The World in 2020 According to China : Chinese Foreign Policy Elites Discuss Emerging Trends in International Politics [1 ed.] 9789004273917, 9789004273900

Citation preview

The World in 2020 According to China

China in the World A Survey of Chinese Perspectives on International Politics and Economics Chief Editor Shao Binhong Institute of World Economics and Politics, Chinese Academy of Social Sciences International Advisor Allen Carlson Cornell University

VOLUME 2

The titles published in this series are listed at brill.com/cwpe

The World in 2020 According to China Chinese Foreign Policy Elites Discuss Emerging Trends in International Politics Edited by

SHAO Binhong

LEIDEN | BOSTON

This book is the result of a co-publication agreement between Social Sciences Academic Press and Koninklijke Brill NV. This book is published with financial support from Innovation Project of the Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This publication has been typeset in the multilingual ‘Brill’ typeface. With over 5,100 characters covering Latin, ipa, Greek, and Cyrillic, this typeface is especially suitable for use in the humanities. For more information, please see brill.com/brill-typeface. issn 2213-8439 isbn 978 90 04 27390 0 (hardback) isbn 978 90 04 27391 7 (e-book) Copyright 2014 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Nijhoff, Global Oriental and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper.

Contents Foreword  vii List of Contributors  ix Journal Information  xxvii Introduction  1

Part 1 Chinese Foreign Policy  11 1 Perspective Shifts during the Development of Chinese Diplomacy: From Revolution and Nationalism to Development and Globalization  13 Zhang Baijia 2 China’s Contemporary Foreign Strategy: Ideology, Basic Platform, Current Challenges, and Chinese Characteristics  34 Shi Yinhong 3 China’s Dual-Identity Dilemma and Its Countermeasures  51 Li Shaojun 4 Traditional Chinese Culture and East Asian Security Cooperation  69 Wang Fan

Part 2 International Strategy  87 5 Repositioning China in 2020  89 China 2020 Research Team 6 “Marching Westwards”: The Rebalancing of China’s Geostrategy  129 Wang Jisi 7 Power Shift and Change in the International System  137 Yan Xuetong 8 China’s Rise, the Transformation of East Asian Regional Structure, and Development Direction of the East Asian Order  157 Zhou Fangyin

vi

contents

9 Terrestrial and Maritime Territorial Disputes and Their Resolution in the Process of China’s Rise  183 Li Xiangyang

Part 3 World Economy and China  193 10 The Strategy of China’s Opening-Up under New Circumstances  195 Huang Haizhou and Zhou Chengjun 11 Revisiting the Internationalization of the Yuan  231 Yu Yongding 12 Challenges Facing the Global Governance Mechanism and China’s Counter-Measures  259 He Fan, Feng Weijiang and Xu Jin

Part 4 Sino-u.s. Relations  277 13 Building Mutual Trust between China and the u.s.  279 Qian Yingyi, Jia Qingguo, Bai Chong’en and Wang Jisi 14 Sino-u.s. Relations: Ideological Clashes and Competitions  292 Niu Xinchun Index  309

Foreword Fortunately, in the realm of China’s foreign relations 2013 was not as tumultuous as 2012. While tensions between Beijing and Tokyo remained high, the level of overt hostilities was less than it was the previous year. In addition, although little progress was made on the South China Sea dispute, there was also little in the way of direct conflict between the various claimants to this contested territory. More broadly, the Sino-U.S. relationship haltingly moved away from some of the most contentious issues over which the two sides had recently sparred. In short, a modicum of stability returned to China’s relationship with the outside world. More significantly, beyond these generally positive topical developments, another trend took even deeper root in 2013. Directly stated, China more firmly established itself significant actor on the global stage. China, it is now quite clear, is a major, perhaps even “great,” power, within the current international order. This significance of this trend both for China and the world, however, remains rather opaque as fundamental aspects of the country’s rise continue to be the subject of intense debate. More specifically, China’s apparent ascension to great power status has further fueled discussions (both within the country and in the rest of the international system) related to three wide-ranging sets of issues. First, analysts continue to ask how sustainable China’s rise is. What are the basic metrics by which this accession should be measured? Is this trend now so firmly established that it has become irreversible? Will it continue at the same rate for the foreseeable future? To what degree might internal factors undermine these developments? What can the Chinese leadership do to further cement China’s emergent global role? Second, observers continue to search for indications about what the Chinese leadership (and people) intend to do with their newfound power. While not always explicitly stated, this vein of analysis, more than any other, informs almost all recent scholarship and media reports about China. It is a hunt that has become all the frenzied as the country’s power appears to have grown. While such concerns have taken myriad formations, they all amount to variations on the same theme: is China a status quo or revisionist power within the existing international order? Third, China watchers are increasingly divided about what course of action the rest of the world should take in response to China’s rise. This concern is most pointed within Asia, where each of China’s neighbors now find themselves in a position where they must choose between working with Beijing, standing up to China’s leaders’ emergent interests in the region, or hedging their bets by attempting to do both at the same time. However, as China’s global profile grows, those in Africa, Europe and South America are faced with similar, if not quite as existential in nature, decisions. At the

viii

foreword

same time, the United States continues to struggle to develop a coherent strategy for responding to the now established trend of growing Chinese power and influence both in Asia and the rest of the international system. In the midst of such rapid changes, it is then not surprising that American academics and policy makers remain quite divided over the degree to which Washington should cooperate or confront Beijing on a wide array of issues. Within the context of such broad debates the significance of this second volume in the China and the World series should be readily apparent. To be frank, it does not provide complete answers to the questions raised in this preface (it is unlikely at this juncture that any book could accomplish such a task). However, it does contain English language translations of the most prominent recent writings of China’s leading scholars in the fields of international relations and political economy. Such work, apart from this series, is largely inaccessible to those unable to read Chinese language sources, and yet offers crucial insights into Chinese thinking and debates over fundamental aspects regarding the China’s rise and its implications for the rest of the world. Individually the chapters that follow reveal a great deal about the sophistication and insight to be found in scholarly work now being published within China. Collectively, as with the previous volume in this series, they point to just how extensive differences are within the country over fundamental issues related to China’s rise. In light of such attributes, the book is an invaluable resource to all those looking to gain a deeper, and more nuanced, understanding of this trend. Allen Carlson Cornell University February 2014

List of Contributors Editor Shao Binhong (邵滨鸿) is senior editor at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS) and also the Secretary-General of the China Society of World Economics. Since 1996, she has been managing editor-in-chief of the International Economic Review, one of China’s core periodicals. Authors Zhang Baijia (章百家) is a senior research fellow of the Party History Research Center, Central Committee of the Communist Party of China. He is now executive vice president of the Chinese Society on the Research of the Figures in the History of CCP, and a member of the Academic Committee at China Foundation for International Strategic Studies (CFISS) and the Institute of Modern History, Chinese Academy of Social Sciences (CASS). He is also an adjunct professor at Peking University, Renmin University, and East China Normal University. He was elected as a representative of the 11th National Congress and a member of the Legal Committee of the National People’s Congress (March 2008 to March 2013). He served as deputy director of the Party History Research Center, The Central Committee of the CPC, from December 2004 to August 2011. His main areas of research include the history of China’s foreign ­relations, the history of the CPC, and the reform and opening-up. Selected Publications of Zhang Baijia: “Chinese Policies toward the United States, 1937–1945,” in Sino-American Relations, 1945–1955: A Joint Reassessment of a Critical Decade, eds. Harry Harding and Yuan Ming (Scholarly Resources Inc., Beijing: Peking University Press, 1989). “Chinese Politics and Asia-Pacific Policy,” in The Golden Age of the U.S.-ChinaJapan Triangle, 1972–1989, eds. Ezra F. Vogel, Yuan Ming, and Tanaka Akihiko (Cambridge: Harvard University Press, 2002). The Path of the CPC: Revolution, Construction and Reform (Beijing: Foreign Languages Press, 2012).

x

list of contributors

“Zhou Enlai and the Marshall Mission,” in George C. Marshall’s Mediation Mission to China, December 1945–January 1947, ed. Larry I. Bland (Virginia: George C. Marshall Foundation, 1998). Shi Yinhong (时殷弘) holds a PhD (1988) in the history of international relations from Nanjing University. He is a professor of international relations, chairman of the Academic Committee of the School of International Studies, director of the Center for American Studies (Renmin University of China), and counselor of the State Council of the People’s Republic of China. He has held several academic posts: professor of international history at Nanjing University (1993–1998); associate dean of the School of Humanities, Nanjing University (1995–1998); professor of international relations and director of the Center for Strategic Studies, Academy of International Relations in Nanjing (1998– 2001); chairman of the American History Research Association of China (1996–2002); visiting professor of public policy, University of Michigan at Ann Arbor (2004, 2005, 2008); and visiting professor of studies on modern China, Aichi University in Nagoya (2004). His main areas of research include theoretical ideas and history of international relations, strategic studies, East Asian security, and the foreign policies of both China and the United States. He is well known for his studies in these fields in China and aboard. Selected Publications of Shi Yinhong: “China’s Complexity in Addressing ‘Global’ Security Challenges,” in Global Values in a Changing World, eds. Sonja Zweegers and Afke de Groot (Amsterdam: KIT Publishers, 2013). “China’s New Leadership, Prospects for Foreign Policy, and for the China-U.S. Relationship,” The German Marshal Fund of the United States, Policy Brief, Transatlantic Security Task Force Series, June 2013. “ ‘Triumphalism’ and Decision Making in China’s Asia Policy,” Economic and Political Studies, Vol. 1, No. 1 (January 2013). “New Games in Tightly Fixed Structure: North Korea’s Volatile Desperation and China’s Cornered Strategy,” The Korean Journal of Defense Analysis Vol. 23, No. 3 (September 2011). Li Shaojun (李少军) is a professor at the Institute of World Economics and Politics in the Chinese Academy of Social Sciences (CASS). He has worked on a variety of topics in international relations, including international relations theories, ­international security studies, global issues, and foreign policy analysis.

list of contributors

xi

Selected Publications of Li Shaojun: “Facts and Observations in IR Studies,” International Observation No. 1 (2008). “International Relations Studies and the Method of Hermeneutics,” World Economics and Politics No. 2 (2006). “Key Elements of China’s Foreign Strategy,” in The International Politics of EU-China Relations, eds. David Kerr and Liu Fei (New York: Oxford University Press, 2007). “Theories and Explanations in IR Studies,” World Economics and Politics No. 2 (2008). International System: Theoretical Interpretations, Empirical Facts and Strategic Implications (Beijing: China Social Sciences Press, 2012). Introduction to International Politics (Shanghai: Shanghai People’s Press, 2002, 2005 and 2009). Research Methods for Studying International Relations (Beijing: China Social Sciences Press, 2008). Wang Fan (王帆) received his PhD (2002) in international relations from the China Foreign Affairs University. He is professor and assistant president of China Foreign Affairs University. He is also deputy secretary-general of China’s National Association for International Studies. He was a diplomat of the Chinese Embassy in the u.k. (1995–1997) and director of the Institute of International Relations of China Foreign Affairs University (2006–2012). He was a visiting professor to the department of political science in the C.W. Post campus of Long Island University from September 2003 to June 2004. His main areas of research include East Asia security cooperation, u.s. foreign policy toward Asia, and Sino-u.s. relations. His academic interests also include contemporary Chinese foreign policy, issues related to the Korean Peninsula, Chinese strategy, and the Chinese School of international relations theory. Selected Publications of Wang Fan: “Four Surpasses Need to be Done for Sino-US Relations,” Contemporary World No. 1 (2009). “How to understand the world nowadays—A complex system perspective,” World Economy and Politics No. 10 (2009). “Obama Administration’s Policy toward the Korean Peninsula,” Strategy and Management No. 5/6 (2010).

xii

list of contributors

“The Bottom Line of US Strategy Toward East Asia and Limit of Conflict between China and the US,” Foreign Affairs Review No. 6 (2011). “US Strategy Toward East Asia and China,” Foreign Affairs Review No. 6 (2010). US Alliance System in Asia and Pacific Region (M) (Beijing: World Affairs Press, 2007). US Strategy toward China in the Medium and Long Term (M) (Beijing: World Affairs Press, 2012). Huang Yiping (黄益平) received his PhD (1994) in economics from Australian National University. He is professor of economics at the China Center for Economic Research at Peking University, the Crawford School of Economics, and the Government of Australian National University. Prior to returning to academia in mid-2009, Dr. Huang was the managing director and chief Asia economist for Citigroup, based in Hong Kong, the General Mills international professor of economics and finance at Columbia Business School in New York, director of the China Economy Program at Australian National University in Canberra, and a policy analyst with the Research Center for Rural Development of the State Council in Beijing. He has also been a consultant to international organizations such as IMF, World Bank, OECD, and ADB. Selected Publications of Huang Yiping: Growth without Miracles: Readings on the Chinese economy in the era of reform, co-editor with Ross Garnaut (Oxford: Oxford University Press, 2001). China’s Last Steps Across the River: Enterprise and bank reforms (Canberra: Asia Pacific Press, 2001). Agricultural Reform in China: Getting institutions right (Cambridge: Cambridge University Press, 1998). “The Impact of SARS on Asian Economies,” with Don Hanna, Cambridge: Asian Economic Papers No. 1 (Winter 2004). “Is Meltdown of the Chinese Banks Inevitable?,” London: China Economic Review 13(4) (December 2002). “Foreign entry into Chinese banking: Does WTO membership threaten domestic banks?,” with John P. Bonin, The World Economy 25(8) (August 2002). Lu Feng (卢锋) received his PhD (1994) in economics from the University of Leeds. He is professor of the National School of Development (NSD) and director of the

list of contributors

xiii

China Macroeconomic Research Center (CMRC) at Peking University. Professor Lu publishes extensively on China’s open macro-economy, ­including topics such as exchange rate policy, external imbalance, inflation, capital return, food security, and food trade. His analysis on these issues has been widely reported by media in China. Professor Lu coordinates a quarterly conference, “CCER China Economic Observer,” that provides cutting-edge information regarding China’s macro-economic situation and a long-run forecast based on integrated projections of China’s macro-economic variables by leading Chinese-based research institutions. He has been a research fellow at Harvard University, Australian National University, and the Institute of Development Studies in the United Kingdom. Selected Publications of Lu Feng: “China’s Factor in Recent Global Commodity Price and Shipping Freight Volatilities,” with Yuanfang Li, China Economic Journal Vol. 1, Issue 3 (December 2009). “Profitability of China’s Industrial Firms (1978–2006),” China Economic Journal Vol. 1, Issue 1 (February 2008). “Cotton Trade Polity at a Crossroads” Cotton Outlook Special Feature (December 2006). “A Research on China’s Long-Term Rice Prices (1644–2000),” with Peng Kaixiang, Frontiers of Economics in China 4 (2006). “Is There an Oversupply of Grain,” in Can China Feed Itself? Chinese Scholars on China’s Food Issue, eds. Liu Shouying and Luo Dan (Beijing: Foreign Languages Press, 2004). “China’s WTO Accession: Impact on its agricultural sector and grain policy,” in China’s Integration with the World Economy: Repercussions of China’s Accession to the WTO, eds. Kyung Tae Lee, Justin Yifu Lin, and Si Joong Kim (Seoul: Korea Institute for International Economic Policy, 2001). Wang Jianye (王建业) received his PhD (1989) in economics from Columbia University, and is now the chief economist of the Export-Import Bank of China. His current research interests include reform of the international monetary system, China’s overseas investments, Renminbi internationalization, and other areas of China’s foreign economic relations. Dr. Wang worked for the International Monetary Fund (IMF) from 1989 to 2008. While in the IMF, he led policy surveillance and lending missions to countries in Africa, Asia, Eastern Europe, and the Middle East. He represented the IMF in the Republic of Georgia (1994–1996), and at various international forums, including the Steering

xiv

list of contributors

Committee of Debt Relief International, UNTADC Debt Management Advisory Committee, the Paris Club, OECD, WTO, Bern Union, and Asian Export-Import Banks. He was an adjunct professor at Tbilisi Business Academy from 1994 to 1996 and gave lectures at Peking University (2003, 2005) and the Japan Center for International Finance (2002–2003). Selected Publications of Wang Jianye: Debt, Currency, and Related Reforms (Beijing: China Finance Publishing House, 2012). Access to Trade Finance In Times of Crises, ed. with M. Ronci (Washington: International Monetary Fund, 2005). Officially Supported Export Credits in a Changing World, with a staff team (Washington: World Economic and Finance Surveys series, International Monetary Fund, 2005). “Foreign Investment and Technology Transfer: A Simple Model,” with M. Bloomstrom, European Economic Review Vol. 36, No. 1 (1992); also as NBER Working Paper No. 2958 (1989). “Growth, Technology Transfer, and the Long-Run Theory of International Capital Movements” Journal of International Economics Vol. 39, No. 3–4 (1990); also as Stockholm School of Economics Research Paper No. 6363 (1988). Yao Yang (姚洋) received his PhD (1966) in agricultural and applied economics, the University of Wisconsin-Madison, and is now a professor at the China Center for Economic Research (CCER) and the National School of Development (NSD)—both at Peking University. He currently serves as the director of CCER, dean of NSD, and the editor of the center’s house journal, China Economic Quarterly. His research interests include economic transition and development in China. He has published widely in international and ­domestic journals, and written and co-authored books on institutional economics and economic development in China. Yao Yang is an associate editor of Agricultural Economics and serves on the editorial boards of several domestic and international journals. He is also a prolific writer for magazines and newspapers. Selected Publications of Yao Yang: China’s Ownership Transformation: Process, Outcomes, Prospects, Garnaut, Ross, Ligang Song, Stoyan Tenev, and Yang Yao, Washington: World Bank Publications (2005).

list of contributors

xv

Globalization and Economic Growth in China, Yang Yao and Linda Yueh (editors), Singapore: World Scientific, 2006. CSR and Competitiveness in China, Shen Yan, and Yang Yao. Beijing: Foreign Languages Press, 2009. “Does Grassroots Democracy Reduce Income Inequality in China?,” with Shen Yan, Journal of Public Economics, forthcoming. “The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China,” with Lu Feng, World Development, forthcoming. “Externalities and the Development of Heavy Industries,” with Dongya Zheng, Frontier of Economics in China 2(4) (2007). “Grassroots Democracy and Local Governance: Evidence from Rural China,” with Shuna Wang, World Development Vol. 29, No. 10 (2007). “Establishing a Chinese Theory of Social Justice,” translated from Chinese by David Kelly, Contemporary Chinese Thought Vol. 38, No. 1 (Fall 2006). Zha Daojiong (査道炯) received his PhD (1995) in political science at the University of Hawaii, and is now a professor of international political economy at Peking University, where he specializes in studying such non-traditional security topics as energy, food, and trans-boundary water use. Prior to his tenure at Peking University (since 2007), he taught at the University of Macao, the International University of Japan, and Renmin University of China. Recently, his research interests have expanded to political and societal risk ­management for Chinese foreign direct investment in developing, as well as developed economies. His areas of expertise include Southeast Asia, the trans-Pacific region, and Africa. Selected Publications by Zha Daojiong: “China and Iran: Energy and/or Geopolitics,” in Oil and Gas for Asia: Geopolitical Implications of Asia’s Rising Demand, eds. Mikkal Herberg et al. (Washington DC: the National Bureau of Asian Research, 2012). “China’s Energy Security: Domestic and International Issues,” Survival Vol. 48, Iss. 1 (March 2006). “Researching Chinese Nationalism: the Foreign Relations Dimension,” in China Inside Out: Contemporary Chinese Nationalism and Transnationalism, eds. Pal Nyiri and Joana Breidenbach, (Budapest: Central European University Press, 2005). Managing Regional Energy Vulnerabilities in East Asia (Oxford: Routledge, 2013).

xvi

list of contributors

Building a Neighborly Community: Post Cold War China, Japan, and Southeast Asia (Manchester: Manchester University Press, 2006). China’s International Relations in the 21st Century: Dynamics of Paradigm Shifts (Lanham: University Press of America, 2000). Wu Ho-Mou (巫和懋) received his PhD (1982) in economics from Stanford University. He is Langrun chair professor and executive dean of the National School of Development (NSD) at Peking University. His research interests and teaching fields include economic development, China’s financial market, international economics, industrial policies, and strategic competition. He has published widely in international journals such as Econometrica, Economic Journal, Economic Theory, and Journal of International Economics. Before joining Peking University, he was the special-appointment professor of National Taiwan University; visiting professor at Stanford University, Tsinghua University, and Nankai University; special-appointment professor of the Guanghua School of Management, Peking University; vice president of Chung-Hua Institution for Economic Research (CIER, the largest think tank in Taiwan); consulting member of the Economic Construction Council of Taiwan; consulting member of the Mainland Affairs Council of Taiwan; board member of Taipei Fubon Bank, Taiwan Futures Exchange, and Overseas Chinese Bank in Taiwan; and senior advisor of Taiwan Semiconductor Corporation (TSMC), Taiwan. Selected Publications of Wu Ho-Mou: “General Equilibrium with Endogenous Uncertainty and Default,” with Graciela Chichilnisky, Journal of Mathematical Economics Vol. 42 (2006). “Production Experiences and Market Structure in R&D Competition,” with Shun-Chiao Chang, Journal of Economic Dynamics and Control Vol. 30, 2 (2006). “Asset Price Volatility and Trading Volume with Rational Beliefs,” with Wen-Chung Guo, Economic Theory Vol. 23 (2004). “The Road to Financial Globalization,” in The New Knowledge Economy of Taiwan, ed. Cheltenham (U.K.) and Northampton (U.S.A.): Edward Elgar publishing (2004). “Speculative Trading with Rational Beliefs and Endogenous Uncertainty,” with Wen-Chung Guo, Economic Theory Vol. 21 (2003). “The Centennial Anniversary of Introducing Economics to China: Economic Research in Taiwan,” China Economic Quarterly Vol. 1, No. 4 (2002).

list of contributors

xvii

Xu Jintao (徐晋涛) received his PhD (1999) in natural resource economics from Virginia Tech, and is now a professor of natural resource economics and the chair of the Department of Environmental Management at the College of Environmental Sciences and Engineering at Peking University. His research covers the broad field of natural resource policy, ranging from forest tenure and regulatory reform, forest carbon and water resources, to the valuation of industrial performance under environmental regulations. His papers were published in such journals as Environmental and Development Economics, World Development, Land Economics, and Ecological Economics. Currently he serves as senior editor of the journal Regional Environmental Change and associate editor of Environment and Development Economics. Dr. Xu is head of the Environmental Economics Program in China (EEPC) based at Peking University, one of six world centers sponsored by the Swedish International Development Cooperation Agency (SIDA). With EEPC, he is working to conduct a rigorous economic analysis of China’s environmental and natural resource policies. Selected Publications of Xu Jintao: “An Auction Scheme for Land Use Change in Sichuan Province, China,” with Xuehong Wang, Jeff Bennett, and Haipeng Zhang, Journal of Environmental Planning and Management (2012) doi:10.1080/09640568.2011.644401. “Forest land rights, tenure types, and farmers’ investment incentives in China: An empirical study of Fujian Province” with Qin Ping, China Agricultural Economic Review, Volume 5 Issue 1 (2013), pp. 154–170. “Projection of Timber Supply and Demand Trends in China based on an Econometric Model,” with He Hui, Forest Product Journal, 61(7) (2011). Bennett, Michael T., Aashish Mehta and Jintao Xu, 2011, “Incomplete Property Rights, Exposure to Markets and the Provision of Environmental Services in China,” China Economic Review (2011), doi:10.1016/j.chieco .2010.12.002. “Forestland Reform in China: What do the Farmers Want? A Choice Experiment on Farmers’ Property Rights Preferences,” with Qin Ping and Fredrik Carlsson, Land Economics Vol. 87(3) (2011). “Cost-effectiveness of Payments for Ecosystem Services with Dual Goals of Environment and Poverty Alleviation,” with Crystal Gauvin, Emi Uchida, Scott Rozelle, and Jinyan Zhan, Environmental Management Vol. 45 (2010).

xviii

list of contributors

Wang Jisi (王缉思) is dean of the School of International Studies, Peking University, and director of the Center for International and Strategic Studies, Peking University. He is honorary president of The Chinese Association for American Studies (CAAS) and has been a member of the foreign policy advisory of the Foreign Ministry of China since 2008. He is currently a Global Scholar at Princeton University (2011–2014) and advises a few u.s. foreign policy think tanks. He is the chief editor of International Political Quarterly, and serves on the international editorial board of The American Interest and Global Asia. His main research areas include u.s. foreign policy, Sino-u.s. relations, and international politics. Selected Publications of Wang Jisi: “China’s Changing Role in Asia,” in Chinese Images of the United States, ed. Carola McGiffert (Washington DC: Center for Strategic and International Studies, 2005). “China’s Muscular Nationalism,” New Perspectives Quarterly 13 (1996). “China’s Search for a Grand Strategy: A Rising Great Power Finds its Way,” Foreign Affairs 3/4 (2011). “China’s Search for Stability with America,” Foreign Affairs 9/10 (2005). “From Paper Tiger to Real Leviathan: China’s Image of the United States Since 1949,” in Chinese Images of the United States, ed. Carola McGiffert (Washington DC: Center for Strategic and International Studies, 2005). “International Relations Theory and the Study of Chinese Foreign Policy,” Chinese Social Sciences Quarterly Volume 1, 2 (1993). “The Logic of American Hegemony,” American Studies Quarterly, 3 (2003). “Multipolarity Versus Hegemonism: Chinese Views of International Politics,” in Project on Conflict or Convergence: Global Perspectives on War, Peace and International Order, ed. Samuel Huntington (Cambridge, MA: Harvard Academy for International and Area Studies, 1997). Yan Xuetong (阎学通) received his PhD (1992) in political science from the University of California, Berkeley. He is dean and professor of the Institute of Modern International Studies, Tsinghua University, and secretary general of the World Peace Forum. He is a well-known Chinese scholar of international politics. Currently he is vice chairman of both the China Association of International Relations Studies and the China Association of American Studies, and a member of the Consultation Committee of Ministry of Commerce of PRC. He served as research fellow at the Institute of Contemporary International Relations in 1982–1984 and 1992–2000. His main research includes theory of international security and Chinese foreign policy.

list of contributors

xix

Selected Publications of Yan Xuetong: American Hegemony and China’s Security (Tianjin: Tianjin People’s Publishing House, 2000). Analysis of China’s National Interests (Tianjin: Tianjin People’s Publishing House, 1996). Ancient Chinese Thought, Modern Chinese Power (Princeton, NJ: Princeton University Press, 2011.) International Politics and China (Beijing: Peking University Press, 2005). Practical Methods of International Studies, 2nd ed. (Beijing: People’s Publishing House, 2007).​ Zhou Fangyin (周方银) received his PhD (2006) in international relations from Tsinghua University. He is a professor and director of the Department of China’s regional strategy of the National Institute of International Strategy (NIIS), Chinese Academy of Social Sciences (CASS). He is also among the editors of the Chinese Journal of International Politics (published by Oxford University Press). His main research includes China’s foreign policy, international strategy, and East Asian regional cooperation. Selected Publications of Zhou Fangyin: “‘Hiding Capabilities and Developing Strengths’ and Hedging Bets: Strategic Interactions in US-China Relations and China’s Rise,” Journal of Contemporary Asia-Pacific Studies, 5 (2011). “China’s Understanding of World Order and International Responsibility,” International Economic Review, 3 (2011). “Equilibrium Analysis of the Tributary System,” The Chinese Journal of International Politics, 1 (2011). “Legitimized Rise under Loose Hierarchical System: An Analysis of the Vassal’s ‘Zunwang’ Strategy in the Spring and Autumn Period,” World Economics and Politics, 6 (2012). “The Role of Ideational and Material Factors in the Qing Dynasty Diplomatic Transformation,” The Chinese Journal of International Politics, 1 (2007). “Wars of Attrition and the Timing of Peace Settlements,” The Chinese Journal of International Politics, 1 (2010). Li Xiangyang (李向阳) received his PhD (1998) in economics from the Chinese Academy of Social Sciences (CASS). He is a researcher and director of the National Institute of International Strategy at CASS, vice president of the China Society of World Economy, and vice president of the China Society of Asia-Pacific. He worked

xx

list of contributors

at the Institute of World Economics and Politics at CASS from 1988 to 2009. Dr. Li’s main research interests include international economics and firm theory. Selected Publications of Li Xiangyang: “Prospects of the World’s Economic Center of Gravity Moving Eastward,” International Economic Review 1 (2011). “The Financial Crisis’s Implications on International Trade and Finance Order,” Economic Research Journal 11 (2009). “Prospects of the International Financial Crisis and World Economy,” Finance and Trade Economies 1 (2009). Of the Corporate Reputation, Corporate Behaviour and Market Mechanisms (Beijing: Economic Science Press, 1999). The Market Failure and Government Intervention: a Study on New Keynesian Economics (Beijing: China Financial Publishing House, 1994). Huang Haizhou (黄海洲) received his PhD (1994) in business from the Kelley School of Business of Indiana University, and is now managing director at China International Capital Corporation (CICC). He has over twenty years of experience in conducting research at market, policy, and academic institutions. Dr. Huang is also a fellow of the China Finance 40 Forum (CF40) and a member of its Academic Committee, as well as a vice president of the China Society of World Economics. His main research interests include macroeconomics, monetary economics, and financial markets. Selected Publications of Huang Haizhou: “When Will the u.s. Economy Resume High-Rate Growth?,” International Economic Review 1 (2011). “On the u.s. Dollar and Renminbi: Some Forward-Looking Perspectives,” International Economic Review 2 (2010). “RMB’s Internationalization: A New Drive for Further Reforms,” International Economic Review 4 (2009). “New Contents and a New Policy of Reform and Opening-Up,” Comparative Studies 2 (2009). “Monetary Policies for Developing Countries: The Role of Corruption,” with Shang-Jin Wei, Journal of International Economics Vol. 70 (2006). “The Lender of Last Resort,” with Charles Goodhart, Journal of Banking and Finance Vol. 29 (2005). “Foreign Exchange Regimes: China’s Experience and Choices,” with Shuilin Wang, China Economic Review 15 (2004).

list of contributors

xxi

Zhou Chengjun (周诚君) received his PhD in economics (2003) from Nanjing University, started his career at the People’s Bank of China (PBoC, China’s central bank) in 2003, and is deputy director-general and governor’s adviser. He has been writing intensively on central bank policy while drafting key policy and research documents for PBoC. He is also a research fellow and professor of the Financial Institute of PBoC and the University of International Business and Economics, as well as a research fellow of China Finance 40 Forum (CF40). Dr. Zhou has published numerous academic papers and essays in important journals, including Social Sciences in China, Financial Research, and Management World. Between 2005 and 2013, he was awarded first-prize on the annual key issues of PBoC each year. In June 2012, he won the May Fourth Medal, a national honor. Selected Publications of Zhou Chengjun: A Research on Macroeconomic Effect of the Asset Price Fluctuation in China as in Constitutional Transition Period (Beijing: Economic Science Publisher, 2004). Yu Yongding (余永定) received his PhD (1994) in economics from the University of Oxford, and is now the first academician of the Chinese Academy of Social Sciences (International Studies). He is editor-in-chief of China and World Economy; a member of the Advisory Committee of National Planning of the National Development and Reform Committee of the PRC; and a member of the Advisory Committee of Foreign Policy of the Ministry of Foreign Affairs of China. Dr. Yu was director-general of the Institute of World Economics and Politics (IWEP), CASS, from 1998 to 2009; president of the China Society of World Economy (2003–2011); and a member of the Monetary Policy Committee of the People’s Bank of China (2004–2006). His main research interests include macroeconomics, international finance, and world economy. Selected Publications of Yu Yongding: “The Current RMB Exchange Rate Volatility and RMB Internationalization,” International Economic Review 1 (2012). “Witness Imbalances—Twin Surpluses, Renminbi Exchange Rate and the Dollar Trap,” International Economic Review 3 (2010). “From European Sovereign Debt Crisis to a Possible Global Sovereign Debt,” International Economic Review 6 (2010).

xxii

list of contributors

“The Nature, Causes and Solutions of the Double Surplus in China,” The Journal of World Economy 3 (2006). “On the Derivation of Aggregate Supply Curve by Integration,” Economic Research Journal 9 (2002). He Fan (何帆) received his PhD (2000) in economics from the Graduate School of Chinese Academy of Social Sciences (CASS) and is now deputy director of the Institute of World Economics and Politics, CASS. Dr. He is one of the most active young economists in China. He is the author or editor of 10 books and more than 100 papers in professional economics journals. During the last few years, Dr. He has worked on a broad range of issues like RMB exchange rate policy, China’s foreign trade and FDI policy, and financial system reform. He is a consultant for the Ministry of Finance, Ministry of Commerce, People’s Bank of China, and Ministry of Foreign Affairs, and is deeply involved in many policy discussions. Dr. He is also a member of the Bellagio group of central bankers and academics (Group Thirty), and the chief economist of Alternative Investment Research Center of China Society of Economic Reform. He was selected as a Young Global Leader by the World Economic Forum in 2005, Asian Young Leader by the Asia Society in 2006, and Young Leader (YLF) by NCUSCR (National Committee of u.s. China Relationship) in 2007. His fields of interest include international finance, Chinese macro-economy, and the international political economy. Selected Publications of He Fan: Age of Uncertainty (Shanghai: Shanghai University of Economics and Finance Press, 2003). Foreign Policy in an Era of Globalization (Beijing: World Affairs Press, 2001). A Constitution for Market Economy: The Institutional Adjustment of China’s Fiscal System (Beijing: China Today Press, 1998). “How to Deal with Exchange Rate Appreciation Pressure During Rise of Economy?—Experiences of Japan and Germany Zhang Bin He Fan” with Zhang Bin, International Economic Review (May–June 2004). “Will FDI cause BOPs Crisis?,” with Yao Zhizhong, Journal of Economic Research No. 11 (2004). “The International Circulation of the RMB and its Impacts on the Chinese Economy,” with Li Jiang and Guan Tao, Management World No. 9 (2004). “Should China Join the G7?” International Economic Review (September– October 2004).

list of contributors

xxiii

Feng Weijiang (冯维江) received his PhD (2008) in economics from the Graduate School of CASS and is now senior research fellow and deputy director of the Department of International Political Economy, IWEP, CASS. His main research interests include IPE theory and international economic cooperation. Selected Publications of Feng Weijiang: “Cooperative-oriented Integration in Asia and the role of China and Japan,” International Studies, J. F. Oberlin University, No. 1 (2011). “A Review of China’s Financial Reform and Financial Integration in East Asia,” Obirin Journal of International Studies No. 14 (2009). “The Dispute over the East China Sea: From the Viewpoint of the Incomplete Contract Theory,” Obirin Journal of International Studies No. 13 (2008). Xu Jin (徐进) received his PhD (2008) in international relations from Tsinghua University. Dr. Xu is senior research fellow and vice director of the Department of International Politics, IWEP, CASS. His main research interests include IR theory and international security. Selected Publications of Xu Jin: “The Evolution of the International Laws of War,” Chinese Journal of International Politics Volume 2, Issue 2 (2008). “The Two Poles of Confucianism: A Comparison of the Interstate Political Philosophies of Mencius and Xunzi,” in Ancient Chinese Thought, Modern Chinese Power by Yan Xuetong, (Princeton, NJ: Princeton University Press, 2011). Qian Yingyi (钱颖一) received his PhD (1990) in economics from Harvard University, and is now dean and professor at the School of Economics and Management, Tsinghua University. He was on the faculty at Stanford University, the University of Maryland, and the University of California, Berkeley. He was appointed as the dean of the School of Economics and Management at Tsinghua University in October 2006. He is a fellow of the Econometric Society and a recipient of the 2009 Sun Yefang Prize in Economic Sciences. He has published in international journals such as American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, and Review of Economic Studies. He is a member of the Monetary Policy Committee of the People’s Bank of China,

xxiv

list of contributors

the National Education Exam Steering Committee, the Health Care Reform Expert Advisory Committee of the State Council of China, the Chinese Economists 50 Forum, the Executive Committee of the International Economic Association (IEA), and the Advisory Council of the Hong Kong University of Science and Technology Business School. He also serves an executive vice chairman of the China Center of International Economic Exchanges and chairman of the Academic Committee of China Finance 40 Forum. His main research areas include comparative economics, institutional economics, economics of transition, and the Chinese economy. Selected Publications of Qian Yingyi: Market and Socialism: In the Light of the Experiences of China and Vietnam, co-edited with Janos Kornai (New York: Palgrave Macmillan, 2008). “Infrastructure Development in China: The Cases of Electricity, Highways, and Railways,” with Chong’en Bai, Journal of Comparative Economics 38(1) (2010). “The Return to Capital in China,” with Chong’en Bai and Chang-Tai Hsieh, Brookings Papers on Economic Activity 37(2) (September 2006). “Who Are China’s Entrepreneurs?,” with Simeon Djankov, Gérard Roland, and Ekaterina Zhuravskaya, American Economic Review: Papers and Proceedings 96(2) (May 2006). “Entrepreneurship in China and Russia Compared,” with Simeon Djankov, Gérard Roland, and Ekaterina Zhuravskaya, Journal of the European Economic Association: Papers and Proceedings 4(2–3) (April–May 2006). Jia Qingguo (贾庆国) received his PhD (1988) in politics from Cornell University, and is now professor and associate dean of the School of International Studies of Peking University. He has also taught at University of Vermont, Cornell University, University of California at San Diego, and University of Sydney in Australia. He was a research fellow at the Brookings Institution between 1985 and 1986, a visiting professor at the University of Vienna in 1997, and a CNAPS fellow at the Brookings Institution between 2001 and 2002. He is a member of the Standing Committee and the Foreign Affairs Committee of the National Committee of the Chinese People’s Political Consultative Conference, and a member of the Standing Committee of the Central Committee of the China Democratic League. He is also the vice president of the Chinese American Studies Association and a board member of the China National Taiwan Studies Association. He is serving on the editorial board of several established domestic and international academic journals. His main

list of contributors

xxv

research includes international politics, Sino-u.s. relations, China’s foreign affairs, cross-strait relations, and the rise of China and China’s diplomatic adjustment. Selected Publications of Jia Qingguo: “Exception to the Rule: the Obama Administration and China-u.s. Relations,” The Korean Journal of Defense Analysis, 2(June 2010). “Delicately Poised: Are China and the u.s. Heading for Conflict?,” Global Asia 4 (2010). “Unipolarity: Implications for China, the u.s. and the World,” in Managing the China Challenge: Global Perspectives, eds. Quansheng Zhao and Guoli Liu (New York: Routledge, 2009). “U.S.–Chinese Interactions over Time,” with Richard Rosecrance, in Power and Restraint: a Shared Vision for the U.S.-China Relationship, eds. Richard Rosecrance & Gu Guoliang (New York: Public Affairs, 2009). “Closer and More Balanced: China-u.s. Relations in Transition,” in Rising China: Power and Reassurance, ed. Ron Huisken (Canberra: The Australian National University E Press, 2009). Bai Chong’en (白重恩) received his PhD (1993) in economics from Harvard University. He is the Mansfield Freeman Chair Professor in Economics, associate dean of the School of Economics and Management, and chair of the Department of Economics at Tsinghua University. Before joining Tsinghua University in 2004, he was on the faculties of Boston College and the University of Hong Kong. He was selected as a Cheung Kong Scholar by the Ministry of Education of China in 2006 and received the Distinguished Young Scholar Grant from the National Science Foundation of China in the same year. He currently serves on the editorial board of The World Bank Economic Review and other international journals; he is co-editor of China Journal of Economics. He also serves on the editorial or academic advisory board of other top economic journals in China, including Economic Research Journal. He served on the editorial board of Journal of Comparative Economics from 2004 to 2006. He is the director of the National Institute for Fiscal Studies of Tsinghua University, a member of the National Committee of the Chinese People’s Political Consultative Conference, a member of the Chinese Economists 50 Forum, a member of China Financial Forum of 40 People, and a member of China Info 100. He was appointed a temporary position as vice-president of Beijing State-Owned Assets Management Co., Ltd (August 2011–December 2012). He was a non-resident senior fellow of the Brookings Institution

xxvi

list of contributors

(2006–2007). His main research studies include public economics, corporate governance, economics of transition, industrial economics, and the Chinese economy. Selected Publications of Bai Chong’en: “Spatial Spillover and Regional Economic Growth in China,” with Hong Ma and Wenqing Pan, China Economic Review 23(4) (2012). “The Factor Income Distribution in China: 1978–2007,” with Zhenjie Qian, China Economic Review 21(4) (2010). “Capital or Knowhow: The Role of Foreign Multinationals in Sino-foreign Joint Ventures,” with Jiangyong Lu and Zhigang Tao, China Economic Review 21(4) (2010). “China’s Pension Payment and its Impact on Consumption and Deposits,” with Wu Binzhen and Jin Ye, Social Sciences in China Issue 8 (2012). “Poverty Reduction and Local Government Public Spending: Empirical Study Based on the 8–7 National Plan for Priority Poverty Reduction,” with Mao Jie and Wang Dehua, China Economic Quarterly Issue 4 (2012). “Medical Insurance and Consumption: Proof from the New Rural Cooperative Medical Program,” with Li Hongbin and Wu Binzhen, Economic Study Issue 2 (2012). Niu Xinchun (牛新春) received his PhD (2006) in philosophy from the China Institutes of Contemporary International Relations (CICIR), where he is now professor and director for the Institute of West Asian and African Studies. He attended CICIR in 1996, and was the deputy director for the Institute of American Studies from 2006 through 2011. His main areas of research include United States foreign affairs, Sino-u.s. relations, and Middle East affairs. Selected Publications of Niu Xinchun: “Obama’s Diplomacy: An Era for Neoliberalsim?,” Contemporary International Relations, 5 ( 2009). “Sino-US Relations: Dependency and Fragility,” Contemporary International Relations, 9 (2009). “Sino-US Strategic Mutual Trust: Concept, Problems and Challenges,” Contemporary International Relations, 3 (2010). “U.S. Middle East Policy: Inconsistency and Dilemma,” Foreign Affairs Review, 2 (2011). “Chinese Diplomacy Requires a Strategic Transformation,” Contemporary International Relations, 1 (2013).

Journal Information World Economics and Politics, launched in 1979 by the Institute of World Econom‑­ ics and Politics, Chinese Academy of Social Sciences, is a journal that focuses on theories of the study of international relations. It adheres to the principle of combining studies of international politics and world economy. It also seeks to combine theory and practice, and to balance studies of domestic and international issues. The journal is devoted to improving the comprehensiveness, foresight, and innovation of research, and to catching up with the latest developments in relevant disciplines. International Economic Review, launched by the Institute of World Economics and Politics, Chinese Academy of Social Sciences, in 1996, is a policy review journal that focuses on international relations, economy and politics, and Chinese macroeconomics. It is highly respected in China’s academic, political, and industrial circles for its thoughtfulness, policy reference, and academic standards. International Studies, launched by the China Institute of International Studies, in 1959, is a comprehensive academic journal on international studies. It aims to aid ­China’s diplomacy and seeks to conduct strategic, foresighted, and policy-oriented studies from multiple macro and international strategic perspectives. In its academic analyses, the journal reflects China’s strategic diplomatic thinking and provides theoretical support for China’s diplomatic practice. Its main columns include International Relations Special, International Politics Special, Comprehensive Analysis of International Security and Strategy, Regional and International Issues, and Hot Issue Focus. Global Times, sponsored by People’s Daily international newspaper, was founded on January 3, 1993, and published Monday to Saturday. Global Times foreign correspondents work all around the world in more than 90 countries. They go to news hotspots to report exclusively from the scene of major events, allowing them to present to Chinese readers the ins and outs of world affairs. Global Times has been named China’s “most credible newspaper” and is one of “China’s 500 Most Valuable Brands.” The Journal of Contemporary Asia-Pacific Studies was launched in 1992 by the National Institute of International Strategy, the Chinese Academy of Social Sciences, and the Chinese Association of Asia-Pacific Studies. It covers the latest theoretical and empirical research from China and abroad on political, economic, security, and social issues in the Asia-Pacific region. Contemporary Asia-Pacific Studies is one of the core journals in China and receives sponsorship from the National Fund for the Social Sciences. According to rankings in the Chinese Social Sciences Citation Index (CSSCI) released by Nanjing University in 2012, the journal ranks third among Chinese journals on politics and second among Chinese journals on international studies. Contemporary International Relations is a state-level academic journal on comprehensive international studies that is run by China Institutes of Contemporary

xxviii

journal information

International Relations. It presents the latest research results from domestic and foreign experts and scholars on international strategy, international relations theory, world politics, foreign affairs, economy, military affairs, and other major issues. It seeks to publish strategy-centered, dynamic, academic, and policy-oriented studies. Its main columns include Special Coverage, International Politics and Security, World Economy, Major Power Relations, Foreign Opinion, Dynamic Study, Theoretical Discussion, and Academic Argument.

Introduction This book is the second volume of the series China and the World: A Survey of Chinese Perspectives on International Politics and Economics. In an era when China is rapidly undergoing transitions and reformations as a country, it is the objective of this series to provide scholars in the English-speaking world with a window to understand the important perspectives of the Chinese academia. Each volume in the series will be structured around an appropriate overarching theme. In the first volume, the theme was “Balance, Imbalance, and Rebalance.” It was mentioned in the first volume that China is in an era of transition; the new leaders of China will face the major issue of how to adjust its economic structure and reform its political system. Some institutional changes have to take place. People cannot wait any longer, and thus the next 5 to 10 years will be crucial for China. Now, one year after President Xi Jinping was appointed to office, we all bear witness to the tremendous political and diplomatic changes China has already gone through. Although only time will reveal the long-term effects of the transition, the new leaders are clearly adopting a more active role than their predecessors. So where do we see China’s changes? What are the guiding principles behind these changes? Are China’s diplomatic policies and international strategies more reflective of its own national conditions or international trends? How will China balance its ideology with national interests? How does China see the current international order and its new position within the existing order? Besides answering these basic questions, we will also consider two other important issues: first, the future of China after its era of continuous high-speed growth; and second (the all-important question in China’s foreign affairs) what will become of the Sino-u.s. relationship? As a result, this volume will be divided into four sections: Chinese Diplomacy, International Strategies, World and China Economy, and Sino-u.s. Relations. I will attempt to provide a roadmap of the overall ideologies and perspectives of this volume by discussing selected articles that I consider to be representative of each individual section. The first section, “Chinese Diplomacy,” contains a paper written by Zhang Baijia on the transition of China’s diplomatic ideologies, titled “Perspective Shifts during the Development of Chinese Diplomacy—From revolution and nationalism to development and globalization.” This is perhaps the most important paper on the topic, because it really explores how the Chinese academia views the main ideologies behind their understanding of China’s

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_002

2

Introduction

d­ iplomacy. Perhaps it will help to enlighten Western scholars on why there was an ideological shift in China’s diplomatic process, which in turn may deepen their understanding of China’s diplomacy. Author Zhang Baijia is a famous historian of the Chinese Communist Party, and the senior research fellow at the Party History Research Center. He believes China’s diplomatic research must not be confined to a simple record of China’s diplomatic policies and foreign affairs transitions, but be seen as an explanation of the ideas behind China’s foreign policies’ formulation. China has a very long history; it has experienced all sorts of humiliations and conquests in recent history before finally returning to power after a violent revolution and a major reform. It would be difficult for those who do not understand this historical background, or the major changes that China went through, to understand the basic ideology behind China’s diplomatic policies. To understand the author’s viewpoint, it may be necessary for us to review a previous article written by him, titled “An Outline of Chinese Diplomacy during the 20th Century,” featured in Social Sciences in China, No. 1 January 2002. Mr. Zhang believes China’s diplomacy has two basic objectives: in the first half of the 20th century, China sought to regain the national independence and sovereignty lost during the 19th century; then in the second half of the 20th century, it sought to figure out how to deal with the rest of the world while maintaining its sovereignty, and to learn how to better protect its self-interests while pushing the international community toward a more fair and reasonable direction of development. Mr. Zhang also believes that in all practicality China does not yet possess the ability to intervene in the transformation of the current international political structure. The success and failure of China’s diplomacy is not dependent on any particular incident, but rather on whether it can correctly identify the current situation, seize the moment, and continue to benefit from the currently existing international hierarchy. Self-transformation is the source of China’s power, and it is also the main way for China to exert its influence on the rest of the world. China’s internal reformation will increase its diplomatic influence. Changes to the international political system or in other countries’ China policies have limited effects on China under its guiding principle: change self, affect the world. For China, its future direction is primarily to influence the world by reforming itself. This is also a point of emphasis in my introduction to the first volume. I have mentioned in the first volume that “In the foreseeable future, China should discover and establish its new position in the world through a comprehensive internal reform.” Through the second volume, perhaps readers will be able to see that China’s foreign relations ideology is not, as some outsiders believe, influenced by foreign entities; instead, it is primarily influenced by China’s own political, economic, and societal trends and events.

Introduction

3

This section also contains an article by another well-known Chinese scholar, Professor Shi Yinhong from the School of International Studies at Renmin University, titled “China’s Contemporary Foreign Strategy: Ideology, Basic Platform, Current Challenges and Chinese Characteristics,” which also seeks to consider China’s foreign strategy from the perspective of China. In this article, Professor Shi accepts the idea of “powerful China, feeble China.” This has been a basic and long-lasting theme in China’s domestic and foreign policies. As China is presented with possible success in the near future, it will simultaneously come face-to-face with difficult and substantial challenges. The most basic challenge will continue to be China’s enormous amount of land territories and huge population; perhaps this will become China’s biggest constant in its domestic objectives, global position, and foreign policies situation. Perhaps the ancient Greek maxim “know thyself” applies to not only individuals but also to countries. This is a very important task, but not an easy one, especially for a country like China still undergoing reforms and developments. How has China’s position in the global context changed? Researcher Li Shaojun of the Institute of World Economics and Politics (IWEP) at the Chinese Academy of Social Sciences (CASS) has written an extensive and representative article on the topic titled “China’s Dual-Identity Dilemma and its Countermeasures.” Mr. Li believes a country’s identity is the basis of its definition of its selfinterest. China is currently facing a dual-identity dilemma. Though China has long been reiterating its status as an emerging country, as its influence continues to grow, the rest of the world increasingly considers China to be a great power, if not a world power. The reputation of “great power” bestowed upon China by the external world and the political interactions between China and other countries has already negatively influenced the global environment that China is facing. To resolve this dilemma, China must promote power diplomacy, regulatory diplomacy, and public diplomacy. In the article “Chinese Traditional Culture and East-Asian Security Cooperation” by Professor Wang Fan from China Foreign Affairs University, Professor Wang attributes the misunderstandings and conflicts between China and the world to the Western scholars’ lack of understanding of traditional Chinese culture. Western scholars often question whether or not China can peacefully rise into power because they do not understand the holistic, dialectical, and self-discipline oriented ideologies of traditional Chinese culture. The Western scholars do not understand that China’s peaceful development is inherently different from other great powers’ rise through military force. The second section emphasizes “International Strategy” and the importance of China viewing the world according to a Chinese perspective. China must base its understanding of the world on its own national context, and develop

4

Introduction

an international perspective and strategy that fits its needs. The report in this section was drafted by several renowned Chinese scholars after numerous discussions. This report was completed before the 18th National Congress of the Communist Party of China, and published after the congress in International Economic Review, titled “Repositioning China in 2020.” This report suggests that as China’s economy keeps getting a larger share in the world economy, the international community is no longer contented with a low-key China; instead, they ask China to assume more global responsibilities. On the other hand, China’s overseas interests are expanding quickly, which forces the Chinese government to take a more active role to provide protections. Against this backdrop, China needs to reposition herself in the world. This position is summarized by the following three principles: unified order, multi-polar world, and co-governance. Among other things, China needs to participate in and maintain a unified world order (and become a constructive reformer of the current order), push G20 to become a formal international institution managing world economic affairs, and push for incremental reforms within the currently existing international order. This section also contains an article by a renowned scholar in the field of China’s foreign relationships, Wang Jisi, titled “Marching Westwards: The Rebalancing of China’s Geostrategy.” In recent years, there has been major discussion regarding the focus of China’s foreign strategy and whether to move eastward into the ocean or march westward into the continent. This issue concerns the allocation and integration of China’s national defense and diplomatic resources. Wang Jisi believes that the Sino-u.s. dispute in East Asia is increasingly becoming a zero-sum situation, and that China should march westward and engage in strategic rebalancing. Meanwhile, the “march westward” strategy also includes closer cooperation with South Asian, Central Asian, and Middle Eastern countries. The author believes that besides promoting the Chinese economy, political activity, and national interests, the “march westward” strategy also has important strategic significance. There is a relatively large potential for cooperation between China and the u.s. in areas such as investments, energy, anti-terrorism, nonproliferation, and maintenance of regional stability—and minimal risk of an armed confrontation between China and the u.s. On the issue of maintaining stability in countries like Afghanistan and Pakistan, the u.s. is pressing for assistance from China; this has far-reaching significance for building mutual trust between the two powers. The author also believes that China should not have designated itself as an East Asian country in the first place. The literal translation of China’s name is the “middle country,” and it goes without saying that China should consider the multilateral development of its geographical advantages. The “march westward” strategy is

Introduction

5

still being disputed within China, and includes numerous risks that the author discusses within his article, but in my view, “march westward” doesn’t suggest the complete replacement of “march eastward” as a principal focus; rather, it suggests a policy change for the next decade that attempts to strike a balance between eastward and westward. In a seminar hosted by the National School of Development at Peking University in 2012, Wang Jisi discussed the larger background in China’s “Stabilize Eastward, March Westward” (东稳西进) strategy. He believes that this concept is related to four important characteristics of China’s global position. First of all, China’s national form of government is a socialist power. Second, it is a beneficiary, participant, and reformer of the global political and economic order. Third, China is the most powerful emerging country. Lastly, China’s geographic property is still an Asian power. The author considers modern-day China to be a genuine “middle country”—a “central country” and the bridge to closing the north-south gap. Therefore, China should take full advantage of its position as a “middle kingdom,” relying on a geo-strategy taking a “pan-­peripheral” or geographic view of Asia, to link the east with the west and the north with the south, to emphasize both sea power and land power, and to engage in a larger game of strategy on the Euro-Asia continent, or even in a global context. To improve its relationships with other developed countries, China must first create a safe and prosperous surrounding environment and increase its cooperation with other emerging powers, as well as its neighboring countries to the south. At the same time, China will only stabilize its surrounding regions if it develops a competitively coexisting win-win relationship with developed countries like the u.s. and those within the e.u. Professor Yan Xuetong of Tsinghua University is another notable scholar in the area of China’s foreign affairs. His article “Power Shift and Change in International System” attempts to answer a critical question: As China rises in the 21st century, where will the world center shift to? How should China utilize the historical trend of the shifting of the world center this time around? It is the author’s perspective that, currently, China’s rise has only changed the structure of allocation for the world’s powers; it has not resulted in changes to the entire system. China needs to implement foreign strategies appropriate for its position as the world’s second largest economy, pursue strategic and friendly alliances with other countries, and establish new international norms. In the article “China’s Rise, The Transformation of East Asian Regional Structure and Development Directions of the East Asian Order,” by researcher Zhou Fangyin of the National Institute of International Strategy at CASS, the author attempts to answer several questions regarding the influence of China’s rise within the scope of East Asia. Will China’s rise change the current ­structure

6

Introduction

of East Asia? If so, what will be the new structure? What will effective operation under the new structure entail? The author believes China’s rise will separate the East Asian region into an economic center and a security center, creating a dualistic regional structure that negatively affects East Asian cooperation. China must continue to explore solutions to maintain the stability and effectiveness of East Asian order under this premise. The director of the National Institute of International Strategy at CASS, Li Xiangyang, has directly discussed this issue in his article “Terrestrial and Maritime Territorial Disputes and their Resolution in the Process of China’s Rise,” where he emphasizes the increasingly hostile encounters between China and its neighbors regarding territorial disputes of land and sea. Criticisms by those within China and those of the international community were drastically different. The representative perspective of those within China summarizes the incidents as neighboring countries’ provocation of China, while the mainstream international community considers the incidents to be China’s attempt to assert its power through territorial demands. The author believes that this is a natural occurrence resulting from China’s rise to power; not only are the surrounding countries readjusting their relationship with China, major international players are readjusting their Asian and China strategy. Only by incorporating terrestrial and maritime territorial disputes into the background of China’s rise can we begin to understand the mechanics behind the formation of territorial disputes, understand its future development, and figure out a solution. The third section of this volume is about “World Economics and China.” The article co-written by Huang Haizhou of China International Capital Corporation and Zhou Chengjun of People’s Bank of China titled “The Strategic Layout of China’s Opening-up under New Circumstances” has been a very influential research paper. Authors Huang Haizhou and Zhou Chengjun believe that the opening-up policy that China started to implement in 1978, and especially its accession to the WTO in 2001, has promoted its all-around economic and social progress and laid a solid foundation for deepening reforms. With the continuous deepening of globalization, especially after the outbreak of the global financial crisis, all countries around the world face complicated internal and external, long- and short-term constraints and contradictions in their economic recovery. New trends in international trade and investment rules have been emerging. Under these new circumstances, China is facing an important opportunity for mapping out a new strategy of openingup to the outside world. However, China is also confronted with a series of challenges under new global rebalancing. This paper puts forward ten proposals of strategies for China to better deal with these challenges, including a plan to accelerate China-u.s. Bilateral Investment Treaty (BIT) talks and to push

Introduction

7

for the adoption of higher standards for service trade and investment treaties; to expedite the implementation of a higher-standard FTA strategy; to expand opening-up in the service sector, and to abolish unnecessary waste in this sector; to further widen agricultural opening-up; to accelerate the process of RMB capital account convertibility; and to promote domestic reforms by leveraging on further opening-up. In the article “Revisiting the Internationalization of the Yuan” by one of the most renowned and respected Chinese economists, Yu Yongding, Mr. Yu stresses that while Yuan internationalization has been making rapid growth in import settlement and holding Yuan deposits by nonresidents in Hong Kong, that progress to a large extent is based on exchange rate and interest rate ­arbitrage, which means that the progress in Yuan internationalization is made at the expense of national welfare losses and the worsening of the currency mismatch in China’s international assets and liabilities. Hence, to minimize the negative impacts of Yuan internationalization on the economy, more efforts should be made in creating necessary conditions for growth, such as deep and liquid financial markets, a flexible exchange rate, and interest rates responsive to market conditions. The third section also contains the article “Challenges Facing the Global Governance Mechanism and China’s Counter-measures,” written by researchers He Fan, Feng Weijiang, and Xu Jin from the Institute of World Economics and Politics at CASS. There is a common question within the discussions of Chinese academia as to why the global governance mechanism is becoming increasingly powerless to provide systematic and effective solutions to global issues. The authors of the article conclude that this is because the ability of the governance system advocated by the u.s. to supply public goods to the international community is significantly less than what is required by relative demand, which in turn results in the international community losing faith in the governance system, and the principles behind the system. Given the background of the situation, the authors inquire whether it would be better for China and other emerging economies to create an entirely new global governance system or integrate into the current global governance mechanism to improve supply of international public good and make suggestions for a course of action from the perspective of China. The fourth section relates to “Sino-U.S. Relationships,” another continuous topic of discussion amongst Chinese academia as well as mainstream media. In this section, we’ve chosen a compilation of the perspectives of several scholars—Qian Yingyi, Wang Min, Jia Qingguo, Bai Chong’en, and Wang Jisi, all very influential economists and political scientists in China—published in the nationalistic Chinese newspaper Global Times, titled “Building Mutual

8

Introduction

Trust Between China and the US.” It is their belief that China and the u.s. are currently facing a huge test and a lack of mutual trust. The instability of the two countries will result in significant loss of benefits for both countries, while also jeopardizing world economic development and global security. However, an in-depth change in the international situation and the increasing number of mutual interests will also provide the two countries with unprecedented strategic opportunities. It is important to remember that the core of Sino-u.s. relations is the pursuit of a mutually beneficial situation. The two countries must not only face the difficulties and obstacles of their bilateral relationship, but also work to get rid of any outdated modes of thinking that are not conducive to the development of mutual benefits, and gradually accumulate strategic mutual trust. Economic and trade cooperation is the core of Sino-u.s. relations—it is also the primary foundation and stabilizing agent of Sino-u.s. strategic cooperation. The Sino-u.s. economic and trade relationship has always relied on mutual cooperation and friction to move forward. Under the new global scenario, China and the u.s. should strategically work to nurture and build the four supporting foundations of Sino-u.s. economic and trade cooperation: free trade, a mutually beneficial win-win situation, structural balance, and fairness and equality. China Institute of Contemporary International Relations (CICIR) researcher Niu Xinchun’s article “Sino-U.S. Relations: Ideological Clashes and Competitions” is a discussion of one of the hottest topics among Western scholars: Will China’s rise overturn the current global system, or will it integrate into it? Will China maintain the status quo, or will it seek to change it? The author believes that there is not a black or white answer to these issues. With a beneficial external environment, China may integrate itself into the current international system while also promoting appropriate reforms within the system. Overturning the currently existing international order is not only beyond the powers of China, but is also inappropriate for China’s own national interests. China also will not completely accept the current international order, because its historical experiences, cultural traditions, and ideologies are drastically different from that of the u.s.; for example, topics of sovereign rights and human rights, state economy and market economy, state supremacy, and separation of powers are all inherently different between China and the u.s., therefore it is impossible for China to seamlessly integrate into a u.s.-dominated international system. If there were a huge power discrepancy between China and the u.s., or if Sino-u.s. relations were not as important, the impact of different ideologies would be insignificant. However, as China and the u.s. increasingly tighten their relationship, the impact of varying ideologies becomes significantly more important. Therefore, differences in ideologies are the main

Introduction

9

reason for policy differences between the two countries. China and the u.s. must peacefully coexist with each other in the future, and must explore ways to adjust their differing ideologies to coexist. The two countries must increase their mutual understandings, but discrimination against the other country’s ideologies will most likely be a difficult issue to change. Overall, 2013 was China’s first year under new leadership, and there is a consensus amongst researchers of China’s international affairs that the diplomatic practices China undertook to a great extent demonstrated the new characteristics, perspectives, and requirements of the new leadership. This ambitious attitude toward foreign affairs has not been seen since the era of Deng Xiao­ ping. The new leadership has proposed a series of new concepts, from advancing Silk Road economics to establishing a maritime Silk Road, from active participation in G20 to large-scale plans for international investments.1 Altogether, these pushes demonstrate China’s hopes of increasing its influence in politics, economics, and foreign affairs. Furthermore, the Chinese government has adopted a more active attitude in safeguarding its own interests and bearing more responsibilities as a country. Chinese foreign affairs scholars are also closely monitoring the series of proposals made by the new leadership and the international reception of these proposals, including those that may bring about confusion or insecurities amongst the international audience. Overall, the articles selected in this volume are fairly reflective of the perspectives and theoretical explanations of Chinese scholars regarding the current Chinese government, as well as the indirect impact these ideas have had on advancing China’s diplomatic policies and international strategy. The method of article selection for the second volume was similar to the method for the first volume. I would also like to thank all experts and advisors who have helped me with the selection of these articles, and special thanks go to my team members for their great amount of labor and their attention to 1 Note: The Silk Road Economic Belt is the concept of forming a new economic development region based on the idea of the original Silk Road. A Silk Road Economic Belt would connect the APAC economic region in the east to the developed European countries in the west; it would be the “world’s longest economic corridor with the largest developmental potentials.” On September 7, 2013, during President Xi Jinping’s speech at Nazarbayev University in Kazakhstan, he proposed the construction of a “Silk Road Economic Belt” to promote economic communication between Europe and Asia, further mutual cooperation, and create room for development. He feels countries should work together to create an innovative form of cooperation: a jointly constructed “silk road economic belt” that will benefit all of the countries. Maritime Silk Road refers to President Xi’s address to the Indonesian Parliament on October 3, 2013, where he proposed a joint Sino-ASEAN effort to construct a “21st century maritime silk road.”

