- The Washington Times - Monday, June 21, 2010

Success breeds confidence, and rapid success spawns arrogance. That, in a nutshell, is the China problem facing Asian states and the West. But no country faces a bigger dilemma on China than the United States because the present American policy simply isn’t advancing its objectives.

Rising economic and military power is emboldening Beijing to pursue a more muscular foreign policy, as exemplified by several developments - from China’s inclusion of the South China Sea in its “core” national interests, an action that makes its claims to the disputed islands non-negotiable, to its vile protests against the Indian prime minister visiting a state of the Indian Union, Arunachal Pradesh, on which Beijing has resurrected its long-dormant claim.

A new chill in relations between American and Chinese militaries, underlined by a Chinese admiral’s carping lecture on American “hegemony,” has torpedoed the Obama administration’s hopes to make China a responsible partner in global affairs by giving Beijing a larger stake in solving international problems.

The shift in Beijing’s South China Sea position has resulted in its conveying to the Philippines, Indonesia, Vietnam and other Southeast Asian claimants that any discussions between and among them over their claims would amount to interference in China’s internal affairs. But no less significant is that China’s expanding naval role and maritime claims are beginning to collide with U.S. interests, including the traditional emphasis on freedom of navigation.

Having earlier preached the gospel of its “peaceful rise,” China is beginning to take off the gloves, convinced that it has acquired the necessary muscle.

That approach has become more marked since the advent of the 2008 global financial crisis. China has interpreted that crisis as symbolizing both the decline of the Anglo-American brand of capitalism and the weakening of American economic power. That, in turn, has strengthened its twofold belief - that its brand of state-steered capitalism offers a credible alternative and that its global ascendance is unstoppable.

Chinese analysts have gleefully pointed out that after having sung the “liberalize, privatize and let the markets decide” line for so long, the United States and Britain took the lead to bail out their troubled financial giants at the first sign of trouble when the global crisis broke out. By contrast, state-driven capitalism has given China economic stability and rapid growth, enabling it to ride out the international crisis. Indeed, despite the perpetual talk of an overheating economy, China’s exports and retail sales are soaring and its foreign-exchange hoarding is approaching $2.5 trillion even as America’s fiscal and trade deficits remain alarming.

That has helped reinforce the Chinese elite’s faith in the country’s fusion of autocratic politics and state capitalism, with the largest companies - all government-owned - aggressively advancing the national strategy to secure long-term resource supplies from overseas.

The biggest loser from the global financial crisis, in Beijing’s view, is Uncle Sam. That the United States remains dependent on Beijing to buy billions of dollars worth of Treasury bonds every week to finance a yawning budget deficit is a sign of shifting global financial power balance - an advantage China is sure to milk politically in the years ahead.

The current spotlight may be on European financial woes, but the bigger picture for Beijing is that America’s chronic deficits and indebtedness epitomize its relative decline. Add to the picture the two wars the U.S. is waging overseas - one of which appears increasingly unwinnable - and what comes to the Chinese mind is a global superpower bogged down in serious troubles.

Against that background, China’s growing assertiveness may not surprise many. Late Chinese leader Deng Xiaoping’s advice, “Hide your capabilities and bide your time,” seems no longer relevant. Today, China is not shy to showcase its military capabilities and assert itself on multiple fronts.

Yet America’s economic and military travails are crimping its foreign-policy options vis-a-vis China. Although the Chinese economy is still more dependent for its growth on the U.S. economy than vice versa, Washington seems more reluctant than ever to exercise its leverage to make Beijing correct policies that threaten to distort trade, foster huge trade imbalances and spark greater competition for scarce raw materials.

By keeping its currency ridiculously undervalued and flooding the world markets with artificially cheap goods, China runs a predatory trade policy that undercuts manufacturing in the developing world more than in the West. However, by threatening to destabilize the global economy, China threatens Western interests.

Furthermore, its efforts to lock up supplies of key resources mean it will continue to lend support to renegade regimes. The U.N. Security Council’s latest Iranian-sanctions resolution is a “win-win” outcome for China because it exempts the key sector that matters to both Beijing and Tehran - energy - and opens the path to greater Chinese aid to, and clout in, Iran.

The present U.S. policy on China is a study in contrast to the way Washington unabashedly exercised its leverage when another Asian country - Japan - emerged as a global economic powerhouse in the 1980s. As it rose dramatically to become a potential economic peer to the United States, Japan kept the yen undervalued and erected hidden barriers to the entry of foreign manufacturers into its market. That resulted in the U.S. piling up pressure on Japan and periodically arm-twisting it to make trade concessions.

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