U.S. and China: Which way?

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Current U.S. headlines about China trumpet dubious dog food and lead paint in toys. Too bad all that is burying another important story. China's emergence as an economic power has set off alarms among national security and military experts in Washington, D.C., about China's rapidly rising military expenditures, including the acquisition of world-class submarines, development of a blue-water navy, modern aircraft, satellite-launch and -destruction capability, a broad range of missiles, and a more professional army.

An immediate concern is Taiwan's security, but the longer-term threat resides in China's growing influence throughout Asia and its forays into Africa and Latin America in quest of natural resources. What, then, should U.S. policy be toward China?

Begin with China's economy. Restructuring began in earnest in 1978, when Deng Xiao-ping established the rural household responsibility system, followed by a transformation in industrial production. The economy has turned in a 10 percent annual average real growth for 28 years (11 percent in the last few years). At this rate of growth, real national income doubles every 7 to 8 years, quadruples in 14 to 15 years, rises eightfold in 22 to 23 years, and so on.

The residents of China's coastal cities already enjoy comfortable middle-class living standards. In purchasing power parity (PPP) terms, China's economy is now the world's second-largest, valued at $10 trillion, fast approaching the $13 trillion U. S. economy.

Princeton Professor Gregory Chow, an expert on China's economy, projects a sustained 9 percent to 10 percent growth rate through 2020. At this rate, China's economy will catch that of the United States by 2011-'12.

China has amassed more than $1.3 trillion in foreign exchange reserves, the largest in the world, and continues to accumulate tens of billions every month. During 1995-2006, China's foreign reserves rose at an annual average rate of 20 percent. Several important strategic issues arise out of China's vast holdings of U.S. government securities.

Government revenues in China are extremely elastic with respect to growth. Revenue rose between 20 percent and 22 percent in 2005 and 2006. More and more economic activity is subject to taxation. That means the government collects an increasing share of national output, investing those funds in infrastructure and strengthening its military forces.

A comprehensive indicator of China's financial wealth is household savings, which includes equities, bonds, insurance policies, and other financial and real assets. Compared with the United States — apart from traditional savings, money creation, and intermediation by China's banking system — China's other financial markets are still emerging. Excluding real estate, the value of all U.S. household private net wealth is around $29 trillion, fourfold the U.S. M2. The comparable figure for China is far less, but the value of non-M2 Chinese financial assets will rise rapidly as China's financial markets develop.

These numbers portend that, within a decade or two, the Chinese people will own the world's largest percentage of real household wealth. Rising tax revenues of 20 percent a year will transfer an ever-increasing share of this wealth to the Chinese government, giving it enormous economic, political, and military power.

This economic reality worries strategic planners. Should the United States take a path of confrontation or seek out a path of cooperation? In my view, our mutual interests provide an enormous opportunity. China's overriding objective is to maintain a strong economy, provide 25 million new jobs a year and upgrade living standards throughout the country. To this end, China requires global economic and political stability. The United States shares the same goals of global economic and political stability. Both nations have a stake in maintaining peace and curtailing terrorism.

Over time, the U.S. share of global output and U.S. influence will gradually decline. China, India, Brazil, Russia and other rapidly growing economies around the world will make everyone better off, including Americans, but also give those countries a larger role in international affairs. China needs U.S. markets, and the United States will increasingly need China's markets as its economy continues to expand.

What is needed, then, is a new global security framework, a worldwide Monroe Doctrine, that can take the form of U.S. responsibility for stability in the Western Hemisphere, with China and India assuming greater responsibility for stability in Asia. Trade and other mutually beneficial U.S.-Chinese relationships can build cooperative links across the oceans.

Though much of U.S. security policy focuses on Iraq and the Middle East, we must not neglect the dramatic global change reflected in China's remarkable economic transformation. It is time for some serious thinking and strategic dialogue between China and the United States aimed at developing an increasingly cooperative relationship in trade, politics, and military affairs, rather than treating China's growing prosperity and military power as a threat.

Alvin Rabushka is the David and Joan Traitel Senior Fellow at Stanford University's Hoover Institution.