10

Introduction

details. They are Li Junwei and Cui Xiumei, editors of International Economics Review, Zhao Yuanliang, editor of World Economics and Politics, and Wang Hui, editor of the Journal of World Economy. I also need to thank Wang Tianyang, an intelligent young J.D. candidate at the Seattle University School of Law, Wu Yixue, director editor of China Daily, Xin Zhiming, journalist of China Daily, and Xu Xiaohong, lecturer at the department of diplomacy, China Foreign Affairs University, who helped me with English translations. I would also like to give special thanks to Prof. Allen Carlson from Cornell University. As an expert in Chinese affairs, he has provided me with an extensive list of professional and meaningful suggestions throughout the creation of this volume, and has written an excellent foreword to assist the readers in understanding this series. Lastly, I would like to thank Brill acquisitions editor Ms. Qin Higley, who has invested a large amount of her time and provided me with incredible assistance throughout the process that made it possible to complete this book. Shao Binhong

Executive Editor-in-Chief of International Economic Review Institute of World Economic and Politics Chinese Academy of Social Sciences Beijing

part ONE Chinese Foreign Policy

∵

chapter 1

Perspective Shifts during the Development of Chinese Diplomacy: From Revolution and Nationalism to Development and Globalization Zhang Baijia Abstract This chapter examines the perspective shifts in China’s foreign policy throughout the more than 60 years since the establishment of the People’s Republic of China. The essential ideas of China’s foreign policy, independence and peace, were put forth very early after the establishment of this new China, and proved able to stand the test of time. China’s foreign policy can be separated into two distinct periods, divided at the beginning of the reform and opening-up in 1978: the first 30 years, during which China, in response to new diplomatic circumstances, established normal relations with countries around the world, maintained national sovereignty and security, and established the foundation for later developments; and the last 30 years, during which time China’s basic diplomatic principles underwent major changes. China abandoned the revolutionary ideological perspective in examining and resolving diplomatic issues, and no longer played the role of challenger to the existing international order, instead consciously and actively joining the system to pursue its own development goals.

Keywords Revolutionary diplomacy – Independence and peace – Basic foreign policy – Diplomatic strategy

* The Chinese version of this article was originally included in Xu Zhenzhou 许振洲, Wang Weihua 汪卫华 eds., Zizhu lijie hezuo: zhonghua renmin gongheguo duiwai guanxi 60 nian 自主·理解·合作：中华人民共和国对外关系 60 年 [Self-determination— Understanding—Cooperation: 60 Years of Foreign Relations in the People’s Republic of China] (Beijing: Contemporary World Press, 2012), 131–146. Zhang Baijia is Senior Research Fellow at the Party History Research Center. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_003

14

zhang

Since the establishment of the People’s Republic of China over 60 years ago, China has undergone enormous changes. Diplomatic policies are merely one aspect of these changes. Since the reform and opening-up, academic research on diplomacy in the People’s Republic has developed considerably. Through years of research and analysis, the outlines of the new China’s diplomatic history have become quite clear, and the development of China’s foreign policy has become a subject with which scholars are intimately familiar. In general, the history of the PRC is divided into two periods, separated by the start of the reform and opening-up. Its diplomatic history is no exception. The goal of this paper is to examine the guiding thinking exhibited by China during the development of its foreign policy, and to analyze the background, continuity, and changes exhibited by this policy during the two periods under examination. I

The Consideration and Implementation of Revolutionary Diplomacy in New China

Some of the basic concepts of China’s foreign policy were conceived during the revolution, and became more fully realized and developed after the country’s founding. During the first segment of new China’s history, the country’s foreign policy was imbued with a clear revolutionary character. The ideas and perspectives of this period reflected the most basic demands in foreign affairs after achieving independence. Establishing a New Type of Diplomatic Relations—The Basic Demands of China’s Revolution Chinese Communists gradually accumulated diplomatic experiences during the course of the revolution. Their first experiences were in the Anti-Japanese War and during the initial period after the war. The ideals of the revolution and the ambition to leave behind old China’s diplomatic humiliation formed the basis for the principles underlying the early diplomatic policy of the Chinese Communist leaders. The foreign policy of the early days of new China was guided and defined by these principles and experiences. There are several elements worth examining in the Chinese Communist foreign policy that emerged during this period. The first element is the position of nationalism. In August 1944, the Party Central Committee released the first directive for diplomatic work. This document emphasized that in undertaking diplomacy, the Communist Party of China (CPC) was to first insist on “establishing the position of nationalism” by erecting a “new standard for the Chinese people” with which to face the world. To accomplish this, China c­ larified its 1

Perspective Shifts During The Development Of Chinese Diplomacy

15

opposition to the mistaken trends of “exclusionism” and “foreign terror and infatuation” that had typified diplomacy in China during the previous c­ entury.1 This stand especially highlighted the difficulty that the Communist leaders had in moving past the memories left by the humiliation from old China’s diplomacy. How to rid themselves of the legacy of China’s previous diplomatic traditions, and how to distinguish diplomacy in new China from that of the previous era, became a focal point for the leaders of the CPC. During China’s War of Liberation, Zhou Enlai (周恩来) instructed the Central Foreign Affairs Group to outline the distinguishing characteristics of China’s new type of diplomatic relations, noting its differences from the old system. The second element was emphasis on an international united front. The above-described document also indicated that the various principles outlined in the united front policy against Japan were also to be applied to diplomatic work generally. In fact, the CPC’s foreign policy was derived from its own implementation of the international united front policy. The strategies and analytical methods proposed by this policy had a resounding impact on the CCP. After the founding of the PRC, the international united front strategy became a significant component of China’s overall foreign policy. According to Zhou Enlai, diplomacy consists of two aspects: “one is unity, and the other is struggle.” He believed that when opening up the diplomatic front one should first distinguish friends from enemies.2 Obviously, this point is an extension of the view on the revolutionary united front. Third is the basic perspective on the post-war international situation. In the second half of 1946, Mao Zedong (毛泽东) put forth his theory on the “Intermediate Zones.” He believed that the post-war world was separated into three zones: the United States (u.s.), the Soviet Union (U.S.S.R.), and those areas in between. Sitting between the u.s. and the U.S.S.R. were the intermediate zones, made up of capitalist countries, colonies, and half-colonies in Europe, Asia, and Africa. The largest problem facing the world at that time was not a Third World War brought about by conflict between the u.s. and U.S.S.R., but rather attempts by the u.s. to control and invade the intermediate zones.3 This idea not only represented a calculation of the post-war world order, but 1 Compiled by the Central Archives, Zhonggong zhongyang wenjian xuanji 中共中央文件选 集 [CPC Central Committee Document Collection], Vol. 12 (Beijing: Central Party School Press, 1986), 573. 2 The Foreign Relations Ministry of the People’s Republic of China and CPC Central Document Research Center, eds., Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career] (Beijing: Central Document Press, 1990), 2–3. 3 Mao Zedong 毛泽东: Mao Zedong xuanji 毛泽东选集 [Selected Works of Mao Zedong], Vol. 4 (Beijing: People’s Publishing House, 1991), 1193–1195.

16

zhang

also ­provided an answer to the question of the future of the Chinese Revolution and the future role of China in the world. Hu Qiaomu (胡乔木) once said that the “leaning to one side” policy stemmed from this idea.4 The nationalism position, the international united front policy, and the intermediate zones theory thus formed the theoretical foundations for new China’s foreign policy. It was under these guiding principles that, in the spring of 1949, Mao Zedong put forth three directives to guide China’s foreign policy. These directives were to “set up a separate kitchen,” “lean to one side,” and “sweep the house clean before inviting guests.” Serving as a comprehensive system, these three directives provided answers to two crucial questions: first, how to break down the customs of diplomatic humiliation, free China from its former status as a semi-colony, and establish a new type of diplomatic relations; and second, how to, in the face of the existing international order, select the kind of foreign policy that would secure the power of the newly born revolution. Independence and Peace—The Fundamental Concepts of New China’s Diplomacy The birth of a new China brought unprecedented changes to China’s relationship with the world. In the midst of this transition, the Communist leaders put forward two basic ideas to guide Chinese foreign policy—independence and peace. These ideas made up the essential elements of China’s attempts to reestablish foreign relations on new ground. These two words, “independence” and “peace,” represented China’s most basic long-term demands in terms of foreign relations, and reflected the determination of the CPC to lead China out of the era of diplomatic humiliation, as well as China’s desire for a peaceful international environment. Independence has been seen as the most basic principle of new China’s foreign policy. In the early days after the new government’s establishment, Zhou Enlai made repeated references to the fact that, in regard to diplomatic issues, “the Chinese people are independent, self-governing, and self-reliant.” After entering into an alliance with the Soviet Union, he went on to provide a more specific explanation; the critical aspect of independence was “to not be beholden to the influence of any country, and not to become their tool.” He often stressed that “it is not that there are no differences between the Soviet Union and u.s. . . . One should not blindly follow the Soviet Union without 2

4 Hu Qiaomu 胡乔木: Hu Qiaomu huiyi Mao Zedong 胡乔木回忆毛泽东 [Hu Qiaomu’s Memories of Mao Zedong] (Beijing: People’s Publishing House, 1994), 92–93.

Perspective Shifts During The Development Of Chinese Diplomacy

17

­ aking any criticism. . . . We should not abandon the independence of our m party and country.”5 At its founding, the People’s Republic of China announced its intentions to pursue a peaceful foreign policy. Not long after, Zhou Enlai summarized the new policy of foreign relations in terms of the following six points: (1) “Set up a separate kitchen.” The PRC would not inherit the diplomatic relations that had existed between the Nationalist government and other countries. Rather, the CPC would establish new relations. (2) “Lean to one side.” This new China would firmly side with the camp of peace and democracy, which was headed by the Soviet Union. (3) “Sweep the house clean before inviting guests.” China would first clear up the remnant imperialist presence in the country and would not hasten to establish diplomatic relations with imperialist countries. (4) “Deal with a man as he deals with you.” The CPC would follow the principle of reciprocity in its relations with capitalist countries. (5) “Meet mutual needs.” China would conduct business with foreign countries in accordance with the principle of equality and mutual benefit. (6) “Unite the world’s people.” Under this policy, China’s influence would be expanded and the international forces of peace would be enhanced.6 These six points exemplified the principles of independence and peace. The “leaning to one side” policy was adopted by the PRC during its early years, which led some to doubt whether China was truly independent. Actually, the emergence of the policy was caused by the Cold War and it was a choice to confront the reality of the Cold War. The peculiar circumstances of the time were that the ideological goals of China’s Communist leaders happened to be largely in line with the country’s national interest. By adopting the “lean to one side” policy, China was able to achieve its initial foreign policy goals, including international recognition, national security, and foreign support. Historically speaking, whether or not China was truly independent cannot be determined by the policies of this specific period. While “leaning to one side,” China nonetheless continued in its emphasis of the more important principle, independence, which helped determined the future of China’s foreign policy. It is worth noting that at the Bandung Conference of 1955, Zhou Enlai began using the phrase “independence and peace policy” to summarize China’s basic 5 Pei Jianzhang 裴坚章: Yanjiu Zhou Enlai—waijiao sixiang yu shijian 研究周恩来——外交 思想与实践 [Understanding Zhou Enlai—Foreign Policy Thinking and Practice] (Beijing: World Knowledge Publishing House, 1989), 5. 6 Foreign Relations Ministry and CPC Central Document Research Center, eds., Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career] (Beijing: Central Document Press, 1990), 48–50.

18

zhang

foreign policy.7 However, for a long time after this period, this summary was not the standardized formulation it is currently. The Five Principles of Peaceful Coexistence—The Realization of Seeking Common Ground After the end of the Korean War, China’s leaders judged that conflict mitigation should become the main goal in international engagement. At that time, China needed a peaceful international environment to assist with its own large-scale economic adjustments. It was against this backdrop that Zhou Enlai proposed the famous Five Principles of Peaceful Coexistence and united front strategies, which made major contributions in the effort to expand and develop China’s international relations, as well as break through American efforts at containment and isolation. The Five Principles of Peaceful Coexistence, which had been proposed to improve Sino-Indian relations, were quickly accepted as the basic norms governing the establishment of new relations among states and defining a new international order. The scope of situations for which they were applied gradually grew, and they became a tool for managing relationships with neighboring and distant countries, whether liberated, capitalist, or socialist. These principles were originally put forth in early 1953. After several rounds of refinement, the language was finalized at the 1955 Bandung Conference to read “Mutual respect for sovereignty and territorial integrity, non-aggression, non-­ interference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence.”8 Admittedly, there was nothing new about these principles. Zhou Enlai’s remarkable contribution, however, was his ability to creatively integrate the principles and use them to outline the basic features of a new type of foreign relations. The implications of the five principles were two-fold. First, the mutual non-aggression and non-interference were the most important manifestations of respect for sovereignty and territorial integrity. Second, the first four principles constituted the preconditions for securing peaceful coexistence. These five principles covered not only political relations but also economic relations. 3

7 Li Shenzhi 李慎之, Zhang Yan 张彦, “Renmin de xin tong yafeihuiyi zaiyiqi—yafeihuiyi riji 人民的心同亚非会议在一起——亚非会议日记 [The Heart of the People Meeting Together with Asia-Africa Conference—Diary of the Asia-Africa Conference],” People’s Daily, June 4, 1955. 8 The Foreign Relations Ministry and CPC Central Document Research Center, eds., Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career] (Beijing: Central Document Press, 1990), 119.

Perspective Shifts During The Development Of Chinese Diplomacy

19

Proposing the Five Principles of Peaceful Coexistence was a concrete expression of Zhou’s effort in international relations to apply his philosophy of “identifying common ground while keeping difference aside.” He once said that “countries vary in political system and ideology. Thus it is hard to achieve uniformity. What we should do is to identify common ground and set aside difference without getting entangled in disputes.”9 The five principles provided a common ground that was acceptable to different countries and ensured “peaceful coexistence and peaceful competition” in the interest of “common survival and prosperity.” In explaining China’s foreign policy, Zhou often referred to the Confucian belief that one should not do to others what one does not want done to oneself. The five principles advanced by Zhou also allude to another feature of traditional Chinese culture, namely, the importance of unifying legal and moral restraint. As a legal restraint, the five principles were written into a series of bilateral and multilateral agreements that China signed with other countries. At the same time those principles exercised an international moral restraint. Zhou advocated that countries exercise self-restraint and mutual supervision in upholding the principle of peaceful coexistence.10 Along with the Five Principles of Peaceful Coexistence, also proposed during this period were the concepts of “mutual equal treatment” and that “all countries, big or small, should be equal.” These principles served to guide China’s relationships with other countries, and were especially important in dealing with newly independent countries that were recently freed from colonialism. China’s leaders made repeated reference to the need to reject “great-nation chauvinism” in the country’s relationships with other nations.11 This principle of equality amounted to an overthrow of the traditional international order and power politics. It reflected the joining together of voices from newly independent countries across Asia and Africa, and did much to define China’s new international image. This stand caused China to be seen as a friend by many emerging countries. The proposal of the peaceful coexistence policy had wide-ranging repercussions internationally. It superseded the fierce ideological confrontation of the 9

10

11

Pei Jianzhang 裴坚章: Yanjiu Zhou Enlai——waijiao sixiang yu shijian 研究周恩来— 外交思想与实践 Understanding Zhou Enlai—Foreign Policy Thinking and Practice] (Beijing: World Knowledge Publishing House, 1989), 7. The Foreign Relations Ministry and CPC Central Document Research Center, eds., Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career] (Beijing: Central Document Press, 1990), 179. Zhang Wentian 张闻天: Zhang Wentian xuanji 张闻天选集 [Collected Works of Zhang Wentian] Vol. 4 (Beijing: Central Party History Press, 1995), 191.

20

zhang

Cold War era, and became an effective weapon for China to use in fighting American efforts at containment and isolation. The influence of this policy gradually grew, and eventually came to be seen as the cornerstone of China’s foreign policy. In the same way, the philosophy of “identifying common ground while setting aside difference” became an important way of thinking in China’s diplomatic affairs. The “Sino-US Joint Communique” of 1972, for instance, is a classic example of the effort to seek common ground. 4 War, Peace, and Revolution—The Puzzles of the Cold War Era Since 1953, explorations of foreign policy options began on several fronts at the same time. But this process could not be completed in such a short period of time, and the Cold War made this process of study much more complicated. First, China had to determine how to react to the emerging international order. In the early days after the Korean War, it initially looked as though the world would begin to move toward reconciliation. In June 1953, Zhou Enlai issued a clear statement that “if a new war can be delayed, then perhaps it can be prevented” and “the main international problems of today are questions of war and peace.”12 These judgments made up the foundation of China’s efforts at peaceful coexistence and reconciliation at the time. At the National Conference of the CPC in March 1955, Liu Shaoqi (刘少奇) delivered a long speech to address the international situation. He argued that the building of socialism in China requires long-term international peace. As long as China’s policies are correct, he stated, and we do our work well, then it is possible to hope for long-term peace on the international front.13 This statement provides clear evidence of the relatively optimistic view held by the CCP regarding the world at large. However, after 1956 the Chinese leaders’ estimation of the international situation gradually changed. From the second half of the 1950s until the early 1960s, a series of events brought a nervous tenor to international relations, including the Suez Canal War, the crises in Poland and Hungary, the Berlin Crisis, and the climax of revolutionary movements in the Middle East, Africa, and Latin America. Even more influential were the continued tensions between China and the United States, the increased American presence in the invasion of Vietnam, and the deterioration of Sino-U.S.S.R. relations. In the 12

13

The Foreign Relations Ministry and CPC Central Document Research Center, Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career] (Beijing: Central Document Press, 1990), 61–62. Jianguo yilai Liu Shaoqi wengao 建国以来刘少奇文稿 [Documents from Liu Shaoqi since China’s Founding] Vol. 7 (Beijing: Central Document Press, 2008), 107–138.

Perspective Shifts During The Development Of Chinese Diplomacy

21

first half of the 1960s, the situation around China’s borders saw a clear turn for the worse. In the face of such circumstances, Mao Zedong became anxious at the prospect of war, even more so because of the efforts by the Soviet Union to alleviate tensions with the United States. War and peace were a main topic in international relations. Zhou Enlai, for example, was more interested in traditional relations of war and peace in his analysis of the world. From his perspective, “war and peace” were issues that concerned the peoples and governments of every nation, and preserving peace therefore represented the confluence of the interests of the vast majority of nations, and also a starting-point for China’s foreign policy. For China’s leaders, however, between the issues of war and peace there was also the question of revolution. This was something they had experienced personally. In contrast to Zhou Enlai, Mao Zedong was more interested in the status of the revolution. From his perspective, the more pressing question was “whether war can bring forth revolution, or whether revolution can end war.” Entering into the 1960s, Mao Zedong’s increasing concerns about war and his hopes for global revolution seemed to grow precipitously. This deep ideological divide between Mao Zedong, Zhou Enlai, and other leaders is one of the many reasons for the changes in Chinese foreign policy after 1956. Determining whether u.s.-U.S.S.R. relations were headed toward reconciliation or increased tension and evaluating the future prospects for either global revolution or world war became the two controversial issues that concerned China’s leaders during this period. In fact, in the 1960s it was difficult for people to draw any clear conclusions regarding these issues. Looking back, we can see that after the Korean War, u.s.-Soviet relations experienced periodic warming and cooling—with limits on how cool or warm these relations became—until the breakup of the Soviet Union. As for post-war revolutions, basically all were anti-imperialist or anti-colonial revolutions aimed at achieving independence. Except for a few outliers, they did not have the characteristics of a socialist revolution. By the mid-1970s, the wave of revolutions had basically subsided. Although the world did not experience another world war, China’s leaders, based on their own understanding of history, nevertheless continued to be concerned about the possibility. Their judgments regarding the international scene had an extremely important influence on the focal-point and direction of China’s diplomatic work. One difficult problem that had confronted China’s leaders since the establishment of the Republic was how to manage the relationship between acting in China’s own interest versus supporting revolutionary movements around the world. Zhou Enlai made an effort to differentiate between foreign policy and revolution. He stated that the objective of diplomacy was “the management

22

zhang

of relations between nations,”14 which meant dealing with the governments and power-holders of different countries. He also offered repeated explanations of his opinion that revolution was the business of the people from that nation, and should not be exported or imported. But in the actual course of diplomatic work, it was difficult to completely separate these two issues. In the circumstances of the time, as a socialist country that had already achieved independence, there was no way that China could avoid the duty of supporting revolutions in other countries, especially the struggles of those neighboring countries fighting for independence or unification. In fact, China’s support of liberation and independence movements in Asia, Africa, and Latin America was an important source of international prestige. However, this support also made it difficult for China to deal diplomatically with certain large countries with colonial interests. It was also sometimes difficult to manage China’s relationships with the governments and revolutionary organizations of some other nations. Against this uncertain background, China saw the intersection of two different sets of ideas. In evaluating the purpose of China’s diplomatic work from the early 1950s to the early 1970s, one can view it primarily as an effort to secure an international environment conducive to China’s national construction. Alternatively, one can view it as emphasizing the support of people’s revolutions around the world. In terms of how to evaluate China’s relations with different countries, researchers can look to China’s emphasis on the idea of peaceful coexistence, but can also reference China’s persistent struggle against “imperialists, revisionists, and counterrevolutionaries.” China’s foreign policy became progressively more radical until the early 1970s, when it saw a dramatic transition. The eventual resolution of this divide did not arise from finding an effective way to balance these two sets of ideas, rather, the tide of revolution subsided and the world entered into a period of peace and development. From “Two Camps and the Intermediate Zones” to “Three Worlds”: The Alienation of Struggle From the establishment of the PRC in 1949 until the early 1970s, China frequently played the role of challenger to the existing global order. As is well known, China’s foreign relations experienced three major shifts during this period, from the “leaning to one side” of the early days, to the “anti-two hegemony of two super-powers” policy, to the “unified line” with the u.s. against 5

14

The Foreign Relations Ministry and CPC Central Document Research Center, Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career](Beijing: Central Document Press, 1990), 53.

Perspective Shifts During The Development Of Chinese Diplomacy

23

the u.s.s.r. Despite these major changes in Chinese foreign policy and diplomacy, there was nonetheless a current of pragmatism running through the diplomatic work of the entire era. This pragmatism was reflected in the continued efforts to demonstrate China’s independence and security through struggle, and through unified fronts in one form or another. In previous examinations of China’s foreign policy since the reform and opening-up, some have pointed out that the extreme combativeness of foreign relations in the 1960s aggravated the threat to China’s national security. This criticism is not without basis. But in fact it is difficult for researchers to pass judgment on the policies of this era according to the simplistic standards of “right” and “wrong.” These policies had their own historical context and rational elements, and had a degree of positive influence in the development of China’s foreign policy. For example, while extreme combativeness on the international front caused serious damage in terms of China’s foreign relations, its specific influence on the actual struggles of that time need to be analyzed. During the Cold War, China was isolated and cut off. Engaging in an international struggle was thus also a form of interaction with the outside world, especially with the u.s. and U.S.S.R. China’s willingness to engage in this struggle, especially its willingness to struggle against the superpowers of the world, was an important reason why China was widely seen as an independent force in international politics, and was also a reason why China was able to remove itself from the Cold War at a relatively early stage. The categorization of the world is a big theoretical question. In his later years, Mao Zedong put forth the theory of “three worlds” as a way to categorize and divide. This idea held that the u.s. and the u.s.s.r. belonged to the first world, capitalist countries such as Japan and Europe belonged to the second world, and the countries in Asia, Africa, and Latin America belonged to the third world.15 In regard to form, this type of categorization and division was of the same lineage as the ideas of “two camps” and “intermediate territories,” as well as the “two intermediate zones” previously proposed by Mao Zedong. However, despite their similarities, researchers can observe a transformation of the ideology of struggle. The concept of “anti-revisionism” can historically be attributed to the lack of “anti-imperialist” determination on the part of the Soviet Union, but the ultimate result of this idea was to unite the u.s. and China in resisting Soviet hegemony. Theoretically speaking, the division of “two camps” and “intermediate territories” was based on the idea of 15

The Foreign Relations Ministry of the People’s Republic of China and CPC Central Document Research Center, Mao Zedong waijiao wenxuan 毛泽东外交文选 [Collected Works on Mao Zedong’s Foreign Policy] (Beijing: Central Document Press, 1994), 600–601.

24

zhang

international class struggle, while the division of “three worlds” was more or less based on the overall strength and level of development of different countries, roughly equivalent to the ideas of “superpowers,” “developed countries,” and “developing countries” that later began to be used widely. The normalization of Sino-u.s. relations opened the door for China to interact with the world. This theoretical shift was thus a premonition of China’s overall transition from the philosophy of struggle to the philosophy of development. II

The Development of China’s Diplomatic Theory during the Reform and Opening-Up

The reform and opening-up began in the late 1970s and brought about huge changes in China’s relationship with the world. At the beginning of the reform and opening-up, there were obvious adjustments to China’s foreign policy. But more worthy of attention from scholars were the deep changes that occurred in China’s theories behind diplomatic work and the changes in perspective on international issues. After much introspection and learning from past experiences, these new perspectives were able to provide continuity while simultaneously making new breakthroughs. Economic Development as the Center: Defining the Goals of Diplomatic Work and Adjusting Diplomatic Strategy The adjustment of China’s foreign policy in fact began at the end of the Cultural Revolution. After the Gang of Four was overthrown, Marshal Ye Jianying (叶剑英), the man responsible for diplomatic work, made a statement that China would pursue “the diplomatic line of Premier Zhou.” When viewed against the customary “revolutionary diplomatic line of Chairman Mao,” it is clear that this was an important signal of policy change. Despite the fact that it was, as yet, unclear how foreign policy would be adjusted, China’s intention to speed up the march from behind its closed doors was made clear. This transformation was finally completed at the Third Plenary Session of the 11th CPC Central Committee in late 1978, whereupon economic growth was confirmed as the central policy objective. From this point on, the objective of China’s diplomatic work also became clear. This was—in addition to continuing to maintain China’s independence, sovereignty, and socialist system—to assist in building the economy and the reunification of the motherland, and to work toward establishing a peaceful international environment in which this could occur, especially on China’s borders. 1

Perspective Shifts During The Development Of Chinese Diplomacy

25

The adjustment of China’s diplomatic strategy was the core of China’s foreign policy change. After the Cultural Revolution, Mao Zedong had proposed the “single line” strategy.16 In the early days of the reform and opening-up, China greatly emphasized this strategy, for a time. Deng Xiaoping’s continued support of the “single line” was based not only on national security considerations, but also, more importantly, on a consideration of what was necessary for modernization. In fact, the single line strategy was never very successful. Soon after the u.s. and China established a formal diplomatic relationship, the American Congress passed the Taiwan Relations Act, which ultimately caused China to abandon the strategy. After 1979, China began to intentionally create distance between itself and the u.s., and began considering adjustments to Sino-Soviet relations. By 1982, China had abandoned the single line strategy and begun to develop more comprehensive diplomatic ties. Deng Xiaoping firmly believed in the importance of the normalization of relations with the u.s.s.r. However, from the standpoint of China’s economic development, he always believed in the potential of the Sino-u.s. relationship, and recognized that there were limits on what the u.s.s.r. could do for China. While making changes to the relationships with the u.s. and u.s.s.r., Deng Xiaoping steered the course, making sure not to make the outside world aware of the changes in China’s diplomatic ­strategy. Making use of adept diplomatic skill, he successfully implemented a strategy that integrated China’s short and long-term interests. It wasn’t until the second half of the 1980s that China’s foreign policy adjustments finally began to attract attention. Reevaluating the International Circumstances: Declaring the Theme of the Times, Peace and Development The reevaluation of the international milieu carried significant implications for the reform and opening-up, and for the development of China’s diplomatic relations. The heart of this reevaluation was a shift away from the judgment that another large-scale global war was inevitable; this realization included a recognition of peace and development as the outstanding trend in the world at that time. This transformation was gradual, not at all the prerequisite condition for the reform and opening-up depicted in some articles. Before the normalization of Sino-u.s. relations in the early 1970s, Ye Jianying, Chen Yi, and two other leading Chinese commanders expressed skepticism regarding the prospect of oncoming war. When the reform and 2

16

The establishment of a united front against Soviet hegemony from Japan in the East to Europe and America in the West.

26

zhang

opening-up began in the late 1970s, Deng Xiaoping voiced his belief that another world war could be delayed, and that this was the time for national construction. In the early 1980s, Deputy Director of the International Liaison Department, Li Yimang, suggested that the Central Committee discontinue the use of the “three worlds” theory and cease its insistence that a world war was inevitable. After some discussion, the Central Committee agreed to abandon the theory of “three worlds,” choosing only to preserve the formulation of the “third world.” Thus after the 12th National People’s Congress Plenary, the “three worlds” theory no longer appeared in formal speeches by China’s leaders. As for the international environment, Deng Xiaoping believed it was still necessary to examine the situation further. As is well-known, in 1985 Deng Xiaoping stated clearly his belief that a world war could be avoided, while also pointing out that the major issues facing the modern world were questions of “peace and development.”17 The 13th Central Committee further clarified the themes of “peace and development.” If one takes a close look at the speeches made by Chinese leaders, it can be seen that as early as the International Conference on Cooperation and Development in October 1981, China’s leaders began addressing two major issues of the modern world: how to maintain peace and how to encourage development. This could be said to be the harbinger of the “peace and development” thesis. This new evaluation of the world at large had enormous and multifaceted consequences. First, it allowed China to prioritize economic development without subjecting itself to interference. It allowed China to open itself to the world, thereby taking advantage of globalization in accelerating its own development. Also, in the face of the dissolution of the polarized world and the upheaval in the Soviet Union and Eastern Europe, China’s persistence in this direction allowed it to stay the course, respond calmly, and establish a multilateral and multi-level strategy in international relations. Moreover, China’s national defense and military were, based on these judgments, able to develop the right kinds of strategies and keep pace with the reform and opening-up. Finally, the “one country, two systems” policy toward Hong Kong and Macao also meshed well with these overall judgments on the international scene. It is possible to say that the progress made by China on numerous fronts during the reform and opening-up could not have happened without an international environment focused on peace and development—and an accurate judgment of the international circumstances.

17

Deng Xiaoping 邓小平: Deng Xiaoping wenxuan 邓小平文选 [Collected Works of Deng Xiaoping] Vol. 3 (Beijing: People’s Publishing House, 1993), 105.

Perspective Shifts During The Development Of Chinese Diplomacy

27

A New Formation of Basic Foreign Policy—The Policy of Peaceful of Independence The period from 1982 to 1986 was an important stage in the adjustment of Chinese foreign policy, when China’s leaders and government put forth a new policy of peaceful independence. The main feature of this period of adjustment was an expression of continuity with previous foreign policy, while at the same time expanding and diversifying policy in response to global changes. In August 1982, while meeting with the UN Secretary-General, Deng Xiaoping summarized China’s foreign policy with three main points: Opposition to hegemony, maintaining world peace, and China’s status as a third world nation.18 At the same time, China’s leaders began to make frequent use of the phrase “policy of peaceful independence,” a formulation that had existed for some time, in summarizing China’s basic foreign policy. In diplomatic talks during the years following, Minister of Foreign Affairs Huang Hua made repeated reference to the idea that “China has always pursued a policy of independence and peace, and is willing to establish and develop relations with all countries around the world, based on the five principles of peaceful coexistence.” China’s premier also spoke on the topic of “the policy of peaceful independence” on several occasions while abroad. In March 1986, the Fourth Session of the Sixth National People’s Congress adopted a report in which China’s overall foreign policies were generalized formally as “an independent foreign policy of peace.” The main components of the policy comprised 10 elements: (1) the fundamental objective of China’s diplomacy is to oppose hegemony, preserve world peace, develop friendly cooperation between countries, and promote common economic prosperity; (2) China maintains that all countries, big or small, rich or poor, strong or weak, should be equal; (3) China insists on its independence, and determines its attitude and response toward all international issues based on their individual merits; (4) China will never become an appendage to any superpower, nor will it seek an alliance with any; (5) China abides by the Five Principles of Peaceful Coexistence and works hard to establish, restore, and develop normal relations with any country in the world based on such principles; (6) China belongs to the Third World, and insists on taking the strengthening and development of its solidarity and cooperation with countries in the Third World as a basic point in its diplomacy; (7) China opposes the arms race; (8) China insists on practicing the long-term and comprehensive policy of opening to the outside world; (9) China observes the purpose and principles of the United 3

18

Deng Xiaoping 邓小平: Deng Xiaoping wenxuan 邓小平文选 [Collected Works of Deng Xiaoping] Vol. 2 (Beijing: People’s Publishing House, 1983), 415.

28

zhang

Nations Charter, takes part in various international organizations, and conducts active multilateral diplomatic activities; and (10) China attaches importance to communicating with people of all countries in the world.19 The report summarized the modifications made to China’s foreign policies since the initiation of reform and opening-up, and a foreign policy in harmony with that reform was established. From the late 1980s to the early 1990s, the Soviet Union experienced drastic changes and the world witnessed the end of the Cold War. China’s foreign policy was thus forced to withstand the test of major changes on the international scene, and did so without major changes, demonstrating unprecedented stability and continuity. This was an important indicator of the maturation of Chinese foreign policy. Based on these changes in circumstances, China’s government and leaders added some new ideas to their explanations of “independence” and “peaceful foreign policy.” These additions included further emphasis on China’s true abstention from alliances and unwillingness to act as the standard bearer for global communism or the leader of the Third World. They also voiced China’s intentions to pursue its own interests and to put great emphasis on its own sovereignty and security. Chinese policy indicated a refusal to bow to foreign pressure, and insistence that China determine its own path to reform based on its own circumstances. Seeking Balance in a Changing World—Building a Structure for Foreign Relations Traditionally, China’s diplomacy consisted of four main areas: relations with powerful countries, relations with neighboring countries, relations with other Third World countries, and relations with international organizations. However, whether examined from an overall perspective or from a specific angle, it is clear that there were long-term serious imbalances in China’s ­diplomacy. In the late 1970s and early 1980s, China began to work toward creating more balanced foreign relations. China’s development of a “comprehensive, multi-level” foreign policy by the latter half of the 1980s had already been made quite clear. In the 1990s, this effort was spurred forward even further by factors both international and domestic. By the turn of the century, China had basically established a framework for more comprehensive international relations. 4

19

Shierda yilai zhongyao wenxian xuanbian 十二大以来重要文献选编 [Collection of Important Documents since the 12th Plenary] Vol. 2 (Beijing: People’s Publishing House, 1982), 960–964.

Perspective Shifts During The Development Of Chinese Diplomacy

29

Behind this change in China’s foreign relations framework, one can observe enormous changes in the ideas and methods motivating China’s observation and analysis of the world. This change was a recognition of the diversity of the world, and a recognition of the fact that every component of this diverse world had areas of contention and struggle, but also areas of mutual dependence. In dealing with most international issues, countries, especially powerful countries, shared common interests. There was a need for cooperation, and cooperation was a real possibility. China’s leaders explained that China would manage its relationships with different types of countries based on overarching global trends as well as China’s own interests. China would no longer divide the world based on ideology, and would no longer divide the world into the categories of enemy, self, and friend to form alliances against the strategies of a specific country or countries. Under the guidance of these new ideas, the turn of the century saw China successfully establish a framework for comprehensive diplomacy that achieved unprecedented balance. Under this new framework, China not only emphasized relations with major powers and developed countries, but also relations with neighboring countries and a large swath of developing countries. China not only made efforts to establish bilateral ties with each individual country, but also took an active role in multilateral diplomatic activities. Every aspect of foreign relations thus began to exhibit new characteristics. China’s relationships with global powers had, for a long time, been important factors influencing the whole of China’s diplomatic framework. Before the reform and opening-up, China’s relations with global powers had, in some sense, actually been relations with neighboring countries. When dealing with these powers, issues pertaining to security were the primary focus. After the reform and opening-up, major changes occurred. First, economic issues began to play a more important role in China’s relationships with great powers. Second, both sides realized that regional and global issues increasingly required cooperation. To a large degree, China’s relations with neighboring countries determined the conditions of its border. In the early 1990s, China finally completed the process of normalizing relations with all of its bordering countries. Overall, relations with neighboring countries entered into a period of unprecedented closeness. Bilateral and regional cooperation on political, economic, and security matters gradually took shape and relations deepened. China also became increasingly active on the multilateral stage. In the mid1950s China’s multilateral relations had enjoyed a period of great efficacy that later came to a standstill. This changed when the UN legally restored China’s seat, and after 1990 China’s multilateral efforts again began to bear fruit.

30

zhang

Entering into the twenty-first century, China’s path toward achieving comprehensive international relations was more precise and clear. A new line of thinking, born from historical experience as well as basic necessity, thus took shape, based around “major powers as the key, neighboring countries as foremost, developing countries as the basis, and multilateralism as the stage of action.”20 The four aspects of China’s comprehensive diplomacy were closely matched and intertwined, forming a relatively well-coordinated whole. Gradual Improvement of the International Order— Cooperation and Mutual-Benefit In the first twenty years after new China’s founding, China clashed strongly with the existing international order. In the early 1970s this situation began to change. With the reform and opening-up, China basically became a beneficiary of the international order. Although China sought to establish a more fair and rational international order in terms of politics and economics, and believed that a multi-polar world was developing, the nation’s leaders also realized that this process would be long and tortuous, and that the final results would depend on how different issues developed and on changes in all sorts of power dynamics. China hoped to make this transformative process orderly, and to achieve these changes through cooperation as opposed to confrontation. At the beginning of the twenty-first century, China’s foreign policy exhibited several new attributes in terms of both content and form. First, the scope of diplomatic duties increased, expanding to deal with a whole series of regional and global issues, such as economics, security, human rights, and environmental protection. Second, China began to pursue partnerships with other countries and regional organizations and, as part of these partnerships, establish systems for regular meetings, negotiations, and dialogs at different levels, which allowed China’s diplomatic leadership to play an unprecedentedly important role and make indelible contributions. The world was still transitioning out of the collapsed bipolar order at the beginning of the twenty-first century. But regardless of what transpired abroad, China’s main goal was domestic, to use the first 25 years of the new century to fully establish a “moderately wealthy society.”21 China’s diplomatic efforts were thus intended to aid in this process. To this end, China’s leaders renewed their 5

20

21

Shiliuda yilai zhongyao wenxian xuanbian 十六大以来重要文献选编 [Collection of Important Documents since the 16th Plenary] Vol. 2 (Beijing: Central Document Press, 2006), 1036–1037. Shiliuda yilai zhongyao wenxian xuanbian 十六大以来重要文献选编 [Collection of Important Documents since the 16th Plenary] Vol. 1 (Beijing: Central Document Press, 2005), 1.

Perspective Shifts During The Development Of Chinese Diplomacy

31

efforts to promote peace, development, and cooperation as the international mainstream, and called for the building of a “harmonious world.” China’s diplomacy became more transparent, more pragmatic, more active. Looking at the developments of the first decade of this new century, it is clear that China’s earlier diplomatic achievements had laid the foundation for further developments. In response to changes internationally as well as to China’s own increasing strength, China’s foreign policy has experienced adjustments, while nonetheless maintaining stability. III Conclusions After tracing the changes in diplomatic thinking in the People’s Republic of China, one can draw four main conclusions: First, the most crucial elements of China’s foreign policy—the ideas of independence and peace—were put forth in the early days after the republic’s founding. Moreover, the ideas that would later become the cornerstone of China’s foreign policy, the five principles of peaceful coexistence, were first formulated only a short time after. These five principles went on to define the elements and values included in the more general concepts of independence and peace. These basic ideas, which had a profound influence on China’s diplomacy, proved able to stand the test of time and the challenge of actual implementation. There are two reasons for the continual development of these ideas. These ideas embodied the lessons learned and basic demands from China’s previous foreign engagement. Additionally, these ideas transcended the limits of the Cold War era and its ideological conflicts. Second, in the thirty years from the founding of new China to the beginning of the reform and opening-up, China’s main diplomatic accomplishment was the establishment of normal international ties. These efforts helped maintain China’s sovereignty and security, and established a foundation for later developments. The changes in China’s foreign policy after the reform and openingup, however, were pushed forward by reflections on the wide variety of diplomatic experiences and lessons from this era, as well as by considerations about the actual political and economic needs of China. Third, after the reform and opening-up, China’s foreign policy exhibited continuity, while also undergoing important changes. The changes in guiding thinking for Chinese diplomacy, as well as the new formulation of China’s relations with the world and new stance on important global issues, demonstrated China’s determination to leave behind the ideology-steeped revolutionary perspective in observing and dealing with diplomatic issues. China abandoned

32

zhang

its role as challenger to the global order and consciously took the initiative to participate in the existing international framework to pursue its own development objectives. During this process, China began to analyze international problems and conduct diplomacy from an increasingly global perspective. Fourth, if we are to view China’s revolutionary diplomacy as a product of a specific period and context in the overall development of China’s foreign relations, the position of nationalism has nonetheless been consistent. But even this stance has developed, as shown by the increasing depth in understanding of the people’s interests and national interests, the effort to more fully understand China and its partners, increasing rationality, and the growing ease of comprehension of China’s stances by outsiders. In the early days of the twenty-first century, China’s reform and opening-up entered into a crucial stage of development. The Chinese people increasingly feel that the international economic and political order is undergoing a deep and far-reaching transformation itself. This confluence of internal and external transitions will bring about a delicate era in China’s relationship with the world. If this transition is handled well, it is possible that China will transition into a global power relatively quickly and painlessly. If handled poorly, this process may be delayed for a very long time. To allow for this transition, China’s foreign policy decision-makers must make an objective estimation of themselves and preserve the balance between China’s objectives and China’s abilities. Even more importantly, these decision-makers must discern the trend of global development and keep in step with this process. China is still maturing. Continuing to learn from past experiences and lessons, and diversifying its knowledge, will allow China to better deal with future challenges. Works Cited Central Archives. Zhonggong zhongyang wenjian xuanji 中共中央文件选集 [CPC Central Committee Document Collection], Vol. 12. Beijing: Central Party School Press, 1986. Deng Xiaoping 邓小平. Deng Xiaoping wenxuan 邓小平文选 [Collected Works of Deng Xiaoping] Vol. 2. Beijing: People’s Publishing House, 1983. ———. Deng Xiaoping wenxuan 邓小平文选 [Collected Works of Deng Xiaoping] Vol. 3. Beijing: People’s Publishing House, 1993. Foreign Relations Ministry of the People’s Republic of China and CPC Central Document Research Center, eds. Zhou Enlai waijiao wenxuan 周恩来外交文选 [Collected Documents from Zhou Enlai’s Diplomatic Career]. Beijing: Central Document Press, 1990.

Perspective Shifts During The Development Of Chinese Diplomacy

33

Foreign Relations Ministry of the People’s Republic of China and CPC Central Document Research Center. Mao Zedong waijiao wenxuan 毛泽东外交文选 [Collected Works on Mao Zedong’s Foreign Policy]. Beijing: Central Document Press, 1994. Hu Qiaomu 胡乔木. Hu Qiaomu huiyi Mao Zedong 胡乔木回忆毛泽东 [Hu Qiaomu’s Memories of Mao Zedong]. Beijing: People’s Publishing House, 1994. Jianguo yilai Liu Shaoqi wengao 建国以来刘少奇文稿 [Documents from Liu Shaoqi since China’s Founding] Vol. 7. Beijing: Central Document Press, 2008. Li Shenzhi 李慎之, Zhang Yan 张彦. “Renmin de xin tong yafeihuiyi zaiyiqi—yafeihuiyi riji 人民的心同亚非会议在一起——亚非会议日记 [The Heart of the People Meeting Together with Asia-Africa Conference—Diary of the Asia-Africa Conference].” People’s Daily, June 4, 1955. Mao Zedong 毛泽东. Mao Zedong xuanji 毛泽东选集 [Selected Works of Mao Zedong], Vol. 4. Beijing: People’s Publishing House, 1991. Pei Jianzhang 裴坚章. Yanjiu Zhou Enlai——waijiao sixiang yu shijian 研究周恩来— 外交思想与实践 [Understanding Zhou Enlai—Foreign Policy Thinking and Practice]. Beijing: World Knowledge Publishing House, 1989. Shierda yilai zhongyao wenxian xuanbian 十二大以来重要文献选编 [Collection of Important Documents since the 12th Plenary] Vol. 2. Beijing: People’s Publishing House, 1982. Shiliuda yilai zhongyao wenxian xuanbian 十六大以来重要文献选编 [Collection of Important Documents since the 16th Plenary] Vol. 1. Beijing: People's Publishing House, 2005. Zhang Wentian 张闻天. Zhang Wentian xuanji 张闻天选集 [Collected Works of Zhang Wentian] Vol. 4. Beijing: Central Party History Press, 1995.

chapter 2

China’s Contemporary Foreign Strategy: Ideology, Basic Platform, Current Challenges, and Chinese Characteristics Shi Yinhong Abstract “Contemporary China” refers to the country’s post-reform and opening-up era. By now, it accounts for about half of the years since the founding of the People’s Republic. As researchers draw lessons from China’s foreign policy history, one of the most important tasks is to summarize and analyze the ideological basis and basic platform of contemporary China’s foreign strategy and grasp its main characteristics that are new compared with previous strategies. Moreover, especially as the People’s Republic is embracing its 60th founding anniversary, it is necessary to know the crucial top challenges for China’s domestic and external situation as it copes with the evolution of the world political and economic environment. Meanwhile, this article points out some Chinese traditions and characteristics that are born in and reflected by contemporary China’s foreign situation. It also examines China’s great contribution to world politics and history.

Keywords China’s thoughts on foreign strategy – ideology – peaceful development – scientific development outlook – Chinese characteristics

* The Chinese version of this article was originally included in Xu Zhenzhou 许振洲, Wang Weihua 汪卫华 eds., Zizhu lijie hezuo: zhonghua renmin gongheguo duiwai guanxi 60 nian 自主·理解·合作：中华人民共和国对外关系 60 年 [Self-determination—Understanding—Cooperation: 60 Years of Foreign Relations in the People’s Republic of China] (Beijing: Contemporary World Press, 2012), 205–221. Shi Yinhong is Professor at the School of International Studies, Renmin University of China. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_004

China ’ s Contemporary Foreign Strategy

35

“Contemporary China” in this article refers to the country’s post-reform and opening-up era since 1979. It accounts for about half of the history since the People’s Republic of China was founded in 1949. Contemporary China since the start of the reform and opening-up is a continuity of, and benefits from, the previous thirty years; meanwhile, it has also transcended the previous thirty years, because reform has become the most fundamental characteristic of contemporary China. About thirty years ago, late leader Deng Xiaoping (邓小平) launched the reform drive, which is a great innovation. Since then— especially since 1992 when Deng inspected the southern parts of China and preached new ideas on reform which led to the sustained explosive growth of the Chinese economy—the Chinese society has undergone various great changes. As reform has replaced revolution as the top priority of the country, China’s conduct and leadership style have also undergone decisive changes. I

Ideological Basis of Contemporary China’s Thought on Foreign Strategy

In the Post-Deng Xiaoping era, the ideology of contemporary Chinese political leaders regarding world politics and foreign policy has featured new richness and useful complexity. Traditionally, the ideology of the leaders in that respect is composed of three elements. First, visions on international relations and basic beliefs are embedded in Marxism, Leninism and Mao Zedong 毛泽东 Thought. The second element is China’s patriotism, or China’s modern radical nationalism. Third, pragmatic thought on international politics and foreign policy, i.e., the realpolitik concept is by no means only bound to Chinese or communists. Since the start of the reform and opening-up drive, a new element that can be called “neo-internationalism” has been added to the ideological framework of the Chinese political leaders. Moreover, compared with the Mao Zedong era, the intensity of contemporary nationalism in the minds of the Chinese political leaders has gradually decreased, except in regard to the necessity of China’s border territory sovereignty. Besides, many new concepts that serve the interest of China and the world as a whole, such as “new security concept,” multilateralism and “harmonious world,” have been added to the rationalism of the Chinese leaders. To be exact, neo-internationalism has emerged and developed against the backdrop of globalization and China’s increasing integration into the world system. Such neo-internationalism mainly features China’s sincere belief, and engagement in, multilateral cooperation, international organizations and international regimes. “New security concept” and “harmonious world” can,

36

shi

to a large extent, be seen as reflection of such neo-internationalism, which is also reflected in the multilateralism of China’s foreign affairs, already widely discussed in the Chinese media and academic circles. It is clear that China’s view on world politics has partly featured the same elements of rationalism or liberal internationalism in international relations. Neo-internationalism recognizes the overall anarchy in the international community and the interest difference between sovereign states and, at the same time, it also recognizes and emphasizes rule-based, win-win or multi-win international and cross-­ border exchanges. It stresses common interest, shared values and common rules among different countries engaged in world politics. In the same vein, compared with the Mao Zedong era, the intensity of China’s contemporary nationalism in the Post-Deng Xiaoping era has gradually decreased.1 Following the start of the reform and opening-up drive, especially since 1992 when Deng Xiaoping delivered several speeches in the southern parts of China to urge continued reform, China’s comprehensive strength has improved quickly and its international influence has rapidly increased. The nation has taken on a new look in terms of social and economic progress. Anger, rebel spirit and the idea of “down with imperialism” in China’s contemporary nationalism, which stems from China’s history of being bullied by foreign countries and its turbulent revolutionary past, have been increasingly replaced by poised confidence, prudent pride, strategic vision and composure built on a mixture of confidence and patience. Meanwhile, the pragmatic politics of China’s political circle has had some new inputs. Compared with what it was previously, the concept of national interest in the minds of the Chinese leaders has, to a large extent, featured international socialization—the amalgamation or assimilation of national interest and the common interest of the international community. The aim of China’s grand strategy in the reform and opening-up era features several strategic qualities, such as reasonability, definiteness, balance, limitedness, focus and sufficiency. Among them, balance, limitedness and focus are the most crucial. Experiences since the start of the reform and opening-up drive show that China’s elite leaders are fully aware of the tension, competition or even conflict of varied degrees between the many interests of a nation. Therefore, to map out reasonable basic State goals, it is necessary to try to strike a proper balance among those interests so that they each can be moderated properly to form a system of dynamically balanced strategic goals while 1 Suisheng Zhao, “Chinese Nationalism and Its Foreign Policy Ramifications” in Christopher Marsh and June Teufel Dreyer, eds., U.S.-China Relations in the 21st Century (Lanham, Maryland: Lexington Books, 2003), 63–84.

