An Analysis of US Foreign Policy

A friend writes, "What the end of hegemony looks like..."

In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar.

In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.

A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”

On the one hand, true. China's over $1 trillion in dollar-denominated reserves aren't as safe as they once were, and a devaluation of that asset through inflation would not be good for China. But, where else are they going to go?

While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.

Lets look at this more closely. The Dollar has its privileged position in the world economy because a) many economists believe that the world economy needs some sort of stable reserve currency, b) the US is willing and can afford to maintain such a strong currency, and c) the rest of the world has left this arrangement unchallenged and benefits from it. Much of this is classic Kindleberger--the world economy needs a stabilizer, one stabilizer, to stabilize the global economy as market, currency, and lender of last resort. The US is that stabilizer.

The third of those reasons--acceptance by other world powers--is now under some degree of threat as China starts to fret about its dollar position. However, absent another actor willing and able to play the role of stabilizer, everyone--China included--risks putting themselves in a significantly worse position should the dollar lose its pride of place in the international economic system.

China suggests that the IMF's SDR form a new reserve currency. This indicates they really aren't all that serious about actually doing anything to dislodge the dollar. For one, to have a currency able to act as a reserve currency requires backing of a stable, authoritative, empowered entity that can manipulate fiscal and monetary policy as needed to protect the value of its currency. We call this a sovereign state. To give the IMF such rights would make the IMF a de-facto global economic sovereign. China has no demonstrated desire to create supra-national authority, not at the UN, nor the IMF. Moreover, there is a significant and real cost to maintaining a strong reserve currency. The strength of the dollar makes the US a great destination for products--we can afford to buy others' cheap stuff. A significantly de-valued dollar (coupled with an increased value of other currencies like the Yuan or Yen or Won) would be a disaster to economies that rely on exports. China would need to show that it is willing and able to take on a stabilizing role in the global economy, which just doesn't seem in the cards as of yet.

Perhaps, though, this might be read as an attempt to gain leverage:

The timing of the Chinese announcement, analysts said, could also be aimed at giving Beijing more leverage to negotiate with the United States and other nations in London on trade and on proposals about how to stabilize the global economy.

All that said, it would be foolish for US policy planners to simply ignore China's (and others) growing dissatisfaction with the Bretton Woods legacy system that now constitutes the global economy. The fundamental bargains that made such a hegemonic system possible (cf Ikenberry) have become frayed, and while neither China nor the EU (nor India, for that matter) are poised to overthrow US hegemony in the short term, they can clearly erode US hegemony by driving up the cost of acting as a stabilizer. In the medium term, this imposes a cost on everyone, as the global economy (and security order) falters without a clear stabilizer, but from a realist perspective, the relative gains (or in this case declines) could benefit the challengers to US hegemony--at least that's what they are betting on.

Labels: China, economic crisis, hegemony

One of the interesting and recurring themes in USFP, especially when you look at it through the lens of Hegemony as we are this semester, is the role that certain countries play in the domestic debate. That is to say, there are certain type-cast roles that are used to justify certain policy positions, and having someone to fit that role really helps the person making the particular policy argument in question.

One of the classics is 'China' as "the next big thing." As a rhetorical device, this has little to do with what China is actually doing or plans to do. Rather, there is a role for the future challenger to the USA that requires action today, and China now fits that role. It didn't always have this role--long ago, it was the Soviets, then for a brief time it was Japan.

Fred Kaplan, in Slate, has a very interesting write up of the latest use of the China Card, this time in the Air Force's desire to buy more F-22's. Secretary of Defense Gates wants to stop production of the F-22, which costs $385 million per plane.

Gen. Carlson's rationale for this expansion: "Most people say in the future there will be a China element to whatever we do." In plainer words: He says we need more than twice as many F-22s than the secretary of defense says we need because of the future military threat from China.

Two things should be noted about this claim. First, by the Pentagon's own measure, the Chinese military has a long way to go before it constitutes a threat to U.S. forces. Second, even if it does become a threat, it's not at all clear that the F-22 would be the best weapon to deal with it....

