China Power

If China Sneezes…

When China sneezes, the world could really catch a cold. How will deficit countries respond to this new reality?

Fixation on political vicissitudes in China can draw attention away from the ever larger global impact of a rapidly rising China – and the conditions that make that awesome rise possible.

Commodity exporters from Brazil to Sudan to Australia can seem on the verge of nervous breakdowns at hints that the Chinese economy will slow and its commodity imports will shrink. After all, no country adds more new wealth to the world each year than does China. If China’s property bubble were to burst and the Chinese economy crashed in a “hard landing,” even economies as strong as Germany’s would be impacted. That country’s exports to China last year were worth about $110 billion. When China sneezes, the world could really catch a cold.

Foreign exchange surplus countries stretch the planet, from Indonesia and India to Turkey and Russia. This reflects a large change in the global balance of economic power, a change in which China is but one beneficiary. It seems that this is the last time an American president will be able to choose the person who heads the World Bank.  And how much longer will Europeans be allowed to run the IMF?

The voices of the surplus nations will become commanding voices. India already sees itself as the leader of less developed countries (LDC) in the WTO, which has fought successfully to make the world trading system work to the benefit of the LDCs.

The new division of the world economy replaces capitalism versus communism or the north versus the south. It’s now about surplus nations and deficit nations. The surplus nations include Germany (and others in northern Europe), petro-powers (especially Saudi Arabia) and East Asian exporters, among whom China is the weightiest.

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These winning nations, not just China (which is too often demonized), are privileged by the structural dynamics of the post-Bretton Woods era. Globally, private money has so exploded into trillions of dollars that capital is now available to LDCs at low rates. Add in low wages and good infrastructure and these nations become winners.

To compete, OECD multinational corporations have to take advantage of a New International Division of Labor (NIDL). That is, they must utilize transportation (containers, 747s, etc.) and communication revolutions to produce parts and products all over the world. They can then assemble and ship these products at such low rates that they hollow-out deficit OECD countries, shrinking the middle class and tax revenues, thereby inciting backlash coalitions against the global trading system, with deficit countries insisting, for example, that China stop cheating, but not noticing the larger global forces at work.

Meanwhile, the knowledge revolution and an inability of OECD governments to protect valuable intellectual property rights from Chinese theft allow new technologies to reach emerging market economies ever faster. Product cycle advantages for innovating OECD countries come to have an ever shorter shelf life. Even Germans worry about China in this regard. Add on the fact that the dollar is over-valued and the renminbi is managed to be under-valued (as are German exports when the euro is weakened by the performance of southern European countries) and one sees how winners and losers, surplus and deficit nations, are structured.

Given that structural dynamics strongly facilitate winning and losing, the big question is:  how long can such imbalances persist without de-stabilizing the world trading system?

If Berlin and Beijing et al. continue to play games that hurt so many other economies, how long will the governments of the deficit countries that experience a world rigged unfairly against them allow such an imbalance? The deficit countries, by the rules of the game, receive a “sucker's pay-off.”

 If the deficit countries – southern Europe, much of the LDC world, the United States – opt out of the game, pushed by backlash coalitions, what then? There’s no institution that is committed to creating fair rules for a win-win game. Winners blame the purported immorality of the losers. Victims are mocked. But the problem is structural dynamics whose workings decide who wins.

If the surplus countries don’t change their narrowly self-interested behavior in a direction of more enlightened self-interest, one must wonder how long it will be before the losers in the rigged game will stop playing, thereby threatening the world trading system.

Edward Friedman, a specialist in Chinese politics, is on the faculty of the Political Science Department at the University of Wisconsin, Madison.