Saturday, October 24, 2009

China US Economic Relations

This is an attempt to look at the economic aspect of US - China relations from a Chinese perspective. This approach may yield interesting insights in the most important economic axis of economic interdependence of the modern world, and generate innovative ideas about how to approach existing and future issues.

Theoretical background
The contemporary phase of US-Chinese relationship characterized by high level of economic interdependence can be analyzed from a realist perspective. Henry Kissinger was working towards a classic “realist” balance of power arrangement by seeking closer relationship with China to counterbalance Soviet influence in Asia after the end of the Vietnam war. In Dr. Kissinger's own words with Nixon they “had ideas for the construction of peace on a global scale”. Consequently it could be argued from a constructivist perspective that this classic 'realist' foreign policy act created a reality that will develop into the most remarkable phenomenon of modern politics the economic interdependence between the world's leading liberal free market democracy and the last explicitly communist state. The impressive rise of the economic exchange between the two countries after the reforms introduced by Deng Xiaoping in 1979 led to the current situation in which they dominate world trade and global economic stability is dependent on their successful development. The management of these relations and the interlinked political and security implications require skillful economic statecraft to resolve the issues bound to arise from the unparallelled scope of the economic interdependence and the structural differences between the communist rule over an economy in transition to free market in the case of China and an economy in transition from the 'laissez-faire ' principles of the Reagan era to increasing calls for more regulation after the global financial crisis of 2008.

Historical Context
The relationship between US and China began to develop in in a new direction after Henry Kissinger approached China and the economic relationship picked up particularly after the reforms of Deng Xio Ping in 1979. Trade with the US has helped China achieve dramatic success in improving the quality of life of the most populous country in the world. Chinese political life has advanced towards more openness, democracy and accountability and the protection of private property has given the opportunity for a prosperous middle class to emerge. At the same time China remains a Communist country ruled by Communist Party which is far even from the notion of something resembling Gorbachev's perestroika, let alone more comprehensive political reforms. The remarkable economic development has been accompanied by extensive environmental damage. Some of the new rich have earned their wealth through corruption and the lack of effective judiciary to deal with the problem is due in part to the CCP opposition to political reform. The livelihood of a large part of the population though better than the starving populations of sub-Saharan Africa is still precariously close to the poverty line. The economic development is based on cheap labor and has yet to show signs of achievement into more technologically advanced areas as Japan, and the Asian Tigers have done.
The US approach to China has ranged from the desire to ensure good relations to alleviate the security threat in the 70s through the remarkable period of the growth of economic relations starting with Deng's reforms and culminating in China gaining the top spot among US trading partners and world wide prominence leading to US uncertainty as to how to treat China: as a rival, an ally or controversial partner-difficult to deal with but impossible to reject.
Floating exchange rage for Chinese currency.
The Chinese government has strongly resisted international pressure led by the US to float Chinese currency. The Chinese complain that now after the financial crisis the problem is not the exchange rate of their currency but the value of the dollar or more correctly not the value but the stability of the dollar which is dependent on the stability of US policy. The above conclusion of the Wang Qing, an economist from Morgan Stanley in Hong Kong make the US government responsible for exchange rates linking their stability with the stability of policy. While a link between policy and currency values may be established it is not that direct. There was no observable policy change when the financial crisis struck in the latter days of the Bush administration. It is more the adequacy of particular policy that may affect the exchange rate. In any case the huge Chinese trade surplus has materialized in US dollars mostly in the form of Treasury bonds.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” The problem is that The Chinese cannot undertake a massive sellout of US treasury bonds as this will cause their price to fall. But even if they hold them massive US stimulus will mean the US government selling more bonds and the market may demand higher interest rate for them than the interest rate for the bonds the Chinese hold. That scenario will result in a price drop of bonds held by the Chinese. Alternatively if the US government chose to limit the borrowing and respectively the stimulus may mean slower recovery for the US economy which will hurt Chinese exports to the US. Another scenario involves reduced US trade deficit because of the crisis resulting in less Chinese purchases of US bonds. In any case the financial crisis confronts the Chinese leaders with a difficult dilemma. The US sees the solution in encouraging Chinese domestic consumption. The Chinese government sees a solution in decreasing its reliance for its reserves on the US dollar and dependence on US financial policies outside its control, by calling (alongside Russia) for the establishment of an internationally managed reserve currency that will increase the stability of world financial markets and have the added benefit of more freedom for the financial policies of reserve currency polities like the US, the EU and Japan.