China ’ s Contemporary Foreign Strategy

37

making sure the basic strategic goals are prioritized while not excessively jeopardizing other major targets. Facing various distractions, the Chinese leadership has successfully avoided overstretching or under-developing those goals which are fairly difficult to achieve, so that China can manage to “hide its capacities and bide its time” while being active and assertive when it is necessary. In this way, it has ensured China’s continual rise in a very important aspect. Historians in the future could possibly come to the conclusion that the Chinese political leaders in the reform and opening-up era are highly thoughtful and perform well in terms of strategy and national policy if they judge those leaders from the fundamental perspective of rational politics; in general, they are no inferior to those outstanding State and political leaders recorded in Chinese and overseas strategic history. The ideological basis of China’s perspective on foreign strategy in the reform and opening-up era is truly rational, pragmatic and moral. It is fully reflected in the element of “harmonious world,” which is quite comprehensive and only recently added to the ideological framework.2 The concept of “harmonious world” is first built on the changes in the basic nature of world politics. Compared with the past, the value of war as an effective tool in safeguarding national interest is and will be decreasing. The normal priority in international relations has increasingly shifted from territorial-military security to economic issues and soft power. A country’s performance in economics, culture, foreign affairs and morality and justice has increasingly outweighed its military performance. The level and influence of international economic interdependence has been on the rise and, meanwhile, various non-traditional cross-border threats and problems facing the global community as a whole have become ever more severe. That is to say, “harmonious world” is not a purely fanciful ideal, but a major trend that is happening as the basic nature of world politics evolves. It is most crucial in terms of scientific and historical significance. The concept of “harmonious world” stresses pragmatism, not only in terms of science, but also in China’s real national interest. Since the start of the reform and the opening-up process China’s rise, most of the time and in most aspects, has predominantly depended on peaceful international exchanges and soft power in the broad sense, especially in peaceful trade, international consultation and “smiling diplomacy.” This is apparent in China’s foreign relations history since 2 Shi Yinhong 时殷弘: “Chengjiu yu tiaozhan:zhognguo hepingfazhan hexieshijie linian yu duiwai zhengce xingshi 成就与挑战：中国和平发展和谐世界理念与对外政策 形势 [Achievements and Challenges: China’s Peaceful Development, Harmonious World and Foreign Policy Situation], Dangdai Shijie Yu Shehui Zhuyi 当代世界与社会主义 [Contemporary World and Socialism], 2 (2008), 81–85.

38

shi

the start of the reform and opening-up drive and, therefore is indisputable. Basic strategic common sense in contemporary international politics indicates that a country’s publicization of policy and its concrete policy actions are equally important. II

Basic Platform of Contemporary China’s Thought on Foreign Strategy

Compared with the Mao Zedong era, after the reform and opening-up, the basic platform of China’s thought on foreign strategy has changed. It can be summarized most concisely as peaceful development. Peaceful development directly means two things. First, China wants to develop into a major world power; second, while achieving that goal, China wants to avoid any full-scale war among major powers or conflicts like the Cold War. China will try to become a leading power that can maintain its status continually instead of becoming a major power that falls soon after its rise, which is not rare in contemporary world history. Peaceful development obviously benefits the basic grand strategy. For most of the time and in most aspects, peaceful development predominantly depends on soft power in the broad sense (i.e., peaceful, non-military resources and powers) to act. The characteristics of all those powers are non-violence, gradualism and accumulation, widespread infiltration and, to a large extent, mutual benefit. Relatively, it may encounter the least resistance or obstruction, it has the lowest cost and it achieves the most acceptable results. Therefore, it combines the benefits of efficacy and economy. Moreover, peaceful development has quite a solid foundation as many parts of the basic nature of world politics are undergoing changes. Regarding some exceptionally difficult issues that are often subject to setbacks, China should make adjustments in accordance with the development of the situation when it carries out its foreign relations. Such adjustment measures are especially important for the strategy of peaceful development. They can reflect the characteristics of perseverance, patience and flexibility that are embedded in the policy goals. Contemporary China’s stance towards the Korean Peninsula issue is a very typical case. Seen from an overall perspective, a major decisive incident is that China has risen to become a giant economic power with exceptional international economic links and it has acquired large amounts of resources to exert unprecedented regional political influence in terms of scale and efficacy. It is almost doubtless that in the future, China will,

China ’ s Contemporary Foreign Strategy

39

sooner or later, become the player that can have the most influence in the Korean Peninsula. Despite some mistakes and defects, seen from the main aspects of the issue, China’s policies in dealing with North Korea and South Korea for many years in the past are conducive to the country’s reservation, accumulation and build-up of its influence in the peninsula. While unconditionally sticking to the nuclearfree principle in the peninsula, safeguarding peace and stability of Northeast Asia, and opposing owning and developing nuclear weapons by North Korea, China has also avoided totally alienating North Korea for the purpose of keeping the peninsula nuclear-free. It has tried every means to pursue normalization of the damaged bilateral relations and, through exceptional perseverance and sustained patience, sought to solve difficult problems created by North Korea. China is consistently North Korea’s largest aid provider, maintaining trade and investment relations with the country thus leading other countries in terms of economic exchanges with North Korea. Regarding South Korea, apart from actively developing bilateral economic relations (thus becoming the largest trade partner of South Korea), China has also sought to control and reduce historical differences and resolve other conflicts between the two countries. In the past two years, China has sought to further develop bilateral political relations. China’s policy efforts towards North Korea and South Korea, which largely advance together, indicate that China is using its unique patience and endurance to composedly seek its long-term interest in the peninsula. Its longterm interest is related to the peace, stability and economic development of the peninsula and China is committed maintaining and expanding room for policy choices in the future. “Distance tests a horse’s stamina,” as the Chinese saying goes. This is the best testimony for the political prospects of the peninsula and China’s strategy of peaceful development.3 Power politics remains a main dimension of world politics. The deep-rooted and inherent conflict between the core-periphery relations in political economics and the global capitalist regime remains unchanged and territorialmilitary security remains essentially meaningful. Advanced armed forces and strong national security will remain a necessary safeguard for a country facing such security threats as military power. Justice in the international political and economic arena remains a basic duty for all countries pursuing rational interests while cherishing the feeling of fairness. Moreover, as they face globalization, developed strong powers and cross-border capital, developing 3 Shi Yinhong, “China and North Korean Nuclear Issue: Competing Interests and Persistent Policy Dilemmas,” Korean Journal of Defense Analysis, 1 (2009): 42–44.

40

shi

countries in particular suffer from many inherent or newly developed vulnerabilities. Prevention, control and reduction of those vulnerabilities is a priority for self-independence, national security and social soundness. It is also closely related to the dual task of self-reform and reform of the world. The Chinese government and people are yet to forget or ignore that, and they know that they should not deal with power politics lightly. III

Decisive Challenges China Currently Faces

Roughly speaking, a nation’s basic task or most important experience is keeping up with the times—or, innovation-based adjustment to adapt to the changing world. Creative adaptation is the most important strategic quality for dealing with both domestic and external issues. Regarding contemporary China, its task is to break the bottlenecks (such as serious wealth, urban-rural and regional gaps, ecological degradation and the unhealthy economic growth pattern) that have co-existed and intertwined with the great achievements accomplished in the reform and opening-up era. It requires real political will and courage to resolutely and seriously handle those problems. Similar to key junctures following the launch of the reform and opening-up drive, now it is necessary for China to bear in mind the dynamism of the overall world political situation and trends (i.e., peace and development). It should bear in mind the necessity to cater to that dynamism through creative adaptation and it should continue to bravely explore, experiment with, examine and adjust its strategies. Based on his consistent thoughts about the long histories of many civilizations of the world, Arnold Toynbee, a great thinker, solemnly put forward the following instructions in his masterpiece A Study of History: The growth of a civilization is a continuous process and to make it lasting, an impulse is needed to cope with the challenger and provide incentive for responding to the new challenge. Citing the famous tragedy by Aeschylus 2,500 years ago, Toynbee called the impulse—an impulse that must be there to successfully respond to new challenges and achieve creative adaptation—the Prometheus Impulse.4 In short, the basic guarantee for historic success lies in the Prometheus Impulse. What is most important for China currently and in the coming years is to make China’s development truly healthy and sustainable by transforming 4 Arnold Toynbee, A Study of History (New York: Weathervane Books, 1972), 127–140; Quoted parts in pp. 131, 132, 135, 136.

China ’ s Contemporary Foreign Strategy

41

its current economic development pattern. The unhealthy economic growth pattern is the common source of all of China’s bottleneck problems, including both domestic and external challenges. In that process, the scientific development outlook, put forward by former President Hu Jintao (胡锦涛), should be the guideline while China’s relatively high economic growth rate and the reform and opening-up drive should be maintained. After crossing that threshold of restructuring, China will rise higher in the global political arena. A strategic concept and a corresponding plan for carrying out the strategy should be figured out resolutely, i.e., while we should race against time to cope with the most urgent tasks, we should also seize every minute to carry out the scientific development outlook. One of the basic requirements for the correct grand strategy is to resolutely take the most important and most prioritized interests or targets as the focus of attention and try to eliminate or control all possible distractions from ultimate goals. The global financial crisis and economic recession constitute profound psychological and ideological shocks and the world political culture and its values system have suffered heavily from the shocks. In many countries, the reputation of the so-called “Anglo-Saxon Economic model” (or the “Washington Consensus” if we look at it from the perspective of political economics and ideology) has been battered widely. In China, such a loss of reputation is more serious than in most other countries, especially because given China’s confidence in its amazing economic achievements and their fundamental sources, the country has mainly behaved according to its own way, or the Chinese characteristics; moreover, it is also because China has tailored Western economics to Chinese realities and only taken what truly suits its concrete conditions. In reality, since 2003, China’s top leaders had increasingly emphasized that it would be unsustainable and increasingly dangerous to tolerate a lack of social justice, balanced development and environmental protection as its economic growth soared full steam ahead. This situation was created by a laissez-faire market economy, narrow-minded addiction to GDP and stubborn integration into the economic globalization process. The global financial crisis and economic recession have only fortified China’s crucial belief that it must blaze a new trail with Chinese characteristics, which is different from the path of Western liberalism or any of its Chinese versions, while applying those positive experiences on market economy and its healthy social implications that have been acquired domestically and in other countries. Such a belief in Chinese characteristics is different from the country’s traditional Confucian belief. The Confucian belief takes “Chinese values” as natural and universally applied values. Contemporary China’s belief in the characteristics can be seen as nearly exclusive and it does not suppose that what is best for China will

42

shi

­ ecessarily be best for the world, just as it refuses to believe that what is best n for the u.s., Europe or the former Soviet Union best serves China’s interest. Therefore, from a global perspective, the basic challenge confronting the major global powers lies in their ability to make their respective societies develop a truly sustainable living and development mode. It also points out the direction in which the world can find solutions to the main problems. There is yet no answer as to which of them will make it or become the first to make it, but it will, in the longer term, determine the world disposition and order. That is to say, in the foreseeable future, the most fundamental rule for competition in the world political and economic arena is that the winner would sustain its prosperity while the loser is set to fall. IV

Tradition and Beyond: Chinese Characteristics of Contemporary Foreign Policy

Contemporary China is continuous with Chinese tradition but it goes beyond the tradition. It has transcended the tradition through reforming its ­domestic and foreign national policies; in the meantime, it carries on the Chinese tradition in a complicated, subtle and profound way, and therefore remains Chinese and has Chinese characteristics. Here we can discuss some concepts and behavior types, which are fundamentally related to the country’s foreign conditions and policies but with broader implications. This discussion will highlight their traditional Chinese characteristics and it will partially summarize and anticipate China’s national development direction and foreign policy orientation. “Safeguard”5 is a central concept that has been deeply embedded in the history of traditional China and contemporary China’s reform practices. “Safeguard” is a critical and difficult task because it requires maintaining the unity of the giant country of China and while making it largely stable and peaceful. Traditionally, it stresses how past Chinese dynasties coped with foreign invasion, conquest and resurgence. For contemporary China, it highlights the perseverance, flexibility and capability of Chinese political leaders in such great and long-term efforts of reform; in other words, although the reform efforts have been accompanied by major repercussions, China can still maintain national unity, a stable political situation and even social prosperity, which is starkly different from what happened in the Soviet Union when it conducted 5 Wang Gungwu, Ideas Won’t Keep: The Struggle for China’s Future (Singapore: Eastern Universities Press, 2003), 4–5.

China ’ s Contemporary Foreign Strategy

43

reforms some years ago. It is the so-called “resilient authoritarianism”6 that has been acknowledged by Andrew J. Nathan, one of the most famous American scholars on China issues. Such resilient authoritarianism can be seen as “safeguard” through creative adaptation, not “safeguard” through rigid imitation. For contemporary Chinese political leaders, a basic implication of “safeguard”— also the most meaningful and basic implication in the traditional sense—is ensuring that China’s border areas, including Tibet, Xinjiang and Taiwan, are kept within China in the long-term. No one should doubt their resolve in that regard and the support the Chinese people will provide for this goal. One of the most traditional Chinese characteristics can be called the concept of “biological cycle that controls everything in the universe.” Its political version is the concept of dynasty cycle, i.e., political success and prosperity is inevitably accompanied by decline and ruin.7 For contemporary Chinese political leaders, this concept is quite important, especially given their personal experiences of the improper or wrong management of the State in the pre-reform and opening-up era as well as the difficult changes brought by reform. For example, at a meeting marking the 30th anniversary of the Third Plenary Session of the 11th Central Committee of the Party, Hu Jintao made the following remarks: Neither the progressiveness of the Party nor its status as a ruling party will be eternal or unchangeable; progressiveness in the past does not necessarily mean progressiveness now and progressiveness now does not necessarily mean progressiveness eternally; what is owned in the past does not necessarily mean what is owned now and what is owned now does not necessarily mean what is owned forever. Such understanding and awareness has greatly increased the consciousness of China’s political leaders as to how much good they have brought to the Chinese people, and, therefore, greatly strengthened their alertness and diligence, making them more prudent, hardworking and innovative in policy-making. Meanwhile, it has made them resolved and willing to sincerely claim to their neighbors and the world as a whole that China will never engage in hegemony or try to restore the Chinese Empire of any form. The stress on ethics is part of the Chinese characteristics and deeply rooted in the Chinese tradition. In terms of concerns of the leadership and the political platform of the government, the stress on ethics by contemporary China is 6 Andrew J. Nathan, “Authoritarian Resilience: Institutionalization and the Transition to China’s Fourth Generation” in Christopher Marsh and June Teufel Dreyer, eds., U.S.-China Relations in the 21st Century (Lanham, Maryland: Lexington Books, 2003). 7 Wang Gungwu, To Act Is to Know: Chinese Dilemmas (Singapore: Eastern Universities Press, 2003) 89.

44

shi

reasonable domestically. Internationally, what has accompanied China’s rapid rise is the concept of “harmonious world,” which stresses the four characteristics of the traditional Chinese civilization: focus on the people and respect of people’s dignity and value; perseverance and continual reform and innovation; social harmony and cooperative mutual help; and kind treatment of neighbors and friendly exchange. When dealing with external relations, China has become almost uniquely addicted to its domestic targets. Such a Chinese characteristic can greatly help contemporary China’s “strategic concentration.” It helps China’s outstanding performance in economic growth in the recent two or three decades. It also promotes social stability and the strategic culture of China’s foreign policy, which is largely conservative and prudent. It could also possibly aid China’s efforts to acquire its external influence and power in the future. For Deng Xiaoping and leaders after him, domestic economic growth and social stability, which have been acquired through reform and “safeguard,” are ideology itself. Admittedly, given China’s strong rise and the ensuing fast increase in the reliance of its domestic growth on external markets and resources, opportunities for China to expand its international influence, such as the current global economic crisis, remain naturally attractive for the country to promote its national pride. Therefore, it is not entirely impossible that the external situation leads to basic change in China’s external stance so that it changes its rule of predominant domestic priority. Despite that possibility, given its long strategic culture of prudence and patience, plus the prolonged domestic difficulties in a giant developing country, China’s external stance will be subject only to mild adjustments and decent expansion. As a newly developed Chinese characteristic, contemporary Chinese political leaders (and, through them, most of the Chinese people) cherish a truly important and firm belief in the Chinese characteristics themselves (China’s national conditions) and their predominant significance in “safeguard,” reform and development. Their success so far provides a source of patriotism in contemporary China. The great success of “socialism with Chinese characteristics” has restored the confidence of the Chinese people, which was lost in the disastrous Cultural Revolution and the previous glaring success of the Western countries (which led to the proud claim of “the end of history” in the West). Such confidence has risen to a new height against the backdrop of global financial crisis and economic recession, because it greatly weakened the prestige of the Western countries, and significantly increased their dependence on China. Its influence on China’s foreign policy is apparent. What is more apparent than the change in political leaders and the government is the change in the Chinese people. In the words of a famous journalist from NBC of the u.s.,

China ’ s Contemporary Foreign Strategy

45

who once traveled for three weeks in China, the Chinese people “have adopted the attitudes that made America great—the optimism, dynamism and patriotism, the can-do spirit, the determination to leave the next generation better off than one’s own . . . China, in some respects, is becoming more assertive.”8 The foreign policy implications could be relatively indirect, but its influence will nevertheless be diversified and ultimately powerful. However, prudence, or even the above-mentioned concept of “biological cycle that controls everything in the universe,” has been a regular element in determining the behavior and foreign policy direction of contemporary China’s political leaders. Moreover, this will remain unchanged at least in the next generation, because one of the Chinese characteristics that has long been in the memory of the Chinese leaders and people is “strong China, weak China.”9 This is a permanent and basic theme of China’s domestic and foreign policies since the start of reform and opening-up and it is largely the same to the Chinese people and outsiders. While facing its likely prosperous prospects in the future, China will also face several major and severe challenges. However, the basic challenge remains China’s vast geographical dimension and large population. Perhaps it is the most significant variable in regard to China’s domestic tasks, world status and foreign policy situation. Whether it is in traditional China, modern China or contemporary China, it is the basic source of its power and the important foundation for China’s pride; meanwhile, it is also always a major cause of the difficulties China is experiencing and a constant reminder that it can never cease to stride forward. It is a difficult challenge, but China will rise to meet it. V Conclusion In retrospect, researchers who look back at China’s history in the past 60 years, summarize China’s modern revolution, and put China’s modern history in the grand context of world politics and history, would find its great contribution to world politics and history. This contribution will increase China’s confidence and make it aware of the basic direction in which it should develop. First, through the great revolution and the ensuing self-independent reform and opening-up, the new China has eliminated its old image. From the Opium War to the years before 1949, China had remained weak, attracting strong 8 Martin Fletcher, “The Chinese Dream Has Replaced America’s,” The Times, August 23, 2008. 9 Wang Gungwu, “Strong China, Weak China,” in Wang Gungwu, To Act Is to Know (Singapore: Eastern Universities Press, 2003), 108–125.

46

shi

­ owers in America, Europe and Japan to engage in imperial encroachment, p parceling activities, competition and even major wars in China and its peripheral areas. Moreover, those activities twice helped trigger worldwide turbulence and major conflicts, such as the invasion into and looting of China by Western powers during the First and Second World Wars. However, the founding of the new republic in 1949 changed all this; the unity brought by China’s revolution and safeguarded by the ensuing six decades of hard work and the increased national strength have eliminated a major cause (China’s weakness) of these historical events. In reality, in the post-World War II era, China’s development has made great contributions to the world making it far more peaceful, stable and fair than before. Given that contribution, the establishment and rise of the republic was indispensable for major improvements in or the progress of world politics. Second, the chief goal of the republic, which was established through revolution, is to achieve the full independence of China. After the founding of the new republic, the new China was forced to get involved in the Korean War—although it was resolute in aiding North Korea, and surprised the almost all-powerful United States in the war. Later, in the late 1960s, China sent hundreds of thousands of supportive combat troops to indirectly get involved in the Vietnam War against the United States and served as the home front for the war. A decisive result of the above series of steps is the defeat of the American ambition of building an East Asian empire. The Chinese revolution, as the Americans said at that time, made the United States lose China. Moreover, if China did not provide crucial support for North Korea and Vietnam in these two wars and if the United States had won the two wars, then there would be little doubt that the East Asia where we live today would have been an American East Asian empire. Apart from that, the Chinese revolution, together with the independent role of the new republic in world politics, has weakened the advantage of the United States in other parts of the world, making it impossible for the United States to achieve the great hegemony that it would have otherwise gained. Third, due to the independence of the Communist Party of China and the People’s Republic of China and China’s long resistance against the hegemony of the Soviet Union, including blocking and damaging the control and expansion activities of the Soviet Union in other parts of the world, China actually thwarted the attempt of the Soviet Union to expand into a socialist-imperialist empire. This expansion attempt lasted for about 25 years, from the formal break-up of the two parties in 1960 to 1985, when the Soviet Union’s foreign policy changed after Mikhail Gorbachev took power. This was very significant

China ’ s Contemporary Foreign Strategy

47

as it helped the independence and self-reliant development of all countries that were under the control of the Soviet Union and had previously suffered from the menace of its expansion. Above all, it was helpful for China’s independence and development. Without China, the Soviet Union hegemony and the Soviet Union Model, which is now moribund, may have been spread to and imposed on China and many other countries as Moscow was very ardent in exporting its power and development model. The independence and relative healthy development of those countries would have been at stake. Fourth, since the Bandung Conference in the 1950s, China had been the main initiator and promoter of various movements in the Third World. Until now, it remains active in safeguarding the basic interests of the large numbers of developing countries. Meanwhile, it has refrained from interfering with their internal affairs while treating those small and weak countries equally. Therefore, China has promoted and will continue to promote progressive change in the world power structure, global political culture and international norms. Compared with previous years, the international law principles of sovereign right, national independence, non-interference in internal affairs have become far more established and, meanwhile, such international laws and moral norms forbidding colonialism, racism and racial discrimination have been established. The new trend is, to a large extent, attributable to China’s international role, including its launch of the movements in the Third World and its insistence on promoting the interests of the developing countries. As an entirely independent and the largest developing country, China’s behavior contributes greatly to the changing trend of international political structure, culture and norms. It also makes a great contribution to the start of a new chapter in the world history, i.e., a history co-written by non-Western countries. Fifth, given the basically successful reforms since 1978, together with its fast and great development that has constantly surprised the world, China has raised the living standards of a population that accounts for one sixth of the world’s total. In greatly improving the economic and social conditions of such a vast country as China, China has remarkably promoted the stability and prosperity of the world. Suppose more than 1.2 billion people still lacked food, housing and access to jobs—this situation would definitely make the world less successful and progressive than what it is now. If an additional 1.2 billion people in the world suffered from weak economy and social backwardness, then the world would become very unhealthy, and uncomfortable, or, in figurative terms, it would have become like a person who is mentally nervous and physically disgraceful. Apart from that, China’s development and reform has provided a new and significant potential provider of public good

48

shi

for the international community, i.e., China’s contribution to world finance, trade and security has increased greatly. Moreover, thanks to its new understanding of the world and its strongly increased national power since the start of the reform and opening-up, China is striding towards the threshold of serving as a main provider of public good for the international community, especially in the fields of international finance, trade and East Asian security. The new republic is moving fast in the direction as indicated by late leader Mao Zedong’s comment: China should make quite a big contribution to the mankind. Sixth, China has, in a sense, thwarted United States empire for the second time, because it has consistently stuck to independence and, since 1978, conducted reform to bring about rapid economic development. If the United States remained unchallenged in the world from the collapse of the Soviet Union and the Gulf War, it might have been, as many Americans have believed, a singular world or the end of history. However, China’s abrupt rise, which has become one of the most important topics of the world, means that this imaginary scenario, which was once very close to reality, has failed to materialize. In the wake of the collapse of the Soviet Union and the Gulf War, the United States had once been very close to the status of a “universal monarchy,” a term used from the 16th to the 19th century in Europe to describe a universal empire. Even in China, quite a few people believed that and were ready to accept this change at that time. Now things are very different, in large part due to China’s rise. Therefore, China’s rise, reform and development can, to a large extent, can be seen as a historic triumph over the United States for the second time. To sum up, China has managed to thwart a possible American empire twice and also thwarted a possible Soviet Union empire. It indicates that so long as the giant country of China can remain independent, it would be impossible for any country to become a “universal monarchy.” Considering the above-mentioned facts, it is fair to say that if China does not fare well, the world will suffer, and if China fares well, then no one would be able to control the world. Last but not least, the most important contribution China has made to world politics and political culture is the clear indication to the world that Western modernization is by no means the only way of realizing modernization. China’s successful revolution under the leadership of Mao Zedong and its reform and development under the leadership of Deng Xiaoping and the two generations of leaders following him indicate that the future of a country mainly hinges on the self-independent practices by people in that country. Nothing can replace these independent processes; only the leaders and people of that country can decide the solutions to their problems or play a dominant role in that process.

China ’ s Contemporary Foreign Strategy

49

Nor can any country claim that what is good for that country will be good for other countries or even the world as a whole. It is a great example that China has set and is unprecedented in modern history. It indicates, in particular, to people of the non-Western countries that they do not need to blindly follow the development mode of the Western world and the experiences or beliefs of London, Washington or Moscow cannot replace their own efforts to explore, search for and summarize their own experiences. China is a vast country with long history, solid cultural foundations and unique traditions. It has almost never seen its people never bow to others, whether physically or spiritually, in the past thousands of years. The Communist Party of China and the People’s Republic of China further enhanced the independence awareness of the Chinese people. Mao Zedong and Deng Xiaoping have been very similar in that regard, which is extremely important. China’s revolution of 28 years, its first thirty years after the founding of the new republic and the thirty years after the reform and opening-up have been also very similar to one another. It is fair to say that there has been a universal theme in the three parts of contemporary Chinese history: going its own way. Moreover, China uses its fundamental experiences and its large scale to claim to the world that people of other countries can also go their own way. In a sense, it can be seen as the most important contribution that China has made to the world, and it should be a contemporary Chinese characteristic that consistently dominates China’s foreign relations direction and its foreign strategies. Works Cited Fletcher, Martin. “The Chinese Dream Has Replaced America’s.” The Times, August 23, 2008. Nathan, Andrew J. “Authoritarian Resilience: Institutionalization and the Transition to China’s Fourth Generation” in U.S.-China Relations in the 21st Century. Edited by Christopher Marsh and June Teufel Dreyer. Lanham, Maryland: Lexington Books, 2003. Shi Yinhong 时殷弘. “Chengjiu yu tiaozhan:zhognguo hepingfazhan hexieshijie linian yu duiwai zhengce xingshi 成就与挑战：中国和平发展和谐世界理念与对外 政策形势 [Achievements and Challenges: China’s Peaceful Development, Harmonious World and Foreign Policy Situation]. Dangdai Shijie Yu Shehui Zhuyi 当代世界与社会主义 [Contemporary World and Socialism], 2 (2008). ———. “China and North Korean Nuclear Issue: Competing Interests and Persistent Policy Dilemmas.” Korean Journal of Defense Analysis, 1 (2009).

50

shi

Toynbee, Arnold. A Study of History. New York: Weathervane Books, 1972. Wang Gungwu. Ideas Won’t Keep: The Struggle for China’s Future. Singapore: Eastern Universities Press, 2003. ———. To Act Is to Know: Chinese Dilemmas. Singapore: Eastern Universities Press, 2003. Zhao Suisheng. “Chinese Nationalism and Its Foreign Policy Ramifications” in U.S.China Relations in the 21st Century. Edited by Christopher Marsh and June Teufel Dreyer. Lanham, Maryland: Lexington Books, 2003.

chapter 3

China’s Dual-Identity Dilemma and Its Countermeasures Li Shaojun Abstract The international system, as an overall structure for interactions among actors, is the environment and stage for implementation of China’s foreign policy. In this system, identity is a fundamental factor determining both China’s international position and interests and ways to achieve these ends. China has long stressed that it is a “developing country,” but with the rise of its national strength, China increasingly is viewed today as a “great power.” Because “developing countries” and “great powers” utilize different mechanisms that produce different results in their international interactions, China now faces a dual-identity dilemma. In fact, with its image as a “great power” and the beginning of its interactions with the outside world, China is now facing a negative international environment. To resolve this dilemma, on the one hand, China should subjectively recognize its true identity and the influence of the various mechanisms on its international interactions; on the other hand, it should more effectively resolve the issue regarding the objective coexistence of these different mechanisms. In terms of its foreign relations, China should deal with the influence of the main mechanisms embedded in the international system, including power politics, international institutions, and the concept of construction, so as to properly implement power-based diplomacy, institutional diplomacy, and public diplomacy. Only by using the advantages of the systemic effects of the international system and avoiding its disadvantages in dealing with the problems of the development of power and the shaping of its national image, will China be better able to achieve its national developmental objectives.

* The Chinese version of this article was published in Shijie jingji yu zhengzhi 世界经济 与政治 [World Economics and Politics], 4 (2012). Li Shaojun is Professor in the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. His email address is [email protected]. The author is grateful to Nancy Hearst of the Fairbank Center at Harvard University for revising the English version of this chapter.

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_005

52

li

Keywords China’s identity – international system – China’s diplomacy

The overall structure of the international system as the result of inter-­ actions among actors is not only the environment and stage upon which China carries out its foreign policy, but it is also the source of the resources and conditions that China can take advantage of. In the international system, identity is an essential factor determining one’s foreign-policy behavior. China’s interests, and its approach to achieve its interests, depend on the positioning of its identity. But today China is increasingly revealing a dual identity in terms of its interactions in the international system. China itself insists that it is a “developing country,” but the international community generally views it as a “great power.” Because these two identities utilize different mechanisms and result in different consequences in terms of international interactions, such a dual identity presents a dilemma. China can only resolve this dilemma through diplomacy. China’s identity dilemma is basically a problem related to its position in its participation and interactions in the international system. Its resolution depends not only on determining the source of the dilemma but also determining the appropriate countermeasures. This can be achieved by analyzing the effects of the mechanisms within the international system. Ι

China’s Identities and Interests

Since the 1980s China has clearly identified itself as a developing country. Based on this identity, and in the course of the reform and opening-up of its policies, its economic construction has developed rapidly. Chinese GDP became the second largest in the world in 2010, and, correspondingly, its gap with the United States in terms of economic output declined. U.S. GDP was 15 times that of China in 1978, eight times that of China in 2000, but by 2010 it was only 2.5 times that of China.1 Accompanied by the rise of its economic status and the growth of its international influence, some elements of China’s identity as a great power are causing growing concern. For example, there are those who view China’s rise within the context of a revival of the Chinese civilization with 1 World Bank, “World DataBank,” http://databank.worldbank.org/ddp/home.do?Step=12& id=4&CNO=2.

China ’ s Dual-Identity Dilemma and Its Countermeasures

53

regards to its territories, population, trade, foreign exchange reserves, as well as its position as a permanent member of the UN Security Council, a nuclear power, and a main shareholder in both the World Bank and the IMF. In sum, China is regarded as a “great power” rather than a “developing country.” With respect to China’s “great-power” status, in 2011 the Pew Research Center polled 22 countries asking whether “China will overtake the United States as the world’s leading superpower.” The data revealed that in eight countries, including France, Spain, the U.K., Germany, and China, more than half of the respondents answered in the positive. In the 14 other countries, the responses in eight countries were more positive than negative. It is worth noting that the U.S. responses are included in the latter set of responses.2 The survey results reveal that, to a considerable extent, China’s “great-power” status is confirmed by international public opinion. Even some Chinese regard their country as a “great power.” Obviously, the positioning of China’s “great-power” status has become a reality within public opinion. However, if one looks at China from the perspective of per capita development rather than from a holistic view, one finds that China’s level of development is not high. According to the 2010 World Bank rankings, China’s per capita GDP ranked 100th in the world, slightly lower than that of Angola, in the lower-middle rankings of the 190 countries included in the statistics and less than one-tenth that of the United States.3 In the 2010 rankings in the United Nations’ Human Development Report, the Human Development Index placed China at the middle level of the 169 countries included.4 These two figures reflect the fact that despite China’s huge economic output and its potential for great achievements (for example, in the aerospace industry), there is still a sizeable human development gap between China and the developed countries. This is an indication that, as in the past, China is still a “developing country.” Due to the dual identity, on the one hand, the image of a “great power” is of growing concern. On the other hand, the reality is that China is still mired in poverty. As a result, some commentators claim that in the future as China becomes the world’s largest economy, it will be a very “strange” superpower. It is generally assumed that the world’s largest economy should also be one of the world’s richest countries. In the case of China, however, even though

2 Pew Research Center, “China Seen Overtaking U.S. as Global Superpower: U.S. Favorability Ratings Remain Positive,” July 13, 2011, http://www.pewglobal.org/2011/07/13/chinaseen-overtaking-us-as-global-superpower/2/. 3 http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2. 4 UNDP, Human Development Report (2011), http://hdr.undp.org/en/.

54

li

it has a large economy, it is also very poor when compared with the Western countries.5 For many years the academic community has been concerned about China’s dual identity problem. For example, in 2001 Wu Xinbo (吴心伯) explained that China was facing a dual-identity syndrome with regards to its foreign affairs. Wu states that “as a great power, China would naturally like to possess more influence in international affairs” and become “a major player in the world community,” but “as a poor country, China has neither the material strength nor genuine enough interest to play a role commensurate to its great-power selfimage. . . . This dual-identity syndrome creates a dilemma for China’s foreign policy behavior.”6 In recent years, along with significant improvements seen in China’s national strength, the issue of its dual identity has attracted increasing attention. For example, Guo Kai7 and Gustaaf Geeraerts8 discuss the contrast between China’s two identities, the contradictions between China as a challenger to or as a defender of the international order, and the confusion about how to achieve a balance between maintaining the right to development and a commitment to the responsibilities as a great power. These studies mainly refer to the difficulties in China’s diplomatic decision-making. In fact, upon further reflection, based on behavioral logic, the two are incompatible. Due to the influence of the two identities, China not only faces difficult choices, but it must also deal with consequences that may be counterproductive to its national interests. It is this latter point that is the crux of China’s “dilemma”. As a developing country, China’s fundamental interest is to further its development. To achieve this goal, as in the previous period of reform and openingup, China must focus on domestic construction. As Hu Jinta (胡锦涛) has said, we should always bear in mind that development is our top priority, and we should persist in taking economic construction as our central task, while concentrating on construction and focusing on development.9 The logic of this development strategy corresponds to China’s identity as a developing country.

5 Gideon Rachman, “When China Becomes Number One,” Financial Times, June 6, 2011. 6 Wu Xinbo 吴心伯, “Four Contradictions Constraining China’s Foreign Policy Behavior,” Journal of Contemporary China, 10, 27 (2001): 293–294. 7 Guo Kai 郭凯, “Zhongguo de shuangchong shenfen 中国的双重身份 [China’s Dual Identity],” Oriental Outlook, 46 (2010), http://www.qikan.com.cn/Article/lwdf/lwdf201046/ lwdf20104619.html. 8 Gustaaf Geeraerts, “Zhongguo de shenfen jiongjing 中国的身份窘境 [The Dilemma of China’s Identity],” Caijing Magazine 12 (2011), http://www.dooland.com/magazine/article_ 138001.html. 9 Bandar Seri Begawan, April 21, 2005 (Xinhuanet 新华网), http://www.people.com.cn/GB/ paper39/14593/1297183.html.

China ’ s Dual-Identity Dilemma and Its Countermeasures

55

However, if China were to act in accordance with an identity of a “great power,” its focus would be substantially different. In international relations, a “great power” has the power to define its interests and enable other countries to behave in ways that originally were unacceptable.10 In accordance with the logic of realism, countries that compete with each other should increase their power as much as possible while restraining their opponents at the same time. This in turn will lead to conflicts among the various countries. With respect to hegemonic countries that seek to maintain their status and prevent threats to their influence, revisionist states must be vigilant with respect to the challenges; in particular they should not tolerate their peer competitors. Viewed from this logic and its consequences, great-power politics will inevitably evolve in to a “tragedy” of conflict, and possibly even war.11 From the perspective of these two different types of logic—“concentrating on development” and “political competition among the great powers”—the most prominent difference is in the area of military buildup. The purpose of a military buildup by a developing country is to ensure development. Any investment of resources is defensive and limited, and in general it is an inwarddirected phenomenon. In contrast, engaging in great-power rivalry entails that the military power is developed to such a scale that it remains dominant and influential in certain regions. In terms of construction of national defense, the country will inevitably be involved in an arms race with related countries. Thus the use of power will demonstrate outward-directed characteristics. In its external interactions, China’s dual identity is inevitably impacted by two different mechanisms. Since both mechanisms are incompatible, China faces the following dilemma: in order to achieve single-minded development, it must avoid becoming involved in competition for power with the great powers. However, to be a veritable great power, it must maintain and develop influence in power politics and follow through with corresponding military construction. “Focusing on development” requires a process of self-control, and similarly, political competition among the great powers leads to interactions of “action and anti-action.” When these two mechanisms work simultaneously, the great-power rivalry will invariably play the leading role. In other words, when China is regarded as a great power and is involved in a “greatpower game” with other countries, it will have to respond to these pressures through power politics, inevitably resulting in further actions by the other 10

11

David A. Baldwin, “Power and International Relations,” in Walter Carlsnaes, Thomas Risse, and Beth Simmons, eds., The Handbook of International Relations (London: Sage, 2002): 177. John J. Mearsheimer, The Tragedy of Great Power Politics, (New York: W. W. Norton, 2001), p. 164.

56

li

­ arties. As a result, whether China is willing or not, it will begin to be involved p in the process of great-power politics. Once China is involved in great-power political competition, the strategic center of gravity will change. If the competition for power intensifies, it may result in economic construction, with the fulfilling of domestic demand taking a back-seat role. This will force China to become involved in even more conflicts and to sacrifice the peaceful international environment required for development. At present, China should pay attention to resolving the problem of its dualidentity dilemma. On the one hand, China needs to recognize its true identity and clearly choose appropriate mechanisms of interaction. On the other hand, China must respond appropriately to resolving the problem of the objective coexistence of the two mechanisms. China must be development-oriented and for the long term adhere to the principles of economic construction due to its low level of per capita development. However, because China participates fully in international political interactions, its growing national strength will result in the international community becoming increasingly accustomed to regarding China as a great power, or even as a superpower. In such a case, even if China emphasizes its identity as a developing country, it can no longer behave like a purely developing country in terms of its international interactions. China will face additional negative effects of power politics due to the pressures from the mechanisms of great-power interactions. Since China’s identity dilemma reflects its relations with the outside world based on its involvement in interactions in the international system, in order to analyze and deal with these mechanisms, we need to focus on the influence of the international environment on China’s behavior in its foreign interactions. II

The Impact of Mechanisms in the International Environment

In theory, the international environment that China faces is the international system. This system is the overall structure formed as a result of interactions among the actors, who must participate in foreign-relations interactions on various issues in order to achieve their own interests, thereby creating a systemic multi-level structure. This structure has a complex and systemic influence on China. Based on existing international relations studies, in order to analyze the impact of this environment, three main mechanisms should be discussed. These include power politics, institutional norms, and the construction of concepts.12 12

Li Shaojun 李少军, “Zenyang renshi guoji tixi 怎样认识国际体系 [How to Understand International Systems],” World Economics and Politics, 6 (2009), pp. 13–20.

China ’ s Dual-Identity Dilemma and Its Countermeasures

57

1 Impact of the Power-Politics Mechanism Power politics refers to the structures and mechanisms formed from the interactions among sovereign states as actors competing for power. Because countries need power to ensure their own survival and development under conditions of anarchy, the power relations among countries are a basic structure. In this structure, changing the status quo by outward power interactions usually leads to a high degree of conflict, whereas maintaining the status quo by inward power interactions can usually maintain normal state-to-state relations. Although China needs to use its power influence in its foreign interactions because the core of its focus is on economic construction, its behavioral patterns are inward and self-defensive. Theoretically, the impact of the power mechanisms and the resultant conflicts is limited in this mode of interaction. However, when observing the reality of the dynamics in the power interactions between China and the outside world, it is apparent that China faces increasingly serious political power challenges for three reasons. First, China is increasingly regarded as a rising power, and the goal of a rising power is usually to change the status quo. Superpowers in particular are extremely sensitive about this. Although China has no intention of challenging the status quo and has not posed any such challenges, it is still subject to increasing pressures from the outside powers. Second, China still has not achieved national unity and has territorial and maritime disputes with its neighboring countries. The existence of these problems is related to its power interactions. To safeguard its sovereign interests, China has to form contradictory and conflictual relationships with related countries. If its sovereign interests are under siege, China will have to make more efforts to defend its sovereignty and, as a result, the potential for conflicts will escalate. Third, with the expansion of China’s overseas interests, China also will need to expand the scope of its self-defense. In particular, the expansion of its maritime operations will inevitably give rise to suspicions among other countries. For these reasons, although China adheres to the principle of inward selfdefense and hopes to minimize contradictions (for example by emphasizing developmental interests and defensive purposes and limiting territorial disputes to bilateral conflicts), the outside world still generally regards such a “great-power” identity as outward expansionism. U.S. strategic focus on the Asia-Pacific region, its military alliance enhancements with countries on China’s periphery, its holding of frequent joint exercises, and its intervention in territorial disputes between China and its neighboring countries and on the Taiwan issue are all significant interactions in the area of power-politics. With respect to the regional power structure, which features the goal of containing China, China must become involved in these interactions or it will risk jeopardizing its national interests. However, by participating in these interactions,

58

li

it is inevitable that it will become involved in a power competition “security dilemma.” According to David Lampton, actors will enter a kind of “action/ anti-action” cycle, whereby one party’s unilateral attempts to bring about its own security will stimulate another party to take actions of resistance, which will then lead to cycles of growing competition and distrust.13 China is not immune from participating in these power-politics interactions to safeguard its national interests, but any deeper involvement will interfere with its economic construction. Therefore, despite the negative impact, China must participate in the international structure of power politics. 2 Impact of the International Institutions Mechanisms The system of international institutions is a structure of interactions established through cooperation that is embodied in international organizations and norms. It is the product of the consent of the actors involved in the interactions, thereby making it a legitimate international environment. The actors in this structure are bound to fulfill their obligations, but they also enjoy corresponding rights. This structure functions according to its own rules and norms, and the interactions among the actors are referred to as an “international community.” Within this structure, the interactions of the actors, in principle, are cooperative and mutually beneficial. Such behavior is deterministic, however, because each party expects compliance by other parties. Currently, such interactions within international institutions are commonplace. The impact of China’s participation in international institutions involves three aspects: First, while pursuing its national interests, China can also take advantage of the resources available from the international institutions and receive their protection. Second, China must comply with its obligations and responsibilities to contribute to the common interest. Third, China’s roles and identities will change accordingly, that is, it will be transformed from a country outside the system into a member of the system, and increasingly it will become a dominant member as opposed to a general member. These impacts of the international regime on China, however, have been both positive and negative. If by joining the international regime China has enjoyed its benefits, then it must also be subject to its disadvantages. In order to adapt to the rules and norms of the international institutions, some of China’s domestic interests will certainly be affected, but at the same time it will achieve some of its own interests as well. For example, access to the WTO 13 Yaoli 姚莉, “Zhuanfang meiguo zhuming zhongguo wenti zhuanjia David Lampton 专访 美国著名中国问题专家戴维·兰普顿 [Interview with famous Chinese expert David Lampton],” Global Times, Feb. 10 (2012).

China ’ s Dual-Identity Dilemma and Its Countermeasures

59

required that China clear up over 2,300 laws and departmental regulations, that it reduce the general tariff level from 15.3 percent in 2001 to 9.8 percent in 2010, and that it liberalize foreign trade and further open the services market. These were some of the constraints on China for getting access to the WTO. After ten years of membership in the WTO, China’s imports and exports of goods have increased by 4.8 times. Morever, China has become the world’s largest exporter and the world’s second-largest importer, reflecting the benefits that the international trading system has provided.14 From this perspective, participation in international institutions can be considered to be part of China’s strategic resources. 3 Impact of the Concept Construction Mechanism Unlike the material influences of power and institutions, the construction of concepts refers to the interaction of actors in an “inter-subjective world.” The impact of this structure on China is mainly embodied in international public opinion. Because the social behavior of international actors is always accompanied by the expression of ideas, there are always attitudes among the actors regarding issues related to the interactions, the behavior of countries, and even the country itself. The sum of these observations, that is, the shared ideas, constitutes the background to the ideas of public opinion, or the cultural environment behind the implementation of foreign policy. In international relations, the cultural environment, on the one hand, is a psychological arena deeply rooted in peoples’ hearts that constitutes the norms limiting or restricting the behavior of actors; on the other hand, the cultural environment constructs concepts for the actors that will change their behavior, and thus change international relations as well. The impact of the cultural environment on foreign policy may have positive effects, but it may also have negative effects. If a country’s foreign-policy behavior, or the country itself, receives positive feedback from international public opinion, it is likely that its foreign-policy behavior will be supported by the majority of the members of the international community and thus it will easily achieve its strategic goals; without such positive feedback, however, it will be difficult for it to achieve these goals. The international cultural environment that China faces can be broadly divided into two categories: one refers to the specific problems of interactions, and the other refers to identity. The influence of the former is mainly reflected 14

Zhonghua renmin gongheguo guowuyuan xinwen bangongshi 中华人民共和国国务院 新闻办公室, “Zhongguo de duiwai maoyi 中国的对外贸易 [China’s Foreign Trade],” December 2011, http://news.xinhuanet.com/fortune/2011-12/07/c_111222865.htm.

60

li

in a common understanding on specific issues, which will have an impact on China’s foreign policy; in contrast, the influence of the latter is mainly reflected in China’s relations with other countries, involving both its identity and its positioning. If either of these environments include evaluations and opinions of China by others in the system, their sum constitutes China’s national image in the international community. As a rising power, how the world reacts to China’s identity is related to the cultural environment. In the future, other countries will base their attitudes and policies toward China on whether it is a responsible power in terms of peaceful development and building a harmonious world, or whether it threatens other countries, as well as the regional security, and, when it becomes stronger, whether it challenges the hegemonic international order and attempts to change it. The attitudes and policies of other countries are based on such an awareness and knowledge. III

China’s Foreign-Policy Responses

Since China is faced with diverse attributes of the international systems, with each system having a mechanism with specific impact, it must interact with various international systems based on diverse policy demands; it also needs to solve its problem of dual-identity by making decisions based on the various mechanisms in the different systems and by coordinating its diplomatic behavior in consideration of the systemic effects of the international systems. In principle, China should take advantage of the positive effects of participation in interactions and resolve any problems or negative consequences that may occur. China thus should engage in three different types of diplomacy corresponding to its international interactions, namely, power diplomacy, institutional diplomacy, and public diplomacy. 1 Power Diplomacy Power diplomacy corresponds to power interactions. To engage in power diplomacy one must take part in international interactions based on a position of strength. Even though China has considerable weight in power politics with respect to its total economic output, its focus on economic construction determines its goal for ensuring a peaceful environment for development and for taking actions in power interactions that will be characterized by self-defense. With respect to China’s power diplomacy, its military buildup is a sensitive issue. Similar to other countries, China still requires appropriate military development even though it adheres to an inward and defensive national defense strategy. Faced with the contemporary revolutionary tide in military

China ’ s Dual-Identity Dilemma and Its Countermeasures

61

affairs, countries, in general, have little security guarantees if a state’s military power does not keep pace with the times. Since the development of China’s power will inevitably change the regional, and even global power structure, there obviously will be some inevitable resultant tensions. If China cannot respond properly to these tensions, it will be subject to the influence of the logic of power competition. Because the essence of these tensions is a state of mind, China should eliminate any problems occurring in its military interactions with the outside world—not by developing, or not developing some specific military equipment, but rather by establishing a relationship of trust with the relevant countries and convincing them that China’s strength is both moderate and defensive—and avoid creating an atmosphere of threat due to its military interactions. To protect national interests by means of power, the most basic mode of selfdefense is to defend one’s territorial sovereignty. In view of China’s strength, if it deals with its territorial disputes bilaterally, it can limit the problem to a diplomatic level. However, if other parties internationalize the dispute, and draw on external forces to contain China or to balance China’s power, there will be more power interactions in the region. Once China’s territorial disputes evolve into tensions at the regional level of the power system, China’s environment for peaceful development will be undermined. Therefore, to handle the territorial issues, China should adhere to the principle of sovereignty while avoiding turning the disputes into a regional-level power competition. The key to resolving territorial disputes on its periphery is for China to find an equilibrium between defending its sovereignty and maintaining a peaceful environment. To do this, China’s use of power must be combined with diplomacy in order to minimize any negative consequences. More generally, China’s use of the tools of power should not be a military solution, but it must contribute to resolving the problem in terms of a peace deterrence. Given the weight and strength of China’s development, it is not only possible, but also feasible that China will deal with such problems in this way. Development and the use of power to promote peace is consistent with China’s goals of both limiting military development and focusing on its inward domestic interests; and it is also consistent with China’s fundamental requirement of seeking an environment for peaceful development. 2 Institutional Diplomacy Institutional diplomacy refers to the foreign-policy behavior of participants in international institutions and international cooperation. According to the 2008 data in the Yearbook of International Organizations, there are 247 international intergovernmental organizations in the world, of which China p ­ articipates

62

li

in 52, including one international organizational coalition (A Class), 29 global universal international organizations (B class), 13 intercontinental international organizations (C class), and 9 regional international organizations (D class). In view of the historical process, the scope of China’s participation in international organizations is growing. China’s participation in international nongovernmental organizations grew from 2,055 in 1998 to 2,841 in 2008, an increase of 38.2 percent. However, in comparison with other countries, China’s rate of participation is still considered low. With respect to the four categories of international intergovernmental and nongovernmental organizations (from A to D), in 2008 Germany participated in 4,365, France in 4,342, the u.k. in 4,148, the U.S. in 3,310, Japan in 2,652, Russia in 2,396, Brazil in 2,325, India in 2,176, and South Africa in 1,944, whereas China only participated in 1,793.15 From the point of view of interactions in the system of international institutions, there are still many areas in which China does not participate. The purpose of engaging in institutional diplomacy is to advance the process of integration into the international system. In principle, China should participate in all international regimes that reflect common international interests. With respect to universal, open international institutions, especially those concerning global governance, sooner or later China will have no choice but to join. It is better to take the initiative to join rather than to be passive. Not joining will not only damage China’s image, but it will also be harmful to the development of China’s interests. With respect to the regional regimes, China should actively participate in, or closely interact with, the relationships of direct interest, such as APEC, ARF, ASEAN+3, and China, Japan, and South Korean cooperation. By not participating China will be in an unfavorable position in the international community, and its economic and security interests will suffer. With respect to those institutions with which China has no direct interests, such as other regional organizations, China should strengthen ties and dialogue because as part of the process of global interactions, interregional interdependence is expanding and growing. In the process of participating in international institutions, China should not only abide by the rules of the institutions, but also play an active and leading role as a creator of the institutions. In contemporary international relations, there are an increasing number of voices calling on China to be “a responsible player.” Moreover, to be a “responsible great power,” China will need to provide appropriate public goods in its international interactions. The provision of such public goods can be broadly interpreted as contributions for 15

Union of International Associations, Yearbook of International Organizations, 2009–2010, (Berlin: de Gruyter/Saur, 2009), 47, 54, 141.

China ’ s Dual-Identity Dilemma and Its Countermeasures

63

the ­realization of international common interests in the international community. To assume such responsibility, China should not be compared with the Western countries, nor should it be compared with the small developing countries. China must seek a balance. As it develops, it should gradually assume greater responsibilities in some areas, and at the same time, not ignore the reality that its social development is still at a very low level, thereby limiting its ability to provide public goods. 3 Public Diplomacy Public diplomacy corresponds to the construction of concepts of foreign-­ policy behavior. Conceptually, public diplomacy is a form of diplomacy through which well-intentioned behavior and discourse win the hearts and minds of other countries. The purpose of this diplomacy is to create a positive image and to change the views and opinions of peoples and governments elsewhere in order to promote one’s own foreign-policy goals. Such interactions are a kind of “diplomacy” because their ultimate goal is to influence the foreign policy of the other governments. This diplomacy is not directed against other governments; rather it is directed towards the outside public that influence their own government. In international interactions, implementation of public diplomacy is closely related to maintenance of a country’s image. The image is the sum of the impression, cognition, identity, and evaluation of a country as formed by the public. This shared social concept is the product of the external form of the country’s intrinsic element that affects human consciousness. Such a consciousness will determine public opinion and the foreign-policy decisions of the government. The formation of a country’s national image is dependent on two issues, namely, the reality of the intrinsic elements in the country, including its political system, economic development, ideology, cultural traditions, and value orientation, and the subjective feelings and evaluations of the national public regarding the performance of these intrinsic elements. In general, the ­formation of subjective feelings by the public is based on all the relevant information that they receive. If they receive positive information, after a period of time, they will form a more positive impression of the state; in contrast, if they receive negative information, they will form a negative impression. During this process, whether the public image is positive or negative will depend on the quality of information received. Whether the information is positive or negative will depend on two issues: First, if the intrinsic elements in themselves are negative, the negative information becomes a reflection of the “negative reality”; second, the intrinsic elements of a state are not problematic, but the

64

li

process of transmission of the information is problematic, either because the incomplete transmission of the information will cause misunderstandings, or because the information is deliberately distorted and demonized. Although public diplomacy can improve a negative image caused by intrinsic problems, it cannot fundamentally solve them. In contrast, public misunderstandings of a national image due to demonization may be resolved through public diplomacy. The purpose of China’s public diplomacy is to eliminate a negative national image and to replace it with a positive image. China’s national image, generally formed by the public (including the Chinese public), involves many aspects, including both evaluations based on China’s foreign-policy behavior as well as public opinion resulting from its national development, social governance, and other aspects of peoples’ livelihood. The sum of these views will determine whether it has a favorable or unfavorable image. From the perspective of China’s implementation of public diplomacy, analysis of the environment of international public opinion should focus on China’s image in foreign relations. Today, the most striking aspect about China as an emerging power is the growth of its power embodied in its rapid economic and military development. Global public opinion toward such development will have a direct and significant impact on China’s foreign relations. Data released by the Pew Research Center in July 2011 reveal China’s favorability ratings. Among the 22 countries surveyed, more than half of the respondents in 14 countries, including the United States, Britain, France, and Russia, had a favorable impression of China. In contrast, four countries, including Japan and Germany, did not have a favorable impression. Overall, then, China’s image can be said to be generally positive and constructive. Nevertheless, the Pew Survey also revealed some very negative public opinions regarding China’s economic and military growth. In the 21 countries surveyed in 2011, a majority in 17 countries had a negative opinion of China’s military growth. In terms of its economic growth, a majority in 13 countries held a positive view, but the majority of those among the great powers, for instance, the United States, France, Germany, and Russia, held a negative opinion. On the issue of whether it is good or bad that the Chinese military is as powerful as that of the United States, of the 22 countries surveyed, people in 15 of the countries considered it to be negative, and more than half of the respondents in 13 countries considered it to be negative. In contrast, in seven countries people thought it was a good thing, and more than half in four countries, including China (84 percent) and Pakistan (73 percent), thought it was good. The majority of respondents surveyed in Europe considered it to be bad. In the

China ’ s Dual-Identity Dilemma and Its Countermeasures

65

United States, France, Japan, and Germany, the proportion of respondents who considered it to be bad exceeded 80 percent.16 The Pew Center data, no matter how accurate or inaccurate, are still noteworthy. The negative public opinions of China’s economic growth and military development undoubtedly constitute the breeding ground for the “China threat theory.” With respect to these issues, one should note the trends in Chinese public opinion. Under the condition that the degree of China’s development is only at a lower-middle level, to think that China can take on the United States, or to think that China should be as militarily powerful as the United States, whether this mentality is real or construed, will not only have an impact on China’s foreign policy, but will also have an impact other countries’ foreign policies toward China. Because China’s basic national conditions determine that China can only follow the logic of development rather than the logic of power competition, China’s own “great-power” mentality and its image as a “superpower” shaped by international public opinion are completely inconsistent with the direction of China’s development. Furthermore, the existence and spread of this concept are harmful to China’s peaceful development. Engagement in public diplomacy cannot be considered as a type of advertising or packaging of China in the diplomatic sense; rather it enables the public in other countries, through communications, to understand the real China. In this effort, while the form of communication is important, what matters more is the content of this communication. When considering the main problems facing China in terms of international public opinion, the following aspects of its public diplomacy may be of particular importance: First, regardless of China’s achievements, the lower-middle global level of China’s per capita development is a basic reality. This means that for a long period into the future, China will not be able to change its identity from a developing country. China’s most important interest will continue to be comprehensive social development. To achieve this, China’s strategic center will always focus on solving domestic issues, and it will not devote resources to seeking hegemony. Second, maintaining the focus on development means that the fundamental goal of China’s foreign strategy will be to ensure a peaceful environment for development. Such an environment should be based on the international institutional framework. China will not and cannot build a hegemonic system, 16 http://www.pewglobal.org/2011/07/13/china-seen-overtaking-us-as-global-super power/2/.

