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The World of Market Authoritarianism

China's winning model is leaving the U.S. and the West increasingly isolated. Our October issue's cover story.

By From the October 2009 issue

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In September 1972 President Richard Nixon played the China card. It was a brilliant gambit; in one stroke he opened U.S. relations with Communist China and chilled Beijing’s relations with Moscow.

The succeeding four decades saw the Soviet system collapse and China emerge from the fanaticism of the Cultural Revolution (1966–76) to become the global power it is today. Along the way, China has mounted a formidable challenge to U.S. economic and military pre-eminence. But more serious is China’s challenge to the ideas that have informed Western progress for 300 years, and which now provide the foundation for Western dominance in global affairs.

Today the elegance of Nixon’s strategic vision has gone missing.

Gangs and Grand Scenarios

When Hillary Rodham Clinton appeared before the Senate Foreign Relations Committee as the administration’s nominee to be secretary of state, the confirmation hearing produced a transcript of more than 53,000 words. It covered a long list of pressing issues: the global financial crisis; terrorism; nuclear proliferation; the intractable Arab-Israeli conflict; climate change; plans for withdrawing troops from Iraq and rooting out al Qaeda in Afghanistan. In this extended congressional exchange, one major issue was barely mentioned. As a subject in itself, China accounted for a total of six sentences.

Clinton’s Senate hearing highlights another aspect of the China challenge. Beyond Olympic games and occasional headline grabbers like violent protest in Tibet, China is often ignored or skipped over by American politicians and opinion writers, unless you belong to one of Washington’s designated “China-gangs.”

Former Secretary of Defense James Schlesinger makes the point that the American China debate is globulated and divided into separate lobbies and single-issue groups. Each group is concerned with a specific part of the China question: Chinese military development, trade and labor issues, human rights, technology transfer, intellectual property rights violations, or business opportunities and the benefits of commercial engagement.

These groups proceed along largely separate lines. But taken together, they create a China debate dominated by competing sets of grand scenarios, such as “China is coming to get us,” “China is coming to buy us,” or “China is coming to join us.” In turn, these scenarios create camps of “panda-huggers,” who tend to preach the virtues of commercial engagement and the inevitability of Western-style democracy in Asia, and “panda-bashers,” who warn of a menacing China threat in various guises.

The reality, however, is that the China story defies these kinds of scenarios. The nature of the China challenge is such that no single group has the answer—or even a complete definition of the problem. The Chinese are our economic partners. But they are also our political rivals. Thirty years of successful market reforms indicate that the Chinese Communist Party (CCP) is not about to crumble. But neither is it melting into democracy. China has survived the global demise of Communism to become the world’s most powerful rising power. Yet it has neither confronted the U.S.-led system nor gradually conformed to its worldview in the two decades since Soviet collapse.

The China Threat…

America and the West face a very serious challenge from the East, but not in terms of the conventional definitions of the China threat. Over the past two decades, U.S. analysts have viewed China’s actions in the Taiwan Straits and South China Sea, the purchase of U.S. Treasury debt, and the hugely unfavorable trade balance with varying degrees of concern. We must ask, however, if these pose China’s most serious challenge to American security—or if the more serious challenge from China arises in a different dimension.

The Military Threat: Many in the national security community and beyond have been concerned about China’s dramatic military modernization, warning that China is catching up with America’s military lead in ways that may soon challenge American military supremacy in the Western Pacific and, possibly, elsewhere.

What’s more, the speed and degree of Chinese military modernization has increased in tandem with its emergence as a global economic player. Rapid economic growth has provided the hard currency to expand a range of military programs, and research and development, without leaving gaping holes in the broader national budget.

The overall budget for the People’s Liberation Army (PLA), for example, has doubled in recent years, from $27.9 billion in 2000 to $60.1 billion in 2008. The Pentagon, moreover, estimates that in terms of actual military expenditures, total military-related spending for 2008 was more likely between $105 billion and $150 billion.

It is clear, then, that Beijing takes the question of military modernization very seriously. Fast-paced development can be seen in the acquisition of submarine and space capabilities as well as cyberspace.