The F-22 is the centerpiece of Air Force procurement at the moment. It has nearly no role in the sorts of wars that the United States has been fighting in the last 20 years—or has much prospect of fighting in the next 20.

And so, the China threat is dragged out of the cellar once again, as it has been to justify troubled weapons systems for 40 years now.

Kaplan goes on to document the leaps and bounds by which Chinese military power is behind the US. Its certainly worth reading all of it, especially if you are a China-o-phile. The moral of the story: China's military doesn't fit the role today, but the role is quite powerful--powerful enough to drive billion-dollar military spending at a time when the US military has many other more pressing and immediate needs. He concludes

In other words, it's worth keeping an eye on China. But it's probably not worth spending tens or hundreds of billions of dollars now for a program like the F-22, which its own sponsors admit might be needed in case a threat develops 20 years in the future.

(plus, how can you not love a chance to have some cool F-22 pics on the blog?!?!)

Labels: China, f-22, hegemony, military

As Barry Posen argues, American Hegemony is based on military command of the commons: the ability of the superior US military capability to control the global common areas of airspace, the high seas, and outer space.

This week's Economist has an excellent discussion of the importance of space-based assets to American military superiority:

The Combined Air Operations Centre's exact location in “southwest Asia” cannot be disclosed. But from here commanders supervise tens of thousands of sorties a year. Through aircraft surveillance pods they get a god's eye view of operations that range from old-fashioned strafing to the targeted killing of insurgent leaders with bombs guided by global positioning system (GPS) satellites, and emergency air drops to isolated soldiers using parachutes that steer themselves automatically to the chosen spot.

If Napoleon's armies marched on their stomachs, American ones march on bandwidth. Smaller Western allies struggle to keep up.

(implying that lesser developed potential rivals--Iran, North Korea, for instance--are left in the dust...)

[T]he armed services' hunger for electronic data means that four-fifths of America's military data is transmitted through commercial satellites. A single Global Hawk unmanned surveillance aircraft flying over Afghanistan can eat up several times more satellite bandwidth than was used for the whole of the 1991 war against Iraq.

In a nutshell, the US relies on space-based assets as the backbone for all of its technologically dominant military technology.

China, starting with its 2007 A-Sat test, is making an overt play to challenge the US military by placing these space-based assets at risk. Even by creating more space-junk, they put valuable satellites at risk of collision with a deadly piece of debris. Now, a poorly developed challenger to US influence has no hope of countering the massive military advantage afforded by space dominance. But a so-called "near peer" competitor (ie China, Russia) could. By blinding or even taking out US satellites, they could drastically reduce the US military's ability to exercise its dominance in other areas of the global commons.

While it will be a long time before any other nation can match what the US has produced and launched into space, its a current reality that several nations could level the playing field significantly by taking out America's space based assets.

The key question: How likely is such an action, and how much would it really matter?

Labels: China, hegemony, outter space, satellite

China is in the Satellite business.

The NYT reports that China is launching a communications satellite for Nigeria (pictured right).

The lead says it all:

For years, China has chafed at efforts by the United States to exclude it from full membership in the world’s elite space club. So lately China seems to have hit on a solution: create a new club.

Beijing is trying to position itself as a space benefactor to the developing world — the same countries, in some cases, whose natural resources China covets here on earth. The latest and most prominent example came last week when China launched a communications satellite for Nigeria, a major oil producer, in a project that serves as a tidy case study of how space has become another arena where China is trying to exert its soft power.

This past semester, in my Hegemony and US Foreign Policy class, we talked about China often--usually in terms of a 'hegemonic challenger.' One of the point that we often noted, however, was that a hegemonic challenger must do two things: 1) overthrow the old hegemonic order, in this case, knock the US off its block as teh global #1, and 2) replace it with a new hegemonic order. In most of our discussions, we concluded China not really keen on either--instead treating the US as a rival (as opposed to an enemy) and looking to improve its own position within the system, as China now benefits tremendously from certain aspects of the current US order--especially in areas such as trade.

