5 Dec 2013
By Martin Wolf
Will we sustain an open global economy while also managing tensions between a rising autocracy and democracies in relative economic decline?
That was the question posed by the arrival of imperial Germany as Europe’s leading economic and military power in the late 19th century.
It is the question posed today by the rise of communist China. Now, as then, mistrust is high and rising. Now, as then, actions of the rising power raise risks of conflict. We know how this story ended in 1914. How will the new one end, a century later?
China’s decision to create an East China Sea Air Defence Identification Zone that covers uninhabited islands currently under the control of Japan is evidently provocative: The two countries’ air defence zones now overlap.
Neither Japan nor South Korea recognises the new zone, which China seems prepared to defend.
The United States does not recognise the zone too, and is bound by treaty to support Japan in a conflict. Yet the State Department has also indicated that it expects US commercial aircraft to comply with China’s demands to avoid endangering innocent lives.
The signals, then, are mixed — as is usual in such situations. But, as William Fallon, a former head of US Pacific Command, has noted, the Chinese zone raises the potential for an accidental conflict. What would happen if Chinese and Japanese military aircraft were to fire on one another? What would happen if Chinese military jets were to fire on a civilian aircraft or force it down?
The mixed signals from the US may even increase the risks of conflict.
IT ONLY TAKES A SPARK
As we also know from the onset of World War I, seemingly minor events can quickly escalate to catastrophic proportions. Europe never recovered from that war and the even bigger one it spawned 25 years later.
Today, with China under the leadership of Xi Jinping, an assertive nationalist, Japan under the leadership of Shinzo Abe, a no less assertive nationalist, and the US committed by treaty to defending Japan against attack, the risk of a ruinous conflict again exists.
Such an event is far from inevitable. It is not even likely. But it is not impossible and it is more likely than it was a month ago.
Again, there are parallels with the rise of Germany. In the early 20th century, that nation launched a naval arms race with the United Kingdom.
In 1911, Germany sent a gunboat to Morocco in response to French intervention in that country. The aim was, in part, to test relations between France and the UK.
In the event, it cemented that alliance, just as China’s action is likely to cement the alliances between Japan and South Korea, on the one hand, and the US on the other.
And, as was the case for the UK then, the US of today is increasingly troubled by the challenge presented by China’s desire to assert its rising regional power.
Why would the Chinese President take such a provocative action? Since he appears to be in an increasingly powerful position inside his country, Mr Xi presumably took this decision consciously, perhaps with a view to further such actions.
Yet, to the disinterested observer, the gains from control over a few uninhabited rocks are vastly outweighed by the risks to his nation, which has just embarked on complex economic reforms, is deeply embedded in the world economy and is still a long way from its goal of becoming a high-income country.
This was just the question raised by Norman Angell, the English liberal, in his 1909 book The Great Illusion. Angell did not argue, as some allege, that war among the European great powers was inconceivable. He was not that foolish.
He argued instead that a war would be fruitless, even for the victors. Absorbing conquered territory would add nothing useful to the welfare of their citizenry, other than perhaps allowing them and their leaders to prance in temporary glory.
Never can a prediction have proven more true: The war, when it came, damaged all the main combatant nations catastrophically.
Today, again, one wonders why the Chinese leadership thinks asserting sovereignty over a few rocks is worth the risk. Yes, China may get away with it this time and the next, and the time after that. But each throw of the dice renews the risks. What gains can justify the possible losses?
SENSELESS RISK FOR CHINA
Military experts assume that in a head-on conflict China would lose. While its economy has grown dramatically, it is still smaller than that of the US, let alone of the US and Japan together. Above all, the US still controls the seas.
If open conflict arrived, the US could cut off the world’s trade with China. It could also sequester a good part of China’s liquid foreign assets. The economic consequences would be devastating for the world, but they would, almost certainly, be worse for China than for the US and its allies.
China is, after all, an exceptionally open great power, with a higher ratio of trade to gross domestic product than the US or Japan. Being resource poor, China depends on imports of a host of vital raw materials.
While advancing rapidly in its technological skills, the country is far more dependent on foreign know-how and inward foreign direct investment than the rest of the world is on China’s skills. A conflict could force many Western and Japanese companies to pull out and go somewhere viewed as safer.
Its foreign currency reserves, equal to 40 per cent of GDP are, by definition, held abroad. Much, then, would be put at risk.
Evidently, as Angell would tell us, risking a conflict makes no sense for China. The mutual gains from rising trade and economic interdependence are orders of magnitude greater and, one would have thought, more persuasive than those from marginal territorial gains offshore. In the same way, no gain could justify the disaster of World War I.
Yet history, alas, also teaches us that friction between status quo and revisionist powers may well lead to conflict, however ruinous the consequences.
Indeed, Thucydides, the great ancient historian, argued that the calamitous Peloponnesian war was due to the alarm that the growing power of Athens inspired in Sparta.
Nationalist ambitions and resentment over past wrongs are all too human. But this game is just too risky. For the sake of the longer-term interests of the Chinese people, Mr Xi should think again — and halt.
ABOUT THE AUTHOR:
Martin Wolf, the Chief Economics Commentator at the Financial Times, is widely considered to be one of the world’s most influential writers on economics.