These trends can be used to paint a grim picture of China’s ability to project force that could threaten American military power in the Pacific and beyond. And that would indeed be the case had Chinese military development not proceeded on a different logic.

In reality, Chinese leaders neither want the financial strain nor the negative and potentially costly atmospherics that would accompany a genuine arms race with the United States. This helps to explain the continued and yawning gap between American and Chinese defense budgets. The statistics illustrating Chinese military development might seem impressive, but they are dwarfed by their American counterpart. The official base budget for the U.S. Department of Defense in 2009 was $515.4 billion, an almost 74 percent increase since 2001. Behind this is another $70.0 billion in “emergency allowance” to support “activities related to the Global War on Terror into 2009.”

Chinese military development might more accurately be described as a “just-in-case” capacity to “puncture” the American battlespace. China seeks to leapfrog American military hardware with the development of high-tech, close-in weapons, which target American vulnerabilities, principally U.S. reliance on communications and intelligence technology. These weapons are intended to provide an “area of denial” around Mainland China and Taiwan without purchasing millions of tons in new hardware to reach parity with Washington.

China’s priority here is to disrupt U.S. command, control, communications, computers, intelligence, and reconnaissance in the requisite battle space. For these reasons, Secretary of Defense Robert Gates has called Chinese military development as giving cause for concern about U.S. interests in the Taiwan Straits, but not for panic about expansive Chinese ambitions.

The Taiwan Threat: Here we meet another popular iteration of the “China threat.” As much as any location in Asia, the Taiwan Straits are a focus of concern; they have all the traditional makings of a Great Power flashpoint. But, reflecting the Mainland’s shift from Maoism to market-authoritarianism, the prospect of conflict between the U.S. and China over Taiwan, displayed in primary colors for a half-century from 1950, is now seen in pastels.
Against the backdrop of periodic diplomatic friction, cross-strait economic ties have blossomed over the last decade. China has become Taiwan’s largest trading partner while Taiwan has become one of China’s biggest investors. Taiwan’s trade with Mainland China totaled $102.3 billion in 2007, rising 16.1 percent from the previous year. Its exports to China in 2007 totaled to $74.28 billion, an increase of 17.3 percent, reaching a new high in the last three years. Thus the economic effects of a war between the two sides today would be catastrophic for both sides.

The Economic Threat: Aside from the issue of China’s ownership of very large amounts of U.S. debt, which is addressed in a moment, Washington has seen an emerging chorus of alarm about the effects of Chinese foreign investment in the U.S. economy. Without question, U.S.-China economic relations are the most complex of the various renditions of a China threat. It is also true that relations in this area are unusually susceptible to simplification and misconception.

Chinese investment has proceeded through a range of public and private entities, including high-profile, government-owned organizations like the $200 billion Sovereign Wealth Fund, the China Investment Corporation, and the China National Offshore Oil Corporation, which attempted to purchase the U.S. oil firm UNOCAL in 2005 before it was blocked by Congress. Critics have argued that Chinese ownership of important U.S. economic assets would present a serious national security threat. This is true, but it depends upon the industry, the scope of the follow-on effects, and the dimensions of the investment. Another dimension in which China possesses ominous leverage over the American economy is its rising surplus of dollars, which it reinvests in American debt.

As Americans have purchased large quantities of Chinese exports, China has used part of the profit to reinvest in American bonds and shares. This has given rise to a popular theme in our formulation of the China threat, which warns that Beijing could heavily damage America by slowing its ongoing purchases of Treasuries, thereby injecting doubts about the dollar’s continued strength, or selling a portion of its U.S. securities. Either step would see interest rates—hence mortgage, credit card, and loan rates—climb and the value of the dollar fall.

This is a significant liability. China’s position as an American creditor, however, is not simple, and is better assessed in less apocalyptic terms. The large amount of credit Beijing has extended to Washington, in fact, also presents new and serious liabilities for China.

