U.S., China and the Emerging Economic Order

by Henry Kissinger

On the Road to Economic Recovery

At a recent dinner ending their annual Cabinet-level strategic and economic dialogue in Washington, D.C., the four chairpersons from the United States and China expressed their commitment to cooperative conduct with a warmth I have not seen exceeded in the nearly 40 years since the two countries resumed contact in 1971. It is good that this was so, for the next decade will witness sweeping challenges to their adaptability and their vision.

The annual dialogue as it stands inevitably concentrates on the problems of the moment. Useful as this is, the deeper challenge for a relationship described by President Obama as important as any in the world is to achieve a common vision with respect to the emerging world order.

The assumption that the end of the recession will restore the familiar global economic system ignores the psychological and political upheaval that has taken place. A vast tide of liquidity coupled with America's appetite for consumer goods had sent enormous amounts of dollars to China that, in turn, China lent back to us for still more buying. Before the crisis, China sent scores of experts to the United States and invested in major American financial institutions to learn the secrets of the system that seemed to produce permanent global growth at little risk.

The economic crisis has shaken that confidence. Chinese economic leaders have seen the American financial system subject a decade of their savings to potentially catastrophic fluctuations. To protect the value of its Treasury investment and in order to sustain its own export-driven economy, China finds itself obliged to largely retain its Treasury holdings of nearly $1 trillion.

Ambivalence in both China and the U.S. is the inevitable consequence. On the one hand, the two economies have grown increasingly dependent on each other. China has a major interest in a stable -- and preferably growing -- American economy. But China also has a growing interest in reducing its dependence on American decisions. Since American inflation as well as deflation have become for China as grave nightmares as they are for America, the two countries face the imperative of coordinating their economic policies. As America's largest creditor, China has a degree of economic leverage unprecedented in the American experience. At the same time, the quest for widening the scope of independent decision exists in ambivalent combination on both sides.

A number of Chinese moves reflect this tendency. Chinese officials feel freer to offer public and private advice to the United States than previously. China has begun to conduct its trade with India, Russia and Brazil in their own currencies. The proposal of China's central bank governor to create gradually an alternate reserve currency is another case in point. Many American economists make light of this idea. But it surfaces in so many forums, and China has such a consistent record of pursuing its projects with great patience, that it should be taken seriously. To avoid a gradual drift into adversarial policies, Chinese influence in global economic decision-making needs to be enhanced.

The conventional wisdom for a new global economic order creates another imperative for the coordination of long-range economic policies. According to it, the world economy will regain its vitality once China consumes more and America consumes less. But as both countries apply that prescription, it will inevitably alter the political framework. An America that consumes less will import less from China. As Chinese exports to America decline and China shifts the emphasis of its economy to greater consumption and to increased infrastructure spending, a different economic order will emerge. China will be less dependent on the American market as its pattern of trade shifts, while the growing dependence of neighboring countries on Chinese markets will increase China's political influence. Political cooperation must, to some extent, compensate for this shift.

A cooperative definition of a long-range future will not be easy. Historically, China and America have been hegemonic powers able to set their own agendas essentially unilaterally. They are not accustomed to close alliances or consultative procedures restricting their freedom of action on the basis of equality. When they have been in alliances, they have tended to take for granted that the mantle of leadership belongs to them and exhibited a degree of dominance not conceivable in the emerging Sino-American partnership.

To make this effort work, American leaders must resist the siren call of a containment policy drawn from the cold war playbook. China must guard against a policy aimed at reducing alleged American hegemonic designs and the temptation to create an Asian bloc to that end. Confrontation will, in the end, drain both societies to the detriment of global well-being much as World War I did Europe. Issues that can only be addressed on a global basis, such as energy, environment, nuclear proliferation and climate change, will require a common vision of the future.

At the other extreme, some argue that the United States and China should constitute themselves into a G-2. A tacit Sino-American global governing body is not, however, in the interest of either country or of the world. Countries that feel themselves excluded might drift into rigid nationalism at the precise moment that requires a universal perspective.

The great contribution of America in the 1950s was to take the lead in developing a set of institutions by which the Atlantic region could deal with unprecedented upheavals. A region hitherto riven by national rivalries found mechanisms to institutionalize a common destiny, greatly reducing the prospects for war and leading, in time, to a far more benign world order.

The 21st century now requires an institutional structure appropriate for its time. The nations bordering the Pacific have a stronger sense of national identity than did the European countries emerging from the Second World War. They must not slide into a 21st -century version of classic balance-of-power politics. It would be especially pernicious if opposing blocs were to form on each side of the Pacific. While the center of gravity of international affairs shifts to Asia, and America finds a new role distinct from hegemony yet compatible with leadership, we need a vision of a Pacific structure based on close cooperation between America and China but also broad enough to enable other countries bordering the Pacific to fulfill their aspirations.

U.S., China and the Emerging Economic Order - Henry A. Kissinger