Security Debrief

The most recent military development on the Korean Peninsula cannot be seen outside the overall context of US-China relations. In recent weeks, the United States and China have been engaged in a “currency war,” underscoring the race between Washington and Beijing for global influence in the 21st century.

Beijing accuses Washington of deliberately devaluing the dollar to slow China’s ambitious economic expansion plan by rendering Chinese products more expensive to American and world consumers and by reducing the value of China’s investments in U.S. securities.  Washington, on the other hand, accuses China of artificially undervaluing the Yuan in an effort to pursue an aggressive export-driven growth policy that can destabilize world markets in the long run.

The reality is that the US-China relationship is very complex; it is governed by two forces pulling in opposite directions:

A) Economic interdependency: China needs to sustain its economic expansion strategy through unfettered access to the U.S. consumers’ market, and America needs to sustain federal obligations and commitments through debt by encouraging China’s investments in U.S. government securities.

B) Economic competition: China has the ambition to become a superpower that can rival the United States on the world’s stage, and America desires to contain China’s expanding influence to preserve the international order it helped design.

As long as these two forces are at equilibrium, the U.S.-China relationship can develop on a win-win basis with tremendous benefits to the world community and the global economy.  Unfortunately, current data clearly point to a trend towards imbalance favoring China. Let me explain.

Is Economic Interdependency a Myth?

In 2009, U.S. federal spending on social security, unemployment/welfare, Medicare, Medicaid, and interest on the national debt was equal to the total revenues of the U.S. government. In other words, all other U.S. government programs (e.g., Defense, Agriculture, Education, Veterans Affairs, Health and Human Services, Transportation, Justice, State, etc.) – and the funding of the wars in Iraq and Afghanistan – are currently being paid for through debt advanced to the United States by China.

In summary, China is financing almost 100 percent of the U.S. government’s spending outside of welfare/entitlements/debt interest, including the constitutionally mandated top priorities of the U.S. government: defense policy, monetary policy and foreign policy. This financial dependency on China has already grown further in 2010 and is expected to skyrocket in the coming years.

Some analysts argue that this dependency on China is of no threat to U.S. national interest because China has “no other alternative” than the U.S. market: only the United States can consume Chinese-made products at the rate China’s needs to sustain its exports-driven economic growth policy; and, only the U.S. government is capable (it owns the U.S. dollar, the world’s dominant currency) and willing (desiring to keep its deficit-driven spending) to absorb through debt China’s growing U.S. dollar-based wealth without major political and/or economic backlash. In other words, the U.S. government can go on with its deficit-driven spending without worries about China “pulling the plug” anytime soon.

While this interdependency is today true, it is quickly moving in a different direction that is not advantageous to the United States:

• First, the Chinese domestic market has the real potential to become a sustaining force to China’s continued economic growth. Already the world’s second largest economy, China has growing upper and middle classes that are pushing domestic consumption upwards.  While in theory this trend presents an opportunity for U.S. companies to increase their exports to China, in reality, Chinese companies are increasingly directing their products to their domestic market at the expense of foreign imports. Preserving a lower value for the Yuan strengthens this trend by rendering foreign made goods priced in U.S. dollars more expensive.

• Second, emerging economies are on the rise around the world and are increasingly providing fresh opportunities for international investments. A cash-rich China is already overtaking a debt-burdened America. Chinese investments are on the rise in every continent around the world.

In short, the seemingly interdependent economic environment is already imbalanced in favor of China.

What happens when, by 2025 or 2030, as international economists and financial experts predict, China surpasses the United States to become the world’s largest economy, if America continues down the road of deficit spending and debt piling?

Economic Competition: At Major Crossroads
China is pursuing economic, financial and trade agreements worldwide much more aggressively and more successfully than the United States. Flush with cash, China has already secured treaties with resource-rich countries in the Middle East, Africa, Asia and Central/South America:

Latin America: The Chinese government made it quite clear earlier this year that it seeks a comprehensive development of its relations with Latin America. China has already secured oil contracts, defense sales agreements and joint ventures in Latin America.  Furthermore, approximately 50 percent of China’s non-financial FDI (foreign direct investment) has been in Latin America, mainly Brazil, Mexico and Argentina.

Asia: With America preoccupied with terrorism, Iraq, Iran and Afghanistan, China has increased its presence in Asia at the expense of the United States. China’s stronger relations are most visible in the economic sector. In Indonesia, for example, China is now a major financier of mega projects, a role that had been played in the past by international institutions like the World Bank and countries like Japan and the United States.