2. What China expects from the US

Budget deficit control
Following the financial crisis and the implementation of stimulus measures the primary concern of China is the US government's resolve and ability to bring the budget deficit under control. From the perspective of Chinese national interest their ability to deal with the adverse effects of the global financial crisis depend on the value of their national reserves which is dependent on US policies. Commentators speculate on whether China will continue to buy US securities to and thus finance US government spending. The obvious answer is yes because there is no substitute for US government bonds in terms of secure investment even when taking into account all the pitfalls of using them as financial reserve instruments. A logical consequence of improving trade balance between China and the US will be that China will buy less US securities as it will have less free funds to use for bonds purchases but will use the money gain from export to the US to pay for imports instead. To conclude if China had a financially viable option to switch reserves to other safe haven like IMF Special Drawing Rights or Euro they would have done so and they will not hesitate to do it if it becomes viable in the future. The current calculations though make the US dollar most attractive despite its contradictory position of serving as an international currency but held under US national control. China will continue to keep their national reserves in US dollars and attempt to influence the US government to pursue policies that will prevent the dollar from losing value.

Free trade not rotectionism
The other most important economic statecraft policy issue that China would like to see positively resolved in their relations with the US is how the administration will go about with dealing with protectionist pressures from Congress. China is understandably suspicious on the true US intentions. On one side we have the resolute declarations of president Obama on several G20 meetings warning against the dangers of protectionism and on the other the controversial imposition of tariffs on tires imported from China.

New US financial regulations to prevent crises
China is concerned with the negative impact of the current financial crisis that has exposed their economic vulnerability to events beyond their control. Understandably, China wants to see better regulation to ensure the smooth operation and predictability of the US financial system as the world trade is dependent on its health.

Increased role for China in IMF
At the 20th meeting of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund in Istanbul the Deputy Governor of the Central Bank of China Yi Gang made a point for a larger quota for the developing nations and better monitoring abilities for the International Monetary Fund. He accused the IMF of failing to foresee the global financial crisis and blamed this failure on mismanagement stemming from skewed representation in IMF governing bodies. That is a valid Chinese complaint as they have done what was expected from them: efficiently produced goods for export and the financial collapse adversely affected them without warning. That the IMF is in need of structural and administrative reform including quota revision is acknowledged supported by the US government.

Recognition of the status of China as a market economy.
The recognition of China as a market economy affects the way the fair market value of goods is calculated to determine whether the country engages in subsidies or dumping. As China is not recognized as a market economy by its main trading partners the US and the EU they can more easily apply punitive measures against China as was in the latest case of US tariffs on tires imported from China. Theoretically the question has two sides. The first one is can China be considered a market economy? The prevalence of state enterprises and the strict control over the national currency points towards a negative answer. On the other hand the remarkable development of China towards establishing efficient enterprises including private ones successfully working towards ever increasing export capacity points to a conclusion that China is making considerable effort to implent an market driven system. The results of the latest China - US Strategic Dialogue show that there are no insurmountable obstacles on the way of US recognition of China's market economy status which will materialize sooner or later depending on political developments in both countries.

While official Chinese policies may be concerned with the continuing dominance of the Communist Party and Marxist ideology from the Russian (and Yugoslav) experiences suggest that the true interests of the ruling elite may be the more material than ideological centering on the perpetuation of their economic power. The metastasis of corruption feeding on China's economic boom points int that direction Bearing that in mind three scenarios can be discerned for the future development of China. The most desirable, but maybe not the most probable will be the gradual political development of the Chinese society towards democracy following the consolidation of the market principles in the economy. The most dangerous would be a slip backwards under the pressure of economic duress into the oppression and belligerence of the Mao era. The most probable though will be the collapse of the Communist party and transfer of power into the hands of corrupt officials and mafia like structures. US inducement for democratic reforms in China may diffuse the dangers of chaotic collapse of communism and the and the considerable security implications that may cause. Ultimately it can be concluded that there is a convergence of interests between the Chinese Communist Party, the entrepreneurs and the people of China and that leads to peaceful economic development as a way to solve all problems facing modern China. That position can find understanding in the US and the rest of the world because it is in harmony with the long term interests of all countries interested in developing economic relations with China on a win-win basis.

Wednesday, October 14, 2009

Why Love and Who Are You?