A measure of stability is found in what has become a marriage of liabilities: China’s “threat” to the U.S. is mitigated by the U.S. “threat” to China. China has as much interest in keeping the U.S. economy and the U.S. dollar stable as Americans themselves. The Chinese government has purchased American debt for the simple reason that such purchases sustain the macro-economic engine that Beijing relies on. Chinese investment in American assets such as bonds and mortgage-backed securities has helped to keep American interest rates low, making credit easier to obtain and generating a pool of capital for Americans to continue buying consumer products—i.e., Chinese consumer goods. Low interest rates have also been crucial in enabling American businesses to expand. The huge supply of foreign money has enabled the U.S. government to fund large deficits that have stimulated the U.S. economy, allowing for lower taxes and more jobs created by government spending.

Beijing doesn’t fund American borrowing to obtain leverage over the United States; it does so because the United States remains the largest overseas market for an economy that relies on exports. American consumers are the lifeblood for the Chinese economy. American entrepreneurs are one of China’s most important sources of foreign direct investment. Beijing buys American assets to maintain the value of the dollar, which both protects the value of its Treasury bond investments and makes Chinese goods cheaper and easier to buy. Beijing also buys these assets (Treasury bonds) to keep its own currency stable. Today roughly 70 percent of China’s giant foreign exchange portfolio is held in liquid U.S. dollar assets such as Treasury bonds. If the Chinese government allowed the dollar to fall significantly against the Yuan, this would wipe out billions of dollars of value in its coffers.

China’s acute insecurity on these matters was apparent in March 2009 as the U.S. recession grew worse, when Chinese Prime Minister Wen Jiabao said his country was “worried” about its holdings of U.S. Treasuries, and called on the United States to provide assurances that the investments were safe.

Does Beijing have important leverage in this domain? Yes. But Washington, in extremis, has countervailing leverage—the U.S. could limit (or threaten to limit) U.S. direct investment in China or apply tariffs on its goods. Such actions, though introducing a dangerous precedent and potentially costly to U.S. interests, provide a way to “manage” Beijing’s actions, should that be required. Can Beijing harm the U.S. economy and the U.S. consumer? Yes. But not irreparably.

A More Serious Problem…

A more serious problem in China’s ownership of American bonds is not the issue itself or threat of a Chinese economic attack; it’s how this stable system of mutual dependence can weaken America’s voice on the global stage. When Hillary Clinton traveled to China shortly after taking office, she didn’t just stress the need to reach a consensus with Beijing on tackling the global recession. Clinton also emphasized something else, telling an audience of journalists and CCP officials in Beijing that pressing China on “other issues” like Tibet, and human rights “can’t interfere with the global economic crisis.” This statement demonstrated an uncomfortable new reality in Washington’s cooperative relationship with Beijing. The realities of economic interdependence blunt American influence on other issues that underpin the U.S.-led system of international liberal order, such as progress on human rights, the rule of law, and free speech in the world beyond the West.

It is this relationship between economic integration and diminished American power that is cause for concern. China does present a serious and long-term threat to the West, but not primarily by virtue of its military capacity in space or undersea, or the total dollar reserves in the People’s Bank of China.

Instead, China is catalyst-in-chief for a more profound and far-reaching process: just as globalization is shrinking the world, China is shrinking the West. By marginalizing the ideas that have informed Western progress for 300 years, China is quietly helping to remake the landscape of international development, economics, community, and by extension politics. Crucially, it is doing so in ways that progressively limit the projection of Western influence and values beyond the NATO bloc.

New Wealth and New Ideas

The roots of this problem lie in trends that began twenty years ago. Contrary to the predictions of many notable scholars after 1989, a new era embracing the Western model of free-market democracy failed to materialize. Instead, the world evolved into a more diverse political order than many in the West, and particularly in Washington, had imagined. This is not to deny that post-1989 capitalism found even broader application and more ardent support, in effect, reaching a new stage.

