Dragon goes Gringo!

When it comes to US-China ties, for the first time in the history of global relations, a leading power has deep linkages with its most likely challengerZORAWAR DAULET SINGH DELHIIN RECENT YEARS, analysts have alluded to the systemic change underway in the international system, specifically, the redistribution of industrial capabilities towards the Eurasian region and its implications for the dawn of a geopolitically plural era. What has received less attention is the impact that such a reorganisation of the international political economy has had on interactions among major powers. Specifically, US-China relations offer an extraordinary caricature of the nature of contemporary interdependence. In India, the complexity of US-China relations has not been investigated seriously by either the strategic community or in mainstream discourse. This is puzzling since Sino-American relations will determine, to a large extent, the context and options for Indian foreign policy in the coming years. The dynamic US-China relationship has few historical parallels. Never before in the history of international relations has the leading power of the system had such an entwined relationship with its most likely challenger. And, at the core of US-China relations, is the reciprocal economic dependence that sustains the other's growth. Over the past decade, China has emerged as the largest exporter of manufactured goods to the US. In 2007, Chinese merchandise exports to the US were $321 billion with a trade balance in China's favour of approximately $256 billion. China's holdings of US treasuries, second only to Japan, reached $502 billion by May 2008, or 19 per cent of total US bonds held by international investors. Thus, US bonds accounted for 29 per cent of China's total foreign exchange reserves of $1.75 trillion (May 2008). Last year, China financed 30 per cent of the US's current account deficit. In short, Chinese capital finances and sustains a significant portion of the US's over-absorption, thereby enabling US growth; high enough for one Chinese scholar to remark that "China is providing, rather than destabilising, the foundations of US hegemony"! China accounts for 70-80 per cent of total US imports of toys, footwear and other low-end products, nearly 40 per cent of total apparel imports and 35 per cent of consumer electronics. Alternatively, over the past five years, US exports to China have grown at five times the rate of US exports to the rest of the world, and China has surpassed Japan to become its fourth-largest export market projected to reach $80 billion by the end of 2008. China has also emerged as the third-largest market for US high-tech exports ($14 billion, 2006). While the US had an FDI stock of $51 billion by 2005 (8.2 per cent of total FDI stock in China), bilateral statistics understate the level of US involvement in the Chinese economy. US MNCs operating across East Asia have ‘sliced up' the manufacturing supply chain, with multiple countries now participating in various stages of a single production process with final assembly undertaken in China. It is estimated that 58 per cent of all imports into the US come from US subsidiaries operating in China. Thus, China's central role in the East Asian geoeconomic division of labour, specifically for information and communication technology products, implies that China has become the primary interface for the US's economic engagement with East Asia. According to the World Bank, in 2007, China surpassed the US's contribution to global economic growth (17 per cent). China's projected GDP for 2008 at $3.8 trillion will ensure it displaces Germany to emerge as the third largest economy. China has, therefore, become a second pillar of global growth, and is cushioning the impact of a US slowdown that a decade ago would have typically manifested in much slower growth rates in emerging markets. Further, unlike a decade ago, when China was asymmetrically dependent on the US market, subsequent Chinese export diversification has created a more equitable economic relationship. By 2006, the EU had surpassed the US as the largest importer from China.Not surprisingly, American economist Fred Bergsten recently suggested in a Foreign Affairs article that Washington "should seek to develop a true partnership with Beijing so as to provide joint leadership of the global economic system," analogous to the US-Russian duopoly that maintains strategic stability in international security matters. The initiation of a bi-annual US-China strategic economic dialogue in 2006 was the first explicit recognition by Washington that the Chinese economy had become crucial for the former's stability. Clearly, the "complex interdependence" between US and China, two so-called arch rivals, is an empirical reality. To what extent is this interdependence historically unique and what are its structural implications for the foreign policies of other actors? This is not simply an academic issue. Enquiries into these questions will provide more systematic insights into the patterns of interaction in the emerging multipolar order. To appreciate this phenomenon, it is vital to juxtapose today's interdependence with the type that prevailed during the Cold War. Recall, that the bipolar division of the international system was geopolitical and geoeconomic. Both blocs were self-sufficient and inter-bloc trade and investment was dwarfed by that which existed within either blocs. Today, the erstwhile ‘blocs' are clearly much more entwined at an economic, and thus, political level. This is not to suggest that geopolitical competition has ceased or that states will pursue an international division of labour over relative national gains. That would be illogical in a system where ‘self-help' is the only reliable guide to security. Yet, the zero-sum impulse has been tempered, stimulating inter-State cooperation to levels unattainable in previous eras. One US analyst expresses it succinctly: "Today, states are adopting foreign policies that are aimed at generating national resources from the economic relationship it enjoys with a competitor - even as it prepares to use those very resources generated from economic interdependence to cope with the geopolitical rivalry that exists with that competitor."What explains such a phenomenon? As realists have accurately noted, historically, economic interdependence by itself failed to restrain the use of force in inter-State conflicts. This was demonstrated vividly between 1880-1914 when economic engagement between the great powers was unable to constrain them from the self-destruction of the First World War. First, unlike a century ago, when industrial structures for most industries were nationally concentrated, today's system, with the exception of core strategic sectors, is characterised by vertically integrated transnational production value-chains. Technological innovations in physical and virtual connectivity have stimulated such a division of labour in a variety of manufacturing and service industries. This is an entirely new phenomenon implying that contemporary interdependence is more complex and dynamic than recorded earlier. Secondly, the destructive capabilities of contemporary military technology, particularly nuclear and missile weaponry, have made unrestrained State action unviable. The logic of strategic nuclear deterrence has increased the ability of the major powers to ensure their own security autonomously, including in cases of overwhelming conventional asymmetry, and without resorting to the use of force. At the very least, today's great powers are far more restrained and cautious than their historical predecessors, and with fewer options to pursue Clausewitzian goals. The above two variables are embedded in US-China relations to create what has been referred to as "a state of muted security dilemma". The existence of both discord and collaboration in Sino-American relations has profound implications for Indian foreign policy. Prevailing commentaries, however, exaggerate the former and understate the latter. First, the rhetoric of ‘containment' or ‘constrainment' of China, emanating from the US must be placed in its proper perspective. Over the past decade, the US has displayed little inclination or the capacity to prosecute such a policy. Insofar as a deterrence strategy is concerned, the formidable US naval armada in the western Pacific appears adequate for that task. Such exhortations are then perhaps more useful to provide a rationale both for the construction of cooperative ties with states on China's periphery and for the persistence of the US alliance system in East Asia. Similarly, China's rhetoric for "south-south" solidarity and construction of a just international order must be viewed with equal skepticism. For, any notion of Chinese revisionism is inconsistent with the level of its integration in the current international system.Second, it is irrational to pursue exclusive partnerships when the major poles themselves are interdependent. Rather, a multivector approach is likely to yield greater strategic flexibility. Thus, exploiting the interstices in today's balance of power requires far more sophistication than in the past when the major powers had little economic leverage over each other. Finally, US-China relations serve as an excellent case study for Indian statecraft. In today's system, the prospects of increasing non-coercive leverage vis-à-vis another State, even a potential adversary, may very well lie in establishing symmetrical linkages with the respective State itself. Clearly, China has already begun to reap the benefits of such a strategy. The writer is an international relations analyst based in Delhi