God (if yo are a believer) doesn't seem to take part in daily micromanagement of world affairs and we are very much free do do as we please. Including do wrong and including harm ourselves and others. Yet deep inside we are similar and some see this as proof of one creator and I agree with them but that is not the point. The truth is that we come to this world profoundly similar deep inside but with varied talents and free will to use or wasted them as we wish still our rights remain the same but our lives and personalities are unique. In this we try to unite or identify with certain groups we find useful and that's the only way to reach our goals. Unfortunately sometimes such unity is turned against non-members and that is counterproductive and bad, if not outright criminal. Therefore the only real claim to justice that I can possibly have are my own interests, and the only real ethical guide in the call to love your neighbor like you love yourself, no more but as you love yourself (it is then obvious that if you do not love yourself you cannot possibly love anybody).

Tuesday, October 13, 2009

Sovereignty, Human Rights, Responsibility to Protect

Sovereignty involves rights and duties among which the protection of one's fellow citizens is paramount.
Historically people have organized in territorially distinct and independent states to build up the power and security necessary for achieving their goals of prosperity and peace. When a government either fails to fulfill its mandate or malevolently turns against the people, they can overthrow it and install a government according to their will.
The contemporary globalized world and modern weaponry added an international twist to the above classic postulate. In the modern world a small group of people can terrorize a large population using advanced weapons and ruthless tactics. The international community can and does help people under the danger of extermination or other grave deprivations of human rights.
Public support and national interest, as perceived by governments, will make humanitarian intervention a likely and acceptable policy alternative, but the analysis will not be complete if we do not contemplate the possibility to avoid humanitarian intervention altogether or at least minimize the involvement as much as possible . Such an alternative seems even more tempting from the perspective if possible casualties and unavoidable material costs to both intervening and target countries. Politics as part of the universe are intolerant to power vacuum and the absence of a proper democratic institutions based on an economy driven by private property.1 Still it is tempting to avoid intervention to avoid risking life and treasure facing the uncertainty of success. While success military operation may be elusive and the costs unpredictable failure to act almost certainly lead to consequences that are even worse than a failed intervention. The examples of Rwanda, Sudan and Somalia where armed intervention to stop human suffering and restore civil society was withdrawn, insufficient or non existent have become fertile ground for terrorism and organized criminal activities including trafficking of people, arms and drugs and finding willing recruits among the desperate population.2 Alternative approaches to force and end to humanitarian abuses using persuasion, economic sanctions or arms embargoes rarely achieve anything as in the case of Saddam Hussein after the Gulf War, Slobodan Milosevic (who manged to destroy Yugoslavia) and Sudan's al Bashir.3 In general these attempts to avoid armed humanitarian intervention result in prolonging the suffering of the victims as in the case of Bosnia, directly causing hardship for the innocent as with the economic sanctions against Iraq after the Gulf War and being forced to intervene in the end as in Bosnia, Afghanistan and Iraq.
Even if there is a trend of among democratic governments and international public opinion towards favoring armed humanitarian intervention when the circumstances call for it that does not eliminate the need to explore the ethical and legal acceptability of coercive interference into other countries affairs. The post cold war theory has developed from attempts to justify humanitarian interventions under Chapter VII if the UN Charter through the report of the ICISS to the "2005 World Summit Outcome." United Nations General Assembly, 2005. confirming in its Articles 138 and 139 a refined Responsibility to Protect doctrine. It combines the theory of sovereignty as responsibility to protect with implied international responsibility to help a state fulfill that responsibility all the way to intervening with force and take charge if the state fails to protect its citizens. This justification of intervention is limited to four distinct cases of severe humanitarian abuses: genocide, war crimes, crimes against humanity and ethnic cleansing.4 The declared universal acceptance of the Responsibility to Protect doctrine is due to the fact that it is based on established and widely accepted concepts as sovereignty as responsibility, just war, theory, the four Geneva conventions, the Convention for the Prevention of Genocide and the added crime of ethnic cleansing. The solid theoretical work done by the ICISS composed of leading authorities on the subject also contributed to that end. That declared acceptance though does not translate into more effective humanitarian action.
The alternative
Public support and national interest, as perceived by governments, may make humanitarian intervention a likely and acceptable policy alternative, but the analysis will not be complete if we do not contemplate the possibility to avoid humanitarian intervention altogether or at least minimize the involvement as much as possible . Such an alternative seems even more tempting from the perspective if possible casualties and unavoidable material costs to both intervening and target countries. Politics as part of the universe are intolerant to power vacuum and the absence of a proper democratic institutions based on an economy driven by private property.1 Still it is tempting to avoid intervention to avoid risking life and treasure facing the uncertainty of success. While success military operation may be elusive and the costs unpredictable failure to act almost certainly lead to consequences that are even worse than a failed intervention. The examples of Rwanda, Sudan and Somalia where armed intervention to stop human suffering and restore civil society was withdrawn, insufficient or non existent have become fertile ground for terrorism and organized criminal activities including trafficking of people, arms and drugs and finding willing recruits among the desperate population.2 Alternative approaches to force and end to humanitarian abuses using persuasion, economic sanctions or arms embargoes rarely achieve anything as in the case of Saddam Hussein after the Gulf War, Slobodan Milosevic (who manged to destroy Yugoslavia) and Sudan's al Bashir.3 In general these attempts to avoid armed humanitarian intervention result in prolonging the suffering of the victims as in the case of Bosnia, directly causing hardship for the innocent as with the economic sanctions against Iraq after the Gulf War and being forced to intervene in the end as in Bosnia, Afghanistan and Iraq.
Even if there is a trend of among democratic governments and international public opinion towards favoring armed humanitarian intervention when the circumstances call for it that does not eliminate the need to explore the ethical and legal acceptability of coercive interference into other countries affairs. The post cold war theory has developed from attempts to justify humanitarian interventions under Chapter VII if the UN Charter through the report of the ICISS to the "2005 World Summit Outcome." United Nations General Assembly, 2005. confirming in its Articles 138 and 139 a refined Responsibility to Protect doctrine. It combines the theory of sovereignty as responsibility to protect with implied international responsibility to help a state fulfill that responsibility all the way to intervening with force and take charge if the state fails to protect its citizens. This justification of intervention is limited to four distinct cases of severe humanitarian abuses: genocide, war crimes, crimes against humanity and ethnic cleansing.4 The declared universal acceptance of the Responsibility to Protect doctrine is due to the fact that it is based on established and widely accepted concepts as sovereignty as responsibility, just war, theory, the four Geneva conventions, the Convention for the Prevention of Genocide and the added crime of ethnic cleansing. The solid theoretical work done by the ICISS composed of leading authorities on the subject also contributed to that end. That declared acceptance though does not translate into more effective humanitarian action.
How to define a successful intervention?
A simple and clear definition would be one that has achieved its aims with minimum casualties and maximum efficiency. There are several difficulties with attempting to apply this definition to real life cases. The first obvious one is with the aims of the intervention. It could be the stated goals in that case Somalia was a successful intervention as the US and UN forces helped distribute humanitarian aid. Many observers, analysts, experts and the general public do not agree with a positive assessment of the Somalia operation.5 Another approach would be to deduce an implicit goal for all humanitarian interventions as lasting peace which would involve state building. Assessing the efficiency of an armed intervention can be even more difficult than assessing the effectiveness. While obviously less causalities is better how can the level of acceptable casualties be defined? The Kosovo campaign with zero casualties for the intervening forces is a champion of effectiveness. On the other hand the intervention in Afghanistan is praised for the low level of troops involved and consequently low cost but the slow progress and mounting casualties will hardly make it a good example to follow. It comes back to the opening question:What is a successful intervention?