66

li

nor can it accept that other countries establish a hegemonic system. For China, if there is no order in its external relations, its economic construction will suffer. In order to ensure an orderly and peaceful environment, therefore, China needs to embark on peaceful means as the preferred route for it to resolve its territorial disputes and national reunification. Third, China’s pursuit of peaceful means to resolve disputes in foreign relations not only is consistent with China’s national interests, but is also consistent with China’s traditional strategic culture. Historically, in the interactions that took place between China’s central dynasty and the states on its periphery, it was the politicians in ancient China who tended to favor peace. When war became inevitable, then the goal was to promote peace by war. After realizing peace, the emphasis then shifted to education and “acts of kindness” and “morality.” In the contemporary world, this tradition, as embodied in the “harmonious culture,” still has a major impact. In the 1950s, the Chinese government put forward the idea of peaceful coexistence; in the 1960s, Zhou Enlai (周恩来) elaborated on a philosophy of diplomacy based on national ­tradition.17 These are all a reflection of China’s ancient strategic concepts. Fourth, focusing on developmental goals rather than hegemony determines China’s defensive and inward military policy. The purpose of China’s military construction is to serve its development. This in turn limits the development of China’s military power to defensive missions. Once the military buildup exceeds the limits of self-defense, however, it tends to have a negative impact on national development because it not only utlizes domestic resources needed for development, but also creates unnecessary tensions in foreign interactions. Fifth, China’s economic development is conducive to its development of global economic interactions. China certainly will consume more global resources, but it will also produce more goods needed by other countries. China not only exports its commodities overseas, but it also has a huge domestic market and requires imports from abroad. The rate and weight of China’s economic growth is increasingly becoming a driving force behind global economic stability and development. As China changes its mode of development and expands domestic demand, it will not transform its economic development achievements into military-based power. So, in general, China’s economic growth will also be beneficial to the interests of other countries as well. 17

Zhonghua renmin gongheguo waijiaobu, Zhonggong zhongyang wenxian yanjiushi 中华 人民共和国外交部、中共中央文献研究室编, “Zhou Enlai waijiao wenxuan 周恩来 外交文选 [Selected Works of Zhou Enlai on Diplomacy],” (Beijing: Central Party Literature Press, 1990), 327–328.

China ’ s Dual-Identity Dilemma and Its Countermeasures

67

Sixth, along with an upgrading of its status and influence, China has advanced to center stage in its global governance. With such cooperation through a framework of international institutions, due to its weight China will take on increasing responsibilities, including maintaining international peace, providing international aid, stabilizing the global economy, promoting an agenda for global governance, and so on. In short, through participation in an international system, coupled with a sustained focus on economic construction and development, and by avoiding the negative impacts of power competition, China can resolve its dual-identity dilemma. To achieve this goal, China must use the tools of power appropriately, while at the same time take advantage of the positive impacts of institutional and public diplomacy and avoid the negative consequences of power politics. If China can more effectively utilize the systemic effects of the international system for its specific goals and mission, to a certain extent it will be able to avoid its “great-power” identity problem and successfully achieve its overall strategic objectives. Works Cited Baldwin, David A. “Power and International Relations.” in The Handbook of International Relations. Edited by Walter Carlsnaes, Thomas Risse, and Beth Simmons. London: Sage, 2002. Begawan, Bandar Seri. April 21, 2005. Xinhuanet 新华网. http://www.people.com.cn/ GB/paper39/14593/1297183.html. Geeraerts, Gustaaf. “Zhongguo de shenfen jiongjing 中国的身份窘境 [The Dilemma of China’s Identity].” Caijing Magazine 12 (2011), http://www.dooland.com/ magazine/article_138001.html. Guo Kai 郭凯. “Zhongguo de shuangchong shenfen 中国的双重身份 [China’s Dual Identity].” Oriental Outlook, 46 (2010), http://www.qikan.com.cn/Article/lwdf/ lwdf201046/lwdf20104619.html. Li Shaojun 李少军. “Zenyang renshi guoji tixi 怎样认识国际体系 [How to Understand International Systems].” World Economics and Politics, 6 (2009). Mearsheimer, John J. The Tragedy of Great Power Politics. New York: W. W. Norton, 2001. Pew Research Center. “China Seen Overtaking U.S. as Global Superpower: U.S. Favorability Ratings Remain Positive.” July 13, 2011. http://www.pewglobal.org/2011/07/ 13/china-seen-overtaking-us-as-global-superpower/2/. Rachman, Gideon. “When China Becomes Number One.” Financial Times. June 6, 2011. UNDP. Human Development Report (2011). http://hdr.undp.org/en/.

68

li

Union of International Associations. Yearbook of International Organizations, 2009– 2010. Berlin: de Gruyter/Saur, 2009. World Bank. “World DataBank.” http://databank.worldbank.org/ddp/home.do?Step= 12&id=4&CNO=2. Wu Xinbo 吴心伯. “Four Contradictions Constraining China’s Foreign Policy Behavior.” Journal of Contemporary China, 10, 27 (2001). Yaoli 姚莉. “Zhuanfang meiguo zhuming zhongguo wenti zhuanjia David Lampton 专访美国著名中国问题专家戴维·兰普顿 [Interview with famous Chinese expert David Lampton].” Global Times, Feb. 10 (2012). Zhonghua renmin gongheguo guowuyuan xinwen bangongshi 中华人民共和国国 务院新闻办公室, “Zhongguo de duiwai maoyi 中国的对外贸易 [China’s Foreign Trade],” December 2011, http://news.xinhuanet.com/fortune/2011-12/07/c_111222 865.htm. Zhonghua renmin gongheguo waijiaobu, Zhonggong zhongyang wenxian yanjiushi 中 华人民共和国外交部、中共中央文献研究室编, “Zhou Enlai waijiao wenxuan 周恩来外交文选 [Selected Works of Zhou Enlai on Diplomacy].” Beijing: Central Party Literature Press, 1990.

chapter 4

Traditional Chinese Culture and East Asian Security Cooperation Wang Fan Abstract By elaborating and analyzing traditional Chinese cultural concepts, such as the holistic, dialectical, and self-discipline views, this essay reveals the organic links between traditional cultural concepts and the strategic thinking of China’s diplomacy. The author believes that China’s plan in East Asian cooperation reflects traditional Chinese cultural concepts. The exploration and popularization of traditional Chinese cultural concepts would have a constructive effect on the future positive settlement of East Asian security issues, as well as the cooperation, stability, and integration of East Asia.

Keywords China – cultural concepts – East Asian security

Of the five permanent members of the United Nations Security Council, China is the only one from the East and is among the civilized ancient countries that has realized renewed vitality and vigor in the modern international system. China had existed for thousands of years—long before the birth of modern civilization. Therefore, China has consistently explored how to deal with relationships and development with other countries in accordance with its own cultural tradition, instead of blindly following others. China’s traditional culture plays an important role in its diplomatic practices and development. Meanwhile, China also attaches great importance to its influence and believes that advanced ideas are essential in resolving conflicts and keeping peace. * This paper was submitted to “non-western reflection to the political conference” (sponsored by the Czech Republic International Relations Institute, November 13, 2012). The author was one of the keynote speakers. Wang Fan is professor and the assistant president of China Foreign Affairs University. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_006

70

wang

Given the increase in complex and variable international issues, Western international theories increasingly fall short of expectations in their explanation and guidance. However, from the perspective of the development of a future international community, the ideas of both the East and the West can promote and integrate with each other, thus forming a new balance between the cultures. This integration will prove favorable in the attempt to change the unbalanced situation between Eastern and Western cultures and to transform the international value from a Western monopoly to pluralism. Furthermore, it plays a positive and constructive role in dealing with unfairness in international society, man-caused violent disasters, and deep-rooted hot spots. Therefore, it is necessary to examine the significance of Oriental culture, or traditional Chinese culture, for international relations. Chinese scholars have made some important efforts in this aspect.1 This essay proposes a solution to East Asian issues as an example to sketch the Eastern traditional idea from the ideas of holism, dialectics, and self-­ discipline. These interconnected aspects differ from each other in that holism and dialectics focus on the relations between oneself and others and the relations between short- and long-term interests, whereas self-discipline focuses on how to discipline oneself and how to influence others by changing oneself. It also embraces altruism and the idea of using one’s virtues to win respect. In general, the Chinese theory of peace is not groundless. Its contribution lies in building a method that promotes win-win cooperation to reduce conflicts and strengthen harmony. It also promotes open-mindedness and flexibility, rather than narrow-mindedness and rigidity and stresses that people should act in accordance with morals by happily extending their hands to others. This essay comprises four main parts. The introduction describes the main features of traditional Chinese culture. The first part mainly describes the basic connotation of holism, or zhengti guan 整体观. The second part emphasizes the characteristics of dialectical thinking, or bianzheng guan 辩证观. The third part discusses the constitution of self-discipline, or zilü 自律 and its effect on China’s diplomacy. The fourth part discusses the North Korean nuclear issue and the South China Sea problem, which are prominent issues in current Eastern Asian culture, and takes these issues as examples in analyzing the constructive role of China’s traditional culture. Finally, the essay summaries the influence of traditional Chinese culture on the concept and practice of China’s diplomacy. This essay also points out that China’s 1 Qin Yaqing 秦亚青, “Zhongguo wenhua jiqi dui waijiaojuece yingxiang 中国文化及 其对外交决策影响 [Chinese Culture and Its Implications for Foreign Policy-making],” International Studies, No. 5. 2011, 27.

Traditional Chinese Culture And East Asian Security Cooperation

71

traditional culture can provide a useful perspective for resolving regional and global issues. I

Concept of Holism (zhengti guan 整体观)

The major difference between Eastern and Western cultures manifests itself in the two cultures’ ways of thinking. With thousands of years of history, China has a macro-conception of history which other great powers rarely enjoy. Therefore, Chinese people are good at analyzing problems from a macro-­ perspective and thinking with foresight about long-term problems. Chinese rationality differs greatly from American rationality. The Chinese often relate to the macro-conception of history, whereas Americans emphasize their immediate interests. Chinese rationality manifests itself in a number of ways. First, it manifests itself in how the culture deals with problems. Aiming to find a proper resolution, China is rather calm and patient in dealing with international issues, and the West may misinterpret this patience as a dilatory tactic. Chinese people tend to believe that a solution to a problem may emerge as long as the development continues. They may thus leave tricky problems to time and people in the future. Today’s Chinese people believe that potential problems should be under control because some of these problems will never become realities.2 Second, unlike Western cultures, the Chinese attach importance to collectivism, the coordination of both individual and overall interests, cooperation, coordination, the placement of greater benefits over smaller ones, and the ability to collaboratively handle problems. China’s multilateral diplomacy stems from the belief that all concerned parties should not involve themselves in great power deals, which relates to the democratization of international ­politics. Meanwhile, long-term mentality and foresight are necessary in resolving issues. “Only by ascending Mountain East will you find how dwarfed State Lu is, and only by ascending Mountain Tai will you find how dwarfed all mountains under heaven are,” Confucius said. China’s diplomacy theory, which is about peaceful cooperation, prioritizes the common threats of humans, rather than other countries’ threats, as the logical starting points. China’s policy is, overall, foresighted and high-level. The Chinese don’t stress that nontraditional security threats are the primary 2 Zheng Yongnian 郑永年, “Dangdai zhongguo waijiao de wenhuadiyuan huanjiang 当代 中国外交的文化地缘环境 [Cultural and Geographical Environment of Contemporary China’s Diplomacy],” Lian he zaobao, February 7, 2012.

72

wang

ones that the world faces today, and they believe that humans must respond to threats with mutual cooperation. In the presence of a dangerous and imminent threat, countries must collaborate as one. In responding to problems, China stresses addressing both the symptoms and the root causes, rather than of solving superficial problems. Ⅱ

Dialectical Thinking (bianzheng siwei 辩证思维)

In short, things are interdependent. There is no clear-cut method of normalizing the relationship between two existences. They are interchangeable; there is no way to distinguish them from each other. “Rigorous experiments by psychologists such as Peng Kaiping and Wu Shali show that there are striking cognitive differences between Chinese and Americans, with Chinese more likely to use contextual and dialectical approaches to solving problems.”3 In other words, some things are distinguishable; others are not. Every coin has two complementary and indispensable sides. Things can change together. Former enemies can become friends. Enemies and friends exist in the relations among countries, and most countries compete and cooperate with each other. Countries have a number of paths from which to choose without encountering conflict. Dialectical thinking considers reasons and causes, distinguishing things and making reasonable judgments. It attaches importance to complex thinking, instead of using a linear mindset. Dialectical thinking relates to the Chinese Doctrine of the Mean, which states, “the heaven nourishes the myriad things and they grow up together without harming each other, and they follow their courses simultaneously without interfering with each other.” Confucius regards impartiality and constancy as the highest morals. Handling states relations through the Mean is a way to implement impartiality. Mean is the theorem that people should stand in the center without leaning to either side and advocates that people can achieve peace through understanding and tolerance of other people and countries.4 Oriental philosophy holds that the one who takes a different path from the one you have taken is not necessarily your enemy. But the West takes the view 3 Daniel A. Bell, “What can we learn from Confucianism?” http://www.guardian.co.uk/ commentisfree/belief/2009/jul/26/confucianism-china. 4 Ye Zicheng 叶自成, Chunqiu zhanguo shiqi de zhongguo waijiao sixiang 春秋战国时期的 中国外交思想 [Chinese Diplomacy Thinking During the Spring and Autumn Period and the Warring States Period] (Hong Kong: Hong Kong Social Science Press, 2003), 153–156.

Traditional Chinese Culture And East Asian Security Cooperation

73

that other people are enemies of the West. Chinese culture advocates friendship with others. When judging problems, the Chinese underline mediation rather than quick judgment of different opinions and believe that all opinions are both right and wrong to a certain degree. In short, Chinese culture promotes complicated and dialectical, rather than simple, thinking. It does not force others to accept its ideas and agree with it. Chinese culture opposes onesided views of things, instead advocating the Doctrine of the Mean. It holds the view that every coin has two sides that depend on change. Once change begins, there is more space to come to a solution to problems. With this thinking, the third road, step-by-step approaches to difficult problems, can begin. Both enemies and friends can mutually change, and contradiction can become agreement. In this way, people can negotiate economic solutions. If one assumes good and evil in humanity and then makes a judgment, one would find a sharp distinction between cooperation and competition. If humans are evil, then conflict is eternal. If humans are good, then cooperation can prevail. Through recognizing the distinction between good and evil, Eastern culture also argues that humanity can be good or evil depending on a people’s education and environment. Therefore, Eastern culture does not take an arbitrary or random approach to definitions. Eastern dialectical thinking offers flexibility. This ability constitutes an obvious distinction from the approach for Western countries, such as the United States. Meanwhile, the development of the Chinese military also mirrors the Eastern culture. China stresses the use of military forces only for maintaining peace and order. The purpose of updating weapons is to prevent the use of weapons. Defense rather than offense characterizes China’s approach to military strategy. In addition, China develops certain kinds of weapons and military strategy only when it knows which means and weapons other countries would use against China. China rarely uses aggressive, pre-emptive strategies, as the United States does. In the book On China, Henry Kissinger compares the strategic gaps of the Chinese and the Western cultures to the differences of the games of Go, or Wei Chi, and chess. In his view, Western chess is a zero-sum game, or rat race, whereas Go stresses relative gains and an overall balance. Losses offset gains in the long term. Therefore, China believes that immediate loss does not always result in a long-term loss.5

5 Henry Kissinger, On China (New York: The Penguin Press, 2011).

74

wang

1 Game and Interaction (boyi yu hudong 博弈与互动) Western thinkers prefer to resolve problems with conflict and contest, whereas the Eastern mindset advocates interaction. China’s diplomatic policy promotes positive interaction instead of the competitiveness that the Western mindset emphasizes. In the book Le Grand Livre des Conspirations (2010), French writer Bernard Bourdeix sharply queried Charles Darwin’s theory of evolution, noting that only 26 percent of Americans believe that human evolution is a natural phenomenon. Darwinism is the only philosophy advocating and encouraging conflict.6 This type of “game thinking” is simple and involves clear, logical analysis, but it fails to recognize or explain the complexity of events. Cooperative thinking, on the other hand, is logically complicated. As a complicated mindset, cooperative thinking asks people to consider issues from various perspectives and multiple interactions. Over the past centuries, the world, thanks to game thinking, has encountered confrontation, contest, and victory-or-defeat and competition. However, all countries should take full advantage of dialectical thinking to understand the world. They should encourage positive interaction and mutual help rather than blindly seeking ways to win. The classic balance-of-power theory favors the principle that “the enemy of my foe is my friend.” Countries should attempt to use peaceful means to change this principle to: “My enemy is likely to become my friend.” This kind of thinking is taking effect on countries’ foreign policy. Shelving differences and ­seeking joint development are also the manifestations of dialectical thinking. It is meaningless to get clear-cut victories in disputes. When fighting and cooperation don’t work, countries should try to temporarily buffer the two sides or to use new means to achieve an accord. China’s stance on this issue is consistent, seeking new ways of cooperation, instead of resorting to forces that are likely to hurt both sides. Even though countries sometimes cannot find the effective means to immediately solve problems, they should still attempt to avoid unilateral action. China’s diplomacy emphasizes the principle of seeking common ground while resolving differences. Besides, Chinese politics proposes the idea of “one country, two systems,” which also manifests dialectical thinking. Another important idea that aligns with answering evil with good and turning enemies into friends relates to the Doctrine of the Mean. During the long historic evolution of China, a cultural tributary, the “brotherhood culture,” has 6 Su Yan 苏言, He Pin 贺濒, Kanjian weilai: meiguo ling junshi, zhongguo zhu jingji, chaoji jingying quanjie weilai shijie 看见未来：美国领军事中国主经济——超级精英全解 未来世界 [See the future: U.S.A. leads military, China leads economy, Super Elite explain the future of the world] (Nanjing: Jiangsu People’s Publishing, 2010), 345.

Traditional Chinese Culture And East Asian Security Cooperation

75

featured gratitude and resentment within families, and these feelings are inextricable from each other. Families hand down these alliances and feuds from one generation to the next. However, mainstream Eastern culture believes that returning enmity for enmity not only hurts everyone but is also endless. So it comes to the conclusion that eliminating an enemy—that is, making an enemy into a friend—is better than making an enemy. Therefore, whichever country takes the first step in returning good for evil appears as the more virtuous country, For example, China’s reaction toward the American containment policy during the Cold War proved that China is a responsible and forgiving country. In short, success will eventually come but only if countries proceed step by step, pursue the doctrine of the Mean, and wait for conditions to become ripe. Meanwhile, countries should avoid acting rashly and using unscrupulous tactics. Instead, they should carefully preserve basic preconditions and a peaceful atmosphere in solving their problems. 2 Toleration (baorong 包容) Toleration also links to the Doctrine of the Mean. Chinese people think inclusively and tolerantly, whereas people in the West think in terms of surpassing, replacing, and canceling. Just as the famous Chinese scholar, Qian Mu, put it: Westerners prefer division to unification, whereas the Chinese prefer peace, unification, and assimilation.7 Chinese culture is broad and profound because of its spirit of great tolerance. It respects the varieties of world cultures. As Confucius said, “Gentlemen and diversity, and the villain rather than the same.”8 In other words, Eastern philosophy promotes the principles of tolerance, cross-civilization dialogue, and exchange to promote cultural harmony but rejects homogeneity. He went on to say, “Gentlemen can coordinate and compromise with each other on the premise of insisting on their own personalities, while villains pursue the superficial harmony, but the very opposite seems to be the case.”9 Harmony implies a balance between the yin and the yang, which can not only coexist but also change as one. Further, it pursues the goals of a well-­ functioning government and the ability of people to live in harmony. When 7 Qian Mu 钱穆, Rensheng shilun 人生十论 [Ten Lessons on Life] (Nanning: Guangxi Normal University Press, 2004), 118. 8 Zhang Yanying 张燕婴 annotated, Lun Yu 论语 [The Analects of Confucius] (Beijing: Zhonghua Book Company, 2006), 199. 9 Li Ruihuan 李瑞环, Xue zhexue yong zhexue 学哲学 用哲学 [Study philosophy and use philosophy (II)] (Beijing: China Renmin University Press, 2005), 629–630.

76

wang

dealing with neighboring countries, harmonious relationships are far more important than compromised interests. In other words, the perfect geographical position outweighs perfect timing, whereas the relationships among harmonious people outweigh the perfect geographical position. To create harmonious relationships, countries must be friends with other countries, rather than being selfish and forming cliques. Such nonalignment emphasizes the coordination of state-to-state relations, honesty, understanding, and tolerance. As Confucius also says, “Harmony is the best policy.”10 The definition of “tolerance” includes the notions of shelving differences, seeking joint development, and proceeding step by step. In other words, it is easier to resolve divisive issues with patience, understanding, and tolerance. 3 Flexibility (biantong 变通) Chinese culture focuses on flexibility and compromise. Things may differ under changeable circumstances; therefore, it is unwise to simply copy others. Chinese philosophy emphasizes flexibility, which leads to a smooth state, and the smooth state leads to harmony. In other words, passivity can become activity, pressure can become motivation, criticism can become encouragement, and crisis can become opportunity. On the one hand, people remain still so that they can respond to all possibilities. On the other hand, they change themselves to adapt to changing circumstances. Adaptability and flexibility are the best choices. Rather than work against the current trends, people should strive for a balance between the random and the deliberate, the changing and the persistent, the relaxed and the tense. This concept is equally applicable to the country when deciding foreign policies.11 Apart from the flexibility at the philosophical level, Chinese people also believe that poverty causes flexibility and that flexibility brings about smoothness. For instance, in the early years of the founding of the new China, China had a depressed economy. However, the owners of the Daqing oil field proposed that it would enhance oil production no matter how difficult it was. If conditions were unfavorable, they would create new conditions. Further, China began to implement a peaceful strategy in East Asian because the government was proposing a policy of reform and openness. However, at that time, East Asian countries were unwilling to cooperate with each other. Even so, China did not give up and made great efforts to break the deadlock. Given 10 Confucius 孔子, Mencius 孟子, Lun Yu Meng Zi 论语 孟子 [The Analects of Confucius and The Book of Mencius] (Beijing: Yanshan Press, 2001), 303. 11 Wang Meng 王蒙, Zhuangzi de kuaihuo 庄子的快活 [The joyfulness of Chuang Tse] (Beijing: Zhonghua Book Company, 2010), 189.

Traditional Chinese Culture And East Asian Security Cooperation

77

the situation and historical background of this area, China actively promoted cooperation under the leadership of Association of Southeast Asia Nations Plus Three (ASEAN+3) cooperation on energy, transport, and information and communications technology. This cooperation turned a new page in East Asia. Further, since the beginning of the Cold War, the United States has been strengthening its strategic alliance with Asian countries, but China did not adopt the same strategy. On the contrary, it stuck with a nonalignment policy, and, under the guidance of overall diplomacy established a series of strategic cooperative partnerships with Asian countries, thus maintaining regional and global stability. III

Self-Discipline (zilü 自律)

Self-discipline includes reflection, self-control, altruism, and non-enforcement. 1 Self-Reflection (ziwo fanxing 自我反省) Chinese people have always pursued and practiced self-control and self-criticism to improve and perfect themselves. According to an old saying, “One should reflect upon oneself three times a day.” In addition, according to 20th century theorist Zhu Xi, “[If we self-reflect] every day, then we can correct mistakes that we have made. And if [we have made] no mistakes, we can keep endeavoring.” Chinese people also emphasize that people should not change or lower their requirement to themselves simply because of personal chances. Instead, they should act as if they were poor yet not lose their righteousness and act as if they were rich, and they should not deviate from morals. Worldwide stability will occur only after people cultivate themselves, achieve harmony in their families, and effectively manage their nations. People should also strive not to fall behind others but instead to reflect on themselves so that they can surpass the others.12 In Western culture, people are strict with others but lax with themselves, but Eastern cultures have an opposite philosophy. They firmly believe that they can influence others by improving themselves.13 12 Confucius 孔子, Mencius 孟子, Lun Yu Meng Zi 论语 孟子 [The Analects of Confucius and The Book of Mencius] (Beijing: Yanshan Press, 2001), 303. 13 Tang Huashan 唐华山, Shouyi yisheng de hafo xinli ke 受益一生的哈佛心理课 [The lifelong benefits of the Psychology lessons taken in Harvard] (Beijing: Posts & Telecom Press, 2010), 69.

78

wang

Therefore, consistent reflection and strict requirements on oneself are precious virtues of traditional Eastern culture. When facing problems and conflicts, people in Eastern cultures strongly believe that changing themselves is more efficient and important than changing others. They should also remember that there is a large price to pay for breaking promises and breaching principles. People can influence others only by first improving themselves. 2 Self-Discipline (ziwo yueshu 自我约束) An effective shortcut for reducing errors is to strengthen self-discipline. Selfdiscipline is an effective tool for preventing people from sliding into other alternatives.14 The international community also needs more effective institutions to manage. Implementing a balance of power is one approach, but it can cause one institution to gain too much power. According to the late Robert Jackson, former United States Attorney General (1940–1941) and an Associate Justice of the United States Supreme Court (1941–1954), World War II not only strengthened people’s recognition of the danger of state-to-state wars but also revealed the importance of preventing a big power from getting out of control.15 Western values are defective in that they allow an opposing side to get too big and then become out of control; thus, European countries like to pursue infinite international power.16 However, self-discipline is as important as mutual discipline. Political scientist Alexander Wendt also mentions the crucial role self-discipline plays in the formation of collective identity.17 In international relationships, it is normal to blame others rather than ourselves when something happens. However, Chinese culture puts self-discipline first, exerting great influence on maintaining the stability of the international community. Self-discipline focuses on active self-control, rather than restricting others before restricting ourselves, merely restricting others without restricting ourselves, or simply controlling ourselves with the aid of external factors. The 14 15

16 17

Joseph Halinan, translated by Zhao Haibo 赵海波, Cuojue 错觉 [illusion ] (Beijing: CITIC Publishing House, 2009), 2 16. Robert Jackson, 罗伯特 杰克逊 and George Sørensen, 乔格 索伦森, translated by Wu Yong 吴勇, etc., Guojiguanxi xuelilunyu fangfa 国际关系学理论与方法 [Introduction to International Relations Theories and Methods] (Tianjin: Tianjin Renmin Press, 2008), 9. Zhang Wenmu 张文木, Zhanlue de zuigaojiexian bijingshi heping 战略的最高境界限毕 竟是和平 [The Highest State of Strategic is Peace, Strategic Issues], 2011, 2. Alexander Wendt 亚历山大 温特, translated by Qinyaqing, 秦亚青译, Guojizhengzhide shehuililun 国际政治的社会理论 [Social theory of International Politics] (Shanghai: Shanghai Renmin Press, 2008), 334.

Traditional Chinese Culture And East Asian Security Cooperation

79

Chinese use self-discipline not to raise their status by discrediting others but to obtain a good image by improving themselves. When facing a common standard, they should be as strict with themselves as they are with others. Two other points also apply. First, according to Western culture, countries tend to follow successful ones and to abandon failing or undeveloped ones, thus making these failing countries forever weak. Second, a growing country should pay attention to its behavior. As an old saying goes, “A tall tree catches the wind.” In other words, other states will not feel kindly toward a growing state that is inattentive to its behavior. It warns China that the more developed a country is, the more humble it should be. Therefore, an Eastern country’s image will differ from that of a Western country. No matter how strong it is, China will continue to maintain its foreign policy of peace and cooperation. 3 In Moderation (shi ke er zhi 适可而止) Chinese wisdom includes the concept of moderation. Chinese culture emphasizes that too much is as bad as too little and that greed can make people lose control. As Confucius put it: harmony without the same, joyful without being licentious, grievous without being hurtful. Everything should be done in moderation. It greatly enlightens the Chinese in handling sensitive international issues moderately and appropriately. The great Chinese philosopher Chuangtzu also emphasized the notions of balance and naturalness and warned the Chinese about the danger of excessiveness, extremity, and deliberation.18 4 Altruism (li ta zhuyi 利他主义) The core of altruism is how to deal with relations between oneself and others. The real wisdom lies in considering not only ourselves but also others. More important, we should take others’ interests into consideration when considering our own ideas. Although Western theories also emphasize the mutual benefit, they still pay more attention to their own interests. Chinese people value altruism, whereas Westerners value exclusionism. Traditional Chinese philosophy advocates thinking about others, which will, in turn, benefit oneself. Western policy advocates benefiting oneself first. As Laotzu said: “The saint never saves anything for himself. Now that he has done and given everything for humanity, he naturally will own and gain more.”19 This is the quintessence of Oriental wisdom. 18 19

Wang Meng 王蒙, 2010, Zhuangzi de kuaihuo 庄子的快活 [The joyfulness of Chuang Tse] (Beijing: Zhonghua Book Company, 2010), 62. Wang Bi 王弼 annotated, Lou Yulie 楼宇烈 checked, Laozi daodejing zhu 老子道德 经注 [Notes of Lao Tsu’s Tao Te Ching] (Beijing: Zhonghua Book Company, 2011), 200.

80

wang

Western culture, whether it is Christian culture or Muslim culture, is religious and exclusive and has a sense of mission. One characteristic of the exclusive culture with a sense of mission is the desire to change others, aiming to make others more like themselves. If this transformation fails, we would regard the others as our enemies. Chinese culture, on the other hand, is secular and inclusive, without a sense of mission. It does not try to change others. What’s more, it actively accepts and tolerates others’ cultures. Chinese interpersonal relationships evolved from altruism show a view of “receiving less whereas returning more, gaining less whereas giving more.” Chinese people believe that ignorance is bliss, and call for focusing on the overall situation and righteousness and never fighting for temporary interests. However, in the world today, interests still keep influencing human thinking. They involve ceding, sharing, and competing interests. Therefore a clear-cut line exists between the self and others and between the unequal division and monopoly. Altruism is the key to the relationship between the self and the other. For that reason, China puts forward the thought of a win-win foreign policy. “Winwin” does not refer to an ideal situation without conflict; the unequal division of benefits still remains as a problem. Therefore, it requires a combination and balance of egoism and altruism in the longer term. Although the Western world admits the integration of egoism and altruism, it attaches more importance to egoism. At the beginning of China’s implementation of a series of reform and opening-up policies, its win-win strategy emphasized the significance of the balance between egoism and altruism to China’s sustainable development. A better interpretation of the win-win” strategy in theory and in practice would make enormous creative contributions to China’s theory of development. The win-win strategy emphasizes cooperation. If cooperation aims merely for self-strengthening, it is nothing but a makeshift strategy. Only if it targets a win-win situation can the relationship be long-lasting. Win-win stresses coprosperity, sharing, interdependence, mutual-shaping, and cooperation rather than being the victor over other countries. Another notable viewpoint in altruism is helping others to succeed. It is deeply rooted in the traditional Chinese belief of benefiting mankind. Loving one’s country and helping others help to achieve a good reputation. On the contrary, benefiting oneself at the expense of others, you would achieve nothing but condemnation. On the perspective of international security, altruism refers to correctly assessing partners and taking their security into consideration. Only then can China maintain its own security.

Traditional Chinese Culture And East Asian Security Cooperation

81

5 Non-force ( fei qiangzhi 非强制) The Confucian doctrine advocates “Don’t do to others what you don’t want others to do to you,” which emphasizes introspection, whereas Christian doctrine advises, “Do unto others as you would have them do unto you,” stresses guidance and demonstration. But Chinese civilization, inheriting from Confucius and Zhuangzi, advocates modesty no matter one’s level of intelligence or success. Chinese culture also emphasizes reasonable persuasion. It is just like a move in Chinese Taichi 太极. Use tender actions to offset power from your enemy. Moreover, Sun Tzu’s The Art of War mentions that the supreme art of war is to defeat the enemy without fighting. Chinese foreign policy emphasizes non-enforcement and inclusiveness, mirroring the old Chinese belief that, if you force others to submit themselves to your rule, their admiration will not be sincere and true because they are weaker than you only in physical strength. Only with a noble character and personality will you receive sincere admiration. Disciples of Confucius honor him as a saint because he treats others—men, women, old, and young—with benevolence. People with high standards of morality never feel lonely because like-minded people are always willing to accompany and support them. Traditional Chinese culture defines a “gentleman” as a man who is reserved and gregarious but will join a group or fight for his own interests. The Chinese believe that, no matter where people live, they should be willing to make friends with others because others’ morality and reputation. In other words, a country should be like a gentleman. Chinese culture does not believe in “an-eye-for-an-eye” mentality, instead advocating the return of good for evil. Only in this way can the Chinese overcome the vicious circle in the relations between national states and eventually achieve positive development. The concept of “altruism” involves helping others to succeed, introspection, and inclusiveness. When interests diverge, the Chinese believe that people should put others in an equal position to their own position and take others’ demands into consideration. In the event of problems, people should reflect on themselves first instead of shifting the blame onto others. Ⅳ

Chinese Traditional Culture and the Solution to the East Asian Security Problem

In East Asian security, China has come up with a unique diplomacy based on China’s traditional culture. When confronting issues, whether newly arisen

82

wang

or longstanding, between China and its neighbors, China advocates working them out by providing specific solutions to specific issues. Regarding North Korea, or the People’s Democratic Public of Korea (DPRK), China firmly sticks to a multilateral approach. Additionally, China has creatively organized six-party talks on the DPRK nuclear issue. The approach calls for a step-by-step solution consistent with a long-term target and prefers a gradual conversion rather than a radical change. Despite numerous issues in DPRK, China still believes that two possibilities—to be either friends and to be enemies, both exist in the countries’ future relationships. DPRK would likely be a friendly cooperative partner by means of mutual trust and endeavors. Therefore, the simple boundary of being a friend or an enemy will not solve any problems. Regarding foreign policy, China offers its consistent assistance in trying to persuade North Korea to implement economic reform to benefit its people. China also tries its utmost to help and to patiently and carefully make an influence on DPRK. Even though DPRK has not yet changed its standpoint on the possession of nuclear weapons, China believes that its policy will ultimately be more effective and useful than that of the United States in keeping regional peace. Concerning its relationship with the United States, China unswervingly maintains its stance of peaceful cooperation. China will not yield to the logic of power politics and will not respond to challenges with a Cold War mentality. For instance, no matter what adjustments America’s Asia-Pacific allies make, China will never enter into a military alliance because the appearance of two rival camps is the last thing it wants. China maintains stable relations with the United States by maintaining the principles of interdependence, mutual benefit, self-discipline, and self-restraint in an attempt to set a positive example to influence the United States. Shelving differences on the South China Sea issue displays dialectical wisdom: China believes that all disputes can achieve resolution at the right moment in an appropriate way. Meanwhile, the Chinese admit the existence of some new challenges over the South China Sea issue and other emerging ones, such as how to effectively shelve differences and seek joint development. Therefore, some states concerned about the South China Sea issue are beginning to worry about the possible change of the status quo, fearing that other states may challenge it first. So, they make an attempt to change the status quo and achieve a power balance with the help of outside forces, attempting to benefit from the crisis. On all regional hot issues, it is easier to disagree, deny, and undermine than to agree, maintain peace, and cooperate. The problems China faces stand

Traditional Chinese Culture And East Asian Security Cooperation

83

between limited confrontation and limited cooperation; thus, the country should take advantage of an intermediate buffer to resolve differences, reduce conflicts, and control crises. To prevent the possible escalation of these issues, China should take the following steps. First, keep in contact with other countries and do not stop communication because of opinion differences. Second, to avoid escalation of conflicts, take actions that the other side can accept. Third, retain self-control rather than blaming others. The precondition of self-reflection inn the South China Sea is the result of interaction, and no one should take full responsibility. Flexibility is also important, which requires to pay attention to the combination of leading the process and remaining flexible. If one policy proves impractical or dangerous, it is required to adopt another to protect sovereignty and to avoid the escalation of military conflicts. Such policies might include dispatching a fishery administration vessel to deal with the territorial-waters crisis and to protect offshore development. When a potential conflict emerges, the rational behavior is to lower risk by slowing things down, adding buffers, or trying to work around the problem. China maintains a policy of adhering to the status quo, putting aside sensitive issues in the name of joint exploration and long-term goals. Thus, the country should resolve the South China Sea issue with a long-term perspective in mind by means of gradual rather than radical change. China must think carefully about the relationship between temporary solutions and long-term solutions. Before escalating a crisis, the country should take the following concerns into consideration. First, consider whether China has sufficient alternative plans. Current solutions, methods, and thoughts cannot address the current security problems. So China should find more alternatives and methods or concede to others in handling territory issues. Every nation worries when other countries attempt to change the status quo, especially in territorial issues. These issues, in regard to natural resources and the great powers’ relationships with each other, are becoming more complex and difficult to resolve. But countries must still fully consider more alternatives to their current security plans. Second, countries should attempt not to undermine the current situation, avoiding the escalation of crisis. Last, it is urgent to choose a temporary solution most effective and consistent with the overall solution. When facing problems, China has two choices: a temporary solution and a long-term one. Therefore, it is of great importance to choose the right solution at the right moment. Sometimes, for the sake of overall stability, China must adopt temporary solution, even though it may be irrelevant or contrary to the final one. China must also choose between a partial solution and an

84

wang

overall solution. Although it seems that the United States has no intention of achieving an overall solution, it is obvious that Eastern Asian countries, such as China, Japan, and South Korea, want a fundamental solution. In short, China has the following proposals for the future of East Asian security: integration against division, the new relationship pattern between great and small countries, the new nonalignment cooperation pattern, and the security cooperation pattern. Meanwhile, China should remember three combinations that the countries should take into consider: crisis prevention and risk-control, common interests and national interests, self-discipline and mutual constraint. V Conclusion In the world today, international changes are accelerating, global issues and international cooperation are increasing. Most of the originally Westernculture-based international-relations theories are increasingly showing limitations, dictating the need for a new perspective on international-relations theory. Eastern culture and oriental philosophy, represented by traditional Chinese culture, are useful complements. China is one of the Four Ancient Civilizations, and it has a long history and profound cultural heritage. In history, China dominated the Eastern Asia system for a long time. This process promoted the stability and development of East Asia. Western forces interrupted this stability and development only in the modern times. China’s traditional culture is extensive and profound. This essay elaborates the main idea of holism (zhengti guan 整体观), dialectical thinking (bianzheng guan 辩证观), and self-discipline (zilü 自律). Moreover, it provides a brief analysis of their effects on China’s diplomatic philosophy and practice. It is incomplete to study China’s diplomacy only from a Western perspective, just as it is counterfactual to examine China’s development from the logic of power politics or power shifts. In traditional Chinese culture, holism requires people to look at the overall picture. It emphasizes collectivism, promotes common interest, and seeks mutual benefit. Dialectical thinking reflects the Confucian Doctrine of Mean. It focuses on interaction and transformation, calls for tolerance and modifications, and advocates harmonious coexistence and common development. The concept of self-discipline in traditional Chinese culture differs from the concept in Western culture. It requires constant self-reflection, strengthens self-discipline, pursues appropriateness, and asserts altruism. Under the effect of these traditional Oriental ideas, China’s peaceful development differs from

Traditional Chinese Culture And East Asian Security Cooperation

85

that of other big powers. Regional cooperation in East Asia is also unique. For many issues on East Asian security, this article points out that the Western international relations theory of power politics and fact-oriented methods all do not contribute to problem solving. The solution to the many problems of East Asian security issues and cooperation issues needs more concentration on the guidance of the Oriental culture. Only in this way can geopolitical and traditional cultural ideas become harmonious. Works Cited Bell, Daniel A. “What can we learn from Confucianism?” http://www.guardian.co.uk/ commentisfree/belief/2009/jul/26/confucianism-china. Confucius 孔子, Mencius 孟子. Lun Yu Meng Zi 论语 孟子 [The Analects of Confucius and The Book of Mencius]. Beijing: Yanshan Press, 2001. Halinan, Joseph. Cuojue 错觉 [illusion]. Translated by Zhao Haibo 赵海波. Beijing: CITIC Publishing House, 2009. Jackson, Robert, 罗伯特 杰克逊. George Sørensen 乔格 索伦森. Guojiguanxi xuelilunyu fangfa 国际关系学理论与方法 [Introduction to International Relations Theories and Methods]. Translated by Wu Yong 吴勇, etc. Tianjin: Tianjin Renmin Press, 2008. Kissinger, Henry. On China, New York: The Penguin Press, 2011. Li Ruihuan 李瑞环. Xue zhexue yong zhexue 学哲学用哲学 [Study philosophy and use philosophy (II)]. Beijing: China Renmin University Press, 2005. Qian Mu 钱穆. Rensheng shilun 人生十论 [Ten Lessons on Life]. Nanning: Guangxi Normal University Press, 2004. Qin Yaqing 秦亚青. “Zhongguo wenhua jiqi dui waijiaojuece yingxiang 中国文化及 其对外交决策影响 [Chinese Culture and Its Implications for Foreign Policymaking].” International Studies, No. 5. 2011. Su Yan 苏言. He Pin 贺濒. Kanjian weilai: meiguo ling junshi, zhongguo zhu jingji, chaoji jingying quanjie weilai shijie 看见未来：美国领军事中国主经济——超级 精英全解未来世界 [See the future: U.S.A. leads military, China leads economy, Super Elite explain the future of the world]. Nanjing: Jiangsu People’s Publishing, 2010. Tang Huashan 唐华山. Shouyi yisheng de hafo xinli ke 受益一生的哈佛心理课 [The lifelong benefits of the Psychology lessons taken in Harvard]. Beijing: Posts & Telecom Press, 2010. Wang Bi 王弼. Lou Yulie 楼宇烈. Laozi daodejing zhu 老子道德经注 [Notes of Lao Tsu’s Tao Te Ching]. Beijing: Zhonghua Book Company, 2011.

86

wang

Wang Meng 王蒙. Zhuangzi de kuaihuo 庄子的快活 [The joyfulness of Chuang Tse]. Beijing: Zhonghua Book Company, 2010. Wendt, Alexander, 亚历山大 温特. Guojizhengzhide shehuililun 国际政治的社会 理论 [Social theory of International Politics]. Translated by Qinyaqing 秦亚青译. Shanghai: Shanghai Renmin Press, 2008. Ye Zicheng 叶自成. Chunqiu zhanguo shiqi de zhongguo waijiao sixiang 春秋战国时 期的中国外交思想 [Chinese Diplomacy Thinking During the Spring and Autumn Period and the Warring States Period]. Hong Kong: Hong Kong Social Science Press, 2003. Zhang Wenmu 张文木. Zhanlue de zuigaojiexian bijingshi heping 战略的最高境界 限毕竟是和平 [The Highest State of Strategic is Peace, Strategic Issues]. 2011. Zhang Yanying 张燕婴. Lun Yu 论语 [The Analects of Confucius]. Beijing: Zhonghua Book Company, 2006. Zheng Yongnian 郑永年. “Dangdai zhongguo waijiao de wenhuadiyuan huanjiang 当代中国外交的文化地缘环境 [Cultural and Geographical Environment of Contemporary China’s Diplomacy].” lian he zaobao, February 7, 2012.

part two International Strategy

∵

chapter 5

Repositioning China in 2020 China 2020 Research Team Abstract As China’s economy keeps earning a larger share in the world economy, the international community is no longer contending with a low-key China. Instead, it asks China to assume more global responsibilities. On the other hand, China’s overseas interests are expanding fast, which in turn means that the Chinese government must take a more active role to protect its interests. Within this context, China needs to reposition herself in the world. This is summarized by the following three principles: “unified order, multipolar world, and Co-governance (一元多极共治).” China needs to participate and maintain a unified world order (一元化的国际秩序) and become a constructive reformer (建设性改革者) of the current order. In the meantime, China should push G20 to become a formal international institution managing the world economic affairs (管理世界经济事务的正式机构). China’s reform initiatives need to be sensitive to the current stakeholders (增量改革) so that reforms in new areas can be more fruitful. China should also provide more space for the economic growth of other countries. Lastly, domestic political and economic reforms are needed to help China’s repositioning in the world.

* This report was written by the China 2020 Research Team, led by Zhou Qiren 周其仁 of the National School of Development (NSD) at Peking University and Qin Xiao 秦晓 of the Boyuan Foundation. Major background report contributors to this report and participants to discussions include: Yao Yang 姚洋, Lu Feng 卢锋, Huang Yiping 黄益平, Wu Ho-Mou 巫和懋, and Xu Jintao 徐晋涛 of NSD, Jia Qingguo 贾庆国, Zha Daojiong 査道炯, and Zhu Feng 朱锋 of the School of International Studies at Peking University, Huang Haizhou 黄海 洲 and Peng Wensheng 彭文生 of China International Capital Corporation (CICC), Chen Zhiya 陈知涯 of National Defence University PLA China, Former Columbia University Beijing Center researcher Xiao Geng 肖耿, Wang Jianye 王建业 of Exim Bank of China, and He Di 何迪 of Boyuan Foundation, amongst others. The entire research team participated in the full revision of the report before it was published.  Original report published in guoji jingji pinglun 国际经济评论 International Economic Review 2013 Issue No.3, this is an edited version with minor deletions.

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_007

90

china 2020 research team

Keywords repositioning China – unified order – multi-polar – co-governance – world order – global responsibilities

The rise of China and its impact on the global governance structure has been the most influential event since the twentieth-century’s Cold War. In 2010, China passed Japan to become the world’s second largest economic entity. Aside from a sudden unforeseeable global or domestic event that significantly alters current trends, China will surpass the United States by 2020 to become the world’s largest economic entity calculated in terms of the current value of the Dollar. The rapid growth of the Chinese economy has become a major topic around the world; both developed and developing countries are paying close attention to the phenomenon, and they are increasingly encouraging China to take on more responsibilities in international affairs. The increasing strength of the Chinese economy has also invoked a sense of cultural pride in Chinese citizens, and Chinese support for China’s more active role in world affairs is growing daily. Meanwhile, with China’s growing amount of overseas investments, its interests are directly tied to governmental stability of the investing country; the challenge now for China’s diplomatic strategy is to figure out how to protect and maintain Chinese economic interests and the safety of Chinese personnel in those countries. Within this global context China will surely have to make significant adjustments to its diplomatic strategies within the next decade and reposition itself on the global stage. China’s current diplomatic strategy remains governed by the passive principle of “hiding one’s capabilities while biding one’s time,” and some scholars (e.g. Wang Jisi 王缉思) believe that China will continue in this way for the foreseeable future. However, if the global context mentioned earlier is true, China will no longer be able to continue with such a passive policy. The aim of this report is to identify and provide China with a new adaptive position to address the changes in its economic structure in the next decade. The core concepts of this report are as follows. China’s global position for the next ten years should be based on the framework of a unified multi-polar order of cogovernance, and China should work to increase its position in global affairs on this basis. Unified order is defined not in the sense of an autocracy of any one country, but rather is the acknowledgement of a unified, global system of value and support. Multi-polar means the coexistence of different countries and powers under a unified global system of value and co-governance promotes the participation of all international powers in the global maintenance of the

repositioning china in 2020

91

unified global system of value under an accepted framework of international code. The orientation towards a unified multi-polar order of co-governance conforms to China’s developmental trends for the next ten years, and will promote China’s national interests while also contributing to the peaceful development of the world. This report contains seven sections in total. The first section discusses the prediction that China will surpass the United States and become the world’s largest economy in 2020. The report will also provide incremental and prediction data for China’s several other economic indices, and all these data fully suggest that China will significantly impact the world’s economy in the future. Section Two (2) of the report discusses the structural shifts in China’s demographics and provides a prediction of the future. In the past 20 years the labor force of China as well as other emerging countries joined the rest of the world in its business cycle fluctuations and greatly contributed to the rapid and stable increases to the world economy, what Greenspan refers to as the “Great Moderation.” Greenspan’s “Great Moderation” was due not so much to the efficient macroeconomic policies of established countries, but rather to the world being able to benefit from the tremendous amount of labor resources of emerging countries. Although China’s demographic dividends will continue to decrease in the next few years, it will remain as one of the most important forces driving the rapid growth of its economy. Section Three (3) will summarize the historical factors associated with the hierarchal transition between powerful nations and attempt to figure out conditions for a peaceful transition that will neither challenge the current world order nor engage in colonial expansions. This is a transition that will rely on trade to increase national wealth and accept a mainstream valuation system. Based on these four conditions, the report suggests that China may peacefully transition into its place as a strong and powerful country. Section Four (4) will provide further explanation for the ideals of a unified multi-polar order of co-governance from both an economic as well as an international relation perspective. This section will be the center of the report. From an economic perspective, a unified global system is the most resource-conservative system. There are many risks and conflicts around the world that need to be sequestered by power. However, when there are several powers, competition between these powers will result in the waste of valuable resources better utilized elsewhere. From an international relations perspective, unified order does not exclude multi-polarity, i.e. a corporation may put profits as their unified order goal, but will not exclude the participation of several shareholders in corporate governance to meet said goal. In reality, unified order may be understood to be the equilibrium result of a multi-polar international game in the sense that it is the concurrence of value

92

china 2020 research team

of all major national powers. A unified multi-polar order of co-­governance will not only benefit the peaceful development of the world, it will also maximize China’s national interests. In Section Five (5) and Six (6), the report will provide specific policy suggestions for China to participate in the public governance of the world under the framework of unified, multi-polar order of co-governance. Section Seven (7) will be a summary of the entire report. Ⅰ

China’s Economic Growth for the Next Decade and Ιts Impact on the Rest of the World

1 China’s Economic Growth for the Next Decade When discussing China’s GDP and when making comparisons with U.S., this report will generally refer to Nominal GDP rather than Real GDP calculated using PPP. GDP calculated with PPP reflects the standard of living for a nation’s citizens, but it does not reflect the relative purchasing power of another country, while nominal GDP does. For example, when China’s Renminbi (RMB) appreciates by 10% against the u.s. Dollar (USD), China’s GDP with PPP will not reflect the change, but Chinese residents who purchase U.S. products and services using RMB will have a 10% increase in purchasing power. As a result, when confirming the relative position between countries, nominal GDP is a better index than real GDP. In the past decade, the Chinese economy continued to maintain a consistent two-digit growth. Calculated using comparable prices, by 2012 nominal GDP reached 51.93 trillion RMB (or 8.23 trillion USD), a 67% increase from 2009. In 2009, the U.S. GDP was 2.9 times that of China, and in 2012 this figure dropped to 1.88.1 Between 2003–2012, calculated in USD, China caught up to the U.S. at a nominal rate of as high as 17.3%; this means that China will have cut its gap with U.S. by nearly half in less than 5 years.

1 Data Source: China’s GDP data from 1978–2009 comes from “Zhongguo tongji nianjian (2010)《中国统计年鉴 (2010)》[China Statistical Yearbook (2010)],” statistics after 2010 come from “Guomin jingji he shehui fazhan tongji gongbao《国民经济和社会发展统计 公报》[Statistical Bulletin for National Economy and Social Development]” on National Bureau of Statistics of China’s official website. U.S. GDP data came from the U.S. Bureau of Economic Analysis. RMB to USD conversion rates from 1981–2009 comes from “Zhongguo tongji nianjian (2010)《中国统计年鉴 (2010)》[China Statistical Yearbook (2010)]”, data after 2010 were calculated based on the annual average conversion rate of RMB, USD, and JPY as recorded by the State Administration of Foreign Exchange (SAFE).

repositioning china in 2020

93

Assuming that from 2013 onwards, China’s economic aggregate will maintain an annual rate of increase of 7.5% calculated using comparable prices, and U.S. economic aggregate will increase at 2.5% also calculated using comparable prices; assume also that U.S. inflation rate remains at 2% while Chinese inflation rate remains at 3.6%, RMB will then have an annual nominal appreciation of 2.5% against the USD. China calculated in RMB will have a nominal growth rate of 11.1%, and 13.6% if calculated using USD, while U.S. nominal growth rate will be 4.5%. Thus: by 2015, China GDP aggregate will reach $12.05 trillion USD and the U.S. gap with China will shrink to 1.47 times that China; by 2020, China’s GDP aggregate will reach $22.69 trillion USD and surpass the U.S. GDP by 3%, therefore becoming the world’s largest economy.2 Meanwhile, RMB/USD exchange rate will appreciate to 5.87 RMB/USD (by 2015) and 5.19 RMB/USD (by 2020). Assuming the world economy will grow at an annual nominal growth rate of 7% in the next 10 years, then in 2020, China’s economic proportion to the world economy will increase from the current 10% to 19%. In 2012 the Chinese GDP per capita was $6,084 USD, which ranks it at around 90 in the world. The United Nations predicts that China’s population will increase to roughly 1.43 billion people by 2020, with an average per capita income of $15,900 USD. At that point, China will have moved up to the high-income list of countries as listed by the U.N., but would still retain an average per capita income of roughly less than 25% than that of the United States. China’s proportion to world trade is identical to its share of the world’s GDP. If the investment rate of China decreases from the current high 40% to approximately 35%, its amount of investments would reach $7 trillion USD, equivalent to roughly half of the total global investment volume of $14 trillion USD. So far, China’s national defense spending amounts to about 14% that of U.S. After 2020, even if the proportion of national defense expenses relative to total government expenditures remains constant, China’s national defense expenditures will reach about half of that of the United States. 2 Trend Analysis for China’s Position in the World China’s various economic indices as compared to those of other countries around the world are changing, as evidenced in the last section’s prediction for 2 Morgan Stanley predicted that if calculated based on PPP, China will surpass the U.S. in 2016. Economist Robert Feenstra of UC Davis adjusted the World Bank estimate and predicted that if calculated based on PPP, China will Surpass U.S. by 2014. Arvind Subramanian from Peterson Institute for International Economics further calculated that if calculated based on PPP, China should have surpassed U.S. in 2010.

94

china 2020 research team

China’s next decade. This section will focus on investments, exports, FOREX reserves, bulk commodities, and other fundamental economic indices, and it will quantitatively measure China’s proportion to the global total in order to observe the relative volume of China’s economy. Different indices will have discrepancies in the results, but generally speaking, China has already become one of the most important economic bodies in the world. The first observation will be the proportion of China’s capital formation. This index rose from 5.9% in 2000 to 22.7% in 2012. In 2006, China’s share of global investments surpassed Japan, pushing close to Japan’s index peak value of 23.2% in 1992. China continued to surpass the United States for the first time in 2009, and it surpassed the European Union for the first time in 2011 and became the world’s largest investment body. China is estimated to sustain this capital growth for the foreseeable future and retain its current position in the world.3 Next we will look at China’s share of world exports. This index rose from 3.5% in 2000 to 10.5% in 2012. Chinese export shares surpassed Japan in 2004, and the U.S. in 2011, but they are far below the 34.6% of the top three countries in the European Union. Contrary to popular perception, China’s world share of exports and GDP are actually quite similar, and this similarity between indices shows that China’s export dependence is equivalent to the world average. However, due to the relatively high trade surplus, China’s import dependence remains slightly lower than the world average.4 The absolute scale of China’s FOREX reserve and its increases relative to the rest of the world suggests that China’s expansion of macroeconomic growth is facing external imbalance. China is playing economic catch-up, and domestic investment returns are relatively high, although China’s QFII regulations restrict foreign investors’ securities investments and direct investments. Private capital portfolios still have a significant amount of surplus. In 2001, capital account surplus realized mainly through FDI net inflows reached $34.8 billion USD. This figure rose significantly to approximately $265 billion USD in 2011 and the annual average was $110 billion USD (capital account surplus for the year 2012 was $16.8 Billion USD). The dual surplus of both current and capital accounts led to the abnormal growth of the FOREX reserve. China became the world’s second largest reserve holder in 2000, and in 2006 reached the trillion mark to surpass Japan and become the largest reserve holder in the world. By 3 Data Source and explanation: The index was “gross fixed capital formation” and the data came from UN statistics, 2012 data were from the prediction of IMF WEO (2012 Oct.). 4 Data Source: Prior to 2011, the index data for “export of goods and service” comes from UN statistics, 2012 data comes from World Bank WDI.

repositioning china in 2020

95

2012, the scale of China’s reserve reached $3.33 trillion USD, one-third of the world total, and surpassed the combined foreign reserve total of the beginning of the twenty-first century.5 Due to fast-paced industrialization and urbanization, China’s consumption of base metals and energy was much more accelerated than previous predictions. In the 1980s, China’s production of steel began to grow, and in 1996 it reached an estimated 100 million tons, surpassing Japan to become the biggest producer of steel6 and it has remained in this position ever since. With the turn of the century, China’s steel production continues to grow and expand at an unbelievable pace. In 2000, steel production reached 127 million tons, and rose to 717 million tons in 2012–47.5% of the world’s steel production and 1.99 times the production of U.S. Germany, Japan, Russia, and U.K. combined.7 China’s consumption of other bulk commodities such as copper, aluminum, iron ore, and petroleum are also growing at various accelerated paces. The relative size of the Chinese economy may also be observed in its growth within a set timeframe relative to the world or China’s rate of incremental contribution. For example, if we set the global index of increase in investments within a specific timeframe at 100 units, China’s relative increase in the index would be 30; China’s 30% increment relative to the world increment is defined as the “Rate of Incremental Contribution.” From the perspective of increment comparison and rate of incremental contribution, China has already become the most important economic body in the world, maybe even a superpower, and its importance on the world stage is definitely pronounced. From the GDP incremental trend value measured in USD, the European Union and the United States have been the largest incremental economic contributor nations in the world for a long time. Partially due to exchange rate fluctuations, the E.U. GDP increments measured in USD saw the larger ­fluctuations. China’s incremental trend values rose from 144 billion in 2000 to 1.118 trillion in 2012, surpassing the U.S. in 2006, and the E.U. in 2008, to become the largest global increment contributor. In the 1980s during the height of Japan’s economic catch-up, its GDP incremental trend value came close to that of the U.S., but these trends weakened during the 1990s. Although the value is showing signs of positive increase, it remains only a shadow of what it once was. The sum of GDP incremental trend values for the four other

5 Data Source: World Bank WDI Data. 6 Japanese steel production decreased from 102 million tons in 1995 to 99 million tons in 1996. China’s production increased from 95 million tons to 101 million tons. 7 Data Source: World Steel Association.