All the major powers of the world today rely on free markets and free trade—though in different measures—for growth, rising standards of living, and political stability. Economic integration and advances in technology and global transport networks have indeed created a new “global village.” We live and work on a “smaller” planet, where time and distance are minimized as obstacles to commerce; where capital moves instantly around the world at the click of a mouse; technology goes where it finds the smartest people and the best financial incentives; manufacturing goes where it finds the cheapest labor and an undervalued currency; customers circumvent the globe instantly in a virtual world of call centers and offshore business processing.

But our understanding of economic integration and its effects are also changing. Twenty years ago, it was typified by the global rise of American brands. Globalization was driven by American capitalism and its two founding ideas—that markets, not governments, drive progress, and that democracy is the optimal way to organize society.

Today, in the world beyond the West, these certainties are eroding. Many Americans and their Western allies thought the great post-Cold War transition to a global market would generate a global acceptance of the Western liberal order. Instead, it’s brought two new developments in international relations: new sources of wealth beyond the West and new ideas about capitalism without democracy.

Since capitalism went truly global, smaller and poorer countries have gotten rich through their natural resources, cheap abundant labor, export industries, and outsourcing. With new wealth have come new connections that circumvent the traditional architecture of Western power. Developing countries are deepening the ties within the “developing pack,” trading preferentially in many cases with its leaders, namely Brazil, Russia, China, and India—collectively christened the BRICS by Goldman Sachs in 2001.

As emerging markets have become richer, they have often integrated with the global economy, but this has not necessarily meant greater integration with the West. In fact, the level of interaction among developing countries is gradually surpassing the level of interaction between many of these countries and the West. Emerging markets are increasingly turning to each other for business that would have previously been sought from the West. In 2005, for example, China and ASEAN signed an agreement creating a single market of approximately 1.8 billion people and pledging to establish an EU-like Community for ASEAN by 2020. Not only did this help China to secure vital sea-lanes and access to raw materials, but it also created a major regional entity that excludes the United States and its major allies.

Antoine van Agtmael, the fund manager who invented the phrase “emerging markets,” now predicts that the 25 companies most likely to be the world’s next great multinationals include four companies each from Brazil, Mexico, South Korea, and Taiwan; three from India, two from China, and one each from Argentina, Chile, Malaysia, and South Africa. Goldman predicts that “China could overtake the U.S. by 2027 and the BRICs combined could overtake the G7 by 2032.”

The trend here is neither conflict nor assimilation with the West; instead, it is to make Western influence less relevant. Underlying these new developments in non-Western wealth and connectivity is a simple “neo-Westphalian bargain” centered on the concept of non-interference in internal affairs. Accordingly, sovereign states are empowered to establish the terms of existence inside their borders between the government and the governed. Internationally, they deal with each other in a strict market setting and recognize no real rights or obligations other than to fulfill agreed contracts.

Meanwhile, a growing number of non-Western governments have gained wealth by spurning the Western development model of free-market democracy and the contention of the American brand—namely that liberal economics demands liberal politics and a minimal role for the state. Many developing country leaders now emulate a new kind of capitalism with two distinct components: first, a liberal economic policy that opens the economy to investment and permits the development of a private sector, albeit heavily controlled by the state; second, the persistence of authoritarian rule, which allows the ruling party to keep a firm grip on government, the courts, the military, and the flow of information.

These two developments—new centers of economic autonomy beyond the West and the growing appeal of  illiberal capitalism—have become dual engines for the diffusion of power away from the West. They also have become a force-multiplier in the global rise of China.

Banking With Beijing: The Way Around the West

Beijing has become rich enough to provide a new source of financial assistance and economic development for smaller countries, which enables these countries to sidestep the traditional sources of Western assistance. The critical distinction between Chinese and Western assistance is that China provides hard-currency loans without the conditions imposed by the West. There is no obligation to create a civil society in the Western sense, no requirement to abide by international accounting standards or accepted legal standards—and certainly no attempt to interfere in the recipient’s internal affairs. China, its state owned enterprises and businessmen offer an alternative path to economic development.

It is, in effect, an “exit-option” from the often intrusive demands of global lenders like the World Bank and the International Monetary Fund (IMF) in areas such as good governance, human rights, transparency and pro-Western political and market reforms.