There are two well documented examples of armed intervention and subsequent policies which led to unsurpassed positive humanitarian results: Japan and Germany after WWII. Even if the war itself was of the classic aggressive, defensive type the mass atrocities committed by the Japanese and German armies made the Allied victory an humanitarian relief operation of epic proportions. Post WWII development also contributes to the concept that promoting economic development and democracy as the US did in Western Europe and Japan leads to a state of peace and stability in these regions. The Soviet block managed to provide for basic economic needs but the suppression of democracy led to an explosion of organized crime and corruption after the fall of communism. From another point of view the US intervention in Haiti stopped abuse and restored a semblance of democracy but failure to prompt democracy with economic development led to the predictable crumbling of the fragile democratic institutions.
To prevent the regrowth or metastasis of the root causes for intervention the need for state building including creating viable opportunities for sustainable economic development and reform in the most important spheres of public life as media freedom, law reform and the rebuilding of civil society.
In the case of Somalia, initially the United Nations Security Council resolution 794 (1992) authorizing UNITAF calls only for establishing of a secure environment for humanitarian operations. It can be argued that this limited objective prevented more decisive action towards disarmament of the marauding militias and ultimately undermined the success of the operation. Alternatively others argue that that the change of mission from humanitarian aid to nation building led to a decline of public support by pursuing an seemingly unattainable goal even before the tragic events in Mogadishu that triggered the withdrawal of US forces.8 Later with resolution 814 (1993) the UN Security Council raised the goals by including state building right when the newly created UNISOM II force lacked the number and resources to accomplish the task