96

china 2020 research team

emerging economic bodies besides China surpassed the U.S. in 2008 and the E.U. in 2009.8 From the incremental trend values for capital formation measured in USD, Japan has surpassed the U.S. in this index since the 1980s. Japan grew to the same level as the 15 countries of the E.U. by the late 1980s and early 1990s, becoming the country with the largest investment increments, but this trend weakened after the 1990s. China’s incremental trend value of investments surpassed the U.S. in 2002 and 15 countries in the E.U. by 2006 in order to become the new country with the largest investment increments. The four other emerging economic bodies’ total investment increments surpassed the U.S. in 2004, becoming the 3rd largest incremental investment economic conglomerate after China and 15 countries in the E.U.9 From the export comparison with the three-year rate of incremental contribution for the rest of the world, it is apparent that the E.U. rate of incremental contribution for exports was higher on average, and it was the world’s largest region of incremental contribution for exports. However, due to the drastic drop in export during the financial crisis, the E.U.’s three-year rate of incremental contribution dropped to –8.7% in 2010, and bounced back to 21.6% in 2012. China surpassed Japan in this index back in 1996, and surpassed the U.S. in 2001. It then fluctuated afterwards around 10%, making it the world’s second largest incremental contributor behind the 15 countries of the E.U. Since the shrinkage of exports during the crisis was relatively small, in 2009, China’s three-year rate of incremental contribution rose from 11% during 2008 to 26.7% in 2009, temporarily passing the E.U. to become the largest incremental contributor in the world before dropping back down to 15.8% in 2012. In 1985, Japan had one of the highest rates of incremental contribution for exports, but it has dropped significantly since then, and by the late 1990s it was lower than both the U.S. and the E.U., in third place. In recent years, the other four emerging countries had a rate of incremental contribution similar to that of the U.S.10 For the past half a century, China’s various bulk commodity production and consumption compared to its global rate of incremental contribution can be 8

9 10

Data source and explanation: Other emerging countries refer to the four other BASIC countries excluding China—India, Brazil, Russia, and South Africa. HP trends extracted from various annual increments in GDP for economic bodies. 1970–1979 data comes from UN statistics “GDP and its breakdown at current price in USD,” 1980–2012 data comes from IMF WEO. Data source and explanation: 1970–2011 data comes from UN statistics, 2012 data from IMF WEO (2012 Oct). Data source and explanation: World Bank WDI Data.

repositioning china in 2020

97

categorized into different types. First of all, its rate of incremental contribution for petroleum consumption had an overall average growth, failing to surpass 10% between the 1960s and 1970s. In the past thirty years however, there were significant signs of growth: 14.9%, 24.9%, and 46.3% respectively. Second, the rate of incremental contribution for production and consumption of crude steel and iron ore sustained relatively fast growth for the last forty years, rising to 50% in the 1980s, and 92.1% and 83.0% respectively within the past decade or so. Thirdly, in the consumption of the two most important nonferrous metals of copper and aluminum, the contribution rate was no more than 20% and 10% respectively in the 1990s, but in the past 20 years, this rate of incremental contribution drastically increased, and showed an unbelievable rise to 134.2% and 80.8% respectively for the first decade of the new century.11 In summary, although the various rates of incremental contribution for bulk commodities have significant differences, their relative levels were still significantly high for the past decade. Rate of incremental contribution for petroleum was consistently more than 40%, and the rate of incremental contribution for other major crude metals was higher than 80%, and sometimes over 100%.12 Looking at these bulk commodities, the change in China’s demands has an

11

12

Data source and explanation: Petroleum data comes from U.S. Energy Information Administration. Iron ore consumption is calculated by the gross total of production and import into China, data comes from “Zhongguo gangtie gongye wushinian shuzi huibian 中国钢铁工业五十年数字汇编 [a compilation of 50 years of the China Steel Industry]” an annual Chinese Steel Industry yearbook. 2012 production data comes from State Statistics Bureau, import data comes from P.R.C. Customs statistics. Electrolytic aluminum and refined copper data comes from annual “Zhongguo youse jinshu gongye nianjian 中国有色金属工业年鉴 [China Nonferrous Industry Yearbook]” and “Zhongguo youse jinshu wushinian lishi ziliao huibian 中国有色金属工业五十年历史资料 汇编 [50 years of historical data of the China Nonferrous Industry Compilation].” Data after 2007 comes from the annual “Zhonghua renmin gongheguo guominjingji he shehuifazhan tongji gongbao 中华人民共和国国民经济和社会发展统计公报 [P.R.C. Nation Economy and Social Development statistical bulletin].” World iron ore production data comes from U.S Geological Survey, world consumption of electrolytic aluminum comes from World Metal Statistics. 2007–2008 data comes from Australian Commodities, volume 15, number 4. 2010–2012 global aluminum consumption comes from Bloomberg. World consumption of refined copper comes from World Metal Statistics. 2007–2008 data comes from ISCG (International Copper Study Group), and 2010–2012 world copper consumption data comes from Bloomberg. If during any period China’s rate of incremental contribution exceeds 100%, it suggests that the product’s production or consumption was declining for the rest of the world countries during the period.

98

china 2020 research team

obvious and significant effect on the world’s demand and supply relationship and market quotation. Ⅱ

Structural Shifts in China’s Demographics and Its Contribution to Economic Growth

The structure of a country’s demographics plays a decisive role in its long-term economic growth. Institutions are important, but institutions change; change in demographic structure however, is slow, and when the working population is declining, the demographic structure will have certain irreversible features. In the past 20 years, China’s rapid growth benefited in part from the decrease in the dependency ratio of population due to the state’s family planning regulations. In the next decade, the scale of China’s demographic dividends will continue to decrease, but it will continue to be a supportive force of China’s rapid economic growth. 1 China’s Trend of Demographic Reformation The acceleration of the Chinese labor market is declining and the numbers will turn from positive to negative by 2015, but within the population, the ratio of net producers to net consumers will maintain its relatively high position. The labor market’s trend of rapid growth for the past 20 years is changing, and UN statistics predict that China’s population and labor force supply will reach its peak around the year 2015. However, from the relationship between net producers (ages 25–64) and net consumers (less than age 25 or more than age 64), the ratio of China’s net producer to net consumer is larger than 120%, and will remain north of 100% for the next 30 years.13 Growth of China’s labor force and age structure is nearing the levels of developed countries and the quality of its labor force is better than that of other emerging countries, but it still has a way to go before it is equal to that of developed countries. China’s labor force supply for the next 10 years will continue to grow, and it is estimated to increase at an annual rate of 0.5%, slightly higher than developed countries, but clearly lower than India, Brazil, and other emerging markets. From the ratio of producer to net consumer, China’s situation is much closer to developed countries than emerging countries. Compared to India, Vietnam, and other emerging markets, China has a relatively high proportion of producers and net consumers, high reserve rates, 13

Material source: UN statistics, China International Capital Corp. (CICC) Research Department.

repositioning china in 2020

99

high production capacity, and relatively mild inflation rates. From the perspective of labor force quality, the proportion of Chinese labor population with education beyond high school is higher than that of India and emerging markets, but still lower than developed countries. China still has the potential to further increase the labor force production rate in the future, and this will help sustain its economic growth. 2 Impact of China’s Demographic Reformation on Economic Growth China’s economic growth might be hindered due to the deceleration of its labor force growth, but there will not be a large-scale decrease in the immediate future. One economic perspective indicates that China’s demographic structure is reaching the Lewisian Turning Point and so the demographic dividends will disappear, which will result in long-term structural increases in the cost of labor, a decrease in economic growth, and a continuous increase in prices.14 This view will be further discussed below in two points. First of all, increased production rates may decrease the negative effects of the disappearance of demographic dividends. The disappearing of demographic dividends means that the labor population growth is decreasing in recent years, and will turn negative around 2015, lowering labor supply. This is essentially an issue regarding the rate of potential economic growth. In China, it is true that labor growth is decreasing, and the number of young people of working age is decreasing, but these changes are a slow process, and many factors may partially counteract the impacts brought by the population change. The replacement of man-power by machine power can reduce the impact of labor cost on total cost; increase in the population’s educational level may increase labor productivity; internalizing production chains may reduce operating costs. All the aforementioned actions will reduce the economic impact of the demographic changes. Secondly, the Lewisian Turning Point is related to the concept of the urbanrural dual sector model and the urbanization of labor force, but it does not involve the overall social population or change in gross supply of labor. To be more specific, according to Lewis’ dual sector model, surplus labor forces of traditional agricultural sectors are being absorbed into the growing manufacturing sectors in two stages. The first stage is the stage of unlimited labor 14

See Cai Fang 蔡昉: “Chengshihua yu nongmingong de gongxian——houweiji shiqi zhongguo jingji zengzhang qianli de sikao 城市化与农民工的贡献——后危机时期 中国经济增长潜力的思考 [Urbanization and contribution of rural migrant workers— Reflection on post-crisis Chinese economic potential]” Zhongguo renkou kexue 中国人口 科学 China Demographic Science, 2010 Vol. 4, pp. 2–10.

100

china 2020 research team

supply. Because there are enormous labor productivity and wage differences between modern industrial sectors and traditional agricultural sectors, industrial sectors can continuously absorb the surplus labor forces. The second stage is the shortage of labor stage. The continuous transition of the labor force into manufacturing sectors supports the growth of labor productivity in traditional sectors and its product price comparison to manufacturing sectors, resulting in equivalent labor productivity between traditional and manufacturing sectors. Since manufacturing sectors can no longer attract labor force using relatively lower prices, the elasticity of wages in labor market increases. This report holds that the short-term impact of the Lewisian Turning Point on China’s growth and inflation should not be overstated. The Lewisian Turning Point happens when the increase in productivity for the agricultural sector grows close to that of the manufacturing sector. However, the productivity of China’s agricultural sector is much lower than its manufacturing sector, as illustrated in the discrepancy and continuing gap between urban and rural wages. In 2012, China’s urbanization is 51%, much lower than that of developed countries and other emerging markets. China’s urbanization process still has a long way to go, and the transition of agricultural population towards manufacturing and service sectors is not finished. Therefore, China’s Lewisian Turning Point might be simply another turning point, an improvement process accompanying the increase in labor productivity. After the 1990s, the labor force of China and emerging countries were integrated into the global market, stimulating the supply of the world economy. Under the global economic growth influenced by western society before 1990, labor forces from these countries were not utilized to their full potential. After 1990, several changes resulted in the integration of these labor forces into the world economy: first, the change in the political structure of U.S.S.R. and Eastern European countries; second, the further opening-up of Chinese reform policies; third, the liberalization of finance and trade under background of globalization. In the past 20 years, emerging markets including China, India, Russia, and Eastern European countries have integrated into the global economy, contributing approximately 700 million more workers into the world, almost equivalent to the total population of western countries. This has had a profound effect on the growth of the world economy and trade. Before 2008, the world economy had a period of accelerated and stable growth rates while sustaining a relatively low inflation rate. This is commonly referred to as The Great Moderation, and the labor supply of emerging markets was an important factor for this phenomenon. Some western economists believed that the high growth and low inflation of the world economy was primarily due to macroeconomic policies of western governments (especially

repositioning china in 2020

101

the price-fixing policies of the central bank), which controlled the inflation rate. Although policy had some effect on the demand, we cannot ignore the important effects of emerging markets on the world economic supply. The substantial increase of the labor force stimulated the productivity of world economic supply, so the increase in demand of the western world did not result in shortage of supply and increase in price. Without the ample supply of the labor force, when demand in western countries increases, prices would incur an upwards pressure, thereby forcing the central banks of these countries to increase interest rates to maintain price stability, and effecting the economic rate of growth. China’s structural shift in its demographics will result in significant changes to its relative position in the world economy. During China’s 30 years of reform, the large supply of cheap labor helped China to become the world’s center for factories and manufacturing, with its primary focus on the lower-end of the supply chain. Its main role in the world economy is primarily that of a producer and supplier, and its effects on global market demand were fairly limited. This discrepancy between supply and demand effects resulted in continuous and substantial trade and current account surplus. As the quality of its laborers increased, however, China’s labor productivity significantly improved, and China’s manufacturing industry began targeting products on the higher ends of the value chain. Meanwhile, as the incomes of Chinese citizens increase, China’s rate of consumption will also increase (especially low to mid-end consumption), demand of capital goods will increase (use machinery to replace manpower), and the service sector will improve as well. China’s economic development will become more balanced, leaning towards more reliance on internal demand rather than increased exports, and China’s influence on the world economy will mainly be reflected through its demand. Ⅲ

Normal Pattern of a Nation’s Rise and Its Inspiration for China

1 Historical Experiences In recent history, there have been seven incidences in which an emerging power surpassed a traditional power. Six of the seven times resulted in longterm conflicts or war: 16th century Spain against Holland, 17th century Holland against England, 18th and 19th century England against France, 20th century Anglo-French against Germany, Germany’s double confrontation with the Soviet Union in 1914 and 1941, and the 1941–1991 Cold War between the U.S. and Soviet Union. The only instance which did not result in conflicts or war was when the U.S. surpassed the U.K. By 1890, the U.S. surpassed the U.K. to

102

china 2020 research team

become the world’s number one economic body and by 1914, the U.S.’s per capita income had also surpassed that of the U.K. A summary of these seven historical situations is beneficial to China as we begin thinking about its global position for the next decade. The U.S. and the U.K. share the same language and similar cultures, but this does not necessarily guarantee that there will never be war between the two countries, and the American Revolutionary War is a prime example. To summarize, there are four reasons why the U.S. was able to peacefully surpass the U.K.: one, it did not challenge the established global order; two, it did not try to colonize or expand its territories; three, it used global trade to increase national wealth; four, they shared a common set of values. On the other hand, the other six incidences resulted in sustained conflicts or war because it violated one or more of the above preconditions. The established global order was constructed by the powers at the time and challenging that order meant challenging the power, which resulted in violent retaliation; colonization or territorial expansion will erode the current power’s foreign interests, which will also result in violent retaliations. Meanwhile, equal international trade will result in advancing the interests of both parties, and its methods are peaceful, therefore it is more morally justified. Lastly, having a common set of values will facilitate communication between the new and old powers, and it will help them avoid mutual suspicion and antagonism due to having different values. During the uprising process at the end of the 19th century, the U.S. was part of a global order led by the U.K. This does not necessarily mean that the U.S. preferred the U.K.’s method, but rather the U.S. believed it would benefit from staying in the current global order. Only when the U.K.’s methods threatened the U.S.’s core interests did the U.S. choose to retaliate. The Monroe Doctrine was an example of retaliation for the U.K.’s intervention in North and South America. Further, the U.S. continued to expand within its surrounding territories, but did not stress colonization abroad. It simply requested that other countries adopt an open door policy towards its commerce. In contrast, the U.S. relied on free trade rather than foreign colonization to increase its national wealth. Since free trade benefited the U.K., the U.K. was more tolerant of the U.S.’s rise. In the end, a common value system resulted in the U.S. and U.K. joining forces to fend off enemies under a different value of systems, i.e. their alliance during WWI, WWII and the Cold War that followed. Unlike the U.S., the other six historical instances of global power transition all lacked one or more of the conditions. Sixteenth century Holland overtook Spain to become the most powerful country in the western hemisphere. Both countries relied on foreign predatory trade, so there were fierce maritime confrontations. The rise of England

repositioning china in 2020

103

afterwards repeated the route taken by Holland, thus resulting in its confrontation with Holland. England eventually won, not only on the sea, but it also took over Holland’s colonization attempts in India and North America. However, England’s victory was only the overture to the conflicts. France and its alliance challenged England, and although England marginally won the Seven Years’ War (1756–1763), France in the end had its revenge when it helped the 13 colonies of North America become independent of England. However, when Napoleon lost its 1815 attack on Russia, and was subsequently defeated in Waterloo, the U.K. became the largest power of Europe, and began its reign as “the empire on which the sun never sets.” The U.K.’s 19th century economic achievements were inseparable from its imperialistic characteristics. Although Britain advocated for free trade, the premise of this was the notion of “first come, first serve” and Britain’s imperial system secured its position to always be the “first serve[d].” Entering the 20th century, the U.K. was being challenged both by Germany and the U.S. To prevent a conflict with the two large powers, the U.K. took a soft and restrained approach towards the U.S., and a direct confrontation policy with Germany. Unlike the U.S., Germany rushed to establish its presence within the traditional Anglo-French territories, which led to WWI. Germany’s double provocation towards Russia forced Russia to ally with the U.S., the U.K. and France even though Russia had a different set of values. This accelerated Germany’s defeat. After WWII, the Cold War between Russia and the U.S. was completely due to the conflict between two sets of value systems, with a mix of the two party’s arms race abroad. In summary, the reason why there are continuous conflicts or wars between existing powers and emerging powers is because of the conflict of interest between two different sets of values; on the contrary, the reason why the U.S. was able to peacefully overtake the U.K. was because it prevented confrontation of non-core interests with the U.K., and shared a common set of values with the U.K. 2 Inspiration for China As an ancient country with great contributions to human civilization, China’s dream of becoming a world power is understandable. If China is on course to surpass the U.S. to become the world’s largest economic body in 10 years, China’s relationship with the U.S. right now is similar to that of the U.S. and the U.K. at the end of the 19th century. But does China satisfy the four requirements like the U.S. did in the past? From the territorial and free trade aspects, China satisfies the conditions of the 19th century U.S. For the past few decades, China has set clear boundaries with its surrounding countries, and China has expressed substantial ­flexibility

104

china 2020 research team

in terms of conflicted territories. Of course, Taiwan and Tibet are China’s core interests, and China’s attitude towards these countries has always been firm, and it has the understanding of many countries in the world on this issue. Trade is one of the most important supports of China’s economic growth, and China is actively participating and supporting the work of the WTO. Further, China is one of the most welcoming and open countries for foreign investments, and it is second only to the U.S. as the largest target for foreign investments in the world. In terms of the current world order, China is still considered a beneficiary of the current order. On one hand, the free trade system established by the U.S. enables China to fully exert its comparative advantages, and it increases its national wealth through exports. Before entering the WTO, the U.S. gave China a Most Favored Nation (MFN) status for nearly 20 years and this allowed Chinese products to enter the world’s largest markets. The main international institutions currently in existence, the United Nations (UN), World Bank (WB), and International Monetary Fund (IMF) were all established under the leadership of the U.S. Although these organizations still have many problems, they allowed China to peacefully develop for several decades. On the other hand, China has always been supportive of several international arrangements, and has been an active participant, especially within the UN framework. Even regarding the highly controversial issue of the “Dollar Hegemony,” China has been more of a beneficiary. China’s demand for the Dollar is evident in its maintenance of the RMB to closely align with the USD. However, not everyone within China shares the same opinion on world order. Some people (especially those on the left wing) believe that the current world order is restricting China’s development and reach of power, therefore, China should change the current international order. The Chinese ­government, through its actions and announcements, reminds its citizens and foreign observers that China is not fully satisfied with fully obeying the current world order. On the subject of value systems, China’s similarity with Western civilization is much more prominent than what some may believe. From the central leadership of the communist party to the common people, free democracy is a widely accepted theory. In fact, China does not lack elements of ­democracy— the election of rural village officials happens democratically. China’s difference with western countries is not based on theory, but rather on practice; Chinese leaders continuously stress the fact that China needs time to become fully democratic. The past 30 years of reform were an attempt to shift from a planned economy towards a market economy. Decreasing the role of the government in the economy, is identical to a western set of values. Some will stress

repositioning china in 2020

105

that the historical traditions of China are different from that of the west; even if this is a valid point, Confucian teachings of the “golden mean” and being “simple and honest” are very similar to American pragmatism. However, some people within China not only reject the western value system, but actually believe that China has created a new set of values sufficient to replace the western set of values. Disputes revolving around the Beijing Consensus and the Washington Consensus are clear examples of this. Although the proposer of the Washington Consensus John Williamson does not agree, the Washington Consensus has widely been viewed as an equivalent to Neo-liberalist economics. On the opposing side is the Beijing Consensus, whose core ideals involve State Capitalism under the leadership of the central government. This perspective of putting China and the West on two sides of the balance clearly does not fit with the actual situation of China’s reform. At the most basic level, it failed to find the real reasons for China’s economic success. The discussion of the Beijing Consensus by some within China reflects the idea that China can use a new set of values to replace the western set of values currently in place in the world order. From the aforementioned discussion, it is clear that China does not yet satisfy all of the conditions like the U.S. did in the 19th century when it overtook the U.K. This is especially true in terms of the world order and values because there is still a lot of divergence within China, and this is a major concern for western countries.15 Therefore, to prevent an undesired showdown between the U.S. and China, both sides still need to work harder together. Ⅳ

Unified, Multi-polar Order of Co-governance: China’s Global Position for the Next Decade

As China’s economic body rapidly expands, both domestic and foreign elements require China to play a more active role in international affairs. From a national interest standpoint, China’s investments abroad are increasing by the day and the $3 trillion foreign currency reserve is enough to require China to participate more in the international monetary system. Internationally speaking, both developed and emerging countries are asking China to bear more international responsibilities. These responsibilities are not simply to participate in international institutions, but rather they require China to act more 15

For further discussion, see V “Ruhe canyu yiyuan duoji gongzhi:guoji fangmian 如何参 与一元多极共治：国际方面 [How to participate in a Unified Multi-polar Order of Co-governance: An International Perspective].”

106

china 2020 research team

like a world power leader. China needs to not only focus on its own national development, but it must also leave room for development for its neighboring countries. With this background, China can no longer maintain a low-profile and conservative diplomatic policy; for the next decade, China needs to transition into a more active role under the theory of a unified multi-polar order of co-governance. Unified order means that there can only be one unified set of values supporting and defining global order; multi-polar means that various world powers should coexist under a unified order; co-governance requires world powers to participate and contribute towards the maintenance of a unified global order and set of values within an accepted international framework. A unified global order and set of values can be seen as a balanced result of the monetary game participated in by the various powers within the multi-polar system. In other words, it is something agreed upon by all of the world powers, rather than something forced by the strongest power onto other nations. Unified multi-polar order of co-governance can be analogized with corporate governance. Internally, the corporation’s growth and profits are its sole targets; thus is the concept of a unified order. A corporation is established by a group of shareholders; the relationship between the majority and minority shareholders are the different “poles” of a multi-polar system. These shareholders will jointly participate in the governance of the corporation; this is co-governance. Shareholders do not have equal voices within a country and majority shareholders have more voting and decision rights than minority share­‑ holders, but they have the same objectives—furthering of the ­corporation’s growth and profits. China will become an important pole within the multi-polar system, but its objective should not be to replace the existing world order and set of values with a brand new one; rather it should work towards improving the order currently in place, and gradually realize its objective of overtaking the U.S. to become number one sometime in the latter part of the century. The following section will address the importance and necessity of a unified, multi-polar order of co-governance. There will also be a discussion describing the feasibility of China increasing its global position under the unified, multi-polar world order, followed by a discussion of how China will participate in the multi-polar governance, especially its relationship with the U.S. 1 Why a Unified Order? Within a country, the government has a monopoly on the use of force, and there can only be one government, or else there will be war. Globally, although the world cannot operate like a unified country, it has long stepped away from

repositioning china in 2020

107

obeying the “law of the jungle.” Peace is what all countries desire, and all countries wish to have a peaceful uprising. However, international affairs are always variable, and risks are everywhere, so there must be a strong and stable power responsible for the maintenance of world peace. This power may be an international institution, or an alliance of several countries, but regardless of the form, they must always be only one. This is the concept of a unified order. So why do we want this particular unified order? First of all, a unified order eliminates competition between various powers for international control, thus conserving resources. During the Cold War, the U.S. and the Soviet Union wasted a substantial amount of resources trying to surpass each other in their arms race, eventually exhausting the Soviet Union to the point of its dissolution. Furthermore, a unified order helps save transactional costs between countries. An international order is a system between various countries, and a unified system provides safeguards in international communications. Countries understand how each other will act and respond in specific situations, facilitating a stable balance between countries because no country has to secondguess another’s motives. Also, a unified order will benefit the economic development of emerging countries. International order is always led and maintained by developed countries, and so long as emerging countries do not challenge this order, it will win the acceptance of developed countries, allowing for more room and opportunities to expand and develop their national economies. In the late 1970s, China joined the international order based on the market economy maintained by the U.S., and its marketization reforms won the approval of the U.S. as well as other western countries. As a result, China’s international expansion took off, and this provided favorable external conditions for economic growth. Lastly, a unified order maintains a single set of values, eliminating competition stemming from divergent ideologies, which in turn significantly reduces the probability of international conflicts. Before its reforms, China incurred unnecessary losses due to its competition against other countries with different ideologies. First, it stood on the opposing side of western countries and tried to instill socialist ideologies; second, it severed its ties with Soviet Union that brought the countries to the brink of war. After its reforms, China began introducing western technologies into its system, along with western economic and business models, closing the gap between the two different sets of values. China’s open-door policy is without a doubt one of the most important forces behind its rapid economic growth. It is evident that the current mainstream international value system is the result of humanity’s search for the past five centuries. China was a part of this

108

china 2020 research team

search, in particular in its transition from ancient to modern civilization. Some people prefer to see China’s revolution as an exceptional case, but from a historical perspective, China’s revolution is just like that of the English Revolution or the French Revolution. A commonality between all of these revolutions is the transition from an ancient agrarian society to a modern civilization. Therefore, China’s current system should not be viewed as an exception to the history of mankind, but rather an intermediate state between its transitions to a perfectly modern society. The current state of China and its future direction can only be fully appreciated through an observation of historical evidence. 2 Why Multi-polar Co-governance? First of all, multi-polar co-governance is demanded by the U.S. as its relative position decreases. After the dissolution of the Soviet Union, the U.S. essentially ruled the world. However, after the September 11th incident, the U.S. became increasingly powerless and both the financial and subsequent debt crisis only exacerbated the situation. To make up for its huge financial deficit, the U.S. government had no choice but to seek out loans from other countries; and to stimulate economic recovery, the U.S. Federal Reserve had no choice but to issue more currency. These attempts of relief are only temporary fixes with severe residual effects. Federal Reserve’s QE policies resulted in global inflation, but these inflations are usually unbalanced, mainly affecting emerging economies such as China, India and Brazil. Although these countries suffered, the unbalanced inflation nevertheless transferred some wealth from the U.S. into these countries, further weakening the U.S.’s position. As the emerging economies rise to prominence, the world’s geopolitical landscape substantially change. For example, currently, China’s military spending is only approximately one-tenth that of the U.S., but in 10 years, even if China maintains its military spending to be proportional with its overall government expenditures, China’s gross military spending will reach half of that of the U.S. Under this circumstance, as long as the U.S. remains in control of the situation, it will be reasonably expected to ask China to assume at least some global military responsibilities. Secondly, other countries also have the desire to participate in global governance. During the Cold War, Europe was essentially a dependency of the U.S.; as their common enemy the Soviet Union dissolved, European countries began searching for their place, with the E.U. being the product of its efforts. Even though the E.U.’s stances on many affairs are similar to those of the U.S., there are still disagreements between the two when it comes to nongeopolitical affairs. One prime example of disagreement is the difference in attitudes regarding global warming. Currently, the U.S. has essentially given

repositioning china in 2020

109

up on ­reducing greenhouse gas emissions, and it has indefinitely shelved the Clean Energy Act. European countries, however, were essentially established upon the foundation of reducing energy consumption, and are at the forefront of the global effort of conserving emissions, thus they are much more willing to promote a globalized emission reduction agreement. Although Russia has now fallen to a second-tier country, it nevertheless remains in possession of a powerful military, hoping for an eventual return to prominence, and it will continue to play an important role in international affairs. India and Brazil are actively seeking an opportunity to be a part of the UN Council, and their influence is increasing. Furthermore, the regional influences of Turkey and several countries in Africa, like South Africa, cannot be ignored. China’s economic uprising has significantly increased its influence in international affairs. What all of this means is that the U.S. can no longer be fully in control of a unipolar world. Furthermore, a multi-polar world does not necessarily have to be multiordered. As the aforementioned discussion suggests, a unified order is better than multiple orders. A multi-polar world may have co-governance, like shareholders coordinating within a corporation. As long as participating countries have sufficient overlapping interests, co-governance is possible. Lastly, from China’s own perspective, participating in global co-governance under a multi-polar world is better than going rogue, or starting something new. Acting rogue will appear to other countries as free-riding, and China will be seen as being irresponsible, it could even be excluded by other countries altogether. Starting something new will be a direct confrontation to the existing world order, and it will not be tolerated by western powers, especially not by the U.S. In truth, China’s national interests may be exponentially expanded under the current global order. This is because under various international organizations, voting and decision-making power are allocated based on the relative GDP of a country weighed against the rest of the world. Therefore, as China’s economy grows, its voting and decision-making power will most likely grow in conjunction. 3 China’s Position under a Unified Multi-polar Order The change in the relative position of the U.S. does not necessary symbolize its decline. In the foreseeable future, there will not be a country or power capable of acting against the U.S. or taking over its leadership position. The greatest advantage of the U.S. is its self-regulating system capable of fending off challenges and various crises. Under the future global governance framework, the U.S. will no longer enjoy an absolute leadership, but it will nevertheless retain its majority leadership. Under these circumstances, will China’s participation

110

china 2020 research team

in a unified multi-polar system mean forgoing China’s independence in international affairs? Furthermore, will China’s economic development be handicapped by other countries? The first question is more important than the second question, so it will be discussed extensively afterwards. Regarding the second question, the answer is most likely yes. As China actively participates in global governance, or to use the words of western powers—undertakes more global responsibilities— China will necessarily have to consider its neighbors’ interests, and leave for them some room for development. Toyota is the largest automobile manufacturer in the world, capable of producing quality vehicles of any class and model, but it does not market its flagship full-sized Lexus SUV in the U.S. market, because it wants to leave room for U.S. manufacturers. Using statistics from the first section, China’s economic development has a huge impact on global markets and resource supplies, and many countries feel that China is hindering their development. This is not beneficial to the image of China in the rest of the world, and it will encourage protectionism, ultimately restricting China’s development. But, if China chooses to be considerate of other countries, it will reciprocally win valuable friends, allowing more room in China’s diplomatic and foreign economic policies. Currently, China’s foreign investments are largely in the resources sector. As domestic businesses develop, businesses in other sectors will begin investing abroad, and China’s international reputation will become the crucial determinant of these companies’ success or failure. Therefore, participation in global governance may reduce China’s eco‑ ­nomic growth in the short-run, but will be beneficial to China’s long-term economic growth. Going back to the first question, the essence of this question is determining the best way to manage the Sino-U.S. relationship. In this aspect, it must be clear that there are different sides to the relationship. There are conflicts as well as cooperation between the two countries, and under a unified multipolar co-governance framework, cooperative prospects may be broader. The conflicts mainly arise from the following: conflicting interests between an existing power and an emerging power; different social institutions, especially conflicting values; China’s unifying stance on Taiwan. The U.S. views Taiwan an important part of its Asian strategy, and there exists the possibility of armed conflicts between the U.S. and China. The conflicting interests arise from fundamental elements; thus there will not be a possible solution in the short-run, but it is also unlikely that the situation will escalate into war. This is because the interdependency between the two countries allows for the formation of mutual interests, which in turn allows for the rational, material, and intelligent consideration of the two country’s differences, and helps resolve divergences, conflicts, and possible crises.

repositioning china in 2020

111

There are also many similarities between China and the U.S. China is undergoing reform, and its commercial and economic cooperation with the U.S. has had unprecedented developments, especially after China’s entrance into the WTO. Although there are trade imbalances and frictions from time to time, and disputes regarding RMB’s exchange rate remains a focus of discussions, the mutual reliance of the two country’s economies is increasing. This reliance is especially evident after the financial crisis. Global economic recovery and rebalance must be led by the cooperation of China and the U.S., and the mutual economic and trade reliance will establish the foundation of Sino-u.s. relations. Regarding national safety, threats of terrorism and the possibility of nuclear proliferation, China and the U.S. are also cooperating due to mutual interests. This bilateral relationship, to sum up using the words of Deng Xiaoping (邓小平), is the idea that: “[the relationship between China and the U.S.] won’t get better, but can’t get worse.” The development towards either side of the spectrum is limited. As long as the U.S. cannot contain China’s growth and China does not have the ambition to overtake the U.S. to become the world’s leader, the current bilateral relationship will likely persist for a fair length of time. Under a unified multi-polar order of co-governance, China and the U.S. must agree upon common ground to provide public goods for global governance, including the maintenance of world peace, establishment of a fair and just order, stimulating global economic growth and social development, as well as coping with humanitarian challenges, i.e. poverty, nuclear proliferation, threats of terrorism, deterioration of the environment, conservation of food and energy, education and health reforms, prevention of natural disasters, rational allocation of resources. China and the U.S. together comprise a relatively large proportion of the global economy, with relatively large influences on political, military, and cultural factors. Providing global public goods is not only a necessary obligation, but also a beneficial action. Cooperating with the U.S. does not necessarily require China to forego its own national interest. Regarding China’s core interests (e.g. keeping its territories intact), China must show a firm resolve; regarding unreasonable aspects of the international order, China must push for reforms. However, from a strategic standpoint, reforming unreasonable aspects of the international order is not a direct challenge to the U.S., but rather it would mean incremental changes on marginal issues. In other words, China’s participation in a unified multi-polar order of co-governance is one of a cooperator, but also of a constructive innovator. Section VI of this report “How to Participate in a Unified Multi-polar Order of Co-governance: A Domestic Perspective” contains a more detailed discussion on this subject.

112

china 2020 research team

In short, participation in a unified multi-polar order of co-governance fits China’s long-term interests, and it will win the support of many other countries. On the other hand, some of China’s diplomatic policy orientations and domestic changes are invoking concern and doubts in many western countries. The next section discusses this issue and suggests a few specific policy suggestions. Ⅴ

How to Participate in a Unified Multi-polar Order of Co-governance: An International Perspective

With the repositioning under a unified multi-polar order of co-governance, China must more actively participate in global governance, and in principle become not only a cooperator in the current order, but also a constructive innovator. The key is to find a balance between the two roles. This section contains six specific policy suggestions, for the reference of decision-makers. 1 Multilateral International Institutions China’s current foreign affairs policies incline towards bilateral rather than multilateral relationships. Bilateral relations may resolve specific issues between two countries, but under the current background of globalization, China’s bilateral relationship with a world power will inevitably affect other countries, so resolving an issue with one world power may result in issues with the others. As China’s economic body grows, China must adjust its foreign affairs policy to account for both bilateral as well as multilateral relationships, and it must more actively participate in G20, IMF, World Bank, and other multilateral institutions. China’s objective is not to change the current rules in existence, but rather to use current rules to realize its goals. Currently existing rules essentially allocate power amongst countries based on the size of their economy; as China’s economic body grows, these rules will become more beneficial for China. In the field of economics, G20 and IMF are two vital international organizations, and China must work to more actively participate with these organizations. The UN is too massive, and the decision-making process is relatively slow, so it is not a suitable platform for pressing matters such as economic and financial discussions. G20 is an idea platform because it includes the main economic bodies, and the relative size of their economies establishes what type of role the countries will hold within the organization. It is also relatively easier to establish consensus on economic and financial issues. However, currently G20 is still only a consulting organization, and decisions are usually made based

repositioning china in 2020

113

on the wishes of the U.S., making the organization more like a multilateral method for the U.S. to assert pressure on China. Under these circumstances, China’s policy can be divided into a short-term and a long-term strategy. In the short-term, China may attempt to suggest the normalization of G20, with the core focus on: establishing a governance framework similar to that of a corporation, allocating voting rights based on the nation’s economic size; turning the IMF into the permanent establishment of G20 (or set up a G20 secretariat within the IMF), specifically to execute decisions made by G20. If the first suggestion may be realized, within ten years China’s voting rights will resemble that of the U.S. Since voting rights within the IMF are already allocated based on the nation’s economy size, China’s portion of the rights will increase in time. Meanwhile, China must strive to obtain more senior positions, in order to be more influential in the decision-making process of the IMF. In the long-run, China’s target is to transition G20 into a permanent establishment to manage global economic affairs, forming a division of labor with the UN, whose focus shall mainly be on politics and national safety. The ­decision-making structure of the UN is primarily the use of veto power and majority rules. In contrast, G20’s decision-making structure should be based on shares. It is foreseeable that by the middle of the 21st century, the economic bodies of China and the U.S. will be neck and neck, and the aggregate size of the two economies will be more than twice the size of the third largest power. Therefore, if G20 develops as this report suggests, in ten years, the management of the world’s economy will be undoubtedly under the co-governance of China and the U.S. 2 Incremental Reforms The framework of international power is disadvantageous to China mainly due to the U.S.’s policies towards China. For the U.S., uncertainties remain regarding China’s future development, thus the U.S. must hedge its bets in order to reduce the risk that these uncertainties might turn out to threaten U.S. interests. In this context, any attempts by China to change the world order will be seen as a challenge to U.S. interests. However, China will not choose to stand still and allow itself to be constrained by the U.S. China’s strategy should be primarily focused on incremental reforms and it should avoid any actions that may violate other world powers, especially the U.S. The suggestion for G20 is such an incremental policy. This would establish a regional or cross-regional international organization or institution. A free trade zone is another viable option; specifically, further research on a free trade region for the three countries in Northeast Asia and the establishment of an Asian monetary fund organization.

114

china 2020 research team

Statistics suggest that trade between China, Japan and South Korea has always been very close, and the level of economic integration is much higher than what people may imagine it to be. Several macroeconomic data (e.g. real exchange rate) also appear to trend towards synchronization. The establishment of a Northeast Asian free trade zone will greatly increase the level of benefits for the citizens of the three countries. Also, the three countries share a similar cultural background, and cultural communications are much easier. From a geopolitical perspective, Japan and South Korea are approximately between China and the U.S. If they do not become friends of China, they will become allies in the hedging process of the U.S. against China. Since the Asian financial crisis, Asian countries have accelerated the establishment of regional economic cooperative institutions, including the Currency SWAP Agreement established under the framework of the Chiang Mai Initiative. However, so far, there is yet to be substantial progress in the development of these institutions. For example, when the financial crisis worsened in 2008, South Korea needed liquidity support for hard currency, but for historic reasons, it refused to seek the assistance of the IMF. It also refused to initiate a regional reserve mechanism because these mechanisms are also restricted by IMF’s conditional clause. Eventually South Korea applied for liquidity swap agreements with the U.S. Federal Reserve. This evidence suggests that there must be relatively large advancements in regional cooperative institutions. After the Asian financial crisis, Japan suggested the establishment of an Asian Monetary Fund (AMF), but it was shelved after the opposition from the U.S. and a lack of support from China. China’s stance at the time may have been constrained due to international economicpolitical elements, but this type of issue may have to be revisited under the new global economic structure. For example, Europe has already touched on the possibility of creating a European Monetary Fund (EMF). If this suggestion is eventually carried out, it will clearly lead to changes in the current management system of international finance. China’s influence in Africa and Latin America is increasing as well, and China should continue its dialogue with African and Latin American governments. However, western academics and some within Africa and Latin America often label China as promoting neocolonialism. China has substantially aided Africa, yet it fails to win the approval of the African elites. China needs to learn from Japan’s assistance to China. Japan was one of the largest supporters of China, and has nurtured a large number of Chinese government officials and normal students through intergovernmental agreements, yet it failed to establish a positive image in China. China has done a lot for Africa, and has also cultivated a large number of African officials and normal students, but it still

repositioning china in 2020

115

needs to do more work in order to win the approval of the upper class in Africa as well as of the international community. From the U.S. experience, China can consider the idea of establishing a fund specifically for African studies, allowing scholars from China as well as other regions to apply and engage in joint research about and within Africa. As far as management goes, China structure the organization to be owned by the state but managed by individuals, so that prominent scholars in both China and abroad will be responsible for choosing the projects. Priority may be given to research relating to China’s investments in Africa. China has done a better job in Africa than western countries, but this fact must be transmitted through the research of the academics. All of the BRICS Nations are large emerging powers, and therefore share a mutual objective. The periodic conferences of BRICS Nations allow the world to hear their aggregate voice. China must work to ensure that the U.S. and the E.U. will not view this conference as an attempt to start something new. This requires that the participants in the BRICS conferences should voice their opinions but not take specific actions. Also, there are many differences amongst BRICS Nations, and the cost for acting together is very high. Therefore, for carrying out substantial changes, China should view the G20 as a better platform. 3 Learning to Become a World Power China’s economic growth will definitely impact the world. Thus, to win international support China should always try to leave other countries, especially emerging ones, room for development. Even though China’s current foreign trade policy is not in violation of free trade principles, China should nevertheless consider other nations’ development interests when drafting its foreign economic policies. China should learn from the experiences of the U.S. in this respect. Its economy grew exponentially post-WWII. Germany, Japan, and the Four Asian Tigers during their initial stages of economic development relied heavily on the U.S. market. They all tried to peg their local currency to that of the U.S., and the U.S. had a very tolerant attitude towards these actions. China’s economic growth also benefited from the favorable conditions provided by the U.S., most notably its MFN treatment. Before 1994, China used a dual-exchange rate system, promoting export while restricting imports. The IMF was initially very much opposed to this system, but since the U.S. was silent on the matter, the IMF dropped the opposition. This superpower mentality won the U.S. many friends and allies. China’s rapid economic growth not only impacted developed countries, but it also impacted emerging countries. This is mainly evident through the following aspects. First, China’s products were cheap but good, and this affected the national industries of several emerging countries. Second, some

116

china 2020 research team

e­ merging countries over-relied on resource exportation, resulting in the “curse of resources,” which led to a reduction in manufacturing industries, appreciating domestic currencies, and internal corruption. Although China’s share of resource exports for most countries was relatively low, its actions were labeled as neo-imperialism. Further, China’s exchange rate system lacks flexibility, as the currency of other emerging countries (e.g. Brazil) rapidly appreciates against the dollar, RMB instead follows the USD and depreciates against the other countries. Needless to say, the emerging countries resented China’s action. Lastly, besides the U.S., China’s trade with other countries remained balanced overall (e.g. China’s aggregate trade surplus was essentially equivalent to its trade surplus against the U.S.). However, countries with a trade surplus against China were mainly resource exporters, with the exception of Japan, South Korea, and a few Southeast Asian countries, and most emerging countries had a trade deficit against China. China had many assistance programs in Africa, but it gave Africa mainly import credits, hoping that it would promote the purchase of Chinese products by African countries. Learning to be a superpower means leaving room for the development of weaker countries. Excessive surplus is one of the crucial reasons for China’s economic imbalance, and one way to reduce surplus is to increase imports from emerging countries. By leaving room for other countries, China’s rate of growth will relatively decline, but it also means the transition of China from a manufacture-oriented country towards a consumption-oriented country, and increasing resident welfare. 4 Reforms of the International Monetary System Even after the financial crisis, the Dollar’s dominant position in inter­ national financial transactions remains unchanged. Based on Bank for Inter‑­ national Settlements (BIS) statistics, although the ratio of the Dollar in international bank debts decreased to 43% during the crisis (early 2008 was the trough of the decline beginning from 54% in late 2000), it returned to the current 49% (as of 2012 3Q). However, this trend is clearly unsustainable in the long run, so how will the future of international reserve currency play out? There are three possibilities: first, the Dollar may rebound, and continue its responsibilities as the global leading currency; second, not only will the Dollar weaken, but the reserve currency system diversifies, and the strength of Euro, RMB, and other currencies increase; third, the creation of a new global currency, such as the IMF’s special drawing rights (SDR). When faced with the three possibilities, China should separate what should be from the reality. The USD’s hegemony should be reformed because it is unfavorable to the rest of the world; but in reality, almost none of the e­ xisting

repositioning china in 2020

117

alternatives would be able to change the dollar’s dominant position in the short-term. SDRs are not a form of currency, and they function at most as storage of value. It would be nearly impossible for it to be transformed into a global currency unless a world government is established. A more practical prediction is the second possibility, which would create a three-way competition between the Dollar, the Euro, and the RMB. For this, China’s insistence on the globalization of RMB is the correct path of development. To be an international currency, another country’s residents and corporations must hold such a currency. For example, the U.S. used the Dollar’s dominant position to provide Dollars to other countries through trade deficits. This method, however, will not work for China, so the only alternatives for China are the foreign issuance of loans in RMB, and the establishment of foreign RMB bond markets to make sure the RMB stays abroad. Currently, the Chinese government is doing just this. Since 2010, the government began encouraging overseas trade settlements in RMB, and in less than two years, trade settlements in RMB increased exponentially from 535 billion RMB in 2010 to 2944 billion RMB in 2012. Hong Kong is firmly established as China’s point of entry into offshore markets. By end of 2012, RMB deposits in Hong Kong exceeded 600 billion RMB and the outstanding balance for RMB loans through Hong Kong banks is close to 79 billion RMB (2010: 1.8 billion). RMB bond issuance in Hong Kong is also rapidly rising, increasing from 35.8 billion in 2010 to 107.9 billion in 2011, and 112.2 billion in 2012. China’s next objective should be to figure out how to gradually implement the opening of its capital accounts and to establish a fully floating RMB exchange rate. A large amount of RMB flowing offshore will undoubtedly necessitate China’s development of channels for it to return onshore in other ways than through trade settlements. Therefore, the opening-up of China’s capital accounts is inevitable. However, by opening-up capital accounts, it becomes impossible to maintain a steady exchange rate and also an independent monetary policy. This further becomes problematic because an independent monetary policy is essential for an economy the size of China, so the only possible alternative is to have a fully floating RMB exchange rate. The central government’s goals should be to complete its opening-up of capital accounts and to ensure a fully floating RMB exchange rate within the next five to ten years. To reduce the resulting impact, China should try to adjust its RMB exchange rate towards the equilibrium exchange rate as soon as possible. 5 Refrain from Aggressive State Capitalism As pointed out in section III of this report “Normal Pattern of a Nation’s Rise and its Inspirations for China,” state capitalism is creating concern throughout

118

china 2020 research team

western political and academic fields regarding China’s future. Before, western politicians and academics were in consensus that China’s economic development is good for the world, but some are becoming unsure of this, because they believe China’s state capitalism not only results in unfair competition between China and other countries, but it is becoming a direct challenge to the current international values. Chinese corporations’ attempts to acquire western corporations were blocked multiple times by regulators not only because they were prejudiced against China, but also because the regulators were suspicious that the Chinese government was involved in the background. The main way to prevent state capitalism is to ensure that the government is not constantly endorsing its domestic corporations. The truth is, several domestic corporations understand the government’s motives, and try to use it for their own interests. For as much as it is possible, the government should allow its corporations to engage in negotiations by themselves without direct government involvement. If necessary, the government should try to limit its involvement to industry associations and the government’s role should be to only lend a helping hand when it is absolutely necessary (e.g. Geely’s acquisition of Volvo). 6 Sino-U.S. Relations The Sino-U.S. relationship is the foundation of all of China’s foreign relationships. So long as there are no major changes in the global structure, China will possibly overtake the U.S. to become the world’s leader over the latter part of the century; however, it is unwise for China to challenge the U.S. position at this moment. Since the financial crisis, the Sino-u.s. relationship is in decline, possibly even leading to confrontation one day. In current situations, the U.S. is experiencing quite a bit of anxiety regarding the future direction of China, and has begun resurveying and repositioning China in the following ways. First, the U.S. is combing through and widening central economic and trade disputes, attempting to push China into engaging in a new round of dialogues related to these issues. The U.S. has consistently criticized China regarding the RMB exchange rate and the imbalance of the international balance of payment. Regarding U.S. policy responses, not only were there Congressional attempts to place unilateral pressure on China through legislatures, there was also a strong emphasis on bilateral dialogues between the two nations as well as attempts to find resolutions under the G20 framework. The U.S. especially emphasized that the RMB exchange rate is a multilateral issue and it considers Sino-U.S. trade imbalances an important factor for global trade imbalances. Furthermore, the U.S. has also questioned and appealed to China’s current stances on Intellectual Property Rights (IPR), Government

repositioning china in 2020

119

Procurement Agreements (GPA), and proprietary intellectual property rights. These economic and trade policies and manufacturing polices are all closely aligned to U.S. business interests. Second, the U.S. is asking itself whether the initial assessments [on China] are still correct, demonstrating U.S. intentions to reassess its policy and strategic relationship with China. For example, the U.S. used China’s recent “Guo Jin Min Tui” (国进民退, the state advances, the private sector retreats) discussions to ask whether the initial assessment—that China is moving towards a market economy system—is still correct. The U.S. is using China’s recent foreign trade disputes and China’s recent disputes with its neighboring countries to ask whether the initial assessment—that China’s development will be ­beneficial to the healthy and stable development of the geopolitical structure—is still correct. Furthermore, the U.S. is wondering if China will accept current international rules and actively participate in formulating future international rules. The U.S. is even going as far as to ask whether a prosperous and powerful China will conform to the fundamental interests of the U.S. and the world. Third, the U.S. is using historical comparison to engage in deep reflection. Basically, both U.S. officials and citizens believe that China is now a great power. U.S. elites believe that contemporary world history teaches us that the overtaking of established powers by emerging powers is the decisive reason for the various turning points of contemporary history and that proper management of the overtaking will be beneficial to the advancement of history. The elites believe that the most important issue is to accord emerging powers enough respect on one hand, but also to ensure that emerging powers are content to accept existing rules and that they are willing to actively participate and contribute to the formulating of new rules, on the other. Furthermore, the elites believe that the U.S. has given China enough respect, and what remains to be seen is whether or not China is willing to actively contribute to the writing of the rules. The reassessment of U.S. policies towards China reflects the strategic state of anxiety of U.S. elites as they face imminent in-depth challenges from China. On the one hand, the U.S. needs the aid and support of other nations in order to resolve its current crisis but it still wants to maintain its alpha-dog mentality. On the other hand, it must also give in to realities and attempt to actively seek a resolution. The various “whether initial assessment is still correct” questions, although fairly one-sided in the interpretation of China’s trends and policies, still serve as a reminder for China regarding its foreign policies towards the U.S. Most importantly, China should not try to challenge the current world order, but rather it should try to advance its position under the current world order.