The key line in the lead is "form its own club." Space has long been seen as a global commons, one where the US can provide certain public goods (such as satellite communication and navigation) and exercise its Command of the Commons as a foundational aspect of US Hegemony. Here you have not just China challenging that US order, but starting its own club for other states with similar interests.

You also see the invocation of "Soft Power." I must admit, we read a lot of Nye in the class (probably second only to Ikenberry on the syllabus) and his work was popular with the students. The notion of Soft Power as a tool for hegemonic management is the heart of Nye's work--get them to like you and want what you want so you don't have to force them to do what you need them to do--and here you have the NYT reading China in that light.

The second interesting thing is the impetus toward the move into space. What I found notable was that the NYT managed, in the span of 3 brief paragraphs, provide ample evidence for Constructivist, Liberal, and Realist explanations of this launch:

For China, the strategy is a blend of self-interest, broader diplomacy and, from a business standpoint, an effective way to break into the satellite market. Satellites have become status symbols and technological necessities for many countries that want an ownership stake in the digital world dominated by the West, analysts say....

China’s more grandiose space goals, which include building a Mars probe and, eventually, putting an astronaut on the moon, are based on an American blueprint in which space exploration enhances national prestige and advances technological development. But Beijing also is focused on competing in the $100 billion commercial satellite industry....

Satellites also are becoming vital to Beijing’s domestic development plans. In the next several years, China could launch as many as 100 satellites to help deliver television to rural areas, create a digital navigational network, facilitate scientific research and improve mapping and weather monitoring. Research centers on microsatellites have opened in Beijing, Shanghai and Harbin, and a new launching center is under construction in Hainan Province....

But China’s focus on satellites has also brought suspicions, particularly from the United States, since most satellites are “dual use” technologies, capable of civilian and military applications. Currently, China is overhauling its military in a modernization drive focused, in part, on developing the capacity to fight a “high tech” war.

Constructivism: Prestige, status, and identity: having a Satellite shows you're one of the cool kids.
Liberalism: Maximize gains: satellites as income generating, development promoting devices with a key focus on domestic political factors.
Realism: Enhances military power relative to the USA.

All that from one fun picture.

Labels: China, hegemony, satellite

Since its China as Hegemonic Challenger week and Earth Day, I though that this report might be an interesting issue to discuss (hat tip to Dan Drezner):

China will overtake the United States as the world’s biggest emitter of heat-trapping carbon dioxide (CO2) either this year or next, the International Energy Agency said on Wednesday.

The estimate is much firmer than the IEA’s previous forecast, last November, that on current trends China would overtake the United States before 2010.

”Either this year or next year,” IEA Chief Economist Fatih Birol told Reuters, in answer to the question of when China would overtake the United States.

Talk about a challenge to a key US #1 ranking....

Of course, you have to consider that China is like 4 or 5 times the size of the USA population-wise. But, that's part of the allure of China as hegemonic challenger.

Chinese officials point to their country’s relatively low per capita emissions of greenhouse gases, saying historically the main culprits are developed nations, who have no right to deny economic growth to others.

U.N. data for 2003 put the United States top with 23 percent of world carbon dioxide emissions and China second on 16.5 percent. U.S. individuals were far bigger emitters, at 20 tonnes per capita against China’s 3.2 tonnes and a world average of 3.7.

But China is catching up quick and is having to try to balance 10 percent annual economic growth with environmental and energy supply issues.

Latest data shows China is building a coal-fired power plant every four days, British foreign ministry official John Ashton said on Monday.

Growth in the emerging Asian giant’s emissions puts in perspective Western efforts to fight climate change, Birol said.

”What we do in Europe may be with good intentions, may be very ethical... but if you put it in terms of numbers its meaning is very limited.”

A senior staff scientist at the U.S. Carbon Dioxide Information Analysis Center (CDIAC) last month estimated it was very likely that China would overtake the United States this year, estimating China’s CO2 emissions in 2005 at 5.3 billion tonnes versus the United States’ 5.9 billion, but with China growing much faster.

So what does this do to all the dire predictions of China overtaking the US at some point?