This aspect of China’s global presence poses an inherent challenge to the Enlightenment values and principles that have guided Western progress for more than two centuries. As in other policy areas, China is using its $2 trillion of reserves as a strategic instrument. Its global commercial network is fast creating a group of grateful and compliant acolytes—but not in the Cold War sense. We are not talking about a voting bloc within the UN, or other global institutions, which accepts daily instructions from a bloc leader (though Beijing expects support on Taiwan, Tibet, sovereignty, and human rights issues). Rather, we see a growing number of developing nations that are loosely connected by an admiration for China, a desire to capture the power of international markets, and an equal desire to remain autonomous from Western concepts of global civic culture and liberal development economics.

Fortunately for the Robert Mugabes and Omar al-Bashirs of the world, Beijing believes sovereignty is inviolate. This view is ultimately rooted in the Chinese government’s own sense of insecurity at home and the need to suppress the democracy narrative. It gains rhetorical strength from the memory of Chinese humiliation at the hands of invading European powers in 19th century. The concern was propelled in the 20th century by China’s claim that the West sought to “split” China by recognizing Taiwan or encouraging Tibet’s independence, and these themes are reflected today by China’s consistent rejection of interference by outside authorities in the internal affairs of nations. Naturally this is very attractive to autocrats, proliferators, and madcap monarchical personality cults that have raw materials to sell or money to buy Chinese consumer goods.

Meanwhile, China’s rise also reflects a familiar historical theme—namely that ideas travel along the arteries of commerce and power. To this extent, the global marketplace has become a transition belt, via which Beijing is inadvertently promoting a most troublesome export: the example of the China model.

When I speak about the Chinese “model,” I am of course referring in one sense to a complex set of developments and reforms in China over the last thirty years that owe their success to the unique variables of China’s own culture, demography, geography, and governing philosophies. In this sense, there is no “model” to speak of that can be replicated or exported to places like Latin America or Sub-Saharan Africa.

But in ideational terms, China is exporting something simpler, and indeed more corrosive to Western pre-eminence, than the individual nuts and bolts of its colossal thirty-year transformation. This is the basic idea of market-authoritarianism. Beyond everything else that China sells to the world, it functions as the world’s largest billboard advertisement for the new alternative of “going capitalist and staying autocratic.” Beijing has provided the world’s most compelling, high-speed demonstration of how to liberalize economically without surrendering to liberal politics.

Officials and leaders now travel to China from seemingly every quarter of the globe beyond North America and Europe—Southeast Asia, the Middle East, Central Asia, Sub-Saharan Africa, and Latin America—to learn from the Chinese about how to disaggregate economic and political freedom. Beijing, of course, does what it can to promote its model—albeit softly—through speeches, conferences, summits, and exchange programs that compliment the daily fare of commercial relations.

China’s Perfect Timing

China’s rise on the world stage coincides with a time when the appeal of free market capitalism and Western democracy—as exemplified by the American brand—has, at least momentarily, been lost in a tide of disdain across the globe. Few opinion-making circles in the developing world are exempt. Underlying these trends is America’s vulnerability to accusations of hypocrisy and incompetence arising from the last eight years of war in Iraq and Afghanistan.

Ideas have traditionally been among the West’s most important exports. As Francis Fukuyama lamented in Newsweek shortly before the 2008 election, American power and influence used to rest on more than simply tanks and dollars. It also rested on the fact that millions of people around the world looked up to the American form of government and sought to shape their societies along similar lines. Harvard Professor Joseph Nye has famously called this “soft power”—namely, leading by example and attracting others to do what you want. He often says, “It’s not whose Army wins, it’s whose story wins.”

The Global Battle Space: A Clash of Governing Models

Beijing’s leaders join Nye in the belief that the global information space of the 21st century has become a crucial strategic battleground for ideas and influence. This is the area where China poses its most serious strategic challenge to America. But it is also the area where America poses the greatest challenge to China.

