Thank You, G2

Since the end of the Cold War, big strategic thinkers have been longing for an enemy worthy of their big strategic brains. Many have tried hard to turn China into one. In the late '90s, Andrew Marshall, the Pentagon's near-legendary chief of "net assessment" and the last of the Truman-era Cold Warriors, directed a study that called for a wholesale reallocation of military assets away from Europe and toward Asia. In the view of Pentagon planners, the new Fulda Gap—the region where Soviet troops were poised to invade Western Europe during the Cold War—would be the South China Sea, a key "chokepoint" that the Chinese might some day seek to control. The prominent realist scholar John Mearsheimer argued that if China continued "modernizing at a rapid pace," it "would surely pursue regional hegemony, just as the United States did in the western hemisphere during the nineteenth century." His potted prescription: America should not only withdraw from engagement but slow down China's growth.

The debate, fortunately, has moved somewhat beyond those simplistic, stuck-in-the-last-war views of the U.S.-China relationship. But it hasn't moved far enough. Today's grand strategic critiques tend to focus on economics—the staggering imbalances between China's capital surpluses and America's deficits—while still using Cold War terminology. That's why, in 2004, Larry Summers, then president of Harvard, described the relationship between America and China and Japan, the largest holders of U.S. debt, as "a kind of balance of financial terror." New York Times columnist Paul Krugman, in the latest iteration of this approach, urged President Obama to talk tough to Beijing about currency during his first visit to China this week in order to avoid "a potentially ugly confrontation." Krugman said the Chinese were deliberately keeping their currency weak as part of a strategy of "beggar-thy-neighbor devaluation" that would allow China to maintain its export might. Beijing's aim is to appease its own population with continued high economic growth while doing nothing to help ease America's double-digit unemployment, and that's a "dangerous game," Krugman warned.

Is it? China's game of cheating at the margins of the system by playing with its currency misses a much bigger point. Step back a moment. The larger story that has unfolded in the year since the biggest economic disaster since the Depression—an era that led to near-total breakdown and world war—is just how intact the international system remains. "We've never had a situation where we've been at such risk but at the same time the major powers have acted so responsibly as adults," says Richard Medley, who was formerly chief political adviser at Soros Fund Management and chief economist for the House Banking Committee and now manages successful hedge funds. "I'm very impressed by the Chinese, by the Americans, by the British, and even a few of the Europeans." Trade has dropped precipitously but not broken down. There is no great surge of protectionism, or virulent nationalism. On the contrary, a cautious and polite debate is taking place about reforming the global financial system (too cautious, in fact, many critics say).

Most of all, Medley says, the main motor of the world economy and global system—the "G2," America and China—is a continuing source of stability. "The G2 is evolving and both sides are doing an adult job of letting it evolve," he says. So much so that the third great source of world growth, the European Union, is getting a bit jealous. In the latest of a never-ending series of calls for an always-fractious Europe to unite itself, British Foreign Secretary David Miliband warned late last month that the EU risked becoming "spectators in a G2 world shaped by the U.S. and China." A few weeks later, Italian Foreign Minister Franco Frattini also admonished his fellow continentals: "If we do not find a common foreign policy, there is the risk that Europe will become irrelevant ... We will be bypassed by the G2 of America and China, which is to say the Pacific axis, and the Atlantic axis will be forgotten."

All this is not only entertaining but marvelously healthy: a war of words that has no chance of becoming a real war. The G2 itself is not necessarily in a happy place, of course: at their fairly sober summit meeting on Tuesday, Obama and Chinese President Hu Jintao seemed to disagree on climate change and attempts to sanction Iran over its nuclear program, which Hu did not endorse. Hu even gave Obama a free-market poke by suggesting America was encouraging protectionism with its imposition of tariffs on tires and steel pipes. But the differences were muted and for good reason: it's in the consummate interest of both leaders to keep them that way. When Obama, in his Shanghai town-hall meeting Monday, declared that "power in the 21st century is no longer a zero-sum game," he was speaking a prosaic yet profound truth about the relationship between the current superpower and the emerging one. Yes, the U.S. and Chinese economies are so integrated that to disentangle them would mean a kind of "mutual assured destruction," or MAD (to resurrect another Cold War term). But that's a good MAD, not a bad MAD. The global system resembles, in fact, more of a "mutual aid society," as Princeton scholar John Ikenberry puts it. No country, not even would-be rogues like Iran and (possibly) Russia, has found a way around the iron law of this benign global order: in order to be influential or powerful, a nation must be prosperous; in order to be prosperous, its economy must take part in the international system; in order to take part effectively in the international system, even countries with dramatically different political and social systems, like America and China, must act according to a set of strict norms. There is no other choice. "To be successful today, a major nation has to join the World Trade Organization," says Ikenberry.

Deng Xiaoping, the Chinese supreme leader, may not have understood the full implications of what he was doing when he began to open up the Chinese economy in 1978. Deng was just trying to avoid the fate of the failing "command economy" of the Soviet Union. It didn't matter what color a cat was, Deng said, as long as it caught mice. What that meant, in the koanlike rhetoric of Chinese politics, was that if private enterprise works, we'll try it. Was this all part of a 100-year plan, as some hardline U.S. analysts of China still suspect, to overcome and dominate the United States using its own economic methods? Who knows? But if so, it's unlikely the Chinese mandarins will ever succeed in carrying out that plan, for the simple reason that, to a degree they never could have anticipated, they have been permanently co-opted into the system.

This is somewhat analogous to what happened to Japan in the last century. Japan waged war twice in the 20th century, first with ships, planes, and armies, then with trade. But as Japan's economy matured, after years of relentless pressure to open up Japan's markets and change its practices, Tokyo's bureaucratic and business elite began touting the concept of kyosei, or "symbiosis" with Western economies. Japanese multinationals began setting up production abroad, in the United States, to avoid trade sanctions on exports, and in Asia, to escape the high-priced labor of their own maturing economy. The result was that Japan began losing its "Inc."—the interests of the nation and its giant corporations started to diverge. The Mitsubishis, Toyotas, and Matsushitas, the pride of Japan's postwar rebirth, began joining the great multinational diaspora. Thanks to globalized production, Japanese companies, to a startling degree, have become "us" rather than "them."

And that's where the Chinese are headed as well, if we have the patience to coax them there. Eventually—and maybe it will take another hundred years—as the population grows wealthier, the Chinese will begin consuming more normally, introducing more balance to capital flows. (Perhaps even more than the Japanese have: China's is a more naturally capitalist culture than Japan's.) The global system may not be pretty; no grand strategic thinker ever would have designed it this way. But it is working. So let's hope Barack Obama has the wisdom to leave well enough alone.

By Michael Hirsh

Source: Newsweek

Post-Crisis World Institute