Africa: “China has become the alternative partner for Africa. In the last 10 years, Africa with assistance from China has been able to do much more with less because Chinese technology is much cheaper compared to that of the West that Africa relied on before,” states Leonard Kimani, the director of the economic sector at the National Economic Social Council (NESC), the think-tank that advises the Kenyan government. Soon after taking office, South African President Jacob Zuma went to China in August 2010 to discuss South Africa-China relations, including focused discussions on nuclear cooperation and Chinese investment in South Africa’s infrastructure, such as railways. Zuma defended Chinese investments as “… not to colonize, but to help Africa stand on its own and work together with China.”

Middle East: In November of this year, China and Turkey established a “strategic cooperative relationship” at all levels – military, economic and political. In 2010, China has replaced the European Union as Iran’s largest trade partner, oil purchaser and foreign investor. China is already one of the biggest winners of Iraq’s oil contracts.

This overall trend in China’s expanding economic, political and military relationships is expected to grow further in the coming years. Faced with this reality, what “leverage” does the United States have to achieve its economic competitive objective?

A)    Energy
Energy is the lifeblood of the global economy. Without unfettered access to sources of energy, China’s ambitious goal of becoming a superpower in twenty-odd years cannot be realized. Oil and gas are still the “oxygen” for global energy today. U.S. Department of Energy statistics show the following:

• Oil: approximately 87 percent of oil reserves outside Canada, the United States, Russia and China exist in Muslim countries.

• Gas: approximately 61 percent of gas reserves exist in the Muslim Middle Eastern countries. In Eurasia, with about 10 percent of the world’s reserves, Russia has 62 percent and approximately 37 percent exist in Muslim countries or countries with a majority Muslim population (e.g., Kazakhstan). In Africa, with about 9 percent of the world’s reserves, 87 percent exist in Muslim countries like Libya and Algeria, and countries with Muslim majorities, like Nigeria. In Asia and Oceania, with about 3 percent of the world’s reserves, China is the largest holder. Outside China, 43 percent of gas reserves in this region are in Muslim countries like Indonesia and Malaysia.

B)    Trade Routes

Approximately 90 percent of world trade is transacted today by sea through shipping, with about 70 percent of it transiting through the Indian Ocean. China today, lacking a powerful navy, has to rely on the U.S. Navy to keep open these shipping lanes, which are of vital importance to its trade and economic expansion. A close look at the countries along the Indian Ocean – eastern coast of Africa, the Arabian Peninsula, the Persian Gulf, South Asia, East Asia and Oceania – along with shipping gateways such as the Suez Canal, Bab El Mandeb, Strait of Hormuz, and Lombok Strait, that connect the Indian Ocean to the rest of the world, reveals the importance of Muslim countries and countries with large Muslim populations.

In short, how the United States manages its outreach to the Muslim world becomes of strategic importance to America’s economic competitiveness vis-à-vis China in the 21st century.

The Real Stakes
The festering problem of North Korea must be viewed and dealt with in light of this background.  The current U.S. policy towards North Korea – a regime of sanctions on the one hand and beefing up military arrangements in the region on the other – has immediate benefits in terms of military sales and bilateral trade matters with countries of the region. But it also exacerbates the U.S. Government deficit by driving military expenditures upward. This is a small price to pay as long the overall strategic outlook for U.S.-China relations remains at a point of equilibrium, wherein any broader conflict caused by North Korea would bring more harm to China’s strategic position than to that of the United States.

The trend as I described it earlier, however, clearly points to a state of imbalance in the strategic relationship favoring China, leaving the United States with the possibility of facing a “double jeopardy” if it does not act soon to reverse it. If the United States keeps in place its current policy towards North Korea without drastically altering the course of its global policies, more especially towards the Muslim world, it will be in a much weaker position to influence policy in the Korean theatre 15-20 years from now when China becomes the world’s largest economy.

Even countries like South Korea and Japan will then seek greater accommodation with China at the expense of the United States. Finally, if the United States also fails to bring under control its upward spiraling budget deficits, then by the time China’s economy surpasses that of the United States, the U.S. government will be under so much debt over the next ten to fifteen years that it will practically lose all flexibility in governing its international affairs. Is China applying lessons from America’s playbook against the Soviet Union? By driving the Soviet Union bankrupt, the United States won the Cold War and helped bring about the end of the Russian empire.

Cultural Intelligence matters!