On June 4, 2009, President Obama delivered an important speech in Cairo. It was a distillation, lightly tempered with some post-Bush circumspection, of the basic principles that underlie the civic bargain and secular beliefs of the Western model for society:

…I have an unyielding belief that all people yearn and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn’t steal from the people; the freedom to live as you choose…There is no straight line to realize this promise. But…governments that protect these rights are ultimately more stable, successful, and secure. Suppressing ideas never succeeds in making them go away…

In these brief words, Obama codified the principles that have largely guided America’s global rise over the past century. They represent a basic agreement, resting on the consent of the governed and committing government to ensure the rights of speech, belief, assembly, and political expression, provided it is peaceful, tolerant, and guided by compromise. They also represent a kind of political hammer, which is America’s to use and China’s to fear in equal measure.

These ideas are what Chinese leaders fear the most. They are also America’s product. What remains is to make it attractive to those nations transitioning from the Third World.

Confucius versus Jefferson—A Thought

Building upon the asian model pioneered by the Japanese in Manchuko in the 1930s and refined in Korea, Japan, and Singapore, China embraces principles of governance that challenge the social contract found at the center of these ideas. The Chinese Communist Party has also embraced a format that is deeply rooted in China’s own Confucian culture, and has been thought, over the generations, to reflect the natural order of society. This often escapes Western analysts. Many in Washington have sought a platform in Chinese thought to introduce the Western notions of civil rights and “the loyal opposition” and the freedoms of belief, expression, and assembly. I believe identifying such a point of entry will be difficult.

Whereas the Western ruler has a responsibility to ensure the people have the right of political expression, assembly, and debate in the public square and the people have a duty to exercise those rights, the exact opposite is true in Confucian societies. There the ruler has a responsibility to protect and support while the people have a duty to obey.

We see two modern political systems, therefore, that are enormously influential in global affairs, together providing the foundation for global economic growth, but with profoundly different values and priorities, each projecting its values into the various domains of world affairs—the UN, the IMF, the developing world—and each attempting to
“make its story win,” as Nye would say. The popular caricature of eventual military conflagration or a dramatic economic showdown between two clashing systems is not the longer-term danger; rather, the structures and ideas that have characterized Western preeminence since 1945 face the less spectacular threat of simply and quietly losing their relevance. Perhaps even worse, the principal weapons of America’s enemies in this regard are of her own making—capitalism and the global marketplace.

There’s been a new joke in London since the recent crisis on Wall Street: Capitalism saved China in 1989; China saved capitalism in 2009. As this essay has argued, the intervening period has seen China grow to pose a serious challenge to America, not by virtue of its military power or its accumulation of U.S. dollar reserves, but as the catalyst for a global shift in development economics, away from the market-democratic model and towards a new type of capitalism, which can flourish without the values and norms of Western liberalism. There is no grand strategy for responding to this kind of predicament. Washington must dis-aggregate the challenges. At one level, only through power coalitions and associations of key states can we hope to affect China’s behavior. Our leverage with the CCP comes in our collective ability to exploit its fear of criticism and ingrained aversion to exclusion from international clubs. Both depend on our ability to build multilateral partnerships.

The United States continues to be Number One by traditional measurements of comparative military and economic size, but from here on being number one just “ain’t gonna be what it used to be.”

This is particularly true if we accept the conventional wisdom that the China relationship is on track. It is not. With global developments pitting democratic pluralism against various forms of authoritarian government, one asks why the Obama administration seems blind to the strategic implications of the China model. Managing a commercial and military balance with China in the near term has simply obscured the oncoming treacherous battle of ideas in the mid-term. The expanding appeal of China’s governing model is shrinking the West—making our notions of society and government less relevant—and will do more to alter the quality of life for Americans and the West in the 21st century than any other development.

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About the Author

Stefan Halper is a senior research fellow at Magdalene College, Cambridge, and a senior fellow at the Cambridge Centre of International Studies, where he is director of the Donner Atlantic Studies Program. He is author of The Silence of the Rational Center: Why American Foreign Policy Is Failing (Basic Books).