Thursday, April 16, 2015

US and China: Two systems increasingly baffled by the other



While Iran relations are taking up all the oxygen in the room these days — and they are vitally important for the future of the Middle East — United States-China relations are vitally important for the world — and there’s more going on there than meets the eye. The concept of “one country, two systems” was invented to describe the relationship between Hong Kong and mainland China. But here’s the truth: The economies and futures of America and China are today totally intertwined, so much so that they are the real “one country, two systems” to watch. And after recently being in China to attend the Bo'ao Forum in Hainan and hearing President Xi Jinping speak, what is striking is how much each side in this relationship seems to be asking the other: “What’s up with you?”

Both countries almost take for granted the ties that bind them today: The US$600 billion (S$816 billion) in annual bilateral trade; the 275,000 Chinese studying in America and the 25,000 Americans studying in China; the fact that China is America’s largest agricultural market and the largest foreign holder of US debt; and the fact that, last year, Chinese investment in the US for the first time exceeded American investment in China.

But dig underneath and you find these two systems increasingly baffled by the other. Chinese officials still have not got over their profound shock at how the US — a country they took as an economic model and the place where many of them learned capitalism — could have become so reckless as to trigger the 2008 global sub-prime mortgage meltdown, which started the trope in China that America is a superpower in decline.

Chinese officials were also baffled by an effort by US President Barack Obama’s team to resist China’s establishment of an Asian Infrastructure Investment Bank, by lobbying America’s biggest economic allies — South Korea, Australia, France, Germany, Italy and Britain — to not join. While US Treasury Secretary Jack Lew kept stressing publicly, and responsibly, that America’s only concern was that the bank operate by international standards, other Obama officials actively pressed US allies to stay out. Except for Japan, they all snubbed Washington and joined the Chinese-led bank. The whole episode only empowered Beijing hard-liners, who argue that the US wants only to keep China down and cannot really accommodate it as a stakeholder.


Americans, though, are asking of Mr Xi: “What’s up with you?” Mr Xi’s anti-corruption campaign is clearly aimed at stifling the biggest threat to any one-party system: Losing its legitimacy because of rampant corruption. But he also seems to be taking out potential political rivals as well. Mr Xi has taken more control over the military, economic and political levers of power in China than any leader since Mao. But to what end — to reform or to stay the same?

Mr Xi is “amassing power to maintain the Communist Party’s supremacy”, argued Willy Wo-Lap Lam, author of Chinese Politics In The Era Of Xi Jinping: Renaissance, Reform Or Retrogression?. Mr Xi “believes one reason behind the Soviet Union’s collapse is that the party lost control of the army and the economy”. But the President seems more focused on how the Soviet Union collapsed than on how America succeeded, and that is not good. His crackdown has been not only on corruption, which is causing a lot of officials to not make any big decisions, but on even the mildest forms of dissent. Foreign textbooks used by universities are being censored, and blogging and searching on China’s main Internet sites have never been more controlled. Don’t even think about using Google there or reading Western newspapers online.

But, at the same time, Mr Xi has begun a huge push for “innovation”, for transforming China’s economy from manufacturing and assembly to a more knowledge-based one, so this one-child generation will be able to afford to take care of two retiring parents in a country with an inadequate social-safety net.

Alas, crackdowns do not tend to produce start-ups.

As Mr Antoine van Agtmael, the investor who coined the term “emerging markets”, said to me, Beijing is making it harder to innovate in China precisely when rising labour costs in the country and rising innovation in America are spurring more companies to build their next plant in the US, not China. The combination of cheap energy in America and more flexible, open innovation — where universities and start-ups share brainpower with companies to spin off discoveries; where manufacturers use a new generation of robots and 3D printers that allow more production to go local; and where new products integrate wirelessly-connected sensors with new materials to become smarter and faster than ever — is making America “the next great emerging market”, said Mr van Agtmael.

“It’s a paradigm shift,” he added. “The last 25 years was all about who could make things cheapest, and the next 25 years will be about who can make things smartest.”

Mr Xi seems to be betting that China is big and smart enough to curb the Internet and political speech just enough to prevent dissent, but not choke off innovation. This is the biggest bet in the world today. And if he is wrong (and colour me dubious), we’re all going to feel it. 



Thomas Friedman is a Pulitzer Prize-winning columnist at The New York Times.

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