UC Berkeley Point of View

U.S.-China relations: Forget globalization - it's time to put an end to this free-riding

Steven Weber | 20 July 2005

Editor's note: Thomas Friedman's column in the July 20 New York Times, about the United States' economic entanglement with China, draws heavily from a lecture that UC Berkeley political science professor Steven Weber gave at IBM headquarters in Armonk, New York, on July 15.

Below, Weber elaborates for the NewsCenter on the core argument of this lecture: that the U.S.-China relationship is characterized by a dangerously unbalanced codependency.

As 9/11 recedes (a little bit) into the background, China is returning to where it was in the summer of 2001 - first on the list of American foreign policy concerns.

The Sino-American relationship is now central to the health of the global political economy, but it is not a healthy relationship. Stories about globalization and economic interdependence are important. But the notion that the Sino-American relationship is market-driven is illusory and misleading. This is a political relationship through and through. It's about power and control as much as it is about wealth.

'It’s not just that Washington and Beijing have guns to each other’s heads, it’s that everyone else is running around emptying our pockets while we stand there.' -Steven Weber, director of UC Berkeley's Institute for International Studies (Peg Skorpinski photo)

In a talk that I've given twice in the last three weeks, I discuss three problems that need to be managed between the U.S. and China - urgently. They are conflicts over currency, over energy, and over property rights. How these issues are managed will tell us a great deal about the future character of what is now a bipolar relationship.

In fact it is a codependent, but asymmetrical, bipolar relationship - which makes it much less stable than the bipolarity we became familiar with between the U.S. and the Soviet Union during the Cold War.

This relationship is threatened by attempts that each side will make to leverage asymmetrical interdependence. For example: the U.S. is dependent on Chinese purchases of dollar assets to sustain our current account deficit at low long-term interest rates. To absorb labor coming out of agriculture into the industrial sector, the Chinese depend on continued U.S. household spending - driven by low interest rates, the housing bubble they produce, and the resultant wealth effect on homeowners, who now save almost nothing and spend the proceeds of their home equity loans on Chinese-made goods at Ikea.

That's codependency, but it's asymmetrical in a profound sense. Break the relationship, and the U.S. risks recession and stagflation. The Chinese risk revolution - after all, 9 percent growth keeps the middle class on the track toward wealth and farm workers coming into the Chinese industrial economy employed. A recession in the U.S. is a nuisance. A recession in China could mean the end of Communist Party rule. If you are sitting in Beijing and watching John Snow pressuring you to float your currency, wouldn't you wonder if this is a relatively low-cost, non-military U.S. strategy aimed at regime change in China?

Sino-American bipolarity is also threatened by the ability of lots of third parties to free-ride to their hearts content on the codependence. Here's an example of this dynamic. The U.S. put up with a significant amount of free-riding on the dollar and on U.S. defense expenditures during the Cold War. Of course, it was our allies that were free-riding back then, and in a real sense we saw it as something of an investment in their economic and political recovery. So Cold War free-riding was mainly about our NATO allies not paying their 'fair share' for defense.

My point here is not only that the U.S. was willing to tolerate some of this. It's that this kind of free-riding had a downside limit. Countries can't put their defense budget below zero and impose more costs on the U.S. that way.

Today, free-riding on the U.S.-China currency bargain has essentially no boundaries. Third parties that want to take advantage of the situation can multiply their bets to an unprecedented degree through financial leverage - negative amortization mortgages, hedge-fund investments, and all sorts of other exotic financial instruments. There's almost no limit to what people can do here that impose costs on the bilateral bargain.

And people get smart about this very fast. I think the single biggest boost to innovation in the financial sector the last few years has been the opportunity to find new ways to arbitrage against the dollar-renminbi standard.

So it's not just that Washington and Beijing have guns to each other's heads, it's that everyone else is running around emptying our pockets while we stand there.

This is as much a power game as a wealth game. The Chinese right now seem to understand that fact better than Americans do - in part because we are a bit obsessed with slightly idealistic visions of 'globalization.'

That the foundations of economic globalization are political doesn't have to be bad news, but the sooner we get serious about that fact and shore up those foundations, the more likely we are to navigate through economic change successfully.

The first step is to build a much deeper bilateral dialogue between the U.S. and China, one aimed at shared understandings of each sides' vital interests. I don't mean agreement - I mean understanding what the other side means when it says or does something like what is happening in the debate over Unocal, the U.S. oil and gas company that China's Cnooc oil company is proposing to buy. There are very compelling historical precedents in the U.S.-Soviet relationship - in particular, what both sides did wrong and late in achieving some of these understandings, and how that process contributed to the very rapid unraveling of detente, for example, between 1972 and 1975.

We need a massive "Track Two"-style political dialogue and we need it now. Governments are not in a good position to set this up - they have too many conflicting incentives. Universities lack urgency and concrete interests. American companies should spearhead this initiative. They have the most to gain from successful management of the Sino-American relationship, and the most to lose if it goes badly in ways that impede continued economic globalization.

 

The director of UC Berkeley's Institute of International Studies, Weber has just launched a blog, "Politics and Economics."