120

china 2020 research team

The truth is that it is the European countries are actually the most affected by China’s uprising in terms of international affairs, because they must give up a portion of their voting and decision-making rights in international organizations. China’s objective for the next decade should not be focused on restricting or checking and balancing the U.S., but rather on advancing its position internally within the international framework led by the U.S. China’s relationship with the U.S. should be based on the principle of finding the greatest common divisor (GCD). Regarding the attitude towards the dollar hegemony, China should take a realist approach. China should look towards the future, but work in the present, and continue to conditionally maintain the position of the Dollar as the international currency. Conditional maintenance means asking the U.S. to implement responsible monetary and fiscal policies. U.S. monetary and fiscal policies must consider the potential negative effects they may have on the world economy, especially emerging economies. The U.S. must not engage in trade or investment protectionism, and developed countries must remove restrictions on China’s exportation of high-tech products. Currently, China and the U.S. are engaged in frequent negotiations in areas of trade. On this basis, it is plausible to require the two countries to establish a consultative organization to coordinate the currency and exchange rate policies between the two countries. As an international reserve currency, the U.S. will not be able to overcome the Triffin Dilemma, because on one hand the U.S. must seek to maintain a stable global financial system, while on the other hand it retains the impulse to oversupply its currency. China and the U.S. have frequent trade and capital interactions. The RMB will not become fully independent from the Dollar to become an absolute floating currency anytime soon, thus China’s monetary policies remain tied down by U.S. monetary policies, and a standing consultative organization will be beneficial for China. Although the U.S. might potentially oppose such an organization, it is still a viable possibility. Even if China fails to come into an agreement with the U.S., it may still consider raising this suggestion within the framework of the G20, and unilaterally restricting the irresponsible monetary and fiscal policies of the U.S. Ⅵ

How to Participate in a Unified Multi-polar Order of Co-governance: A Domestic Perspective

China must adapt to repositioning itself in a unified multi-polar order of cogovernance, and must implement supplemental domestic policy reforms. It must improve China’s soft power in the world, reduce direct government

repositioning china in 2020

121

­ articipation in economics, and turn government economics into public p finance. These goals should be approached from the directions of politics, economics, and human resources. 1 Reforming the Political System Reforms of political systems and values are highly controversial but unavoidable. When choosing the optimal route for modernization, each country has its distinct national circumstances, history, and cultural traditions; thus it is impossible and also incorrect to try and fit a single model of modernization across all countries. But characteristics should be a universally tolerated variant, not an incompatible alternative. Universality is in terms of the value of freedom, rationality, and individual rights and the accompanying democratic regime governed by law. China, while maintaining its own unique characteristics, should not exclude or reject the values of world civilization; or try to distinguish between socialist and capitalist values; or attempt to deconstruct universal values and democratic regimes using conspiracy theories. Furthermore, China should not confuse western countries’ imperialist aspects towards foreign countries with their domestically democratic aspects. China’s reform of its political systems and values is an extremely significant attempt at social transformation, and China should maintain its uniformity and stability during its transformation. Meanwhile, China must also try to create a rational, open, and accommodating political atmosphere, because the pros and cons of regulation and values can only be verified under an openly competitive environment. China has been through more than 30 years of reforms, and during these 30 years, while the world was changing China, China was also changing the world. China is now at a critical moment of its economic and social transformation, and people should reasonably believe that the modernization of a civilization with more than 5000 years of history will be beneficial to its own future and the rest of the world. There must be a point of penetration in order to reform a political system, and China’s current economic imbalance is the perfect opportunity. There are many reasons for the economic imbalance but a major factor is the distortion of government actions. The government’s financial policies are economic finances not public finances, while the government maintains itself to be a production-oriented government. This is reflected in several ways. First, the Chinese government invests more than 20% of its government revenue into economic development, more than two times that of many other countries, while the proportion of China’s social security and health expenditures is approximately half of other countries. Furthermore, the Chinese government has a very high savings rate, more than household saving rate for a

122

china 2020 research team

majority of the years, close to 45% in recent years. In the last decade, China’s household saving rate has steadily improved due to government contributions. Also, the central government controls nearly 60% of the revenue above the line, but the central government’s transfer expenditure for local governments primarily focuses on financial transfers rather than public transfers. Financial transfers are closely related to the growth of local government revenues, and a majority requires local funding from local governments, thus, most of the transfer ends up being spent on project constructions rather than improving public benefits. Lastly, a large amount of government investments in infrastructure is used to directly or indirectly subsidize producers, which is especially evident in constructing development zones and attracting developers. Furthermore, the government’s infrastructure investments require a large amount of bank loans. In recent years, more than 30% of aggregate bank loans were used on infrastructure investments, and a large portion of that were government loans. Large amounts of government loans restrict private investments, especially those of mid-small sized businesses, forcing private investors to rely more heavily on private savings to expand production, and therefore resulting in the increase of the savings rate in corporations. All of the above exacerbates China’s imbalance both domestically and abroad, and this imbalance is becoming the bottleneck that constricts China’s economic development. The history of reforms demonstrates that there is no better time for reform than during a time of crisis. Currently, China’s imbalance creates an opportunity for the next step in political reforms, and the best way to proceed is to reform the production-oriented government and change economic finance into public finance. The biggest obstacle in this reform is the local governments, because they have a strong inclination to develop their economy. It is impossible to try and change the ways of the local government using the old top-down approach. When faced with financial revenue, governments above cannot possibly convince lower governments to reduce economic investments. To realize the shift from economic finance into public finance, the government must fully utilize the National People’s Congress (NPC), and make sure that the representatives are truly carrying out their mission to reduce unnecessary government expenditures. Because being a NPC representative is a part-time job, it is necessary to establish a special budgeting office for each level of the NPC, employ specialized employees, and help the representative examine and approve preliminary budgets before they are finalized. As income increases, the public is becoming increasingly sensitive to the issue of taxation and many are demanding the government to make tax revenue and expenditures public. Currently, public outcries are mainly vented outside of the s­ ystem. However the government needs to improve the situation and turn public outcry

repositioning china in 2020

123

into a democratic process within the system. This way, the government will be able to not only control overflowing populism, but it will also reform the direction of government expenditures and return more government revenue to the public. The recent NPC passed the 12th five-year plan, making the transition of the method of growth and improving revenue allocation as the top priority for economic development, rather than purely focusing on aggregate sum and rate of growth. This shows that China’s economic development is changing from a strategic opportunity period of high-speed growth to a strategic opportunity period for economic transition. To ensure the stability of this change, the government’s role must be necessarily changed as well. 2 Economic Reforms China’s potential is primarily reflected through the size of its economy. If we focus on technological innovations, human capital, energy consumption per GDP and other comprehensive productivity indices, China is still very much behind other advanced countries. If we focus on GDP per capita, household property, medical and education, social security, environmental protection, and other indices which reflect national wealth, the difference is even more apparent. This shows that although China has become one of the biggest economic bodies in the world, it is not strong, and definitely not rich. The road from poverty to wealth is a historical process of economic development. China has been through more than 30 years of consistent, high-speed growth, and if the speed stays the same, it is only a matter of time before China reaches the point of prosperity. However, human society is not like matters in physics; it is organic. The speed of growth is restricted by limited resources, regulations, structure, and external environment. The imbalance and social equality issues that China is struggling with during its economic development reflect its developmental bottleneck; this is what development economists refer to as the middle-income trap. To prevent falling into this trap, China would not only be required to reform its structure and transform the government’s role, but it must also encourage further marketization, and fully develop its market adjustment mechanism and the innovative spirit of its entrepreneurs. Only then will its economic growth continue, its efficiency of growth improves, and its growth ensured to be fairly and reasonably allocated. For this, China must undergo arduous reforms in the following four aspects. First, it must straighten out the price of its production factors so that they accurately reflect resource scarcity. In China, the price of many key production factors is artificially suppressed, resulting in substantial reimbursements for producers. China’s energy price is relatively low; the deposit rate restricted to far below private market rates; prices for productive land are substantially

124

china 2020 research team

suppressed while attracting foreign investments; labor protection is insufficient, and labor costs are artificially suppressed; price of the ­environment is inaccurately measured and environmental quality is substantially worsening. According to Professor Huang Yi-ping’s estimates, relatively lowpriced production factors result in hidden subsidies for producers up to 10% of GDP. These massive subsidies encourage high energy consumption, development of capital-intensive enterprises. They also negatively affect employment, reduce business efficiency, and exacerbate China’s domestic and foreign imbalance. Second, China must reform the financial system and improve financial activity. The financial crisis had minimal impact on China’s financial sectors, and the four state-owned banks all had commendable performances. Some people in China were especially pleased with this, and believed this to be an indicator that China’s financial system is better than that of the west. Contrary to these perceptions, the reality is that it was precisely because of China’s lagging financial structure that China avoided the impact of the crisis; furthermore, a lagging financial system is also the reason behind China’s large amount of current account surplus. Considering the advantages of China’s demographic structure, it is reasonable for China to have export growth, but the problem is that the capital accumulated through exports is not completely utilized within the domestic market, so it is converted into foreign currency reserves. Domestically, deposit-loan differences in Chinese banks are expanding. Even though governmental regulation and control played a part in this expansion (increasing RRR, exchange sterilization of the central bank, etc.), the lack of efficiency of commercial banks is also an important factor. Furthermore, because of the limited amount of banks, and the relatively larger average size of these banks compared to the U.S., they are more inclined to approve loans for large corporations rather than mid-small businesses. Research shows that less than 10% of China’s mid-small business capital came from standard financial institutions, and the majority of the rest relies on accumulation of private capital. This shows that China’s banking system is an important reason why business savings are relatively high. Also, China’s capital market is much less advanced than that of the U.S. and the U.K., not to mention the absence of regional capital markets. Besides the defects in its resource allocation, China’s capital market also lacks an important function of the U.S. and U.K. capital markets—to allow private citizens the right to partake in the fruits of future economic growth. For example, most Americans hand over their ­pension to pension funds to manage in hopes of receiving higher incomes in the future. Even after substantial financial turmoil, the U.S. stock market continues to maintain its average rate of returns of 8% for the past 100 years, which means that a dollar invested today will become 10 dollars in 30 years. When there is a

repositioning china in 2020

125

guarantee placed on predictions of future income, private citizens will increase expenditures today. This is one of the main reasons why the U.S. always has a current-account deficit. China is the complete opposite. Because of unstable predictions of future income, Chinese private citizens prefer to live frugally today in order to increase savings to be used later, which increases current account surpluses. Third, China should reduce reliance on state-owned enterprises. The current trend is to believe that state-owned enterprises are the supporting pillars of the Chinese economy and that they bear the mission to implement national strategic targets; therefore, not only is their existence necessary, but it must also be strongly encouraged. However, other nations’ experiences demonstrate that private enterprises can also bear the responsibility of carrying out national strategic targets. For example, Lockheed Martin is responsible for the design and production of the most sophisticated fighter jets used by the U.S. To ensure the supply of petroleum, China vigorously developed equity oil abroad, but only about 10% is actually transported stateside, and the price is usually similar to the market price. China also has no way to ensure the safe delivery of petroleum into its borders in times of war. Only when international oil prices substantially increase during time of peace will equity oil be able to function as a stabilizer for oil prices. However, it is also during this time that oil prices are distorted, which restricts adjustments to industrial structures. One of the consequences of the government’s backing of large state-owned enterprises is that nations believe that China is a classic example of state capitalism, and this is very bad for China’s future room for development. China has had accelerated economic growth since 2001, largely contributed by privatization in the 1990s. However since the financial crisis, there has been increasing emphasis on the return of state-owned enterprises, which encouraged the disadvantageous interference of local government on local economy. When compared to the past, current local governments are increasingly in control of all aspects of local finance, and this is detrimental to China’s healthy economic development. The local government’s reasoning is that urban development requires government input; but this type of reasoning cannot stand because in various mid-small cities such as Fu Jian and Zhe Jiang, large amounts of private capital was inserted to urban infrastructure constructions and municipal infrastructure, and had outstanding results. Fourth, China should increase imports. China needs to decrease its trade surplus, and the key is not to decrease exports but to increase imports, especially of consumer goods. In China’s 1.4 trillion USD worth of imports, consumer goods only account for approximately 2.3%. This is mainly due to the extremely high tariffs placed on imports as well as VATs. Some believe that imported consumer goods are generally luxury goods, and the domestic

126

china 2020 research team

­ arket is relatively small so it is acceptable to charge high tariffs. However, as m private income increases, items that used to be considered luxuries, such as cars, furniture, cosmetics, brand-name apparels, are slowly making their way to mid-income families. Import restrictions on these products are substantially decreasing the levels of benefits for private citizens. In terms of foreign relationships, especially Sino-U.S. relationships, increasing imports will win China more initiatives. In other words, increasing imports will benefit China in three ways: reduce trade surplus, improve its relationship with the U.S., and increase national wealth. Therefore, China should strive to encourage imports the same way it encouraged exports before. 3 Building Talents In order to play a more important role in international affairs, there must be enough talented people to carry out the jobs. Putting together a team of talent should be approached with two perspectives. China must develop groups of talents who understand international commerce and international finance and who possess diplomatic abilities. Then, it should refer them into ­positions in international organizations. Because of China’s current lack of talent, it may consider looking for a team of young teachers from colleges and universities to fill the gap. Secondly, China must increase its research into other countries, either establishing or reinstating research projects about other nations. Currently in most colleges and universities, research into other countries is viewed as second-rate academics. Most of those who engage in research of other nations either transferred into pure economic research or into cultural history research, and there is significantly less research into contemporary politics, economics, and sociology. The government should implement special funding to reestablish research into different countries. Meanwhile, China should also consider establishing an international research fund, open to Chinese as well as foreign scholars around the world, and launch jointresearch projects with other emerging countries. Lastly, China should follow the methods of developed countries and establish a unified governmental assistance agency responsible for the overall planning of China’s foreign assistance affairs, including the research into other emerging countries. VII Conclusion To bide one’s time has been the consistent principle of China’s foreign affairs policies for the past 30 years, and it won China a sufficient amount of time and

repositioning china in 2020

127

room for development. However, as China’s economy body rapidly inflates, the international community is no longer content to see a low-key China. China’s economic growth has already had significant impacts on other countries, and the international community is demanding that China bears more global responsibilities. China’s overseas interests are continuously increasing, and the government must adopt a more active approach and provide more protections. Therefore, this report suggests that China should reposition itself internationally for the next decade through the implementation of a unified multi-polar order of co-governance, with its core focus being the following six points: One, insist on a unified international order, and participate with other countries in multi-polar co-governance within the unified order to improve China’s own strength. Two, become a constructive reformer within the current international order rather than challenging the existing order and creating a brand new competitive order with a new set of values. Three, encourage G20 to become a formal organization for managing global economic affairs, and insist on a governance system based on principles of a shareholding system in order to gradually increase China’s leadership position. Four, encourage reforms of the current international order through the principles of incremental reforms, and maintain the principle “voice out rather than act out” when cooperating with different regions and countries, with the goal of improving China’s negotiating position within the current international order. Five, maintain a superpower mentality, while leaving other countries room for development, making new friends, and expanding China’s future room for development. Six, in-depth structural reform of domestic political and economic systems, with a core focus on transforming a production-oriented government into a public finance-oriented government. In the absence of any substantial unforeseen circumstances, China will become the world’s largest economic body within ten years. In the future, the scale of the Chinese and the U.S. economy will far surpass that of the 3rd largest country; therefore, China and the U.S. will unavoidably become the two most important countries in leading the current global order. Avoiding conflicts between the two countries is not only in the best interest of the rest of the world, but also to the two countries themselves. Historical experiences suggest the possibility of a peaceful transition of power between two strong countries. For China and the U.S., it is vital to mutually uphold a unified international order, and the similarities between the two nations’ set of values will contribute to the realization of this objective.

128

china 2020 research team

Works Cited Cai Fang 蔡昉. “Chengshihua yu nongmingong de gongxian——houweiji shiqi zhongguo jingji zengzhang qianli de sikao 城市化与农民工的贡献——后危机时期中 国经济增长潜力的思考 [Urbanization and contribution of rural migrant workers—Reflection on post-crisis Chinese economic potential].” Zhongguo renkou kexue 中国人口科学 China Demographic Science, 2010 Vol. 4. “Ruhe canyu yiyuan duoji gongzhi:guoji fangmian 如何参与一元多极共治：国际 方面 [How to participate in a Unified Multi-polar Order of Co-governance: An International Perspective].” “Zhongguo gangtie gongye wushinian shuzi huibian 中国钢铁工业五十年数字汇 编 [a compilation of 50 years of the China Steel Industry].” “Zhonghua renmin gongheguo guominjingji he shehuifazhan tongji gongbao 中华人 民共和国国民经济和社会发展统计公报 [P.R.C. Nation Economy and Social Development statistical bulletin].” “Zhongguo tongji nianjian (2010) 《中国统计年鉴 (2010)》 [China Statistical Yearbook (2010)].” “Zhongguo youse jinshu gongye nianjian 中国有色金属工业年鉴 [China Non­ ferrous Industry Yearbook].” “Zhongguo youse jinshu wushinian lishi ziliao huibian 中国有色金属工业五十年历 史资料汇编 [50 years of historical data of the China Nonferrous Industry Compilation].”

chapter 6

“Marching Westwards”: The Rebalancing of China’s Geostrategy Wang Jisi Abstract China should not confine its sights to its coast and borders, and traditional rivals and partners; instead, it should make plans to “move westwards” and establish a new international geostrategic pillar for its Western Development strategy. The “march westwards” strategy is conducive to establishment of more balanced Sino-u.s. relations and helps build Sino-u.s. strategic mutual trust. As its economic interests grow in western countries, China is facing favorable opportunities for participating in multilateral coordination and contributing to its international status. However, the strategy will also bring risks and more attention should be paid to the environment, people’s livelihood, and employment in the invested countries. Consular rules must be improved to better protect local Chinese and help them get integrated into local communities. This article does not in any way advocate making “marching westwards” a clear written national foreign policy strategy. Rather, it uses this idea to emphasize that as the geo-economic and geo-political situation constantly changes, China needs to have new and comprehensive thinking on geostrategic “rebalancing” that does not lead to clashes between China’s land and sea power.

Keywords Move westwards – geostrategy – strategic rebalancing – Western Development

The Obama Administration has recently proposed a rebalancing strategy, ­centered around the idea of a “return to Asia.” Following changes in the global economic and political structure, Russia, India, the e.u. and other major * The Chinese version of this article was first published in Huanqiu Shibao 环球时报 [Global Times] October 17, 2012.Wang Jisi is Dean of the School of International Studies and Director for the Center for International and Strategic Studies at Peking University. His email address is [email protected]. © koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_008

130

wang

global powers have also adjusted their geostrategies. This new round of geopolitical and geo-economic competition between the great powers is becoming increasingly intense. Presently, the focus of u.s. strategy is “shifting eastwards,” while the e.u., India, Russia and other countries are beginning to “look eastwards.” Located at the center of the Asia-Pacific region, China should not limit its sights to its own coasts and borders, or to traditional competitors and partners, but should make strategic plans to “look westwards” and “march westwards.” I

The Western Development Strategy Needs a New International Geostrategic Pillar

The economic and political focus of ancient China has always been on inland areas. In fact, the Chinese people have almost no history of overseas territorial expansion. The Silk Road, which ran through the western part of Eurasia, was once an important bridge for communication between eastern and western civilizations, as well as for commercial activities. However, in modern times, the western powers and Japan have forced China to have contact with the outside world, both militarily and economically. As this was achieved predominately by means of sea routes, since that time, modern industry and major cities have been concentrated in China’s coastal areas. In the early years of the reform and opening-up period, the United States, Europe, Japan, and East Asia’s “Four Asian Dragons”—Taiwan, Hong Kong, Korea, and Singapore— were China’s major foreign economic partners. The Special Economic Zones, which were set up in the southeast of China, widened the gap between coastal and inland areas even further. This meant that for a long time, China’s western region lagged behind the rest of the country, both in terms of economic and social development, as well as in its contact with the outside world. It was not until the central government proposed the Western Development Strategy in the year 2000 that there was any great change in this situation. China does not have an international geostrategy in print, but as China’s eastern regions have traditional development advantages, threats to China’s sovereignty and territorial integrity have mainly come from the east. Since the founding of the People’s Republic of China (PRC), foreign policy strategy and military deployments have always focused on East Asia and the Pacific Ocean. Up to now, this has been necessary. However, following the introduction of “The 12th Five Year Plan: Western Development Strategy” and the corresponding domestic development strategies, China needs to put into practice an appropriate foreign geostrategy to support this.

“ Marching Westwards ”

131

The construction and improvement of the geostrategic pillar in the overall Western Development Strategy will have the following implications. First, China needs to make an overall plan and cooperate with many other countries, with a view to ensuring that the supply channels for oil and other bulk commodities to the west of China’s borders remain open. These can be divided into three routes—southern, central and northern—for which a new “new Silk Road” can be built led by China. This “new Silk Road” would extend from China’s eastern ports, through the center of Asia and Europe, to the eastern banks of the Atlantic Ocean and the Mediterranean coastal countries in the west. A major route from China’s western regions through the Indian Ocean should also be constructed as quickly as possible. The second implication is that we should increase economic and trade cooperation with, and economic aid to, “all West Asian nations” (in this a­ rticle, “West Asian nations” refers to all countries in South Asia, Central Asia, the Middle East and the Caspian Sea region) and establish a cooperation and development fund. During the ten-year period from 2001 to 2011, the trade volume between China and South Asia, as well as with West Asia, increased roughly 30-fold (in the same period, China’s total trade volume increased 7-fold) and its proportion of China’s total foreign trade volume increased from 2% to 9%. Over the past seven years, the increase in the trade volume between China and Arab countries was 10 percentage points higher than China’s average increase in foreign trade volume, which serves to show both the necessity and huge potential of China’s economic “march westwards.” Third, harmony and stability in Xinjiang, Tibet, and other western provinces and regions is under threat from ethnic separatism, religious extremism, terrorism, and other hostile forces from outside China’s borders. Furthermore, cross-border crime has been even more serious and become a major national security concern. Because of this, we need to formulate and implement social policies, religious policies, and educational directives, which draw together domestic and foreign policies and take into account local conditions, with supporting measures combined. This will create a strategic barrier to both strengthen national security and increase harmony among ethnic groups. Finally, we should increase our investment in diplomatic resources in all West Asian countries. At the same time, we should conduct extensive research into the national conditions and ethnic and religious situations of these nations, as well as strengthen social and cultural communication between our countries. Meanwhile, China should turn its economic advantage in the region into a political advantage and consequently, increase China’s soft power. This, in turn, will widen China’s room for strategic maneuver.

132 Ⅱ

wang

“Marching Westwards” is a Strategic Necessity for China’s Involvement in Great Power Cooperation, the Improvement of the International Environment and the Strengthening of China’s Competitive Abilities

The West Asian nations discussed in this article are located in the central part of the Eurasian continent. They are the birthplace of several of humanity’s great civilizations and have an abundance of natural resources. However, due to a variety of reasons, many of these countries will find it difficult to maintain stability and prosperity over the coming years. The political unrest and transnational ethnic and religious conflicts in several of the countries in this region will have a serious impact on future global order and great power relations. At the same time, this will have a severe impact on China’s rapidly growing economic interests and political influence in the region. Because of this, China cannot afford to ignore these issues. China should adopt a new positive and active stance, which will allow it to make considerable difference in this vast area. This region is one in which the important interests of the e.u., Russia, India, the u.s., Japan, and China converge and compete. In contrast to Western Europe and East Asia, the countries in West Asia do not have, nor could they have, a regional military alliance (or opposing alliances) under the leadership of the u.s. They have also not yet shown any clear trend towards regional economic integration. At the same time, great power cooperation mechanisms and rules of cooperation and competition have yet to be established in this region. The spheres of influence of the great powers in the traditional sense overlap and are continuously being reshaped. However, the United States has already made the first move. In the fall of 2011, u.s. Secretary of State Hillary Clinton made several announcements about u.s. plans for a “new Silk Road.” At the United Nations General Assembly, Clinton, together with the Afghan and German foreign ministers, co-chaired a workshop about the “new Silk Road,” with representatives from 30 countries. In her speech about this proposal, Hillary Clinton remarked, “Turkmen gas fields could help meet both Pakistan’s and India’s growing energy needs and provide significant cross-territory revenues for both Afghanistan and Pakistan. Tajik cotton could be turned into Indian linens. Furniture and fruit from Afghanistan could find its way to the markets of Astana or Mumbai and beyond.” She said that the u.s. would support the “new Silk Road” and would foster private sector investment in rail lines, highways, energy infrastructure and oil pipelines. She stated that, “the proposed pipeline would run from Turkmenistan, through Afghanistan and Pakistan and into India.” In short,

“ Marching Westwards ”

133

this plan aims to construct an international economic and transport network, which links Central Asia, South Asia and the Middle East, with Afghanistan at its center. Its short-term goal is the maintenance of u.s. interests after the combat forces leave Afghanistan. The u.s. has already constructed an oil pipeline that links Azerbaijan, Georgia, and Turkey, and is currently implementing a proposal to link Turkmenistan and Europe through a trans-Caspian gas pipeline. The u.s. has reduced its dependence on the Middle East for oil, but is still attempting to direct regional security affairs, intervene in domestic issues, and maintain long-term influence in the region. Russia views the Caspian Sea region and the Central Asia Union states as its “backyard” and is determined to hold on to its traditional position in this region. In order to stabilize oil and gas prices, Russia is implementing policies of close cooperation with Middle Eastern oil-producing countries. At the same time, Russia plays an active part in Middle Eastern security affairs and resists Western meddling and intervention. In addition, the e.u. is heavily dependent on Middle Eastern energy supplies and thus, is worried that oil prices will rise sharply. In order to minimise political risk, the e.u. is working hard to reduce the proportion of its oil imports from Russia. Consequently, the Caspian Sea region and Central Asia are becoming major areas for expansion in e.u. energy diplomacy. In regional security matters and on political issues, the e.u. and the u.s. will continue their long-term cooperation and will make use of NATO’s military forces when necessary. India is currently working hard to build an oil supply network in its periphery. It sees the Middle East and Central Asia as important directions in which it will push for the diversification of its oil imports. Furthermore, due to an increase in religious extremist forces in India, as well as the ongoing conflict between India and Pakistan, India has to pay close attention to the security affairs of this region. Japan also has increasing economic interests and security concerns in this region. In July 2012, Japan hosted the Tokyo Conference on Afghanistan, an international conference focused on the reconstruction of Afghanistan, during which it pledged a large sum of aid to Afghanistan, Pakistan, and other countries in the region. Looking at China’s peripheral region and beyond, we can see that there is an important strategic significance to “marching westwards.” First, this is beneficial to establishing more balanced u.s.-China relations, as well as strengthening u.s.-China strategic mutual trust. In the u.s. National Security Council, the State Council, the Defense Department and other relevant decision-making bodies, u.s. relations with China have always been considered as part of East

134

wang

Asian relations. Moreover, the majority of administrative officials assigned to u.s.-China relations are East Asian specialists. The “eastward shift” in the strategic focus of the Obama Administration, which has been interpreted as a way to defend against Chinese ambitions, is also focused on East Asia. Whether intentional or not, the u.s. “fixes” China into the category of East Asian nations, which, in turn, easily makes China limit its own outlook. In addition, Sinou.s. competition in East Asia is already increasingly becoming a “zero-sum situation.” However, if China “marches westwards,” the potential for u.s.-China cooperation in the fields of investment, energy, terrorism, non-proliferation, and the maintenance of regional stability will increase. At the same time, there will be almost no risk of military confrontation between the two. On the issue of maintaining stability in Afghanistan, Pakistan, and other countries in the region, the u.s. also strongly hopes that China will provide support. Furthermore, China’s economic interests in West Asian countries are increasing, which gives China a good opportunity to participate in great power multilateral cooperative efforts and improve its international standing. In contrast to the situation in East Asia, historically, there have been almost no conflicts between China and countries in West Asia (with the exception of India). There are also very few points of contention between China and these countries. Thus, in terms of geo-economic and geo-political competition and cooperation, China is in a relatively favourable position. Working with the relevant countries to shape the security environment and development of this region, as well as laying down fair rules for engagement, is in China’s longterm interests. This will also help to foster China’s image as a responsible great power. China can achieve this in the following ways: first, by expanding the scope of the Shanghai Cooperation Organization; second, by working together with major powers and countries in the region to plan and build the “new Silk Road”; finally, by promoting the creation of multilateral security mechanisms and the peaceful solution of regional conflicts. Ⅲ

“Marching Westwards” Must Avoid Risks, Balance All Sides, Increase Efforts in Research and Development, and Be Part of an Overall Strategic Plan

“Marching westwards” is a favorable opportunity for China, but it also involves many risks. First, the countries in this region are far from problem-free. Many of the countries are politically unstable, comparatively poor and the conflicts between ethnic groups are not easily solved. If China were to become deeply involved, as some western countries already are, it would be very difficult for it

“ Marching Westwards ”

135

to then get out. China must dare to “get involved creatively,” but also have crisis management plans and methods. Second, the relations between countries in West Asia are very complicated. In the Middle East, there are ongoing conflicts between Iran, Saudi Arabia, Turkey, Egypt, Israel, and other regional powers. There is also no easy solution to the conflict between India and Pakistan. China needs to work to maintain the fragile peace, yet whatever diplomatic position China adopts on any of these issues, it is certain to offend some countries. The third risk is that China’s “marching westwards” strategy is certain to cause concern in other countries around the world and may result in them taking measures against China. China needs to try its utmost to prevent other nations from uniting against it. China will not achieve this by fighting for supremacy, power, and profit. At the same time, it cannot afford to take stances such as that of “breaking through u.s. encirclement,” seeing normal competition as a zero-sum game or politicizing economic issues. The fourth risk is that it is very easy for other countries to label China as a “natural resources extractionist” and a “neocolonialist.” China must take into account environmental protection, peoples’ livelihoods, and employment in the places it invests in. China should pay close attention to and work to improve consular rules, as well as protect and manage the education of overseas Chinese living in these areas. When compared with the u.s., Europe, East Asia, Russia and other countries and regions, China has a very poor understanding of the countries in West Asia. China has very few experts in Arabic, Persian, Turkish, Kazakh, Hindi, Urdu, Bangladeshi, and Singhalese. There are also very few Chinese think tanks and universities that research the regions. We need to organise more bilateral or multilateral international seminars between official and semi-official think tanks and non-governmental academic organisations, to promote research of these countries, as well as train both Chinese experts on West Asia and West Asian experts on China. China also needs to formulate a long-term plan and offer substantial financial support to this region. By combining the foreign affairs, economic, cultural education, and academic resources of all domestic departments, we can strengthen our coordinated efforts of “marching westwards.” In the rise of great powers, it is common to first establish supremacy in one’s own region and then become a global power. The British Empire was an exception to this. China does not need to limit itself to “first becoming an AsiaPacific power, then becoming a global power.” This article does not in any way

136

wang

advocate making “marching westwards” a clear written national foreign policy strategy. Rather, it uses this idea to emphasise that in the current circumstances of constant change in the geo-economic and geo-political situation, China needs to engage in new and comprehensive thinking about geostrategic “rebalancing,” without causing clashes between China’s land and sea power.

chapter 7

Power Shift and Change in the International System Yan Xuetong Abstract China’s rise has resulted in a power shift from Europe to East Asia, and a changing international configuration is in the making. However, this does not mean that an evolving international configuration or shift in power will lead to a change in the international system as a whole. The international system is composed of three elements—international actors, an international configuration, and international norms. A typological change in any of these elements cannot be equated to a type change in the international system; otherwise there can be no distinctions between an international system and elements of the system. Neither can the relationship among these elements be defined. Therefore, we state that a type change in the international system must be preconditioned by a type change in at least two system elements. Since China’s rise is a main cause for a shift in international configuration, the systematic pressure it faces during its rise will trend up. Therefore, China needs to map out foreign strategies in line with its status as the world’s second largest economy. It must pursue the principle of making strategic friends and establish new international norms.

Keywords Power shift – international system – type of system – world centre – rise of China

The shift in world power centre has long been a major topic of international relations study. Since the start of the new century, this topic has again aroused attention from academic circles following China’s rise. This article aims to answer the following questions: In what direction will the world centre shift * The Chinese version of this article was originally published in Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 6 (2012): 4–21. It has been abridged and adjusted when translated into English. Yan Xuetong is Dean of the Institute of Modern International Studies at Tsinghua University and Secretary General of World Peace Forum. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�09

138

yan

in the 21st century? Will the shift bring about a change in the international political system? How should China dance in tune with the historical trend of world centre shift? I

In What Direction Will the World Centre Shift in the 21st Century?

With the coinage of the concept of BRIC (Brazil, Russia, India, and China) countries and the establishment of the G20 summit, discussions concerning world centre shifts have gradually increased in the media and academic circles. The author holds that the difference regarding in what direction the world centre will shift comes, in essence, from a lack of explicit and objective criteria for defining the term “world centre.” 1 Criteria for Defining World Centre The international geopolitical centre is determined not by its natural geographical position, but by the strength of the countries in that region. To be more exact, there are two preconditions for a region to become a world centre. First, that region must have the most influential countries in the world, i.e., one or more countries in that region should have world-class material power (especially military power) and cultural power (especially that of thought) and become a model for other countries. Second, a world centre should also be the most conflictive region, which means the central countries fight for their interests in that region or other regions. History shows that there are two types of world centres. One is that the central countries fight for their strategic interests in the region where they are located. The other is that the central countries scramble for their strategic interests in peripheral regions. When one of the central countries fights for its interest in the region where it is located, the region’s position as a world centre would become more prominent. In the above-mentioned two scenarios, whether there is a central country that has a global influence is the precondition for determining whether a region can become a world centre. In the post-World War II period until the end of the Cold War, the U.S. and the Soviet Union were the most powerful nations of the world; at the same time, they were also major strategic rivals in the international system. As one of two “polars” of the world, the Soviet Union was located in Europe, which, in turn, was also the centre of rivalry between the two countries. Therefore, Europe was thought to be the centre of the world during the Cold War period. In 1946, British Prime Minister Winston Churchill said in his Fulton speech in the U.S.: “From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain

Power Shift and Change in the International System

139

has descended across the Continent.”1 It is exactly because the strategic rivalry of the two countries happened in Europe that the “iron curtain” had descended across the European continent instead of other regions. With the exception of the U.S. and Canada, members of NATO and the Warsaw Pact Organization are all in Europe, a direct result of the rivalry between the U.S. and the Soviet Union. 2 Vague Terms of “Asia-Pacific” and “Orient/East” When one makes a judgment regarding where the world centre is moving, it should first be clarified whether the region in question is an emerging major power of world influence. Moreover, it also means that the region in which a “world centre” is located should also have clear geographical boundaries. Based on this criterion, the terms of “Asia-Pacific” and “Orient/East” have become too vague. “Europe” refers to a continent that has a fixed geographical position and is composed of established nations. Spanning 10.16 million square kilometers, with the Atlantic Ocean to the west and the Arctic Ocean to the north, Europe is flanked by the African continent to the south, with the Mediterranean Sea and the Strait of Gibraltar dividing the two continents. To its east, lies the Asian continent. Europe is comprised of 45 countries and regions, with a total population of 739 million, or about 10.5 percent of the world’s total.2 In contrast, “Asia-Pacific” is a concept that does not have fixed geographical boundaries and it is not clear which countries belong to this region. Asia-Pacific includes one ocean (Pacific) and four continents (Asia, North America, South America, and Oceania), accounting for two thirds of the world’s surface area and 71 percent of the world’s total population. When a “centre” accounts for two thirds of the “total” world, then in nature, the so-called “centre” would be almost equal to the “total” world. “Orient/East” is an even more vague term, which has no clear geographical boundaries or fixed member countries. During the Cold War period, “East” referred to a group of countries that adopted socialist ideology; in the postCold War era, “East,” however, refers to countries that have an oriental culture. In the narrow sense, it refers to the Circle of Confucian Culture and in the broad sense, it can refers to the whole of Asia, ranging from the Middle East to

1 Fang Lianqing 方连庆, Wang Bingyuan 王炳元 and Liu Jinzhi 刘金质: Guoji Guanxi Shi (Zhanhou Juan) 国际关系史（战后卷）[History of Post-War International Relations] (Beijing: Peking University Press, 2006), 47. 2 “Europe” in Wikipedia and Baidu Encyclopedia, http://zh.wikipedia.org/wiki/Europe; http:// baike.baidu.com/view/3622.htm.

140

yan

East Asia, which includes the Middle East, Middle Asia, South Asia, Southeast Asia, and Northeast Asia.3 The rise of such vague phrases, such as “the world centre shifting from Europe to Asia Pacific” or “the world centre shifting from the West to the Orient/East” probably results from the failure of those who have proposed the concepts to decipher which region—apart from North America—can become a place with global influence. Such a failure reflects their lack of confidence in the development prospects of East Asia. In the 1980s, when East Asian scholars put forward the idea of the world centre shifting to the Asia-Pacific region, few countries or international organizations in East Asia had shown the ability to participate in global strategic competition in the short term. At that time, although it had become the second largest economy of the world, Japan was not a country with comprehensive national strength; neither was it capable of participating in global strategic competition and, therefore, it could not have had major influence on world politics.4 Meanwhile, the former Soviet Union, which was located in Europe, remained a super power with global influence. On the one hand, East Asian scholars hoped that the region where they lived could become a world centre. On the other, they could not find a country in the region that had global influence. As a result, they had to use the term “Asia-Pacific”—a term with very broad inclusion—to support their hypothesis. An advantage of using the term “Asia-Pacific” was that it included the U.S., which had indisputable power and global influence. However, with the Asia-Pacific region having one super power, i.e., the U.S., it would be impossible to make a judgment as to whether the world centre has shifted from Europe to Asia-Pacific, because the U.S. has always been an Asia-Pacific country and its geographical position is a constant, which cannot explain any change.

3 In the broad sense, “Orient” is a cultural concept with the tint of Eurocentrism and, based on the marine route of main European countries reaching Asia, refers to all the regions east of Europe. The term “Orient” appeared in the early years after the European colonists started to expand their foothold and was popular in the 19th century. Due to the vastness of the concerned regions, the Western European countries have, based on the geographical distance from them, further divided the term into “Near East (Eastern Europe and Turkey),” “Middle East (the Arabic regions and the Central Asia)” and “Far East (East Asia).” 4 Barry Buzan 巴里·布赞, Ren, guojia yu kongju:houlengzhanshidai deguoji anquan yanjiuyicheng 人、国家与恐惧—后冷战时代的国际安全研究议程 [People, State, and Fear— an Agenda for International Security Studies in the Post-Cold War Era], Tran. Yan Jian 闫健 & Li Jian 李剑 (Beijing: Central Compilation and Translation Press, 2009), 160.

Power Shift and Change in the International System

141

The Shift in World Centre Mainly Hinges on Europe and East Asia, not the U.S. The U.S. is a Pacific country, but it can also be seen as an Atlantic country; its geographical position would not change no matter what it is called. Therefore, so long as the strength of the U.S. remains at the world level, it will not become a main factor causing the shift in world centre. Starting with the end of the post-Cold War and up until now, the U.S. has remained the most influential country in the world, and it has been always part of the world centre. The fact that the U.S. is part of the world centre is the reality today and very probably it will continue for another 20 years. If it maintained its status as a main strategic competitor of the world in the coming 20 years, the U.S. should not been seen as a factor for analyzing where the world centre will shift from Europe. With the U.S. as the constant, the readers would clearly know that the change in power gap between Europe and East Asia is the factor determining the shift of world centre. Within the next ten years, the relative decline of the U.S. will not change its status as a super power, which means that its fall will only reduce, but not eliminate its influence in the world. The U.S. will remain one of the most influential countries in the world—at least equally influential with the East Asia. Therefore, it will remain a component of the world centre. However, the relative decline of Europe will make it less influential than East Asia. East Asia will therefore replace Europe to become the component of the world centre. The relative decline of Europe, including Russia, is a main factor driving a shift in the world centre. Moreover, another cause for East Asia replacing Europe to become the world centre is that there are no countries in Europe that could potentially become super powers. China in East Asia, in contrast, has the potential to rise and become a globally influential super power. To sum up, the change in power gap between Europe and East Asia is a main driver of the current world centre shift. “The fall of the U.S.,” in this article refers to a relative, not an absolute decline. The resolute strength of the U.S. will be on the rise, but the velocity of China’s rise will be higher than that of the U.S., leading to a narrowing of the gap between the two countries. As stated earlier, the relative decline of the U.S. in at least the next 20 years will not change its status as a super power in the world. However, its success in maintaining this status does not mean it will continue to be the only super power of the world. In other words, it cannot be ruled out that China is getting closer to becoming a super power. The new trend in global power distribution will not change the strategic competitor status of the U.S. while it makes the change of power gap between Europe and East Asia the decisive element in shifting the world centre. 3

142

yan

4 East Asia Needs to Depend on China to Become the World Centre To become a world centre, East Asia needs to surpass Europe in terms of overall strength and influence, which will depend on the rise of China in the future. In the next ten years, due to projected failures to carry out effective political reforms, Japan will see a continual drop in its strength as a global player. Given the limited power of other East Asian countries, even if they gained some strength at a fast pace, they will have a very limited role in boosting the status of the whole region. In contrast, China’s economic scale has risen to 46 percent of that of Europe. In the coming ten years, the annual economic growth rate of Europe will hardly exceed 2 percent while that of China could hopefully be maintained at 7.5 percent, which means China’s economic scale could reach more than 80 percent of that of Europe within the next decade. The overall economic scale of East Asia, including that of Japan, South Korea, and other countries, is set to exceed that of Europe. In the 1980s, the fast growth of Japan and the so-called “Four Asian Dragons” of Taiwan, Hong Kong, South Korea, and Singapore had failed to make the region surpass Europe in terms of economic scale primarily because, apart from the role of the former Soviet Union as a super power of the world, Japan was not a country of comprehensive strength. China’s rise, on the other hand, is based on comprehensive strength while that of Japan is based on primarily its economic strength. China’s improved comprehensive strength has made it an important target for the U.S. of prevention in the 21st century, which means the most strategic competitor of the U.S. has become a country in East Asia and is no longer in Europe. In the coming ten years, China will develop into a super power with global influence that is only second to the U.S. In other words, there will be a country in East Asia that truly competes for its global strategic interest. China’s rise will make East Asia surpass Europe in terms of global influence. In reality, the understanding by the Chinese of their country’s power and status differs starkly from that of the international community. For example, Lee Hsien Loong, the prime minister of Singapore, once said: “China sometimes may not realize how powerful it is in the eyes of other countries, and therefore I think the difference in understanding means China and other countries do not look at issues from the same angles, which could probably need to go through a bad patch (before their understanding converges).”5 The understanding gap, 5 Lee Hsien Loong 李显龙: “Zhongguo buzhidao bieguo yanzhong ziji duoqingda 中国 不知道别国眼中自己多强大 [ China Does not Know How Powerful it is in the Eyes of Other Countries]” Social Outlook, (www.guancha.cn), Sept. 3, 2012, http://www.guancha.cn/ Neighbors/2012_09_03_94989.shtml.

Power Shift and Change in the International System

143

to some extent, has affected the judgment of Chinese scholars on China’s role regarding the shift in world centre and, therefore, most of them still tend to use the term “Asia-Pacific” instead of “East Asia.” China’s rise will not only lead to East Asia having its super power in terms of global influence, but it will also lead to East Asia becoming the core region for global strategic competition. Following the U.S. strategy of “Pivot to Asia Pacific” (also called “Asia-Pacific Rebalance”), East Asia has increasingly become a focus of international politics and a centre in the strategic rivalry among major powers. The aim of U.S. strategic pivot is to maintain its own influence and leading role in the world centre. As its relative strength weakens, it is natural for the U.S. to narrow down its global strategic focus to the regions of the world centre as a means to cope with the challenge coming from rising powers. The U.S. strategic pivot from the Middle East towards East Asia further indicates that the new world centre is East Asia, and not Europe. If East Asia becomes the world centre, the U.S. strategy of “rebalance” will inevitably target at China and the priority of its global strategy will be is the strategic competition in the new world centre. If not considering the marine divisions, the U.S. will become a neighbor of the U.K. and Japan, and Europe and East Asia will be at the doorstep of the United States. Based on this consideration, the U.S. has always claimed to be an East Asian country. From the political and geographical perspective, both China and the U.S. have thus become world-class strategic competitors in East Asia, and competition between them will be conducted in this region. Such strategic competition will be fiercer than in other regions, including Europe. In the history of East Asia, the strategic competition between the Chinese central dynasty and a major power in the region was always fierce, such as the Han Dynasty-Hun, Song Dynasty-Jin, and Ming Dynasty-Manchu rivalries.6 It means that in the next decade, the strategic competition between China and the U.S. will be more intense than their strategic rivalry in other regions. Evolving Fields of Strategic Competition Following a Shift in World Centre Historically, a shift in world centre has been basically achieved through wars, with the military field being the focal point of strategic competition.7 The collapse of the Soviet Union in the 20th century created conditions for a shift in 5

6 See Nicola Di Cosmo, Ancient China and Its Enemies: The Rise of Nomadic Power in East Asian History (Cambridge: Cambridge University Press, 2002). 7 Theories on shifts in power and hegemony and hegemony cycles have reached the same conclusion. See A. F. K. Organski, World Politics (New York: Alfred A. Knopf, 1958), George

144

yan

world centre. In the 21st century, however, China has opted to adopt the strategy of prioritizing economic development, which determines that its strategic competition with the U.S. starts in the economic, rather than military arena. However, it does not rule out the possibility that the competition evolving from the economic field will not shift to the military sphere. This global strategic competition is both a material-based and an ideology-based competition. A material-based competition is reflected in economic and military power. China now is the largest trader of the world. It has the most foreign exchange reserves, and it is the second largest economy in the world. However, it falls far behind the U.S. in terms of military strength. Although China’s national military expenditure is only second to the U.S. in the world, its real military prowess is yet to catch up with Russia because military power is directly related to combat experience. In other words, mathematical military power, or that which is measured in terms of the monetary value of military assets, does not necessarily equal physically measured military power, or that measured in term of the real destroying and defensive capabilities of a country. When observing the different elements in China’s comprehensive strength, readers can find that China’s strategy to prioritize economic development determines the strategic competition driving the shift in world centre to East Asia, which has happened first in the economic field before entering the military sphere. It will enter the ideological sphere even later. The world centre is set to be a region that has a great influence on the thought of the world. Countries in that region not only have world-class material power, but cultural power, especially power of thought that carries with it global impact. It is for this reason then that the world centre has often become a model for peripheral countries to emulate. The U.S. as part of the world centre has had a great ideological influence on the world.8 Currently, China’s ideological influence on the world is far less significant than that of the U.S., but it is becoming

Modelski and William R. Thompson, “Long Cycles and Global War,” in Manus I. Midlarsky, ed., Handbook of War Studies (Boston: Unwin Hyman, 1989), 23–54. 8 Joseph S. Nye, Bound to Lead: The Changing Nature of American Power (New York: Basic Books, 1990), 34; Joseph S. Nye 约瑟夫·奈, Ruan liliang-shijie zhengtan chgngong zhidao 软力量——世界政坛成功之道 [Soft Power—The Means to Success in World Politics], Tran. Wu Xiaohui 吴晓辉 & Qian Cheng 钱程 (Shanghai: Eastern Publishing, 2005), 157; Joseph S. Nye, Yingquanli yu ruanquanli 硬权力与软权力 [Hard & Soft Power], Tran. Men Honghua 门洪华 (Beijing: Beijing University Press, 2005), 107–108; Zbigniew Brzezinski 兹比格涅 夫·布热津斯基, Dajueze:meiguozhanzaishizilukou 大抉择：美国站在十字路口 [The Choice, Global Domination or Global Leadership], Tran. Wang Zhenxi 王振西 (Beijing, Xinhua Press, 2005), 199–201.

Power Shift and Change in the International System

145

increasingly influential.9 For example, foreign scholars in the past used to focus on deceased Chinese figures, such as Lao Tse, Confucius, Zeng Guopan, Liang Qichao, Mao Zedong, and Deng Xiaoping. Now they pay more attention to the strategic thinking of living Chinese. In 2008, Mark Leonard, a British scholar, published a book titled What Does China Think?, a first work by a foreigner on China’s modern strategic thinking in the 21st century.10 When the ideas of living people in a country begin to be studied by foreigners, this means that the country is rapidly gaining ideological influence in the world’s sphere. The future of a rising power depends, to a large extent, on the ideas of living people, rather those long gone. II

Whether Shift in World Centre Will Lead to Change in International System

Studying a change in the international system is an academic topic closely related to understanding the shift that takes place in the world centre. To analyze whether a type of international system has changed, researchers need to clarify the composing elements of the international system before analyzing relationships between these composing elements and the system types. To be exact, will a change in one element lead to a change in the type of system? Or will simultaneous changes in more than one element cause this change? Answers to these questions will allow researchers to observe which elements of the current international system have changed and whether the type of the system has also changed. 1 Unclear Criteria for Change in International System In books and articles on international relations, scholars often find a variety of international system terms, such as Five Service System,11 Tributary System, Westphalia System, Vienna System, Versailles-Washington System, Yalta System, and post-Cold War System, among many. Since 2005, the author has 9

10 11

Yan Xuetong 阎学通 and Xu Jin 徐进: “Zhongmei ruanshili bijiao 中美软实力比较 [Comparison Between China and U.S. in Soft Power],” Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations] (2008), 24–29. Mark Leonard, What Does China Think? London: Fourth Estate, 2008. According to Collection of Xun Zi’s Instructions 荀子集解, the Five-Service System is an international system that has a centre and peripheral regions centered on the imperial city of the head of the Zhou Dynasty, Wang Xianqian 王先谦: Xun Zi jiejie 荀子集解 [Xun Zi’s Instructions] (Beijing: Zhonghua shuju Press, 1988).

146

yan

studied the difference in the two international systems of Spring and Autumn Period, and the Warring States Period in ancient China. Through this study the author found that a lack of common criteria for defining types of international systems has brought confusion into this academic field of study. Generally speaking, an international system is composed of international actors, an international configuration, and international norms. However, the academic circle is yet to reach a consensus as to how many changes in the three elements can be taken as the criterion for defining a type change in the system as a whole. If change in any of the three elements can be taken as the criterion for defining a change in the type of the system, then the concept of “international system” would become meaningless and researchers can simply refer to the individual terms, namely, changes in international configuration, international actors, or international norms. Most of the articles on international system evolution that the author is able to access, actually discuss change in international configuration.12 For example, some articles state that the Cold War and the post-Cold War are two international systems.13 However, the fact is, from the Cold War period to the post-Cold War period, the main actors of the international system have all been sovereign states, and the international norms have remained sovereignty-based norms grounded in the U.N. Charter. The only change is that a configuration of bipolarity has given place to unipolarity. That is to say, among the three elements of the international system, only that of international configuration has changed. However, if a change in international configuration means a change in the international system itself, then the two terms would be interchangeable. The reason that the change in 12

13

Qin Yaqing 秦亚青: “Guoji tixi zhuanxing yiji zhongguo zhanluejiyuqi de yanxu 国际 体系转型以及中国战略机遇期的延续 [Shifting Pattern of International System and Continuity of China’s Strategic Opportunity Period],” Xiandai Guoji Guanxi 现代国际 关系 [Contemporary International Relations], 4 (2009): 35–37; Lin Limin 林利民: G20 jueqi shi guojitixi zhuanxing de qidian G20 崛起是国际体系转型的起点——仅仅 是起点[Rise of G20 is the Starting Point of the Shifting Pattern of International System— Only a Starting Point], Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations], 11 (2009): 36–38; Liu Ming 刘鸣: “Zhuanxing zhong de guoji tixi: zhongguo yu ge zhuyao liliang de guanxi 转型中的国际体系：中国与各主要力量的关系[Shifting Pattern of International System: Relations Between China and Relevant Forces],” Guoji Wenti Yanjiu 国际问题研究 [International Studies], 4 (2008): 18–31. He Yao 何曜: “Dangdai guoji tixi yu zhongguo dezhanlue xuanze 当代国际体系与中国 的战略选择[Modern International System and China’s Strategic Choice],” in Institute of World Economics and Politics of Shanghai Academy of Social Sciences, Guoji huanjing yu zhongguo de heping fazhan 国际环境与中国的和平发展 [International Environment and China’s Peaceful Development] (Beijing: Current Affairs Press, 2006), 3–7.

Power Shift and Change in the International System

147

international configuration cannot be seen as equal to that of an international system, more fundamentally, lies in the logic, and not semantics. The international system is composed of three elements. If a change in any one of the elements can be seen as a change in the international system, then the concept of an “international system” would be meaningless and researchers can simply refer to the individual terms of changing international configuration, international actors, or international norms. On the other hand, if the hypothesis of an “international system being changed” is suggested, then analysis of whether the international system type has changed should be analyzed from the perspective of comprehensive changes in the three elements. In ancient times, the world was divided into several independent international systems. Therefore, this article also takes into account non-global regional international systems as cases for study. Table 7.1 lists international systems, actors, configurations, and norms often referred to by scholars. What should be noted here is that in the same historical period, the nature of nation actors are not necessarily all the same with each other. In the Chinese region in East Asia, the Zhou Dynasty co-existed with other kingdoms, such as Qin, Chu, Lu, and Qi; in Europe, the Holy Roman Empire co-existed with other states, such as the Kingdom of Prussia, the Bavarian Kingdom, the Kingdom of Saxony, the Grand Duchy of Baden, the Grand Duchy of Hesse, the Duchy of Anhalt, the Elector of Mainz, and the Free Hanseatic City of Bremen, among others. In modern times, such nation states as the U.S. co-exist with the Saudi Arabian monarchy and the Vatican papal state. Table 7.1 is based only on major state actors. The concept of “system” refers to one that is formed through interaction among its composing elements.14 It takes the criterion of whether a composing element of the system leads to changes in other elements in order to judge whether the type of an international system changes. The type of international actors has gone through the evolutionary process of “City State→ Kingdom→ Monarchy→ Empire→ Nation State”. The signing of the Peace of Westphalia in 1648 is seen as the starting point for the emergence of nation states, but such a change was only limited to Europe and did not extend globally. With the emergence of nation states, Europe’s international system started to contain features of the sovereign norm, i.e., the state had independent sovereignty.15 14 15

Kenneth N. Waltz, Theory of International Politics, (Mass.: Addison-Wesley Publishing Company, 1979), chap. 3. Torbjrn L. Knutsen 托布约尔·克努成, Guojiguanxi lilunshi daolun 国际关系理论史导 论 [A History of International Relations Theory], Tran. Yu Wanli 余万里 & He Zongqiang 何宗强 (Tianjin: Tianjin People’s Publishing House, 2005), 139.

148 Table 7.1

yan Comparison of some elements of an international system

International system

China Western Zhou (1046 BC~771 BC) Spring and Autumn (770 BC~476 BC) Warring States (475 BC~221 BC) Qin Dynasty (221 BC~206 BC) European regions Roman Empire (27 BC~395 AD) Mediterranean (about 476 AD~1453 AD) Westphalia (1648 AD~1791 AD) Coalitions against France (1792 AD~1813 AD) Vienna (1814 AD~1913 AD) Muslim regions Post-Khalifa (8th~14th Century) Ottoman Empire (14th~16th century) Global Versailles-Washington (1919 AD~1939 AD) Yalta (1945 AD~1991 AD)

Main actors

International configuration

System norms

Royal family, kingdom Royal family, kingdom Monarchy

Unipolar

enfeoffment

Empire

Unipolar

Empire

Unipolar, bipolar Annexation

Papal state and kingdom Nation-state

Multipolar

Religious power

Multipolar

Sovereign norm

Nation-state

Multipolar

Nation-state

Multipolar

Internal affair intervention Internal affair intervention

City-state

Multipolar

Annexation

Empire

Unipolar

Annexation

Nation-state

Multipolar

Nation-state

Bipolar

Takeover and annexation Non-intervention and non-annexation

Unipolar, bipolar, Hegemony-seeking multipolar but non-annexation Multipolar Annexation Annexation

Power Shift and Change in the International System

149

If the formation of the system of Westphalia was a shift in Europe’s international system, then in the shift, the nature of both the international actors and norms had changed. However, since the signing of the Peace of Westphalia, the actors of Europe had always been nation states, which is why researchers generally believe that Europe’s international system underwent a shift from the Vienna System to the Versailles-Washington System. Another phenomenon is that actors of Europe in the medieval times evolved from city states to monarchies, but the academic circle does not agree whether Europe’s international system also changed during this period. In some cases, the type of actors did not change, but the international system did; in others, the type of actors changed, but the international system did not. This author holds that simply a change in the type of international actors does not necessarily lead to a change in the international system, and a change in international norms does not necessarily suffice as the criterion for judging whether the international system has changed. Change in International System Should Be Pre-conditioned by at Least Two Elements If we use the simultaneous changes in the type of actors and international norms as the criteria for judging whether an international system changes, we are able to find that several international system changes in consistence with the criteria throughout history. In the shift from the Western Zhou system to the Spring and Autumn system, the norms of the system changed from enfeoffment to hegemony-seeking, while the actors changed from kingdoms empowered by “the Son of Heaven” to self-empowered monarchies. During the medieval times in Europe, the Roman civilization no longer existed, as a result of which, the feudal system was established in the continent. Later, as Europe went through the Thirty Years’ War (1618–1648), it transitioned from the feudal system to the Westphalia system.16 During this shift in the international system, the actors evolved from feudal kingdoms to nation states, while the international norms evolved from supreme religious power to sovereign rights.17 During the shift in the international system, there was no change in the type of international configuration. Such a change, however, did not appear before the fall of the Western Zhou Dynasty and the early years of the Spring and Autumn 2

16 17

Liu Debin 刘德斌: Guoji guanxishi 国际关系史 [History of International Relations] (Beijing: Higher Education Press, 2003), 26–27, 45. Hugo Krabbe 克拉勃: Jingdai guojia guannian 近代国家观念 [The Modern Idea of the State], Tran. Wang Jian 王检 (Beijing: The Commercial Press, 1957), 1–24; and the English foreword by translators G. H. Sabine and W. J. Shepard, p. 20.

150

yan

period; Europe, on the other hand, had remained a multipolar structure before and after the signing of the Peace of Westphalia. Although scholars can find cases in which simultaneous changes in international configuration and international norms or simultaneous changes in types of actors and international configuration have led to changes in international system, such a method of analysis cannot explain all the international system changes in human history and, therefore, there can be no assurance that so long as two of the three composing elements of the international system change, the type of the international system will definitely change accordingly. However, it is worth paying attention to the following three arguments: First, simultaneous changes in three composing elements of an international system trigger a change in system type. Second, when two of three composing elements change simultaneously, there is a high likelihood that the system will change. Third, when only one element changes, the author does not believe that a change in the international system has taken place because this would be taking a part of a whole system as equal to the whole system, or taking a composing element of a system as equal to the system itself. It would be wrong to consider a change of a certain degree as a change in the nature itself. A typical case to illustrate this concept is in the early 1990s when the collapse of the Soviet Union only changed the type of international configuration, shifting from a bipolar structure to a unipolar structure; however, the type of actors and international norms did not change. That is why most scholars hold that the international political change that occurred in the Soviet Union at that time was one of an “international configuration,” while only a small number of researchers referred to it as “a change in the international system.” As early as 2006, scholars have discussed the post-Cold War change as one of a change in configuration, and not the system itself.18 If we take changes in two composing elements of a system as the criterion for judging whether a system changes, we would also doubt the conclusion that the Vienna system and the Versailles-Washington system are two types of systems. Seen from Table 7.1, these systems do not differ from each other in terms of the type of actors, configuration, or norms. The main difference between them is that the Vienna system was a European system while the Versailles-Washington system was a global one. It is simply because the major European powers expanded their foothold globally that the international sys18

Yang Chenxu 杨成绪: “Zhongguo yu guojitxi 中国与国际体系 [China and International system],” in Xu Dunxin, 徐敦信：Shijie dashi yu zhongguo hepingfazhan 世界大势与中 国和平发展 [The world trend and China’s peaceful development] (Beijing: World Affairs Press, 2006), 54–55.

Power Shift and Change in the International System

151

tem of Europe evolved into a global system. Therefore, the difference between them lies in their geographical scope and the involved major powers and their numbers, not the type of system itself. Seen from the perspective of an international configuration, the two system types are the same in being both multipolar in structure. The difference simply lies in the redistribution of power, which leads to changes in the composition of involved countries, or the polars. What is controversial regarding the shift in system is whether the Westphalia, the Coalitions against France, and Vienna systems, all can be seen as having undergone a systematic change. As is apparent in Table 7.1, while the actors and international configurations of the three systems are all the same, it is hard to say that a change in the nature of the international norms has occurred. Some scholars, however, hold that the European countries, which had fought in seven coalitions against France wars between 1789 and 1814, were in a bipolar configuration and, according to these scholars, the international norms at that time evolved from the principle of secret diplomacy among monarchs into that of general peace and justice.19 If such a judgment is reasonable, then it is justifiable to claim that a change in system took place as the system of Coalition against the France evolved into the Vienna system. 3 Whether International Norms Change is Decisive Whether the shift in world centre in the 21st century would lead to a fundamental change in the international system will hinge primarily on whether the international norms change. However, whether the international configuration will move towards a multipolar or bipolar structure, in this regard— scholars do not differ in their understanding of the role of the changing world centre in reshaping the type of international configuration. With the type of main international actors remaining unchanged, whether the shift in world centre in the 21st century would bring about a change in the system will primarily hinge on fundamental changes in international norms. Further monitoring will be needed to make a judgment as to whether the shift in world centre during this century would bring about a fundamental change in international norms. It is widely known that the rise of China is a core driver of the world centre shift this time around, but it remains unknown whether China’s rise globally could bring about an ideological and conceptual change. Existing international norms currently are based on western liberalism. Therefore, it is hard for the western countries to become the leading force driving a change in existing international norms. China’s rise today is mainly 19

Liu Debin 刘德斌: Guojiguanxishi 国际关系史 [History of International Relations], (Beijing: Higher Education Press, 2003), 89.

152

yan

reflected in material strength, an increase of which can change the international configuration and reshape the structure of power distribution. But this will not necessarily change international norms. China’s contribution to the development of international political ideology remains limited. It remains unknown whether China can provide valuable ideas and concepts for the establishment of a new type of international norm in the future. Looking back into the history of international relations, readers can find that among the three elements of the international system, implementing a change in international configuration is faster compared with the other two elements. In the past 500 years, the types of international configurations have changed many times while the nature of international norms has changed three or four times. The nature of international actors changed only once during that period of time. The phenomenon reminds us of the fact that a change in international system is typically slower than that in an international configuration. History has shown that it is normal for international configurations to undergo two changes in type within a century, but it seems that the international system has never undergone two changes within a century. Since the First World War, the international system only changed in 1945, which was only 67 years ago. This means it may take a long time for the system to undergo another change in the future. Therefore, the author holds that at least for now, using “change in international configuration” to describe the world centre shift in the 21st century is closer to the realities of the current world than using the term “change in international system.” III

How Should China Cope with a Shift in World Centre?

China’s rise is the core driver of a shift in world centre in the 21st century. However, the process of the shift also brings with it considerable systematic pressure and uncertainties for China. The logic of the dilemma of a rising power is that the faster a country rises, the heavier the reverse pressure on the rising country from the international system.20 The fear of the western academic circle about China’s rise has shifted from concerns about China’s material power growth to concerns about the challenge that Chinese civilization will

20

Sun Xuefeng 孙学峰: “zhanlue xuanze yu daguo jueqi chengbai 战略选择与大国 崛起成败 [Strategic Choice and Success and Failure of the Rise of Major Powers],” in Yan Xuetong 阎学通 & Sun Xuefeng, Zhongguo jueqi jiqi zhanlue 中国崛起及其战略 [China’s Rise and its Strategy], (Beijing: Peking University Press, 2005), 28–29.

