequence of a political logic of
directed credit. China is investing large amounts in education, but it may be more difficult to build a creative and
innovative society that replicates the dynamism of the United States in the second half of the 20th century (which
was fed in large part by openness, above all openness to immigration). China also faces a problem of aging and
even demographic decline after the 2040s as a legacy of its one-child policy, which has also created a potentially
destabilizing surplus of young males. With all these threats to stability, an authoritarian though reformist regime
may find it harder to respond flexibly to popular demands and may be prone to try to mobilize a reactive
nationalism to fend off challenges to its authority.

The pressure to engage in large-scale fiscal stimulation is also likely to alter the balance of China's economic
development. The Chinese model of capitalism is very different than that of the United States, and even before the
economic crisis, there were two alternative models. The first was the rural, family, and small-business-based boom
of the 1980s. But by the 1990s, some of the private-sector growth was being choked off by a rival vision of
economic growth built around prestige projects and the large, state-owned enterprise sector. Consider Shanghai,
which impressed many commentators as the most modern city in the world: Analysts of the Chinese economy
have suggested it is one of the least entrepreneurial cities in China. Yasheng Huang, in his book Capitalism with
Chinese Characteristics, described it as "a classic industrial-policy state." The new stimulus package is likely to
push the balance of Chinese development more decisively in this latter direction, toward state capitalism.

China thus has plenty of reasons why it might want to close itself off to the forces of globalization, as the United
States did in the interwar years. This thinking will be reinforced by the structure and character of the international
order. Again, an interwar analogy is appropriate. The United States felt uncomfortable with the international
institutions of the interwar period, in part because they were aligned with the interests of the old hegemonic
power, Britain. The League of Nations looked as if it was an instrument of British power. Similarly, in the modern
context China worries about whether it is adequately represented in U.S.-dominated international institutions. Its
influence in the IMF and World Trade Organization clearly does not correspond to its real position in the world
economy and to the role that China could play in economic stabilization. Reforming international institutions is
thus a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and

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thus a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and
disruptive, or whether a more gradual and peaceful path of adjustment can be achieved.

Just before the Asia-Europe meeting last October, President Hu Jintao stated that China would behave "with a
sense of responsibility." It remains to be seen what stake China really has in the survival of the global economy.
As in 1931, the political arguments are all against a rescue. Only the farsighted will see that the economic case for
such an operation is compelling. Much depends on the extent of China's voice in an altered international
institutional architecture.

But that voice will make demands that are increasingly difficult for the old world to accommodate, including
demands for a guarantee of China's U.S. asset holdings and suggestions for an alteration of the world's reserve
management. In proposing a global reserve currency to replace the dollar, the Chinese central bank president
recently followed in the footsteps of Charles de Gaulle in the 1960s. But unlike France, China is in a much stronger
position to assert its preferences for international monetary reordering.

In other words, the world may be asked to transition from an American to a Chinese model of capitalism, and as in
the 1930s, that won't be an easy switch for any of us.

Another take: Jonathan Holslag on how America is actually becoming more like China.

Harold James is a professor of history and international affairs at Princeton University.

Is China the New

America?

...or is America the new China?

In its rescue plan for the financial sector, the Obama
administration is taking its cues from Beijing.

By Jonathan Holslag

If people had heard the details of U.S. Treasury Secretary

Timothy Geithner's plan to absorb toxic assets a year ago, they
could have been excused for mistaking the message as coming
from Beijing. The scheme "will use government resources in the
form of capital from the Treasury, and financing from the FDIC
and Federal Reserve, to mobilize capital from private investors," TIMOTHY A. CLARY/AFP/Getty Images

Geithner wrote in the Wall Street Journal. "[W]e as a nation must Chairman Tim? The U.S. financial rescue plan
work together to strike the right balance between our need to seems more Chinese than American.
promote the public trust and using taxpayer money prudently to strengthen the financial system."

It is a dramatic shift for a country that, in recent years, has grown more accustomed to righteous deregulation.
But for China, watching the United States has been a lesson in déjà vu. In pursuit of national economic stability,
the Obama administration is clearly moving toward the kind of statist intervention that China has been promoting
the past two decades. You might say Washington is adopting the Beijing Consensus.

While continuing to benefit from the international market, the U.S. government is instituting more control over its
financial sector, restricting government procurement policies, guiding research and development in the energy
sector, and selectively curbing imports of goods and services. Sounds familiar? As in Beijing, what matters is not
the nature of the political system, but the extent to which it is successful in improving the well-being of its
people..

Obamanomics is not the only area looking markedly Eastern; foreign policy has followed suit. In the Beijing school
of diplomacy, national interests, not universal norms, dominate foreign relations. And indeed, Washington is
seeking more and more to build pragmatic alliances that serve the country's economic needs. Cozying up with

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seeking more and more to build pragmatic alliances that serve the country's economic needs. Cozying up with
China and the autocratic Gulf states looks less malevolent when those countries are the main lenders to the U.S.
Treasury. Working with Iran and Russia, meanwhile, holds the promise of reducing the costs of the wars in
Afghanistan and Iraq. In times of crisis, it seems, there is no shame in a bit of realpolitik.

Washington's new realism is more than a revision of the devastating neoconservative muscle-flexing of the Bush
years. Faced with an internationally weakened position, a declining power is attempting to use its restrained
capabilities in a more economical way. After two decades of U.S. and European principles dominating international
policy through a web of multilateral organizations, the West no longer has the leverage to enforce its conditions.

The West's retreat will open up space for a new concert of powers -- Brazil, Russia, India, and China -- tied
together by a fixation with national economic growth. Instead of entrusting the United States with the arduous
task of safeguarding global stability, the so-called BRIC countries will assume a more prominent role in policing
their own backyards. Russia can have its Caucasus, and if the generals in Burma should go mad, that will be China
and India's problem.

Meanwhile, the trans-Atlantic alliance will wane. The United States will be able to adapt to the new rules. But
Europe, its chief ally, lacks the capacity and the leadership to do so. The continent's strategic relevance is only
destined to weaken further.

None of this is to say that the Beijing Consensus guarantees a more stable world order. Far from it. A concert of
powers is only as strong as its weakest player. If economic turmoil worsens, nationalism in one country or another
could reduce the scope for pragmatic bargaining. Overlapping spheres of influence and frozen conflicts could once
again lead to major conflict. And if, as some observers expect, China emerges from the crisis as the big winner, it
won't be long before zero-sum thinking again replaces win-win cooperation as the order of the day.

Jonathan Holslag is head of research for the Brussels Institute of Contemporary China Studies (BICCS).

Is China the New

America?

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