Labels: China, Global Warming

China has over $1 trillion of US treasury bills. Its a well described cycle--China produces massive amounts of consumer goods, the US buys those goods, the trade is imbalanced, so China ends up with a lot of dollars, and they invest them in T-bills, essentially loaning them back to the US government to finance the US federal budget deficit.

So far, China has been sitting on this mound of cash, content to save. That seems to be changing, reports the NY Times today:

China will create a new agency to invest the country’s immense reserves of foreign currency, now totaling more than $1 trillion, the country’s finance minister announced today.

The minister, Jin Renqing, offered no specifics about how much of China’s currency reserves would be under the new agency’s control. But whatever the precise figure, analysts say that the agency is certain to begin life as one of the world’s biggest investment funds.

China’s currency holdings are already the world’s largest, and they are growing rapidly because of China’s huge trade surpluses. Most of the reserves are now invested very conservatively, in United States Treasury bonds and other government securities, a strategy that helps to keep interest rates low in the United States and other developed countries but earns little profit for China.

A trillion dollar investment fund controlled by the Chinese government!

Now, A) that's a lot of money and B)strategically invested, it could do some interesting stuff for China and reshape some significant relationships in world politics.

The new agency will be able to invest some of the money more diversely and aggressively, analysts said, with the possibility of hundreds of billions of dollars put into acquiring “strategic assets” — mines, oil fields, whole companies — around world, especially in developing countries in Africa and Latin America.

“They’re not going to be looking for financial assets, but energy assets and natural resources, minerals, things China desperately needs,” said Jing Ulrich, an analyst at J.P. Morgan.

For those who see the specter of a rising China behind every corner, this is surely a sign of an assertive China challenging US hegemony by buying up all that the US can no longer afford to protect.

But, really, how significant is such a fund? Well, in the first place,

The government said that the new agency would be modeled in part on Temasek Holdings, the Singapore government’s hugely successful investment agency, which manages an $84 billion global portfolio of investments....

Andy Rothman, a strategist at CLSA Asia-Pacific Markets, said the government was likely to proceed cautiously and give the agency only a relatively small part of the reserves to work with at first, perhaps $20 billion. “It’s not going all of a sudden going to change the world,” Mr. Rothman said. “I think they are going to move very, very slowly in diversify what they are doing. Nobody should expect that suddenly they are going to invest $1 trillion.”

A quick comparison:

The Endowment of Harvard University is around $25 billion.
CalPers, the retirement fund of California teachers, is one of the largest investment funds in the US and worth about $230 billion.
The largest Hedge Fund is worth about $21 billion, and the entire hedge fund industry has about $1.1 trillion in assets (pdf).
The largest Asset Management firms in the world (all US or Western Europe) manage about $1 trillion each.

So, China would start out as powerful as the Harvard Endowment in the global economy, but rapidly approach the power of Fidelity or Barclays.

That's still some serious investing power, but not take over the world type power. It would put China Fund in the top 10 of global asset managers, but only the top 10. The rest would still be US based / backed capital, and China's primary investment remains US Dollars.

Now, if China Inc. focuses its investments on maximizing return--which many think it will do out of necessity--

And with that growth have come rising costs at home for education, health care and pensions. Earning more on government holdings, analysts say, will allow the government to better cope with some of these problems.

--then this new entrant creates inflationary pressure in the investment markets (more cash chasing a shrinking number of performing investments) but doesn't fundamentally alter the system.

The more interesting element comes if and when the government dictates the fund to invest in politically / strategically important asset (like an oil field or bauxite mine or something) that performs poorly or even loses money. Will the government A) sacrifice its own financial well-being for national political / strategic gain or B) be disciplined and socialized by the market and get out of the poor investment. Now that's a long way off, but could certainly accelerate key debates about China's future as hegemonic challenger or member of the existing system.

Labels: China

Colbert has caught on to the power of the Frenemy!



Who says Colbert isn't relevant for US Foreign Policy?

(for further discussion of this key issue, watch this!)

Something fun to watch in the snow.

Labels: China, Colbert, Frenemy