Power Shift and Change in the International System

153

pose to the leading status of western civilization,21 a topic that many western scholars have begun to study.22 How China will overcome this systematic pressure and ultimately rise is both a strategic and theoretical question. China Needs to Pay Attention to Consistency between Its Power Status and Policy During the process of world centre shift in the 21st century, China is a rising power and now is also widely viewed as the second strongest power in the world. China, however, still chooses to view itself as a developing country, which is in line with its principle of “keeping a low profile.” However, such a strategy has exposed China to the continually rising demands that it shoulder more responsibilities. The pressure comes not only from the developed countries that China take on more international economic responsibilities, but also from developing countries, some of which hope that China will assume more international economic responsibilities,23 as well as security responsibility. Therefore, there has been a conflict between China’s status as the second largest world power and its identity as a developing country. Its policy target of acting as a responsible major power is out of sync with the principle of “not taking leadership” and its non-interventionist policy contradicts its principle of safeguarding international justice. Resolving these contradictions will be conducive to further promoting China’s international clout and could also help the international configuration evolve in a direction that benefits China’s rise. 1

China Should Pay Attention to the Role of Strategic Relations in Shift in International Configuration The international configuration is determined by two composing elements, i.e., relative strength of major powers and strategic relations amongst them. Currently, the relative strength of major powers is conducive to China’s rise, but the strategic relations among major powers are not. Although its material power is increasingly slowly, the U.S. remains the country that has the most allies in the world—about fifty allies. In contrast, China, due to its policy of nonalignment, does not have any allies in the strict sense. Lack of allies has 2

21

22 23

Yan Xuetong 阎学通 “xifnagren kan zhognguo de jueqi [西方人看中国的崛起 China’s Rise in the Eyes of Westerners],” Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations], 9 (1996): 36–45. Zhang Yongjin and Barry Buzan, “The Tributary System as International Society in Theory and Practice,” The Chinese Journal of International Politics, 1 (2012): 5. Robert B. Zoellick, “Whither China: From Membership to Responsibility?” Deputy Secretary State Remarks to National Committee on U.S.-China Relations, September 21, New York City, 2005, http://www.ncuscr.org/articlesandspeeches/Zoellick.htm.

154

yan

become an unfavorable condition for China in its efforts to improve ties with neighboring countries. If it can adjust its non-alignment policy, then it can effectively step up the number of its strategic cooperators and thus help drive the international configuration shift at a faster pace in the direction that benefits Chinese interests. On the other hand, if China’s strategic friendly relations cannot be effectively improved upon, then the shift in international configuration would be relatively slow. China Needs to Pay Attention to the Establishment of New International Norms Liberalism dominates the current international system, but this does not mean there has been little room for China to promote new types of international norms. Regarding climate change, for example, China puts forward the principle of common but different responsibilities, which has gained support from a considerable number of countries. The qualitative change in international norms needs to be preconditioned by major changes in thinking and concepts. The core concepts of liberalism are equality, democracy and liberty, which are the mainstream ideological basis for existing international norms. However, there is still scope to transcend these concepts. Based on traditional Chinese thoughts of ren (benevolence), yi (righteousness), and li (rite), China can put forward a new type of international norm centered on fairness, justice, and civility. Of course, if a country promotes a new type of value system in the world, it should be first practiced domestically. Social norms that are not promoted domestically will hardly be accepted by the international community. The author holds that only when China’s rise brings changes in both international configuration and international norms can the change in international system be realized. The issue of world centre shift and change in the international system will gain more attention from academic circles as China’s rise accelerates. Concentration on such studies will help push forward development of new theories on international relations. Chinese scholars have a unique advantage in this aspect. It is very possible for them develop new theories of international system if they make full use of their advantage. 3

Works Cited Brzezinski, Zbigniew 兹比格涅夫·布热津斯基. Dajueze:meiguozhanzaishizilukou 大抉择：美国站在十字路口 [The Choice, Global Domination or Global Leadership], Tran. Wang Zhenxi 王振西. Beijing, Xinhua Press, 2005.

Power Shift and Change in the International System

155

Buzan, Barry 巴里·布赞. Ren, guojia yu kongju: houlengzhanshidai deguoji anquan yanjiuyicheng 人、国家与恐惧—后冷战时代的国际安全研究议程 [People, State, and Fear—an Agenda for International Security Studies in the Post-Cold War Era], Tran. Yan Jian 闫健 & Li Jian 李剑. Beijing: Central Compilation and Translation Press, 2009. Di Cosmo, Nicola. Ancient China and Its Enemies: The Rise of Nomadic Power in East Asian History. Cambridge: Cambridge University Press, 2002. “Europe” in Wikipedia and Baidu Encyclopedia, http://zh.wikipedia.org/wiki/Europe; http://baike.baidu.com/view/3622.htm. Fang Lianqing 方连庆, Wang Bingyuan 王炳元 and Liu Jinzhi 刘金质: Guoji Guanxi Shi (Zhanhou Juan) 国际关系史（战后卷）[History of Post-War International Relations] (Beijing: Peking University Press, 2006), 47. He Yao 何曜. “Dangdai guoji tixi yu zhongguo dezhanlue xuanze 当代国际体系与 中国的战略选择 [Modern International System and China’s Strategic Choice],” in Institute of World Economics and Politics of Shanghai Academy of Social Sciences, Guoji huanjing yu zhongguo de heping fazhan 国际环境与中国的和平发展 [International Environment and China’s Peaceful Development]. Beijing: Current Affairs Press, 2006. Knutsen, Torbjrn L. 托布约尔·克努成. Guojiguanxi lilunshi daolun 国际关系理论 史导论 [A History of International Relations Theory], Tran. Yu Wanli 余万里 & He Zongqiang 何宗强. Tianjin: Tianjin People’s Publishing House, 2005. Krabbe, Hugo 克拉勃. Jingdai guojia guannian 近代国家观念 [The Modern Idea of the State], Tran. Wang Jian 王检. Beijing: The Commercial Press, 1957. Leonard, Mark. What Does China Think? London: Fourth Estate, 2008. Lin Limin 林利民. G20 jueqi shi guojitixi zhuanxing de qidian G20 崛起是国际体 系转型的起点——仅仅是起点 [Rise of G20 is the Starting Point of the Shifting Pattern of International System—Only a Starting Point], Xiandai Guoji Guanxi 现代 国际关系 [Contemporary International Relations], 11 (2009). Liu Debin 刘德斌. Guoji guanxishi 国际关系史 [History of International Relations]. Beijing: Higher Education Press, 2003. Liu Ming 刘鸣. “Zhuanxing zhong de guoji tixi: zhongguo yu ge zhuyao liliang de guanxi 转型中的国际体系：中国与各主要力量的关系 [Shifting Pattern of International System: Relations Between China and Relevant Forces]. Guoji Wenti Yanjiu 国际问题研究 [International Studies], 4 (2008). Loong, Lee Hsien 李显龙. “Zhongguo buzhidao bieguo yanzhong ziji duoqingda 中国不知道别国眼中自己多强大 [China Does not Know How Powerful it is in the Eyes of Other Countries].” Social Outlook. www.guancha.cn. Sept 3, 2012, http:// www.guancha.cn/Neighbors/2012_09_03_94989.shtml. Modelski, George and William R. Thompson. “Long Cycles and Global War,” in Manus I. Midlarsky, ed., Handbook of War Studies. Boston: Unwin Hyman, 1989.

156

yan

Nye, Joseph S. Bound to Lead: The Changing Nature of American Power. New York: Basic Books, 1990. ——— 约瑟夫·奈. Ruan liliang-shijie zhengtan chgngong zhidao 软力量——世 界政坛成功之道 [Soft Power—The Means to Success in World Politics], Tran. Wu Xiaohui 吴晓辉 & Qian Cheng 钱程. Shanghai: Eastern Publishing, 2005. ———. Yingquanli yu ruanquanli 硬权力与软权力 [Hard & Soft Power], Tran. Men Honghua 门洪华. Beijing: Beijing University Press, 2005. Organski, A. F. K. World Politics. New York: Alfred A. Knopf, 1958. Qin Yaqing 秦亚青. “Guoji tixi zhuanxing yiji zhongguo zhanluejiyuqi de yanxu 国际体系转型以及中国战略机遇期的延续 [Shifting Pattern of International System and Continuity of China’s Strategic Opportunity Period]”, Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations], 4 (2009). Sun Xuefeng 孙学峰. “zhanlue xuanze yu daguo jueqi chengbai 战略选择与大国崛 起成败 [Strategic Choice and Success and Failure of the Rise of Major Powers]”, in Yan Xuetong 阎学通 & Sun Xuefeng, Zhongguo jueqi jiqi zhanlue 中国崛起及其 战略 [China’s Rise and its Strategy]. Beijing: Peking University Press, 2005. Waltz, Kenneth N. Theory of International Politics. Mass.: Addison-Wesley Publishing Company, 1979. Wang Xianqian 王先谦. Xun Zi jiejie 荀子集解 [Xun Zi’s Instructions]. Beijing: Zhonghua shuju Press, 1988. Yan Xuetong 阎学通. “xifnagren kan zhognguo de jueqi [西方人看中国的崛起 China’s Rise in the Eyes of Westerners].” Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations], 9 (1996). ——— and Xu Jin 徐进. “Zhongmei ruanshili bijiao 中美软实力比较 [Comparison Between China and U.S. in Soft Power].” Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations] (2008). Yang Chenxu 杨成绪. “Zhongguo yu guojitxi 中国与国际体系 [China and International system],” in Xu Dunxin, 徐敦信: Shijie dashi yu zhongguo hepingfazhan 世界大势与中国和平发展 [The world trend and China’s peaceful development]. Beijing: World Affairs Press, 2006. Zhang Yongjin and Barry Buzan. “The Tributary System as International Society in Theory and Practice.” The Chinese Journal of International Politics, 1 (2012). Zoellick, Robert B. “Whither China: From Membership to Responsibility?” Deputy Secretary State Remarks to National Committee on U.S.-China Relations, September 21, New York City, 2005, http://www.ncuscr.org/articlesandspeeches/Zoellick.htm.

chapter 8

China’s Rise, the Transformation of East Asian Regional Structure, and Development Direction of the East Asian Order Zhou Fangyin Abstract The rise of China has in essence changed the political landscape of East Asia and led to the formation of a dualistic regional structure based on mutually separate economic and security centers. Such a structure is the result of the interactions of several factors, such as China’s economic rise, America’s “engagement and containment” policy towards China, as well as East Asian states hedging their bets between the U.S. and China. At the same time, the existence of such a dual structure has further increased the possibility that regional states are hedging their bets between China and the U.S. East Asia’s dual structure has produced unfavorable influences on East Asian cooperation and has caused regional powers and important actors to more frequently employ regional institutions as their strategic instruments, a practice that has reduced regional institutional arrangements to a tactic used by some to serve their power contestations. Generally speaking, the dual structure in East Asia will continue to persist into the future. But fundamentally speaking, the stability and efficiency of the East Asian order need joint cooperation from China and the u.s. to explore ways in constructive coexistence.

Keywords East Asian structure – East Asian order – China’s rise – two-pronged policy – strategic hedging

* The Chinese version of this article was published in Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 5 (2012): 4–32. This article is an abridgement of the Chinese version. Zhou Fangyin is a Professor at the National Institute of International Strategy of the Chinese Academy of Social Sciences. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�10

158

zhou

East Asia has managed to maintain a peaceful state for a long period of time since the end of the Cold War. With the rise of China, fundamental changes though have taken place in the economic landscape of East Asia, but the established regional security structure has remained basically the same. As a result, some special features have emerged during the evolution of the East Asian structure, such as the “superficial friendship” relationship between China and the u.s.,1 frustrated regionalism,2 institutional redundancy, institutional competitions, and widespread strategic hedging by many East Asian nations towards China.3 The emergence of the above-mentioned phenomena in East Asia has had internal links to the paths chosen by China in the process of its rise against the special East Asian backdrop, as well as the special regional structure formed in the process of China’s rise. The special structure so far formed in East Asia will produce profound influences on the evolving path of the East Asian order. I

China’s Rise and the Transformation of the East Asian Structure

Since the end of the Cold War, East Asia has generally maintained a peaceful environment. The most notable changes emerging from this background are a continuous rise in China’s economic strength and the remarkable deepening 1 Yan Xuetong 阎学通, “Dui zhongmei guanxi buwendingxing de fenxi 对中美关系不稳定 性的分析 [The Instability of China-U.S. Relations],” Shijie jingji yu zhengzhi 世界经济与政 治 The Chinese Journal of International Politics, 3 (2010): 263–292. For a remark on this viewpoint, see Alastair Iain Johnston, “Stability and Instability in Sino-U.S. Relations: A Response to Yan Xuetong’s Superficial Friendship Theory,” The Chinese Journal of International Relations, 4 (2011): 5–29. 2 Deepak Nair, “Regionalism in the Asia Pacific/East Asia: A Frustrated Regionalism,” Contemporary Southeast Asia, 1 (2008): 110–42. 3 Nair, “Regionalism in the Asia Pacific/East Asia: A Frustrated Regionalism.” Jürgen Rüland, “Southeast Asian Regionalism and Global Governance: ‘Multilateral Utility’ or ‘Hedging Utility’,” Contemporary Southeast Asia, 1 (2011): 83–112. Li Wei 李巍, “Dongya jingji diqu zhuyi de zhongjie? zhidu guosheng yu jingji zhenghe de kunjing 东亚经济地区主义的终 结？——制度过剩与经济整合的困境 [Has economic regionalism ended in East Asia?— Institutional redundancy and the dilemma of economic integration],” Dangdai Yatai 当代 亚太 [ Journal of Contemporary Asia-Pacific Studies], 4 (2011): 6–32. For another opinion on the inefficacy of regional security cooperation in East Asia, see Xu Jin 徐进, “Dongya duobian anquan jizhi: wenti yu gouxiang 东亚多边安全合作机制：问题与构想 [East Asian multilateral security cooperation framework: problems and considerations],” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 4 (2011): 92–106.

China ’ s Rise

159

of economic and trade links and economic cooperation between China and other regional states. The most noticeable change East Asia experienced between 1991 and 2011 was a shift in economic relations among regional states, with no fundamental changes taking place to their security ties. With the rapid development of economic exchanges between China and other regional nations, East Asia’s economic structure has generally undergone steady and gradual changes in the same direction for a long period of time. The accumulated results caused by such changes have forcibly pushed forward the evolution of the regional structure and formed an inner tension between East Asia’s economic structure and its security needs. The u.s. has maintained a stable alliance system in East Asia for decades. The security ties between the u.s. and its allies in this region date back to the 1950s. Against the backdrop of its “pivot to Asia,” the u.s. has tried to further strengthen links with its Asian allies and security partners like Singapore, India, Vietnam, and Indonesia, in an attempt to build a larger and more effective security network and to further cement its military presence in the region. At the same time, China remains the largest trading partner to a majority of countries in the region. China is also the largest trading partner of the Association of Southeast Asian Nations (ASEAN). The largest trading partner of all the five formal allies of the u.s. in Asia—Japan, South Korea, Australia, the Philippines, and Thailand, except for Manila, is China. What has impressed people most is not China’s status as the largest trading partner to many East Asian countries, but rather the breadth and momentum of China’s economic ties, which in turn have also resulted in huge psychological impacts on China’s neighboring countries. Trade ties between China and the rest of East Asia do not represent the whole picture of their economic relationship, but trade ties can obviously serve as an important symbol of closeness of their mutual economic links. In particular, the current scale of trade between China and other East Asian nations, and the rapid economic exchange momentum occurring can make for a general impression that China is gradually establishing itself as an economic center in East Asia. If this trend continues, China is expected to further consolidate its status for the foreseeable future. In East Asia, it is a common phenomenon for regional countries to build comparatively separate relationships amongst main economic and security partners. This means that East Asia has to some extent form a dual structure, with its security relations obviously separated from its economic ties. Such a dual structure is not a temporary phenomenon that will disappear within three to five years; it will continue to exist for a comparatively long period into

160

zhou

the future. The obvious characteristic of such a dual structure is as follows: 1) at the top level is Sino-u.s. relationship, which is in the process of ongoing power transition with the rise of China’s strength;4 2) the alliance between the u.s. and its East Asian allies still plays a leading role in security affairs; 3) in the economic field is the consolidation of China’s status as a regional economic center and its deepening economic interdependence with other states; 4) from an ideational perspective, there are still many states in the region not psychologically well prepared to accept China as a regional economic center; and 5) established regional institutions and rules are still not in line with China’s gradual ascension to the regional economic center. II

National Strategy and the Formation of Dual Structure in East Asia

East Asia’s dual economic and security structure has emerged under a special set of circumstances that involve the influence of the established regional structure and the strategies employed by main regional actors, including their interactions with each other. From a regional perspective, the formation of East Asia’s dual structure has come in the context of China’s economic rise under a unipolar system dominated by the u.s. Different from the rise of other great powers in modern time, China’s rise has happened in the u.s.-led unipolar world. The unipolar system offers an extremely favorable international environment for the leading state where compared with others, it enjoys a huge strength advantage. As a result, no states within this system have sufficient national strength to exert forcible restraints on the leading state. The unipolar system also sharply increases costs for other states to restrain the leading state, thus expanding the space for its maneuvers, thereby fueling its excessive expansionist inclination. In a sense, unipolarity also offers powerful structural incentives for the leading state to be revisionists.5 When it comes to the secondary states, unipolarity will obviously limit their space of actions. Under the unipolar system, resources are usually excessively concentrated in the hands of the leading state in a disproportionate 4 Researchers need to make differentiations between a power transition at the global level and a power transition at the regional level. At the global level, the power transition between China and the u.s. in a substantial sense is far from coming. But when it comes to East Asia, such a power transition between the two states will come much sooner. For opinion on power transition between China and the u.s., see Steve Chan, China, the U.S., and the PowerTransition Theory: A Critique (Abingdon: Routledge, 2008). 5 G. John Ikenberry and Michael Mastanduno and William C. Wohlforth, “Introduction: Unipolarity, State Behavior, and Systemic Consequences,” World Politics, 1 (2009): 1–27.

China ’ s Rise

161

manner, which will drastically raise the threshold for secondary states in order to counterbalancing this effect.6 Under the unipolar system, the leading state, which usually views maintaining its hegemony as a primary target, is highly sensitive to and less tolerant of the rise of secondary states, and at the same most capable in constraining their rise.7 China has witnessed the fastest rise in its national strength within the current world system since the end of the Cold War, which, together with its huge population and geographic size, makes it natural for China to face huge pressures from the hegemon in the process of its rise. However, a review of its rise after the end of the Cold War will find that China has not been under particularly huge strategic pressures from the u.s. until the outbreak of the global financial crisis. This is to a large extent related to China’s strength and the strategy it has adopted in the process of its rise. As a result, China has successfully realized a rapid rise in its national strength within a comparatively long period under a generally unfavorable international structure. China’s rapid rise has also benefited a lot from its great efforts not to escalate conflicts with the u.s., the sole superpower. Since the early 1990s, China has generally adopted a low-profile strategy to promote its rise. The adoption of such a strategy—in addition to the fact that China’s rise is mainly concentrated in the economic area where China’s interests heavily converge with that of the u.s.—is underscored by the reality that China’s rise in national strength has not constituted a substantial threat to the u.s. Conversely, China’s cooperation with the u.s. in the economic realm has also brought considerable economic benefits to the u.s., which makes it difficult for the u.s. to decidedly impose a full and high-magnitude containment upon China. Instead, the u.s. has adopted a kind of “engagement and containment” policy.8 The strategic choices made by China and the u.s. have 6 William C. Wohlforth, “The Stability of a Unipolar World”, International Security, 2 (1999): 5–41; Liu Feng 刘丰, “Danji tixi de yingxiang yu zhongguo de zhanlue xuanze 单极体系 的影响与中国的战略选择 [Influence of unipolar system and China’s strategic options],” Ouzhou Yanjiu 欧洲研究 [Chinese Journal of European Studies], 2 (2011): 15–29. 7 Jia Qingguo 贾庆国, “Jiyu yu tiaozhan: danji shijie yu zhongguo de heping fazhan 机遇与 挑战：单极世界与中国的和平发展 [Opportunities and Challenges: A Unipolar World and China’s Peaceful Development],” Guoji Zhengzhi Yanjiu 国际政治研究 [International Politics Quarterly], 4 (2007): 57. 8 For another opinion on the tactics interaction between China and the u.s., see Zhou Fangyin 周方银, “Taoguangyanghui yu liangmian xiazhu—zhongguo jueqi guocheng zhong de zhongmei zhanlue hudong 韬光养晦与两面下注——中国崛起过程中的中美战略互 动 [A low-profile policy and the strategic hedging: The China-U.S. strategic interactions in the process of China’s rise],” Dangdai Yatai 当代亚太 [Journal of Contemporary Asia-Pacific Studies], 5 (2011): 6–26.

162

zhou

to a large extent influenced the development of China’s strength, as reflected by its own excessive preference for an economic developmental strategy; this choice also has decided the evolving direction of the regional structure in East Asia. At the same time, countries geographically close to China are “hedging their bets” between China and the u.s., a policy that has further contributed to the formation and development of a dualistic economic and security structure in East Asia. 1 China’s Low-Profile Policy and Its Many Influences Since the early 1990s, China has generally adopted a “low-profile, but to act in some aspects” foreign strategy. The main goal of this strategy is to create a peaceful and favorable external environment that will serve China’s modernization and economic development. From a tactical perspective, such a strategy involves pursuing a comparatively fast rise in China’s strength while at the same time avoiding unfavorable reactions from regional and international players in response to China’s rapid strength buildup; decreasing strategic pressure from other states during its rise; and preempting a possible self-encirclement caused by its rise. From a practical perspective, the low-profile foreign policy will proceed along these two paths: (1) To exercise self-restraint on security issues, and not challenge the u.s.’s dominance in East Asia and the world. For security issues and conflicts existing in its surrounding regions, a practical, self-restraining, and non-provocative “shelving dispute” policy has been embraced. Under the guideline of such a policy, China has refrained from holding a tough and confrontational approach toward the u.s.’s security expansion and strategic layout, which has to some extent facilitated u.s. efforts to maintain, consolidate, and expand its influences in East Asia at a low cost; (2) To actively integrate China into international and regional economic institutions in the economic field by developing economic and trade links with other East Asian nations. Based on this process, China’s economic strength and influence in the region has witnessed a rapid rise. China has become the largest trading partner of both 11 surrounding countries and the ASEAN. It is also the largest exporting market of seven neighboring countries.9 At the same time, China’s investment in surrounding countries and regions has also rapidly increased, contributing to the formation and further deepening of mutual interdependence between China and many East Asian nations in the economic framework. 9 Le Yucheng 乐玉成, “Shijie dabianju zhong de zhongguo waijiao 世界大变局中的中国 外交 [China’s diplomacy in the midst of the world’s great changes],” Waijiao pinglun 外交 评论 [Foreign Affairs Review], 6 (2011): 1–6.

China ’ s Rise

163

The security and economic policies combination adopted by China has played an important role in creating a favorable external environment for the country’s peaceful development. At the same time, this policy has also caused China’s economic ties with other East Asian nations to be separated from China’s security ties with other East Asian nations. This is because the different policies Beijing has adopted in economic and security fields have to some extent caused China’s economic ties with surrounding states and China’s security ties with surrounding states to grow in different directions. A lowprofile foreign policy has led to China’s inability to develop stronger security measures commensurate with its economic strength, with the former growing much slower than the latter. China has not injected huge strategic resources into the creation of a regional structure beneficial to itself on security issues (The Shanghai Cooperation Organization in a sense is only a limited exception). China has embraced an exceptionally cautious attitude in the area of security in order to avoid provoking other nations while preventing the emergence of a security dilemma and a spiral in East Asia affairs. The economic and security ties between China and surrounding states have not advanced thus far in the same direction. If such a posture continues, then it will inevitably produce profound influences on the evolution of the East Asian structure and possibly cause intrinsic imbalances in the relations among regional states. 2 U.S. “Engagement and Containment” Policy toward China In the eyes of the u.s., China’s rise is viewed in uncomfortable terms, but it is also viewed as not posing a big threat to u.s. interests and not having significant impact on the u.s.’s global strategy in a comparatively long period of time. Against this backdrop, the u.s. has chosen a lower-cost “engagement and containment” policy toward China. Despite oscillations between engagement and containment when it comes to dealing with China—edging nearer to one side and then to the other—Washington has not made fundamental changes to its “engagement and containment” policy framework for the most part, since the 1990s. The adoption of a combined “engagement and containment” policy does reflect the complexity of interests between China and the u.s. In Sino-u.s. ties, there are not only areas of interests where the zero-sum game prevails, but also areas of interests where the positive-sum game dominates.10 Under these circumstances, the u.s. has chosen to impose containment or precautions on 10

Thomas J. Christensen, “Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy toward East Asia,” International Security, 1 (2006): 81–126.

164

zhou

China in the field dominated by the zero-sum game; and while it chooses to resort to engagement in the area where the positive-sum game dominates, this is a policy combination that is thought to maximize u.s. interests. At the same time, China’s low-profile foreign policy, which makes Beijing not organize forcible resistance against the imposed containment but conduct active coordination toward Washington’s engagement policy, has contributed to a long-term steady operation of the u.s. “containment plus engagement” policy combination. Moreover, such a policy toward China has been implemented through u.s.’s efforts to maintain its alliance system in East Asia; so, in a sense, it represents a kind of “containment plus engagement” policy based on Washington’s East Asian alliance system. The long-term implementation of such a policy, therefore, has in effect resulted in a considerable rise in China’s economic influence in East Asia, although its influence in security matters in the region has been under obvious restrictions. China’s “low-profile” policy and the u.s.’ “engagement and containment” policy toward Beijing has promoted the further deepening of Sino-u.s. economic ties although the two countries have not achieved substantial reconciliation and deep cooperation in security issues. For a long period, security and economic ties between China and the u.s., which have advanced in a different direction, have failed to form mutually complementary and mutually promoting relationships. This has caused an internal chasm in bilateral security and economic ties and has become cause for huge internal tensions. Due to their enormous size and importance in the Asia-Pacific region, such a separation between Sino-u.s. security and economic ties has also been directly reflected in the East Asian structure. A direct result of this divide is that East Asia’s economic structure has witnessed profound changes although its security structure has remained stagnant. The formation of such an obvious dualistic structure had negative impacts on the stability of the East Asian order. A Policy of “hedging their bets” Adopted by Some East Asian Nations toward China and the U.S. During the rise of China’s economic influence in the region, some of its surrounding states have adopted a policy of hedging their bets between China and the u.s., a policy that involves pursuing economic benefits from China while seeking security guarantees from the u.s.11 The widespread implementation of such a policy among East Asian nations has contributed to the formation of 3

11

Greg Torode, “Region Looks to China for Profit, U.S. for Security,” South China Morning Post, November 15, 2010.

China ’ s Rise

165

a dual structure in the region and consolidated and strengthened its dualistic character. Some ASEAN countries have set a typical example in this aspect. On one hand, they have been actively developing economic links with China, in an attempt to achieve a broad set of goals such as: use engagement and dialogue to integrate China into regional institutions and arrangements, build a mutually responsible and friendly relationship, exert influence on China’s development direction, and reap economic returns from the rise of China’s economic strength. On the other hand, they have made great efforts to strengthen military and security collaborations with the u.s., striving to take advantage of the u.s.’s military presence in this region to balance against China’s rising influence in the military and security domains and ease security pressures from a rising China.12 The policy of developing economic links with China while enjoying security guarantee from the u.s. to counterbalance China’s influence is believed to serve the national interests of many Southeast Asian nations. The security guarantee offered by the u.s. has also boosted their confidence in developing economic ties with China. While handling their ties with China, a few Southeast Asian countries have chosen a “strategic hedging” policy.13 Such kind of policy pursues neither band-wagoning nor balancing toward China. It is not a kind of “wait and see” or “delay” policy. Through the adoption of a set of mutually counteracting options, the hedging strategy is aimed at offsetting risks stemming from structural transformation and offers guarantees for a country’s long-term interests. The policy can allow a country space to develop certain ties that are to its advantage, and also make it well situated for unfavorable circumstances. With such a policy, what a country wants is to “maximize its interests” and at the same time take into consideration risks possibly brought on by the policy. Having both qualities of flexibility and complexity, such a policy sometimes

12 13

Evelyn Goh, “Great Powers and Hierarchical Order in Southeast Asia,” International Security, 3 (2007/8): 113–157. This paper makes differentiations between the hedging its bets policy and the hedging policy. The former refers to a fence-sitting policy adopted by Southeast Asian nations toward China and the u.s., which means they pursue economic benefits from China while enjoy security guarantees from Washington. The hedging policy mainly refers to a kind of “non-balancing, non-bandwagoning” policy adopted by some East Asian nations toward China. To enlist support from the UN on security issues can be regarded as the implementation of the concrete hedging policy. In this sense, the “engagement and containment” policy adopted by the u.s. is also a kind of strategic hedging policy.

166

zhou

faces a series of factors that work against each other.14 For Southeast Asian nations, this stance helps them benefit from China’s rise and at the same time puts them in a vulnerable position against Beijing. Widespread implementation of the strategic hedging among Southeast Asian nations testifies to such a strategic consideration: They do not want to accept China’s dominance in this region and nor do they desire head-on clashes with China, and, in particular, they do not want to take definitive positions choosing between China and the u.s. Their security reliance on the u.s. is a hint of their expectations for a kind of “imbalance of power” in favor of the u.s. in this region, instead of a real “balance of power” between China and the u.s. It is not just the ASEAN countries alone going down this path, but even Japan, an influential regional power, has also embraced such a hedging strategy toward China. Both economic development and external security remain important aims pursued by East Asian nations. Many of China’s surrounding states do not want to turn down economic opportunities arising from China’s fast development and economic profits too quickly, lest it prevents them from deepening their ties with China. At the same time, they also do not want to easily yield security guarantees provided by the u.s.’s military presence in this region. While dealing with China in the economic sphere, they also tactically make use of security cooperation with the u.s. in a bid to further improve their policy returns. At the same time, however, the existence of a dual structure in East Asia also mean many regional states have practical space a broad space to adopt hedging policies, and make these policies a viable option that serves the national interests of many East Asian states. The interaction and mutual strengthening of the effects between hedging policy and the entrenched dualistic regional structure has made it more difficult to reverse the development course of such a dual structure. The stable expectations among many East Asian nations that China will rise to a regional economic center has also consolidated their strategic hedging policy toward China.

14

For more analyses of hedging activities in international relations, see Cheng-Chwee Kuick, “The China Factor in the US’ ‘Re-Engagement’ with Southeast Asia: Drivers and Limits of Converged Hedging,” Asian Politics & Policy, 3 (2012): 315–344; Brock F. Tessman, “System Structure and State Strategy: Adding Hedging to the Menu,” Security Studies, 2 (2012): 192–231.

China ’ s Rise

III

167

Influences of the Dual Structure on National Behaviors and Regional Cooperation in East Asia

1 The Dual Structure and China’s “Low-Profile” Foreign Policy The current dual structure in East Asia is still in its fledging period, and China’s economic status in the regional structure has only taken its initial shape. However, continuous rise in China’s economic influence has also been of great significance in that it can sway the regional structure. A dual structure in East Asia means that China’s rising economic strength is not just meaningful in and of itself. It will also produce profound influences on the regional political landscape. Under these circumstances, China is expected to meet an increasing number of securitization in its economic cooperation with other countries in which economic issues will be handled from a political and security perspective, a tendency that will obviously worsen the environment for China’s external economic cooperation. In the past, the reported China-Japan contestation for a leading role in East Asia had its focus in the economic area. When signs became clearer that China would ascend to become the regional economic center, any further rise in its economic clout will surely exert some strategic influences on the regional structure. In a sense, the vying for regional dominance between Beijing and Tokyo is a power game within the established East Asian structure. In comparison, the struggle between China and the u.s. for the leadership in regional economic cooperation, if there is any, is a game that will influence the regional structure. The China-u.s. competition is by no means just an increase in its scale. Instead, it will involve the nature and development direction of the regional structure. Under these conditions, the external world has become even more sensitive to change in China’s economic strength and its ascending economic influence. As China receives growing global attention, and in particular, as some states become extremely sensitive to and psychologically vigilant of China’s rising economic strength, it will make it that much more difficult for China to continue embracing its long-enduring “low-profile” foreign policy status. Fundamentally speaking, a country that has established itself as a region’s economic center will find it much more difficult to effectively appease outside misgivings over its influence and rapid development within the regional sphere. 2 The U.S.’s China Dual Structure Policy and Its Adjustment As signs become clearer that China is likely to become a regional economic center, the u.s. has gradually escalated precautionary measures taken against China. Washington’s “pivot to Asia” is not only a reflection of the shift of its

168

zhou

strategic focus and strategic adjustment in the Asia-Pacific region, but also a sign of change in its policy toward China. If China’s buildup, such as its ascension to be the regional economic center, is beyond the u.s.’s original expectation, this to some degree would mean the failure of the u.s.’s “engagement and containment” policy. At a time when China already grows into the economic center in East Asia, it becomes more obvious that the u.s. has lost patience with or confidence in engaging with China. The rapid development of China’s economic strength is likely to cause some to believe that Washington’s engagement policy will only leave enough time and space for Beijing to engage in further development. However, a China that is more focused on economic development refrains from wrestling with the u.s. in the field of security or posing a direct challenge. Such a mild gesture makes it very difficult for the u.s. to find sufficient justification for pursuing a containment policy. Increased strategic and security pressures on China by the u.s. in the absence of effective measures to check its rising economic strength and influence will lead to very few outcomes. The eastward shift of the u.s.’s strategic focus is a result of the rising importance of the Asia-Pacific region in the world. It is also the u.s.’s response to the ongoing changes in the East Asian structure in the context of the region’s dualistic economic and security structure gradually taking into shape. Under the precondition that its security advantages get cemented, the u.s. is expected to take actions in the economic area in an attempt to dominate the path and direction of the Asia-Pacific economic cooperation. If the u.s. “pivot to Asia” approach only shifts more resources and energy to the military and security fields while not working to boost its economic influences in the region, this will indeed help reinforce its security advantage and dominance. However, it will further aggravate the tension within East Asia’s dualistic economic and security ties and lay down obstacles to the formation of a sustainable East Asian order. While strengthening its military and security superiority, the u.s. would strive to strengthen its economic links with East Asian states in a bid to raise its economic status in the region as a whole. The u.s.-led negotiations on the Trans-Pacific Partnership (TPP) serve as an example of its policy direction having strategic regional significance. The push for TPP will help the u.s. maintain and strengthen economic connections with many East Asian nations, balancing the influence of China’s rapid economic development while retaining Washington’s declining economic influence in East Asia. At the same time, it will help the u.s. acquire a dominant say in the making of regional economic rules, which can then be employed as a way to impose restraints on China.15 15

Zhu Feng 朱峰, an international relations scholar at Peking University, believes that a core target of the “pivot to Asia” of the u.s. Obama administration is to restrain and guide

China ’ s Rise

169

By pushing for TPP, the u.s. can achieve such a result, thus using one stone to kill two birds at the same time. The u.s. can avoid its exclusion from the process of East Asian economic cooperation on one hand and can push for China’s isolation in regional economic cooperation on the other. From a long-term perspective, East Asian states will have to make a choice between TPP and the 10+X framework (a cooperative mechanism set up between the 10-member ASEAN and other countries).16 However, to exert sufficient pressure on China, TPP needs to reach a certain scale to make the direction of regional economic cooperation irreversible. 3 The Dual Structure and China-U.S. “superficial friendship” Ties Yan Xuetong, a researcher in international relations from Tsinghua University, believes that China and the u.s. have adopted the “superficial friendship” tactics in dealing with each other since the 1990s. To have a better understanding of China-u.s. relations from an East Asian perspective, we can say that the “superficial friendship” relation between China and the u.s. are actually a kind of “superficial friendship” relationship between East Asia’s economic and security centers. The formation of such a relationship is the inevitable result of East Asia’s dual structure in a certain period of time. Economic development and security are both of crucial national interest to East Asian countries. Any time when a region’s economic center and security center fall into the hands of different countries, complicated interest

16

China with international rules and regulations and enable the u.s. to tackle China on issues related to China by cooperating with other regional countries to form a front in the making of rules and their application. See Zhu Feng 朱锋, “Aobama zhengfu ‘zhuanshen yazhou’ zhanlue yu zhongmeiguanxi 奥巴马政府“转身亚洲”战略与中美关系 [The US Obama administration’s ‘pivot to Asia’ strategy and Sino-US Relations],” Xiandai guoji guanxi 现代国际关系 [Contemporary International Relations], 4 (2012): 1–7. For more analyses of the U.S.’s strategic intentions in its push for TPP, see Li Xiangyang 李向阳, “Kua taipingyang huoban guanxi xieding: zhongguo jueqi guochengzhong mianlin de zhongda tiaozhan 跨太平洋伙伴关系协定：中国崛起过程中面临的重 大挑战 [TPP: Major Challenges to China in the Process of Its Rise],” Guoji jingji pinglun 国际经济评论 [International Economic Review], 2 (2012): 17–27; Shen Minghui 沈铭辉, “TPP de chengbenshouyi fenxi: zhongguo de shijiao 跨太平洋伙伴关系协议的成本收 益分析：中国的视角 [TPP: An Analysis of the Costs and Returns From the Perspective of China],” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 1 (2012): 6–34, and Sheng Bin 盛斌, “Meiguo shijiao xia de yatai quyu yitihua xinzhanlue yu zhongguo de duice xuanze 美国视角下的亚太区域一体化新战略与中国的对策 选择 [The New Asia-Pacific Integration Strategy from A US Perspective and China’s Policy Options],” Nankai Xuebao 南开学报（哲学社会科学版）[Nankai University Journal (philosophic and social sciences edition)], 4 (2010): 70–80.

170

zhou

relationships arise, accompanied by more complex implications within the regional context. At the current stage, China has no intention of pursuing confrontations with the u.s. on security issues, and the u.s. is also not prepared to pay a price for economic head-on clashes with China. In terms of economic and security centers in East Asia, an absolute collapse in bilateral ties between China and the u.s. will cost each country a high price, and bring low returns. In particular, as two separate economic and security centers in East Asia, the very deep mutual interdependence between China and the u.s. has extended from economic to trade and financial fields.17 From an interest perspective, unavoidable competitions always exist between a region’s security and economic centers. However, the depth of the interdependency of mutual interest, as well as its breadth in encompassing other countries, should lead China and the u.s. to maintain at least the formality of a cooperative spirit. This, in turn, has led to the foundation of a “superficial friendship” relationship that exists between both countries, to be maintained for a long time to come. With the deepening of the dual structure in East Asia, the contradictions and conflicts between China and the u.s. will likely continue to simmer, particularly if the two fail to find new ways of coexistence. Nevertheless, in the name of practical interests, both countries will take on a cooperative posture and at least maintain a superficial form of accommodating each other, though not at a high level. The Dual Structure and Hedge Their Bets Policy of Some East Asian Nations Under the current dual structure, some East Asian states have adopted the policy of pursuing economic benefits from China while seeking security guarantee from the u.s. This is not only a result of the policy they stake on both China and the u.s., but also a result of their way of seeking balance between economic and security interests. The existence of separate economic and security centers in East Asia, however, has also brought policy risks to those countries with such a two-pronged diplomacy. For East Asian nations that stake their policies on both China and the u.s., there exists a paradoxical logic. Security reliance on the u.s. contains a potential policy implication that they choose to take sides with the u.s. However, significant economic ties with China also make them refrain from seeking confrontation with Beijing, an act that will seriously compromise their economic interests. The perception that to stand against China will not serve their 4

17

For the analysis of the mutual financial dependence between China and the u.s. and its role in bilateral political ties, see Daniel W. Drezner, “Bad Debts: Assessing China’s Financial Influence in Great Power Politics,” International Security, 2 (2009): 7–45.

China ’ s Rise

171

security interests well has also increased their willingness to not be completely on the u.s. side on security issues.18 Such a perception has prompted East Asian nations to want to maintain a certain level of security ties with China in a bid to strike a balance between China and the u.s., and thus prevent the perception that they have intimate security ties with the u.s., which would then produce excessive negative effects on their relations with China. The emergence of the dual structure in East Asia has posed for Japan, which is another economic power in the region, a particularly thorny situation. On one hand, Japan feels irked at the rise of China’s economic strength and influence in the region. Aside from addressing its security concerns, the consolidation of its alliance with the u.s. alone, however, is not enough to help Japan deal with problems related with China’s rising economic strength and influence, especially economic problems. In the context of China’s everrising economic strength, the power distribution between China and the u.s. is also undergoing delicate quantitative changes, which will gradually shake and erode the u.s.’s determination to contain China in a forcible manner and thus compromise the efficacy of the extended deterrence offered by the u.s. to Japan. Although Japan can take some measures to consolidate its alliance with the u.s., such efforts will to a large extent be offset by China’s ever-growing national strength and will be difficult to result in expected improvement in its security environment. Sooner or later, Japan will likely have to improve its security environment by directly improving its ties with neighboring China. On the other hand, it is also infeasible for Japan to impose economic sanctions on China, such as dramatically lowering the degree of mutual interdependence, given that this will directly compromise the staggering Japanese economy. Any economic contraction will be a drag on Japan’s efforts to play a bigger role in the regional economy. Under the dual structure in East Asia and the influence of Sino-u.s. relations, Japan is in a particularly embarrassing dilemma on how to balance conflicts among its security interests, economic interests (conflicts exist between its long-term and short-term economic and security interests), and its status in regional cooperation. 5 The Dual Structure and Regional Cooperation With the dual economic and security structure in East Asia becoming more clear-cut, this will inevitably influence, to some extent, regional cooperation, as well as those factors that may prove unfavorable to cooperation among states within the region. 18

For these states, what they seek are security guarantees from the u.s.; they do not hope the security ties with Washington will lead to their involvement in regional conflicts.

172

zhou

The unambiguous dual structure in East Asia accompanied by its fixed and rigid expectations amongst regional countries will prove to be a disadvantage for the smooth operations and low-cost advancement of East Asian cooperation. As the dual structure becomes more precise, the nature, purpose, and manner of regionalism and regional cooperation in East Asia have correspondingly witnessed some obvious changes. Some regional states have chosen to look upon the ties between China and the u.s., East Asia’s economic and security centers, more from a zero-sum perspective, and endow regional economic competitions with more political and security implications. Against this backdrop, some states would rather look at the role of regional institutions from the perspective of the different influences produced by these regional institutions on security, relative gains, and interest distribution,19 and would correspondingly take different policy stances toward different regional institutions and mechanisms. States may sometimes use regional multilateral institutions as balancing tools, such as by utilizing or dominating multilateral institutions to deal with pressures or alleged threats. To attain expected targets, measures are usually taken to include targeted countries into multilateral institutions to restrain and restrict their behaviors. Another way is to exclude targeted countries from multilateral institutional arrangements to fend off pressures from external forces,20 or push for their isolation. An important goal of this practice is to weaken the strength and influence of alleged adversaries through some activities within the framework of multilateral institutions other than through setting up military alliances or pursuing military races and other hard balancing measures.21 As a result, established regional institutions have been frequently utilized by a few regional states as strategic instruments, and a new regional institutional arrangement is created, not to more effectively address regional problems or facilitate economic cooperation among regional states, but rather to evolve into additional means for regional power contestations. Under these circumstances, the emergence of new regional institutions and mechanisms is 19 Due to their role in interest distribution, some institutional arrangements have unavoidably made beneficiaries and losers. See Jack Knight, Institutions and Social Conflict (Cambridge: Cambridge University Press, 1992), 35–43 and Tang Shiping, “A General Theory of Institutional Change” (London and New York: Routledge, 2011). 20 Kai He, Institutional Balancing in the Asia Pacific: Economic Interdependence and China’s Rise (London: Routledge, 2009), 10. 21 In a sense, it is a kind of “negative balancing.” For more on this topic, see Kai He, “Undermining Adversaries: Unipolarity, Threat Perception, and Negative Balancing Strategies after the Cold War,” Security Studies, Vol. 22, No. 2 (2012), 154–191.

China ’ s Rise

173

not a product of deepened regional cooperation. Instead, it will possibly bring further regional cooperation to a standstill and even result in its retrogression. IV

Dual Structure and the Evolution of the East Asian Order

The special nature of the East Asian order is to a large extent embodied in the special structure of its power base. Sun Xuefeng and Huang Yuxing believe that a region’s order can be divided into two categories according to the distribution of power among regional countries: the order with a single power center and the order without such a power center.22 In this sense, the special nature of the East Asian order is not reflected by its lack of a single power center, but by the existence of two power centers, namely, the separate security center and economic center respectively led by the u.s. and a fast-growing China. Such a power configuration poses a challenge to the traditional comparison and division of the comprehensive national strength of major powers, and will also add some new characteristics to the evolution of the East Asian order. Evolution of the Power Structure, Regional Institutions, and the East Asian Order Since the 1990s, the outside world has been pursuing cooperation with China as part of its efforts to integrate Beijing deeper into the extant regional institutions, systems, and order arrangements. The emergence of the dual structure in the region, to some extent, means the culmination of China’s integration into the region under the established regional institutional framework, which has left China with very limited space for maneuvers to make on its own. However, further expansion of China’s economic size will possibly cause tangible repercussions to the established regional order, although such kind of consequence is not China’s intentional policy target. China’s economic rise is not a matter of the rise of its economic strength alone; it is also a matter that will promote the transformation of the established East Asian order. From the perspective of the power configuration, both China’s economic advantage and the u.s.’s military and security superiority will not experience fundamental weakening in the near future. 1

22

Sun Xuefeng 孙学峰 and Huang Yuxing 黄宇兴, “Zhongguo jueqi yu dongya zhixu yanbian 中国崛起与东亚地区秩序演变 [The Rise of China and the Evolution of East Asian Order],” Dangdai yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 1 (2011): 6–34.

174

zhou

From a general perspective, the u.s.’s military and security advantages are huge and will remain stable. As for China, the drive to modernize its military and improved access-denial capabilities have cemented its defensive stance, but these still don’t pose a substantial challenge to the u.s.’s military supremacy in East Asia. China’s leading economic status in East Asia is still in its initial stage. It has so far been mainly reflected in China’s irreplaceable trade status in the region. If China’s economic strength continues to maintain its rapid growth momentum and domestic demand continues to expand, its economic influence in the region will remain on the upward swing even if established regional institutional arrangements puts it in a disadvantageous position. From a long-term perspective, u.s. policies can do very little to stem the tide of China’s economic influence, and the policies that are put in place will be only from a tactical, rather than strategic standpoint. In the process of adjusting the u.s.’s Asia-Pacific strategy, it is difficult to fundamentally reverse the long-term tendency of power distribution between China and the u.s., and what has occurred between the two states is not a power transition in a common sense. Given that China focuses more on economic development in the process of its rise, the power transition from the u.s. to China has not displayed the same pace in economic field and security fields. Facing China’s economic rise in an era of no-war among major powers,23 the u.s. has few simple and effective ways to respond. However, it is unlikely that Washington will sit and watch China’s rise in economic influence without doing anything, which means there will be a prolonged struggle between China and the u.s. for economic dominance in East Asia. The gradual formation of the East Asian dual structure is both a reflection and a result of comparative advantages existing between China and the u.s., respectively, in the economic and security fields in this region. Whether or not such a dual structure will carry forward hinges on whether both countries can maintain their comparative advantages, especially whether China can maintain its comparative advantages in the economic field. If the implementation of the u.s.’s “pivot to Asia” strategy fails to change China’s comparative economic 23

There have been few wars among major powers since the end of World War II, which, in a sense, means that international relations in a post-war era have entered a non-war state. See John Mueller, “War Has Almost Ceased to Exist: An Assessment,” Political Science Quarterly, 2 (2009): 297–321; Yang Yuan 杨原, “Daguo wu zhanzheng shidai baquanguo yu jueqiguo quanli jingzheng de zhuyao jizhi 大国无战争时代霸权国与崛起国权力 竞争的主要机制 [The Main Mechanism for Power Competition between Hegemon and Rising Power in a Non-War Era],” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 6 (2011): 6–32.

China ’ s Rise

175

advantages, or if the u.s.-pioneered TPP turns out to play a more political rather than economic role, then any of the u.s.’s policies and measures could not substantially influence the dual structure in East Asia; for they will fail to fundamentally weaken China’s status as the East Asian economic center. The u.s. is far from consolidating its dominant status in East Asia, which is its long-cherished strategic target. Even though it is able to cement its security superiority in the region, it has failed to transfer such superiority to the economic field. From a long-term perspective, China’s stable status as East Asia’ economic center, if formed, will surely impact the u.s. in the area of security. 2 Continuity of the East Asia Order and Its Transformation The emergence of the dual structure in East Asia marks an important transformation of the East Asian order from the u.s.-centered unitary power order in the past to one that has two centers—focused on economics and security. Such a transformation is the result of China’s economic rise and its efforts to push for peaceful change in the East Asian order under the u.s.-dominated regional power configuration. China’s move in the region can be seen as a kind of limited and peaceful transfer of economic power between China and the u.s. For China, what will it face next is how to further assimilate and consolidate such kind of order transformation within the framework of regional institutions, regional states, and international relations. The following problems will be relevant to the stability and continuity of the East Asian order: (1) Whether or not China and the u.s. will reach a consensus on their roles in the regional order, especially whether they can accept each other’s role in the region. Compared with China, which will more easily accept the u.s. as a security center in East Asia, the u.s. is more reluctant to accept China as an economic center in the region. From a middle and long-term perspective, the major problem facing the East Asian order is the u.s.’s attempt to challenge and weaken China’s status as the regional economic center, instead of China’s intention to cripple u.s. military and security dominance. If the two countries fail to reach consensus on the other’s role, there will likely be a policy confrontation for some time to come in the future. (2) Both China and the u.s. need to win over followers as they compete to gain more regional influence,24 cement and further boost their influence, and hold on to more strategic positions in the East Asian structure. The u.s. is 24

For opinion on how a rising power can win over followers, see Stefan A. Schirm, “Leaders in Need of Followers: Emerging Powers in Global Governance,” European Journal of International Relations, 2 (2010): 197–221.

176

zhou

likely to further reinforce its security superiority by offering security guarantees, providing common goods in the field of security, promoting divisiveness amongst regional countries, and at the same time trying to extend its security reach into economic and other fields.25 China will work hard to play its role and influence in regional economic cooperation and convert its economic advantages into bigger modes of influence, in a bid to create a more favorable long-term regional environment for its survival and development. Either country is unlikely to gain overshadowing advantages in both economic and security areas, and both will also need to confront areas they cannot handle well. The power standoff between China and the u.s. in different fields will not change over a long period in the future. (3) Researchers should not look at or understand the East Asian order from the perspective of major powers competition alone. Standing separate from major power relations is the important aspect of the regional order in terms of its regional implications. This order tends to create a general equilibrium that comes from the interactions and power games that regional players engage in.26 This equilibrium has an intrinsic requirement that the operational model of the regional order should get widespread endorsement from regional states. When it comes to the East Asian order, it does not inevitably lead to the general interests of the region being maximized, but rather it should be a condition that serves the overall interests of regional countries and gets extensive approval from those who desire to increase the force supporting the regional order, and thereby lowers its centrifugal force. From a short-term perspective, many East Asian nations have reaped considerable economic and security benefits from their economic relations with China, in spite of their security alignment with the u.s. However, such a policy by which they are required to hedge their bets has also brought with it certain internal pressures and tensions. These countries also have to confront the very real possibility that their economic and security interests can be potentially compromised as well. At a time when China enjoys economic advantages and 25

26

On the topic of power transition in different fields, see Robert O. Keohane and Joseph S. Nye, Jr., Power and Interdependence: World Politics in Transition (Boston: Little Brown, 1977), and Dale C. Copeland, The Origins of Major War (Cornell University Press, 2001). For an analysis on the change of power distribution in the international system, see Joseph S. Nye, Jr., The Future of Power (New York: Public Affairs, 2011). A stable equilibrium means that the established regional order, even if disrupted to some degree, will still return to the previous state of equilibrium. Instable equilibrium, however, means the system, once slightly disturbed, cannot return to the previous state, and will likely undergo bigger deviations as time goes by.

China ’ s Rise

177

the u.s. dominates on the security front in East Asia, how can one skillfully adjust and handle ties with both China and the u.s.—this will remain a particularly important issue in the quest for continuity of the East Asian order. Such behavior modification will not only involve an adjustment of expectations and policy options on the part of related countries, but also it will also be a matter of realizing greater regional interests under the current regional order and distributing these interests among regional countries. How East Asia creates, distributes, and shares the benefits of its established order is of fundamental significance to the evolution of its regional order. East Asia should break the illusion that there exists a widespread harmony of interests across the international society on one hand,27 and should also make greater efforts to push for cooperation in broad areas that are relevant to the region’s common interests. In this sense, China and the u.s., especially the u.s., should not focus their energy on how to more effectively weaken the other. Instead, they should spend more time considering how to bring more substantial interests to the region, including how to work out a better design for the regional order that can bring peace, security, stability, and prosperity. Only in so doing, can China and the u.s. gain more support from the region and gain an upper hand over the other in their long-term power games, instead of merely acquiring short-term and unstable advantages. (4) The long-term stability of the regional order depends on the institutionalization of ideas and behavior models that are beneficial to the stability of the regional order, and depends on effective institutional arrangements that are beneficial to the persistence of the regional order. Judging from the current situation, all these remain a prominent weakness in the East Asian order. The u.s. has maintained its status as the center of the East Asian security order by offering security guarantee to many regional states. However, another problem arises: The u.s.-provided peace, security, and harmony, if long continued, will lower East Asian nations’ demand for security protection from the u.s., which will actually hamper Washington’s efforts to consolidate its security advantages in this region. Due to its need to increase some regional countries’ demands for its security guarantee and bring closer its military and security cooperation with allies, the u.s. will to some extent have motivations to instigate security disputes across East Asia and inflame potential conflicts between China and other regional countries. This is particularly detrimental to East Asian efforts to improve regional security environment.

27

For opinions on the harmony of interests and its problems, see Tang Shiping, A General Theory of Institutional Change (London and New York: Routledge, 2011), 11–20, 23–27.

178

zhou

In the economic field, there also exists a serious problem endangering the persistence and stability of the East Asian order. In its push for TPP, one of the u.s.’s important intentions is to weaken China’s rising status and role in regional economic institutional arrangements. On one hand, East Asia has to face the reality of China’s rapid economic development and the continuous rise of its economic status. On the other hand, there exist strong attempts across the region to reduce such an influence by China through regional rules and institutional arrangements. The head-on clash between the two forces is an unfavorable element to the stability and development of the regional order. The u.s.’s attempt on this front will not succeed, but it will exacerbate the intrinsic tensions within the East Asian order and make it difficult to realize the institutionalization of the stability and efficiency of the East Asian order. .

V Conclusion Generally speaking, the East Asian dual structure determines whether or not a region can realize through an effective merger of its economic and security cooperation an institutional framework that promotes mutual interactions and advancements in a benign manner. The prospect of the East Asian dual structure will not be too bad if China, the u.s., and other regional countries can generally accept the regional structure, view it as a normal structure, and make concerted efforts to explore and expand the space for regional cooperation. However, the current dual structure in East Asia is generally unacceptable to the u.s., which will bring more internal instabilities to the already-unstable regional structure and make it more difficult for East Asia to attain a kind of coexistence between its economic and security centers. This will also bring on more challenges for East Asia in its pursuit of smooth cooperation in the future. Major powers always play a particularly important role in the international order, but they also are also faced with the dilemma of how to make other states recognize their special role in the international order. Hence, major powers need to develop a broader perspective of the problem employing a balanced approach and conducting timely and strategic self-restraints over their own actions. This is applicable to not only China but also the u.s.28 Aside from dependence on an intrinsic stability of the power configuration, the 28

For discussions on how major powers should conduct strategic self-restraint to realize a long-term order interest, see G. John Ikenberry, After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars (Princeton: Princeton University Press, 2000).

China ’ s Rise

179

stability of the East Asian order also to a large extent depends on the degree of endorsement by regional countries of their established interest relations; it also depends on whether a relatively reasonable relationship of interest distribution will be formed under the regional order, whether a relationship is expected to continuously bring economic and security returns to regional countries, and whether it can endow the regional order with a character of self-maintenance. Another path for major powers to maintain the East Asian order and play a fundamental role is to handle their relations well. China and the u.s. need to work hard to develop a new type of major power relationship and seek long-term and sustainable ways for coexistence that will not cause destructive impacts to bilateral interests and the interests of the region as a whole. If China and the u.s. can achieve this target, East Asia will have a bright prospect. It is obviously not an easily achievable task. To build a new type of major power relationship, China and the u.s. need a high degree of strategic patience, wisdom, and determination, as well as effective mutual policy coordination. From the perspective of regional order, what East Asia will face is not the existence of two leaders, but the lack of an effective leadership if China and the u.s. cannot conduct effective cooperation or generally achieve a smooth coexistence in the region.29 Such a scenario will result in a continuous separation of its economic and security ties, which will cause certain damage to the established regional economic and security cooperation in the region. East Asian nations should work hard to avoid such an outcome. For a rising power like China, it should know that any foreign policy purely based on pragmatic purposes will not help it play a leading role in the international society. As a country expected by many to play a bigger role, China should drive home the fact that the adoption of purely pragmatic policies will not work. In the process of the evolution of the East Asian order, China should thoroughly ponder over its long-term role orientation in the regional order, and correspondingly adopt a range of concrete diplomatic policies.

29

Zhao Quansheng believes that a China-u.s. dualistic leadership system is emerging in the Asia-Pacific region. See Zhao Quanshen 赵全胜, “Zhongmei guanxi yu yatai diqu ‘shuang lingdao tizhi’ 中美关系与亚太地区‘双领导体制’ [Sino-US Relations and the DoubleLeaders System in the Asia-Pacific Region],” Meiguo yanjiu 美国研究 [American Studies Quarterly], 1 (2012): 7–26.

180

zhou

Works Cited Chan, Steve. China, the U.S., and the Power-Transition Theory: A Critique. Abingdon: Routledge, 2008. Christensen, Thomas J. “Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy toward East Asia.” International Security, 1 (2006): 81–126. Copeland, Dale C. The Origins of Major War. Cornell University Press, 2001. Drezner, Daniel W. “Bad Debts: Assessing China’s Financial Influence in Great Power Politics.” International Security, 2 (2009): 7–45. Goh, Evelyn. “Great Powers and Hierarchical Order in Southeast Asia.” International Security, 3 (2007/8): 113–157. Ikenberry, G. John. After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order After Major Wars. Princeton: Princeton University Press, 2000. ———, Michael Mastanduno and William C. Wohlforth. “Introduction: Unipolarity, State Behavior, and Systemic Consequences.” World Politics, 1 (2009): 1–27. Jia Qingguo 贾庆国. “Jiyu yu tiaozhan: danji shijie yu zhongguo de heping fazhan 机 遇与挑战：单极世界与中国的和平发展 [Opportunities and Challenges: A Unipolar World and China’s Peaceful Development].” Guoji Zhengzhi Yanjiu 国际政 治研究 [International Politics Quarterly], 4 (2007). Johnston, Alastair Iain. “Stability and Instability in Sino-US Relations: A Response to Yan Xuetong’s Superficial Friendship Theory.” The Chinese Journal of International Relations, 4 (2011): 5–29. Kai He. Institutional Balancing in the Asia Pacific: Economic Interdependence and China’s Rise. London: Routledge, 2009. ———. “Undermining Adversaries: Unipolarity, Threat Perception, and Negative Balancing Strategies after the Cold War.” Security Studies, Vol. 22, No. 2 (2012), 154–191. Keohane, Robert O. and Joseph S. Nye, Jr. Power and Interdependence: World Politics in Transition. Boston: Little Brown, 1977. Knight, Jack. Institutions and Social Conflict. Cambridge: Cambridge University Press, 1992. Kuick, Cheng-Chwee. “The China Factor in the US’ ‘Re-Engagement’ with Southeast Asia: Drivers and Limits of Converged Hedging.” Asian Politics & Policy, 3 (2012): 315–344. Le Yucheng 乐玉成. “Shijie dabianju zhong de zhongguo waijiao 世界大变局中的 中国外交 [China’s diplomacy in the midst of the world’s great changes].” Waijiao pinglun 外交评论 [Foreign Affairs Review], 6 (2011): 1–6. Li Wei 李巍. “Dongya jingji diqu zhuyi de zhongjie? zhidu guosheng yu jingji zhenghe de kunjing 东亚经济地区主义的终结？——制度过剩与经济整合的困境 [Has economic regionalism ended in East Asia?—Institutional redundancy and the

China ’ s Rise

181

dilemma of economic integration].” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 4 (2011): 6–32. Li Xiangyang 李向阳. “Kua taipingyang huoban guanxi xieding: zhongguo jueqi guochengzhong mianlin de zhongda tiaozhan 跨太平洋伙伴关系协定：中国 崛起过程中面临的重大挑战 [TPP: Major Challenges to China in the Process of Its Rise].” Guoji jingji pinglun 国际经济评论 [International Economic Review], 2 (2012): 17–27. Liu Feng 刘丰. “Danji tixi de yingxiang yu zhongguo de zhanlue xuanze 单极体系 的影响与中国的战略选择 [Influence of unipolar system and China’s strategic options].” Ouzhou Yanjiu 欧洲研究 [Chinese Journal of European Studies], 2 (2011): 15–29. Mueller, John. “War Has Almost Ceased to Exist: An Assessment.” Political Science Quarterly, 2 (2009): 297–321. Nair, Deepak. “Regionalism in the Asia Pacific/East Asia: A Frustrated Regionalism.” Contemporary Southeast Asia, 1 (2008): 10–42. Nye, Joseph S., Jr. The Future of Power. New York: Public Affairs, 2011. Rüland, Jürgen. “Southeast Asian Regionalism and Global Governance: ‘Multilateral Utility’ or ‘Hedging Utility’.” Contemporary Southeast Asia, 1 (2011): 83–112. Schirm, Stefan A. “Leaders in Need of Followers: Emerging Powers in Global Governance.” European Journal of International Relations, 2 (2010): 197–221. Shen Minghui 沈铭辉. “TPP de chengbenshouyi fenxi: zhongguo de shijiao 跨太平洋 伙伴关系协议的成本收益分析：中国的视角 [TPP: An Analysis of the Costs and Returns From the Perspective of China].” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 1 (2012): 6–34. Sheng Bin 盛斌. “Meiguo shijiao xia de yatai quyu yitihua xinzhanlue yu zhongguo de duice xuanze 美国视角下的亚太区域一体化新战略与中国的对策选择 [The New Asia-Pacific Integration Strategy from A US Perspective and China’s Policy Options].” Nankai Xuebao 南开学报（哲学社会科学版）[Nankai University Journal (philosophic and social sciences edition)], 4 (2010): 70–80. Sun Xuefeng 孙学峰 and Huang Yuxing 黄宇兴. “Zhongguo jueqi yu dongya zhixu yanbian 中国崛起与东亚地区秩序演变 [The Rise of China and the Evolution of East Asian Order].” Dangdai yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 1 (2011): 6–34. Tang Shiping. A General Theory of Institutional Change. London and New York: Routledge, 2011. Tessman, Brock F. “System Structure and State Strategy: Adding Hedging to the Menu.” Security Studies, 2 (2012): 192–231. Torode, Greg. “Region Looks to China for Profit, U.S. for Security.” South China Morning Post, November 15, 2010.

182

zhou

Wohlforth, William C. “The Stability of a Unipolar World.” International Security, 2 (1999): 5–41. Xu Jin 徐进. “Dongya duobian anquan jizhi: wenti yu gouxiang 东亚多边安全合 作机制：问题与构想 [East Asian multilateral security cooperation framework: problems and considerations].” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 4 (2011): 92–106. Yan Xuetong 阎学通. “Dui zhongmei guanxi buwendingxing de fenxi 对中美关系不 稳定性的分析 [The Instability of China-US Relations].” Shijie jingji yu zhengzhi 世界经济与政治 The Chinese Journal of International Politics, 3 (2010): 263–292. Yang Yuan 杨原. “Daguo wu zhanzheng shidai baquanguo yu jueqiguo quanli jingzheng de zhuyao jizhi 大国无战争时代霸权国与崛起国权力竞争的主要机制 [The Main Mechanism for Power Competition between Hegemon and Rising Power in a Non-War Era].” Dangdai Yatai 当代亚太 [ Journal of Contemporary Asia-Pacific Studies], 6 (2011): 6–32. Zhao Quanshen 赵全胜. “Zhongmei guanxi yu yatai diqu ‘shuang lingdao tizhi’ 中美关系与亚太地区‘双领导体制’ [Sino-US Relations and the Double-Leaders System in the Asia-Pacific Region].” Meiguo yanjiu 美国研究 [American Studies Quarterly], 1 (2012): 7–26. Zhou Fangyin 周方银. “Taoguangyanghui yu liangmian xiazhu—zhongguo jueqi guocheng zhong de zhongmei zhanlue hudong 韬光养晦与两面下注——中国崛 起过程中的中美战略互动 [A low-profile policy and the strategic hedging: The China-US strategic interactions in the process of China’s rise].” Dangdai Yatai 当代 亚太 [ Journal of Contemporary Asia-Pacific Studies], 5 (2011): 6–26. Zhu Feng 朱锋. “Aobama zhengfu ‘zhuanshen yazhou’ zhanlue yu zhongmeiguanxi 奥巴马政府“转身亚洲”战略与中美关系 [The US Obama administration’s ‘pivot to Asia’ strategy and Sino-US Relations].” Xiandai guoji guanxi 现代国际关系 [Contemporary International Relations], 4 (2012): 1–7.

chapter 9

Terrestrial and Maritime Territorial Disputes and Their Resolution in the Process of China’s Rise Li Xiangyang Abstract Terrestrial and maritime territorial disputes have recently become a major issue between China and some of its neighboring states. States claiming disputes with China, along with other international powers, attribute the emergence of these disputes to China’s adoption of a hard line foreign policy; moreover, these entities even seek to deny the possibility of China’s peaceful rise. In our view, China’s territorial disputes originate from its rapid rise. Claimants, on the other hand, worry that China is “shelving disputes” and this gesture may favor it more as time goes by. As major powers adjust their own Asian strategies, they have created the external condition for claimant states to provoke tensions with China. As for China, the resolution of its territorial disputes and its own peaceful rise as a global power are not an either/or decision. Therefore, the resolution of China’s territorial disputes has to be perceived in the context of China’s peaceful rise, and through proper handling of relations with major powers and neighboring countries, China will be able to maintain its core interests.

Keywords terrestrial and maritime territorial issues – claimant states – peaceful rise – adjustment of major powers’ Asian strategies

* The article was published in Xiandai Guoji Guanxi 现代国际关系 [Contemporary International Relations], (8) 2012, under the title “Zhongguo Jueqi Guochengzhong Jiejue Bianhai Wenti de Chulu 中国崛起过程中解决边海问题的出路 [Approaches to the Resolution of Terrestrial and Maritime Territorial Disputes].” Li Xiangyang is Director of the National Institute of International Strategy at the Chinese Academy of Social Sciences. His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�11

184

li

China’s territorial disputes with neighboring Southeast Asian countries over islands in the South China Sea, the China-India territorial tensions, as well as the China-Japan conflict over the Diaoyu Islands are all attracting worldwide attention and becoming a major challenge for China in its relations with neighboring countries in the new era. From a broad perspective, it is possible that in the foreseeable future, these disputes may not have easy solutions, and may potentially coexist with the process of China’s upward trajectory. On the surface, these disputes seem to involve only China’s bilateral relations with some claimant states, but behind the scenes China’s relations with other neighboring states and some major powers are also closely connected. Therefore, China’s terrestrial and maritime territorial issues cannot be resolved through stop gap measures; instead they need to be addressed against the backdrop of China’s rise and should be associated with adjustments that China makes in its diplomatic strategy in the new era. I

Terrestrial and Maritime Territorial Disputes: The Inevitable Outcome of China’s Rapid Rise and Readjustment of Major Powers’ Asian Strategies

Although China has delimited its land and sea borders with most neighboring states, some land territories and sea borders, which are currently being disputed, are leftover from history and have not yet been satisfactorily apportioned. For many years, adhering to the principle of “shelving differences,” China and those affected countries have maintained relative stability regarding the lands and territorial waters in dispute. In this sense, terrestrial and maritime territorial disputes are not a new issue. Their simultaneous resurfacing in recent years, however, is a product of the confluence of multiple factors. However, the claimant states and some countries with ulterior motives perceive these disputes as a consequence of China raising its new terrestrial and maritime demands to neighbors after its rapid rise, thus blaming China for intimidating smaller and weaker nations, and asserting that China has abandoned its path towards a peaceful rise. The emergence of terrestrial and maritime territorial issues collectively is a product of claimant concerns over China’s rapid rise. The widening gap in national power between China and the countries involved in these disputes, has led to the belief that China’s tendency to shelve differences is becoming increasingly unfavorable to the countries involved, while China, on the other hand, is benefitting from these preexisting conditions. Take, for example, the China-Japan dispute over the Diaoyu Islands. During negotiations on

Terrestrial and Maritime Territorial Disputes

185

the normalization of Sino-Japanese diplomatic relations, leaders from both states agreed to shelve their differences, which then subsequently became one of the foundations for the rapid development of Sino-Japanese relations. Since the 1990s, with the rapid growth of the Chinese economy and Japan experiencing the “lost 20 years,” the relative competitiveness of the two economies was reversed, and China surpassed Japan in terms of economic size in 2010. Such a reversal had a great impact on both Japan’s domestic politics and foreign affairs, and “redefining Japan’s state identity” thus became a popular idea thereafter. The Japanese government also started denying its agreement with China on the principle of “shelving differences.” The Noda administration’s “purchase of the Diaoyu Islands” just happened against such a background. Compared to Sino-Japanese disputes, China and India have basically upheld their agreement of shelving differences over their disputed territories. For India, the rapid growth of China’s economy will not cause significant changes in a comparison of each other’s national powers, since India’s economy has been growing at a high rate, and some Indian researchers have even noted that India’s economy would surpass that of China and become the world’s largest economy by the middle of this century. The terrestrial and maritime territorial issues of China are not a global event in nature, but they have aroused widespread concern in the international community in recent years. This has happened against the backdrop of major powers readjusting their Asia strategies, which actually centered on China. America’s “return to the Asia-Pacific region” (or re-balancing to Asia Pacific) reflects such readjustments by the major powers. The United States has decided to return to the Asia-Pacific region for two purposes, one is to share the dividends of Asia’s rapid economic growth; the other is to respond to China’s rise. Specifically, it hopes to prevent a rapidly rising China from dominating the future political and economic order of Asia on the one hand, and ensure its own dominance in Asia while constraining China within such an order on the other. This is a natural reaction of a hegemonic power to its potential challengers. As the former u.s. Secretary of State Hillary Clinton emphasized when defining “America’s Pacific century”: the u.s. has to create a rules-based order—one that is open, free, transparent and fair, and only the u.s. is capable of creating and maintaining such an order. For example, the u.s. intervened in the South China Sea disputes under the banner of protecting freedom of international navigation. In this way, the u.s. could avoid the criticism of containing China while forcing China into submission. If it does not endorse American action, then China would be labeled a violator or challenger of the global rule of law. The u.s.’s return to the Asia Pacific region is to achieve clear strategic goals. However, its ability to pursue such goals is limited due to financial constraints;

186

li

therefore, an offshore balancing strategy becomes an indispensable component of its return strategy. In other words, the u.s. needs its Asian allies to shoulder some responsibilities for its strategic return to the Asia Pacific region. Encouraged by America’s return, other major powers, especially those in Asia, have been adjusting their Asian or China strategies as well, with Japan and India being the most prominent players. Seeking to “redefine state identity,” Japan has been implementing the so-called “value oriented diplomacy” based on strengthened Japan-u.s. alliance, aiming to realize “a normal statehood” and forge “a ring of encirclement against China.” Different from Japan, India has adjusted its Asian strategy mainly reinforcing its “Eastward Strategy” in order to fulfill its “big power” dream. India’s specific actions include: First, it has shifted its strategic focus from South Asia to East Asia in response to the “Indo-Pacific” concept raised by the u.s. Second, India is expanding cooperation with East Asian states with the building of free trade zones as the springboard. For instance, India has signed free trade agreements with Japan, South Korea, and the ASEAN bloc of countries. Third, besides participating in Asian strategic affairs, India has also actively engaged in resource exploration in the disputed areas in the South China Sea. Fourth, while coordinating with America’s and Japan’s strategic adjustment in Asia, India is determined to continue its “nonalignment” principle of Indian diplomacy by not following other states as they align with either the u.s. or Japan. Fifth, India’s mentality of “taking China as its reference” determines Sino-Indian relations have a dual feature of competing against and cooperating with each other. Facing China’s rise, major powers within and outside the Asia-Pacific region pursue dual goals when implementing their Asian strategies: They hope to maintain a cooperative relationship with China, on the one hand, but search for “pincer” issues to contain China on the other. Traditional “pincers,” such as Taiwan, Tibet, and Xinjiang etc., are China’s internal affairs through which external forces cannot realize their aforementioned goals by overt interference. Terrestrial and maritime territorial issues, as a component of China’s core interests, involve its relations with other states and thus readily offer those major powers a strategic pincer to contain China. Portraying themselves as dispute stakeholders when intervening in China’s territorial issues, these states seek to contain China under the banner of safeguarding freedom of navigation, but in reality, they aim to expand their influence on the regional order in Asia. In the context of America’s return to Asia Pacific and other regional powers’ adjustment of their Asian strategies, China’s terrestrial and maritime territorial issues have become a focus of their strategic layout towards China. In “Defense of Japan 2011” (Annual Defense White Paper) issued by the Noda government, Japan added a new item of “focusing on trends in the South

Terrestrial and Maritime Territorial Disputes

187

China Sea,” stating that China’s actions may “affect the peace and stability of the region and the international community”. Recently, Japan has provoked more disputes with its “nationalization” of the Diaoyu Islands. As a part of its “Eastward Strategy,” India has been developing oil resource in collaboration with Vietnam in China-Vietnam disputed areas in the South China Sea. When talking about the e.u.-ASEAN issues, officials from the European External Action Service even mention that the e.u. would accept any request for assistance from ASEAN regarding the resolution of the South China Sea disputes. In line with big powers’ Asian strategies, some small Southeast Asian states also try to fish in troubled water to solicit more interests from their disputes with China in the South China Sea. During his visit of the Philippines at the end of June 2013, Japanese Defense Minister Itsunori Onodera indicated that he and the Philippine Secretary of National Defense Voltaire Gazmin agreed that both countries would support each other in their territorial disputes with China. Meanwhile, he emphasized that America’s military presence in East Asia is crucial while Japan and the Philippines should intensify their cooperation to help the u.s. achieve re-balancing in Asia Pacific. As noted above, it is inevitable that China’s terrestrial and maritime territorial issue will surface at this stage. This resurgence of the issue not only demonstrates big powers’ strategic adjustments in Asia centered on China, but also reflects the claimant states’ pursuit of interests by taking advantage of the situation. In this sense, China has to confront the avoidable challenge in its process of ascendency. II

Connections between China’s Terrestrial and Maritime Border Issues and Its Peaceful Rise

Pursuing a peaceful rise or peaceful development has been a basic guideline for China’s diplomatic strategy. The land and sea border disputes involving China have led to conflicts between China and other claimant states. This tension in turn stands to trigger hostility between China and other major powers while causing China’s neighbors to question the prospect of China’s peaceful rise. That is why China has to treat these issues objectively and address them appropriately. First, upholding sovereignty over its territory and territorial waters is a part of China’s peaceful rise, which cannot be set in opposition to each other. Sovereignty over its territory and territorial waters is at China’s core interests. The pursuit of peaceful development does not necessarily mean China would renounce its national sovereignty. China has adhered to the principle

188

li

of shelving differences over the disputed areas in the South China Sea, the East China Sea, and along the Sino-Indian border, which demonstrates China’s commitment to a peaceful settlement of these disputes. The direct cause of the recent emergence of the terrestrial and maritime territorial disputes is that some claimant states seek to change the status quo while denying the principle of shelving differences. This reflects some major powers’ intention of employing these disputes to prevent China’s peaceful rise and to tarnish China’s international image. Meanwhile, it shows that these claimant states also seek to set China’s peaceful rise against its protection of sovereignty over the land and sea territories for the purpose of undermining China’s core interests. Second, creating a stable surrounding environment is an indispensable part of China’s peaceful rise. China’s neighboring relationships are the foundation to enforce its strategy of peaceful rise. Without a peaceful environment in its surrounding areas, China cannot become a true regional power, let alone a world power. In the past three decades, China has been building a regional interest community by boosting economic cooperation between China and its neighbors. However, the terrestrial and maritime territorial disputes left over from history cannot be resolved in a short term. More importantly, some major powers intervene in these disputes to prevent China from rising peacefully, which further complicates the situation, involving big power relations, neighboring relationships, bilateral relations, and China’s peaceful rise. To resolve these territorial issues and create a friendly surrounding environment and shape its status as a regional power, China should not only manage these relationships properly but also have the capacity and willingness to provide public goods for Asia. Otherwise, no one would trust in China’s ability and willingness to be such a provider if its own core interests cannot be safeguarded. Third, a full-scale war is unlikely to break out now between China and those claimant states over their territorial disputes. China and its neighbors have been closely tied economically, with China being the largest trading partner and the export market for most of its neighbors. In recent years, mutual investment between China and its neighboring states has been growing rapidly and the interstate manufacturing network in East Asia has integrated all economies here as a whole. Multilateral negotiation on the Regional Comprehensive Economic Partnership (RCEP), already started, involves all countries having territorial disputes with China. Once the RCEP agreement was reached, economic ties between China and those claimants would be intensified. Considering the major power factor beneath its territorial disputes, China has committed to building a new type of big power relationship, especially between China and the u.s., which would help reduce the risk of war caused by accidental events. Historic experiences indicate that the likelihood of a full-scale war would be

Terrestrial and Maritime Territorial Disputes

189

low so long as major powers maintain a stable relationship. Moreover, since territorial disputes are a zero-sum game in nature, the cost of war is far higher than that of shelving disputes based on rational thinking. III

Solutions to the Terrestrial and Maritime Territorial Issues

China’s territorial issues involve itself and those claimant states concerned. Their effective settlement depends on resolving bilateral disputes on the premise of handling big power relations properly. First, responding to major powers’ strategic adjustment in Asia appropriately is the precondition for China to settle its territorial disputes with others. Major powers within and outside the Asia-Pacific region are systematically adjusting their Asian strategies in the economic, political and security fields. This is an inevitable challenge for China in its rising process. Therefore, China needs to overhaul its diplomatic strategies in this new era. If the challenge is not met successfully, China’s territorial disputes cannot be resolved effectively. When responding to major powers’ adjustment of their Asian strategies, the first and foremost task China faces is to react appropriately to America’s return to the Asia Pacific region. So long as this issue is addressed, territorial disputes between China and others would not really hamper China’s peaceful rise. Sino-u.s. relations represent relations between a status quo power and an emerging major power. Facing the rapid rise of China, the u.s.’s real concern is whether China will challenge the international order dominated by itself and other Western powers in the future. This is also the fundamental motive behind America’s return to the Asia Pacific. To realize its strategic goals, the u.s. needs to construct an alliance network surrounding China. On the one hand, Washington attempts to balance China’s influence in Asia by building such a network. As for the u.s., the core of its alliances in Asia is Japan, which is unable to counterbalance China’s rise after going through the “lost 20 years.” Consequently, Washington attempts to expand its traditional alliance system to other countries like Australia, India, etc. On the other hand, the u.s. seeks to integrate China into the existing world order eventually through alliance building. For instance, the Trans-Pacific Partnership (TPP) agreement, as a part of America’s return to the Asia Pacific, poses a dilemma for China: either be excluded from the TPP if it chooses not to join, or completely embrace the u.s.-led economic order if it does decide to join. Under such circumstances, we would understand why the u.s. (indirectly) provoked China’s territorial disputes with other states. Only in this way, could those claimant states be willing to participate in the alliance network forged by

190

li

America. Those non-claimants in China’s neighbors may also choose to align with the u.s. out of concern about China’s pursuit of hegemony. Breaking through the alliance network knitted by the u.s. in Asia indeed is one option for China to react to America’s return to the region. However, pursuing Chinau.s. cooperation is another option, which means to form a new type of power relations between the two. As for China, no matter which option is chosen, it should be implemented in a peaceful and cooperative way. This is determined by China’s strategy for peaceful rise. Although we emphasize that China needs to respond properly to major powers’ strategic adjustment in Asia and settle its territorial disputes, it does not mean a third party (major power) is needed to participate in the arbitration of these disputes. Proper management of major power relations is the precondition for preventing the escalation of the territorial disputes and for their subsequent resolution. Second, China needs to send out clear and accurate signals to the outside world, especially to those claimant states regarding its territorial issues. Some claimants provoked border disputes with China based on two misperceptions: on the one hand, they mistakenly believe they could fish in troubled water and pursue their own interests with America’s return to Asia Pacific as the backing; on the other hand, they mistakenly assume they could keep challenging the bottom line of Chinese determination to uphold its sovereignty since China follows a path of peaceful rise. For China, it is important to publicize its fundamental principles for dispute settlement, but those claimant states may keep testing its boundary if it does not clarify on its diplomatic objectives, means, and boundaries. The exchange of interests between states usually is the necessary condition for cooperation, but one’s core national interests are not for any exchange. China has to send out clear and accurate signals to the outside world about the components and boundaries of its core interests. Upholding the principle of settling disputes peacefully does not mean China would allow those claimants states to undermine its core interests. Meanwhile, China’s foreign policies need to be coherent and relatively stable to maintain its core national interests. In the past, China once blurred the contents and boundaries of its core interests due to ideological and other concerns. For instance, China took a vague position on the sovereignty of the South China Sea islands during the war of aiding Vietnam against the u.s.; it adopted an indistinct stance on the Diaoyu Islands again during the normalization of Sino-Japanese diplomatic relations. These ambiguous and vague policies have in turn become an important reason for the subsequent border and sea territorial disputes China has to face. Third, China should be prepared to deal with possible misjudgment made by some of its neighboring states. Though it is not very likely that China and

Terrestrial and Maritime Territorial Disputes

191

other claimant states will start a full-scale war over their territorial disputes, some individual states may still take extreme measures based on their misjudgment of major power relations and the regional power structure in Asia, China’s bottom line, as well as its determination to safeguard sovereignty. While adhering to the objective of peaceful rise and peaceful development, China will not renounce its right of using force as a strategic method. War and peace are two situations, which can transfer to the other. Peace without the backing of military force is unreliable. When states have disputes over their core interests, renouncing the right of using force means to give up peace in a certain sense. War demonstrates a country’s commitment to safeguarding its core interests. Countries have to make joint efforts to maintain peace amongst themselves. Just as Chinese leaders have stated explicitly recently, China will follow the path of peaceful development but it will never relinquish its legitimate rights or sacrifice its core national interests. No foreign country should expect China to make deals with its core interests or accept anything that is detrimental to China’s sovereignty, security and development interests. China will follow the path of peaceful development and other countries should take the same road as well. So long as all states pursue development in a peaceful way, they could develop hand in hand while co-existing peacefully. Fourth, China should promote regional economic cooperation with other countries to create favorable conditions for the settlement of its territorial disputes. Economic cooperation, though not being the necessary and sufficient condition for resolving the territorial issues, is helpful for reducing the risk of military confrontation and thus for the establishment of China as a major regional power. The development process of other regions in the world demonstrates that regional economic cooperation is conducive to easing disputes over territories and territorial waters among countries. For instance, economic integration in Europe since the end of WWII has not only reduced historical grievances among e.u. member states but also eliminated their risk of having military conflicts over territorial disputes. Similarly, border disputes between Brazil and Argentina were also resolved due to the founding of the Southern Common Market. In Asia, regional economic cooperation did not play a similar role as it did in other regions. One reason is that many countries take the settlement of territorial disputes as the precondition of conducting regional economic cooperation rather than treating economic cooperation as a means to resolve their territorial disputes. Since the u.s.’s return to the Asia Pacific, economic cooperation in Asia will become more complicated with different types of regional trading agreements pursuing even more different goals. Particularly for major powers, when adjusting their Asian strategies, they usually take regional trading agreements

192

li

as a tool to pursue non-economic objectives. To pursue a peaceful rise, China needs to create a friendly surrounding environment, resolve its terrestrial and maritime territorial disputes peacefully and promote regional economic cooperation. These are China’s inevitable choices. China’s surrounding area is the most vibrant region in the global economy. With China’s rise, it would become the target of major power competition. The resolution of China’s territorial disputes during its peaceful rise process requires a broad vision and innovative thinking.

Part Three World Economy and China

∵

chapter 10

The Strategy of China’s Opening-Up under New Circumstances Huang Haizhou and Zhou Chengjun Abstract China’s experiences in the past 30-plus years indicate that the opening-up policy has promoted its all-round economic and social progress and laid a solid foundation for deepening reforms. Under new circumstances, China is facing an important opportunity for mapping out a new layout of opening-up to the outside world. However, China is also confronted with a series of challenges under new global rebalancing. This paper puts forward ten proposals for China to better deal with these challenges. China must: 1) forgo previous misperceptions and improve publicity; 2) strengthen theoretical research and technological preparation; 3) accelerate China-u.s. Bilateral Investment Treaty (BIT) talks and push for the adoption of higher standards for service trade and investment treaties; 4) expedite the implementation of higher standard FTA strategy; 5) expand its opening-up policies in the service sector, and abolish unnecessary restrictions in this sector; 6) further widen agricultural opening-up; 7) accelerate the RMB capital account convertibility process; 8) promote domestic reforms by leveraging further opening-up policies; 9) strengthen oversight of the opening-up process; and 10) adopt an open-minded approach to globalization.

* The Chinese version of this article was originally published in Guoji Jingji Pinglun 国际经 济评论 [International Economic Review], 4 (2013), and the English version is moderately abridged from the Chinese version. Huang Haizhou 黄海洲 is from the China International Capital Corporation Limited; his email is [email protected]. Zhou Chengjun 周诚君 is from the People’s Bank of China; his email is [email protected]. This paper is a project under “A package program on key areas for deepening China’s reform of economic institution,” a key research subject funded by the China Finance 40 Forum (CF40). The authors would like to extend their thanks to Li Bo 李波, Liu Haiquan 刘海泉, Jin Penghui 金鹏辉, Wei Jianing 魏加宁, Wu Ge 伍戈, Zhang Jianhua 张健华, Zhang Yansheng 张燕生, Zhao Haiying 赵海英, and Lin Zan 林赞 for their precious suggestions and help. The authors also extend thanks to Li Zhiyong 李志勇 and Wanghui 王慧 for their help. The viewpoints of the paper only represent the authors and do not necessarily represent their affiliated institutions.

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�12

196

Huang and Zhou

Keywords reform and opening-up – strategic layout of opening-up – period of strategic opportunity – new international trade rules

Through reform and opening-up over the past three decades or more, China has achieved remarkable progress in attracting foreign investment and management expertise, cultivating international talent, boosting export and foreign reserves, restructuring domestic banks, remolding the real economy, and raising its international status. Looking forward, we believe that although all these dividends produced by reforms will continue to exist, their marginal contribution would decline rapidly—unless new efforts in opening up and reforms are pursued and accomplished. With deepening globalization trends, especially after the outbreak of the global financial crisis, economic recovery in all countries around the world face complicated internal and external, as well as long- and short-term constraints and contradictions. The imbalances in economic recovery that still linger around the world are difficult to change within a short period, as a result cooperation and competition will co-exist among world countries. From a shortterm perspective, the dynamics of the u.s. economy remain fairly weak, but its long-term forecast looks favorable. Fluctuations in the euro zone have temporarily subsided, but the region may still face continuous challenges while moving towards further integration. Despite a temporary market rebound, Japan will need to prove to the market that its multi-decade long gloomy prospect is really ending. At the same time, emerging countries need to deepen reforms in the long run to boost their slowed economic growth. Some new trends in international trade and investment rules have been emerging: 1) Service trade and investment accords have become the core of a new round of international trade talks; 2) New free trade agreements, which are usually clinched as a result of higher standards, will culminate in the making of new global trade rules; 3) The World Trade Organization (WTO), the world’s largest multilateral trade system, will seemingly face increasing marginalization. I

Grasping Opportunities to Push Forward Reform and Opening-Up

International situations have undergone dramatic changes over the past three decades or so, with nation states and countries experiencing both fierce

The Strategy of China ’ s Opening-Up Under New Circumstances

197

competition as well as cooperation worldwide. How has China taken advantages of these opportunities to accelerate its development under such international circumstances? 1978–1989 From the late 1960s to the early 1970s, the hegemonic struggle between the u.s. and the Soviet Union was intense. A series of offensive initiatives taken by the Soviet Union worked to push hard on the u.s., which was struggling with its exhaustive war in Vietnam As a result, the u.s. was eager to find new allies, and the diplomatic intransigency between China and the Soviet Union offered the u.s. such an opportunity. With far-sighted strategic vision and tremendous political courage, China’s leaders was successful in making a strategic decision to improve ties with the u.s., a move that has produced far-flung influences on Sino-u.s. relations and the world’s political landscape. On July 1, 1979, China and the u.s. formally established their diplomatic ties, a milestone event in the diplomatic history of both countries. This transformation, from confrontation to cooperation in Sino-u.s. relations, offered China a favorable and peaceful international environment to proceed with reform and, later on, opening-up policies, thereby allowing it to attract a large volume of funds and adopt new technologies from u.s.-led western countries. 1989–2000 Starting from the 1980s and into the early 1990s, in addition to the collapse of the Soviet Union, East European socialist countries experienced dramatic changes in their political and economic systems. These countries then became the new favorites of the Western world, with China receiving a cold shoulder, and even sanctions from the West following the 1989 political turbulence at Tiananmen Square. China’s ties with the u.s. and Europe deteriorated rapidly, creating an extremely difficult external environment for China. China’s state-owned enterprises also encountered massive obstacles as they pushed forward self-restructuring actions at that time. This, along with the severe repercussions brought about by the 1998 Asian financial crisis, put China in a particularly difficult internal and external position. Within this context, China stopped short of international opportunities in an effort to pull itself out of these difficult positions even though it has made arduous attempts towards reform and opening-up to the outside world. Due to the deep misgivings toward China’s reform and opening-up moves, the u.s. and European countries unequivocally embraced a containment policy toward Beijing.

198

Huang and Zhou

2000–2008 Several changes in the external environment emanating from three different fronts during this period offered a rare opportunity for China to speed up its economic development: From the perspective of domestic reforms: China took advantage of its entry into the WTO to promote a series of substantial reforms in key areas, which helped it realize rapid economic development as well as a considerable uptick in its international political stature. From the perspective of the international strategic environment: The tragic events of September 2011 in the u.s. prompted it to shift its established international strategic priorities. u.s. efforts to enlist international support for its actions in Iraq and Afghanistan to a large extent eased China’s predicament stemming from the u.s.-led western encirclement. China and the u.s. resumed some degree of mutual trust during this period, as a result of which friendship between the leaders of the two countries was also enhanced. From October 2001 to February 2002, u.s. President George W. Bush paid two visits to China and reached consensus with his Chinese counterpart on the establishment of constructive cooperative partnership between both countries. Similarly, Chinese President Jiang Zemin visited the u.s. in October 2002. This renewed Sino-u.s. relations have led to all-round development, including bilateral economic and trade ties, representing a huge leap forward. In 2001, China was the third largest importing market of the u.s., but rose to be the largest in 2011. During the same period, China also transformed itself from the fourth largest trading partner of the u.s. to become the second largest. From the perspective of the international financial system: In 2000, as the Internet bubble in u.s. markets collapsed, in order to boost economic growth, the u.s. Federal Reserve made 11 straight interest rate cuts in 2001, lowering the benchmark interest rate from 6.5 percent to 1.75 percent. It made two more rate cuts later in 2002 and 2003, further lowering the benchmark rate to 1.0 percent. Under the stimulus provided by low interest rates, u.s. real estate markets and consumption started to enjoy a boom, which promoted quick economic recovery and growth in the u.s. Before and after the creation of the euro in 1999, interest rates in the euro zone started to moderate towards German levels, contributing to faster economic growth rates in many countries within the zone. Economic prosperity in the u.s. and Europe offered unprecedented opportunities for Chinese exports. In 2001, China was formally admitted to the WTO. In the process of gaining access to WTO membership and to fulfill its commitments, China effectively pushed for a series of domestic reforms, making its economy more marketized and efficient, as well as more integrated into the world economy. China’s cheap

The Strategy of China ’ s Opening-Up Under New Circumstances

199

labor also helped the country become the “world’s factory,” with “Made in China” brands proliferating in many industries, such as those in automobiles, electronics, and luxury goods. As such, phrases such as the “Factor of China” and “Concept of China” began to exert tangible influence on the world. China’s imports and exports drove the growth of the global economy and became an important driving force of economic growth in neighboring countries in Asia and other developing nations. China’s demand for major raw materials has been on a consistent upward trajectory, and it is now a major importer of global crude oil, steel, iron ore, and other minerals. In its bid to promote economic growth and improve its people’s living conditions, China has also purchased from the world market a large volume of equipment and technologies. China has indeed enjoyed a more important international status than before, and has become a leading member of the BRIC countries, consisting of Brazil, Russia, India, and China. II

Important Benefits Harvested since the Adoption of the Reform and Opening-Up Policy

The Third Plenary Session of the 11th Communist Party of China (CPC) Central Committee, held near the end of 1978, started the journey of China’s reform and opening-up. In particular, since the decisions to develop a market and open economy (made at the 14th National Congress of the CPC and the Third Plenary Session of the 14th CPC Central Committee), which was then followed by China’s entry into WTO in 2001, the country has made significant strides towards opening up to the outside world. China now plays a powerful role in promoting institutional reforms in a wide range of areas. Over the past 30-plus years of reform and opening-up, China has followed the tide of economic globalization, unwaveringly opening its door to the outside world, effectively fending off the impacts of international political and economic turbulences, and pioneering new initiatives with Chinese characteristics. We can, therefore, view China’s entry into the WTO in 2001 as the demarcating line for an analysis of different tactics it adopted and the specific benefits it came by during different times of this period. 1 The “Bringing in” and “Going Overseas” Process 1.1 1978–2000 China had faced harsh economic conditions and a series of economic problems prior to 1978, such as an accumulation of economic institutional maladies, low industrial efficiency, serious imbalances in industrial structure, slow

200

Huang and Zhou

growth in total grain output, and a low level of people’s living conditions. The Third Plenary Session of the 11th CPC Central Committee near the end of 1978 started China’s reform and opening-up journey. The session shifted the focus of the Party and the country to economic development and launched the reform of the country’s economic management mechanism along with it political system. The 14th National Congress of the CPC, held in October 1992, clearly stated that China will build a socialist market economic system, pointing out that “China will further widen opening-up, better utilize foreign funds, resources, technologies and management experiences,” stressing that “China will open more regions to the outside world,” “expand broader areas to foreign capitals,” “actively expand its international market share, diversify its foreign trade and develop an open economy.”1 The Third Plenary Session of the 14th CPC Central Committee that convened in November 1993 passed a resolution establishing the socialist market economic system, and explicitly stating that China will develop an open economy and expand its opening-up to the outside world by taking concrete measures towards this target. For example, it stated that the country would promote “all-directional opening-up,” “further reform its foreign economic and trade system to set up an operational mechanism applicable to the extant international economic rules,” and “actively introduce foreign funds, technologies, talents and management experiences.”2 The focus of China’s opening up during this period was to attract foreign investment, adopt foreign technologies and advanced institutional mechanisms, invite international talent, and take advantage of modern management experiences from foreign sources as a way to reform its state-owned enterprises (SOEs), while helping to set up private enterprises. With the full implementation of these reform and opening-up policies and measures, the scale of foreign funds China absorbed and utilized was on the increase during this period of time. A large number of joint ventures and enterprises solely funded by foreign investors were set up, helping China learn innovative modern management experiences and adopt advanced technologies from external sources. The network of China’s foreign trade started to take shape and the volume of its foreign trade realized substantial growth. 1.2 2000–Current China’s acceptance into the WTO on December 11, 2001, marked a new stage in its opening-up. Since then, China has fulfilled its WTO membership 1 http://news.xinhuanet.com/zhengfu/2004-04/29/content_1447497.htm. 2 http://www.china.com.cn/chinese/archive/131747.htm.

The Strategy of China ’ s Opening-Up Under New Circumstances

201

commitments and followed through on its agreed timetable for industrial opening-up, and subsequent opening-up of its financial, telecommunication, agriculture, retail, home appliance, and automobile industries to international competition. China has changed from opening up only in some regions in the past to the current all-directional approach nationwide. Over the past 10 or so years, China’s economic status and influence in the international economic landscape has made considerable progress. The all-directional opening-up policy includes not only “bringing in” but also “going overseas.” After becoming more powerful, China’s enterprises have begun going overseas and are becoming an important participant in international markets. Industrial Sectors Facing Fierce International Competition and Yet Achieving Unprecedented Success China’s access to the WTO has offered a revealing window into how different industries developed before and after China’s WTO entrance. For example, those industries that had adopted higher degrees of opening-up, also enjoyed faster development after China’s WTO accession, regardless if prior to China’s WTO entry they were enjoying comparative advantages. One example of this is in textile and clothing manufacturing, which stands in contrast to other industries, such as those in home appliance, mechanical and electric products, and machines, which are experiencing obvious disadvantages in international competition. Similarly, industries that had adopted higher degrees of opening-up, also witnessed a sharp rise in their international competitiveness and market share and played an important role in forging China’s “new world factory” image. Even those industries that were believed to be in particularly disadvantageous positions prior to China’s WTO accession and would thus suffer a heavy blow from the WTO membership, such as the automobile and banking sectors, have today achieved unprecedented levels. Let us look at the following examples: 2

2.1 The Automobile Sector Before China’s entry into the WTO, there were predictions that membership would lead China’s automobile industry into catastrophic straits and that efforts to develop the automobile industry would be in vain. The results show, however, that such kind of predictions proved to be far from the reality. Through the setting up of joint ventures and mergers, as well as reorganization, China’s automobile industry has made steady headway in competitiveness, achieving an unprecedented “golden time” in terms of its development. By 2011, Chinese production and volume of sales of vehicles had reached 18.42

202

Huang and Zhou

million and 18.51 million units respectively, both ranked No. 1 in the world, which were respectively more than twice and 1.5 times that of the u.s. during the same year. The total value of vehicles produced came to 2.1 trillion yuan in 2011, 4.7 times that of 2001. The localized manufacturing of China’s auto components and parts is now about 80 percent and its annual per capita manufacturing capacity is more than 10 vehicles (the capacity was only one vehicle before China’s entry into WTO). A batch of domestic auto manufacturers has gradually risen to prominence with equally rapid growth in exports. Some domestic auto manufacturers have even ventured into the international auto market arena via acquisition of some world-class auto brands. 2.2 The Financial Sector According to its WTO membership commitments, China would end a five-year transitional period for its banking and insurance sectors by 2006 and fully suspend location and customer restrictions on the RMB business for foreignfunded banks. Foreign-funded insurers would face no other restrictions except their disqualification to engage in the business of legal property insurance and stipulations that their share-holdings for life insurance is no more than 50 percent. Prior to China’s WTO accession, such membership commitments had caused deep suspicions at home, with many believing the wider opening-up would cause huge damage to domestic banking and insurance sectors, especially at a time when many domestic banks were widely believed to be on the verge of technical bankruptcy. At that time, non-performing assets held by China’s state-owned banks would have been over 50 percent, according to some market estimates, and their capital adequacy ratios were far below the required 8 percent minimum. The World Bank had also believed that China’s banks would still need another 10 years to get ready to avoid being precipitated into a dangerous position. However, the reality now proves much different from those estimates 10 years ago. While foreign-funded banks have gained prospering development in China since its entry into WTO, homegrown banks have also leap-frogged in development due to their resolute reforms and unremitting efforts to draw themselves closer to international standards in terms of corporate governance and running management. By the end of 2012, the capital adequacy ratios of China’s banks had been 13.25 percent on average and their non-performing assets had only accounted for 0.95 percent on average. China’s state-owned “Four Big” banks, namely, Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China (ABC), had all squeezed themselves into the world’s top 10 banks. Past concerns that foreign-funded banks would cause huge repercussions to the domestic banking sector has not come to pass.

The Strategy of China ’ s Opening-Up Under New Circumstances

203

When it comes to the insurance sector, the situation is almost the same. Since China’s WTO entry, the foreign-funded insurance business has been booming in China, but this has not caused substantial impacts to domestic insurance companies.3 Practices after China’s WTO entry indicate that generally speaking, sectors that have chosen to be open more fully to foreign competitors and more actively participate in the distribution of global resources all have experienced comparatively better development, a sharper competitive edge, and closer links to international practices. Out of various concerns, China decided to retain some protective measures in certain industries, but the results have proven opposite to previous expectations. Preferential policies turned out to have provided protection for monopoly power of some industries, such as telecommunications and agriculture. 3 Opening-Up Has Robustly Promoted Reforms China’s experiences over the past 30-plus years indicate that the opening-up policy has forcibly pushed forward reforms. During this period, China’s SOEs have stepped up reforms and the private sector has achieved remarkable development. At the same time, reforms in financial, investment, housing, and the social security sectors have also fully unfolded. Domestic reforms have laid a foundation for China’s economic growth while opening-up has injected a robust vitality into its economic take-off. The combination of reforms and opening-up has promoted China’s economic and social development and prosperity and raised its international status. In 2011, China became the world’s second largest exporting country and second largest economy, acting as the engine of global economic growth. 3.1

Opening-Up Has Promoted the All-Round Progress of China’s Economy and Society and Laid a Sound Foundation for Its Reform After more than 30 years of reform and opening-up, China’s economy has maintained steady growth, and its national power has increased substantially. The process of its industrialization, informationization, urbanization and agricultural modernization accelerated and employment and social security conditions continuously improved, boosting its people’s living standard substantially. China’s micro-economic structure has become more dynamic with its private sector achieving fast growth, and its SOEs seeing improved financial conditions. All these have laid a sound foundation for China to push forward its reforms and towards shared consensus. 3 Data sources: World Bank, WTO, People’s Bank of China and Wind.

204

Huang and Zhou

3.2

Opening-Up Has Helped Raise Domestic Standards and Promoted Domestic Reforms in Various Fields in Line with International Practices Since 1992 when the target of building a socialist market economic system was confirmed, and with its WTO entry in 2001, China has actively introduced advanced technologies, institutions, and management experiences, effectively promoting innovation in its domestic economy. It has also been working hard to bring domestic development closer to international standards through a series of institutional reforms. With rising national power in this process, the internal and external environment has gradually improved for China to participate in international economic exchanges and cooperation, and to be integrated into the international community. 3.3

China’s Participation in International Competition Has Expedited Domestic Institutional Reforms From a micro-perspective, China’s enterprises have participated extensively in international competition; they have made full use of the international market and resources and gained a deserved footprint in the arena of global competition. From a macro-perspective, China has continuously advanced economic and trade ties with the rest of the world. As an important member of the G20 nations and other international organizations, China’s status and voice in global economic governance has increased dramatically, as its role is transforming from passive to active, from peripheral to the core, and from an observer to decision-maker. All of these actions require China to put more effort into reforming its rigid economic institutions and to promote its image as a responsible power in the international arena. In particular, this has been the case after the eruption of the global financial crisis. China has ever since actively implemented the resolutions passed by leaders of the G20 and pushed for reforms of global economic governance, even taking a leading role over other developed countries in some fields. The 18th National Congress of the CPC was convened in November 2012. After more than 30-plus years of rapid development since the reform and openingup were initiated, in 2008, China’s economy encountered an unprecedented global financial crisis that it had not seen in decades, as it was confronted with a series of challenges that could potentially halt its further development and transformation. China’s economic institutional reforms entered the deepwater area, and numerous difficulties and risks were expected to crop up, which would obviously result in obstacles to economic growth and profoundly impact its vested interest groups. China is yet to tackle the wide gap between the rich and poor and resolve a slew of problems that have affected the vital

The Strategy of China ’ s Opening-Up Under New Circumstances

205

interests of its people. At the same time, China has raised the people’s expectations for deepening the reforms, for improving the quality of economic growth, and for improving the level of public services. This time is ripe now, therefore, for China to draw lessons from its experiences in making reforms and openingup over the past few decades, and thereby expedite domestic reforms through further opening-up measures. III

Important Opportunities Now Facing China

Obvious Signs of World Transformation from Uni-polarity to Multi-polarity When compared with the late 20th century, the most prominent change the world faces today is the weakening of the u.s. dominating uni-polar position. After years of rapid development, emerging countries have robustly built up their economic strength and raised their voice in international affairs. Although the prospect of Europe rising is not a very optimistic scenario, its total economic size, which is equivalent to that of the u.s., allows for no degree of underestimation. Profiting from the price hikes of crude oil, Russia has extricated itself from the aftereffects of the “shock therapy” economic reforms and obviously improved its fiscal and current account conditions. After experiencing “two lost decades,” Japan has chosen to adopt some radical monetary and fiscal policies to reverse its economic slump. As global players tend to develop in a balanced manner, China will have more chips in hand in international affairs. China has distinct advantages in some areas, and consequently the good relations that it can build with the e.u. and main emerging countries are expected to help it have a larger say in international affairs and at the same time also enable it to undertake more international obligations. For example, in its bid to gain more shares in the IMF and the World Bank and be more extensively involved in international affairs and global governance, China is expected to seek cooperation with both the u.s. and E.U. and make headway in this direction. 1

U.S. is Expected to Enter a Prosperous Cycle of High Growth and Moderate Inflation Positive economic prospects in the u.s., the likes of which occurred in 2000– 2007, will once again offer a favorable external factor that will drive China’s economic growth. Global economic recovery is on a rising trajectory, but the existence of some structural factors will depress the level of global inflation for a relatively long period. These factors include: the u.s. still has a long road 2

206

Huang and Zhou

to go before realizing a full labor market recovery and its production gap will continue to exist; a demand slump in Europe will dampen the world’s total demand; the decline in the power and influence of labor unions in developed countries will impact recovery; and hyper competitiveness among countries as a result of deepening globalization over the past three decades will make international capital flow earlier. Central banks across the world have adopted very loose monetary policies over the past years, but have refused to change policy targets in the traditional sense. If necessary, they will still have enough means and space to tighten. All these factors mean that global inflation will maintain a moderate level in coming years, and there will be no risks for global hyperinflation. Also, commodity prices will probably continue to decline. All these will offer China a good external environment to continue increasing investment and make full use of the opportunities arising from the economic recovery in the u.s. and the world. New Opportunities for Chinese Ties with Europe, Japan, and Other Emerging Economies Europe is now struggling to pull out of a lingering economic recession and its technologies and brands are what China needs. China owns a colossal foreign reserve, but most of it has been invested in the USD-denominated assets, especially the u.s. treasury debt, with very low returns. Some of China’s investment, if shifted to the euro zone nations, such as PIIGS (Portugal, Ireland, Italy, Greece and Spain), will offer a big opportunity for cooperation between China and players in some key industries. China can reap rewards from industrial advantages that PIIGS countries enjoy, and at the same time balance its demands for rare resources, overseas expansion, technological upgrading while at the same time preserving the value of its assets. It can be imagined that current economic conditions will prompt European countries to hold a defensive posture in formulating future economic policies. This can offer more opportunities for China to take on more active initiatives to gradually share in and potentially take over the economic interests established by European countries in emerging countries. Sino-Japanese relations should be talked about under the framework of Sino-u.s. relations and that of China’s ties with the Korean Peninsula. For example, China and Japan, the two biggest economies in Asia, are expected to maintain a state of competition for a long period, and bilateral disputes over the sovereignty of the Diaoyu Islands will not relent in the coming years. How can China ensure it will win in such kinds of competitions and contestation? At the same time, China and other emerging markets will also face both cooperation and competition. On one hand, the u.s. economic recovery will 3

The Strategy of China ’ s Opening-Up Under New Circumstances

207

lift the value of the u.s. dollar, causing huge repercussions to countries that have excessively depended on foreign capital but have failed to carry out fullfledged reforms within the next three to five years. Some of them will possibly suffer a crisis similar to the 1998 Asian financial crisis or the debt crisis in some Latin American countries. This time, Argentine, India, Indonesia, Turkey, Vietnam, and the Philippines are likely to go through the testing of such a crisis. This will result in the widening of the economic gap between China and these countries. China’s rapid economic development and buildup will prevail, buying it more space and time for a bigger and more sustainable development in the future. IV

Trends of International Political, Economic, and Trade Rules

With the deepening of globalization, especially after the global financial crisis, economic recovery across the world has been confronted with complicated internal and external conflicts, making it risky to engage in large improvements in an unbalanced global economy. Under these circumstances, cooperation, and competitions are expected to coexist in the years ahead. 1 Change in the Developed World More than three years have passed since the world economy started its nascent recovery in the second half of 2009. The road to global economic recovery is bumpy and international economic circumstances are still complicated and precarious. Since the eruption of the crisis, major central banks in the world, including the Federal Reserve, European Central Bank (ECB), Bank of England, as well as the central banks in Japan and China have expanded their balance sheets by a large margin and increased their money bases at an unprecedented scale. The uncertainties in the global economic recovery have possibly contributed to the inclination of central banks to maintain economic growth. Such an international environment is favorable to China. 1.1 The U.S. The economic recovery of the u.s. has displayed a relatively optimistic picture after the crisis. Data indicate that the manufacturing and service sectors in the u.s. are still expanding. Despite a slow improvement in its employment conditions, the u.s. has generally maintained employment rejuvenation and its unemployment ratio has kept declining. As the efforts of de-leveraging and balance sheet repairs pushed by the private sector draw to a close, consumer confidence has gained and reached a record high since the u.s. began

208

Huang and Zhou

economic recovery, although it is still far below before the crisis. By and large, it is possible for the u.s. to maintain a moderate economic recovery momentum that it has enjoyed over past years. Accelerated real estate recovery and increased investment in the real economy are expected to be the main drivers of u.s. economic growth in 2013. Compared with major European countries, the u.s. has basically completed the de-leveraging process and its economic conditions are at a healthy state. The economy of a country is usually divided into four sectors—government, financial, household, and corporate. The 2008 financial crisis was in essence a balance sheet crisis. At the time of the crisis outburst, the corporate balance sheet was at a relatively steady state in the u.s. compared with government, financial, and household balance sheets, laying a certain foundation for its lasting economic recovery. To pull out of an economic crisis is actually a process of balance sheet repairs. The deleveraging in the u.s. real economy is now proceeding smoothly four years after its recovery. Since 2009, the debt level of its financial and household sectors has been lowered by a large margin, but the debt and leverage ratios of government have sharply risen. As household demands for consumption and housing mortgage credit recover, u.s. banks have shown stronger willingness to lend and thus relaxed their lending standards. The new economic stage the u.s. is expected to start, therefore, will undergo a new process of re-leveraging. During his second term of office, u.s. President Barack Obama is expected to focus on protracted deficit and debt issues. At the same time, pressures on such long-reviled issues as fiscal spending, education, immigration, and shanty infrastructure are also expected to ease to some extent within the following years. From a long-term perspective, a series of advantages the u.s. enjoys, such as in low interest rates, low energy prices and labor costs, and leading market and technological innovations, will boost a new round of economic growth. The u.s. is likely to experience a round of robust economic growth momentum around 2015 and also may become the first among the world’s three major economies to realize stable economic growth and economic prosperity. Due to the low interest rate policy by the u.s. Federal Reserve, the dollar’s status as the leading international reserve currency and the safety of dollar assets in a turbulent global market, u.s. treasury yields had reached a record low in more than 200 years recently. The yield of its high-grade corporate bonds had also been on the decline before the Federal Reserve indicated its intention of tapering. All of this means the u.s. government and corporations can get access to financing at a low cost, contributing to its economic recovery. In terms of technological innovation, the u.s. still holds a competitive edge in the world, with investments in R&D accounting for 31 percent of the world’s

The Strategy of China ’ s Opening-Up Under New Circumstances

209

total. At the same time, a mature capital market in the u.s. has helped form a set of full process scientific productivity system, from discovery to cultivation to buildup. There have been two trends deserving attention since the end of the global financial crisis. The first trend is the return of manufacturing to the u.s. Thanks to a continuous rise in China’s labor and land costs and growing concerns over its economic and institutional environment, China is no longer the top overseas destination to u.s. manufacturing. Declining local costs, a weak dollar, a series of preferential policies, as well as the rising efficiency of the production process itself—have all contributed to signs showing u.s. manufacturing returning to its domestic market. The long trend of industrial hollowing-out in the u.s. has been reversed and its high-end manufacturing advantages will become more outstanding. The second trend is that North America is entering a period of energy independence. The successful exploration of shale gas has drastically lowered natural gas prices in the u.s. At the same time, an explosive growth in the volume of shale oil production will possibly cause the u.s. to stop overseas oil imports in a few years. u.s. dependence on overseas oil supplies has kept declining since 2005; the u.s. has been able to change its status from a net oil importer to a net oil exporter at the end of 2010, owing to a steady rise in its oil production volume. Oil supply-demand relations in the North American market will tend to become more balanced in the future, compared with tightening oil supplydemand relationships throughout the rest of the world. With a similar viewpoint, the International Energy Agency believes that the u.s. will become a net oil exporter in 2030, and basically realize its energy independence around 2035, replacing Saudi Arabia to become the world’s largest oil producer. 1.2 Europe The European debt crisis still poses the largest risk to the global economy and its financial market even beyond three years after its outbreak. Owing to the e.u., especially European Central Bank (ECB), Europe has luckily survived its most dangerous moment. Since Mario Draghi, President of the ECB, took office in November 2011, the bank has worked out some timely measures and its balance sheet has expanded by about 30 percent. The bond yields of peripheral countries have obviously declined, their market liquidity has been effectively eased, and their banking sector and financial market have been stabilized. Although the European debt crisis will likely persist (with the specter of crisis in Greece and Spain far from being over), the worst is behind us. In the coming one or two years, the euro zone will gradually extricate itself from the negative influence of the debt crisis. However, the liquidity injected by the ECB alone

210

Huang and Zhou

is far from adequate to pull the zone out of the lingering crisis. To effectively break away from the negative impact of the crisis, the governments of all eurozone countries should further consolidate their political, fiscal, and economic resources, which will be a long and painful process. While the euro zone did not fully pull out of the economic recession in 2013, but its recession was alleviated due to the ECB’s loose monetary policies and mitigated fiscal austerity efforts. However, huge differences will still exist among its members. Some core members, such as Germany and France, will continue maintaining positive economic growth, but peripheral countries, due to strict austerity policies, will find it difficult to pull out of a lingering recession within a short period of time. Since the outbreak of the European debt crisis at the end of 2009, the government debt to GDP ratio across the entire euro zone has been on a steep incline, but the balance sheets among other sectors have not witnessed obvious changes. To return its real economy to a healthy status, the euro zone still needs to engage in a large-scale and lengthy de-leveraging process. This, together with other unfavorable factors such as an ageing population, makes it possible for the euro zone to become the next Japan, featured as feeble economic growth, credit shrinking and even plunging into a liquidity trap. 1.3 Japan Ever since the Liberal Democratic Party returned to power and Shinzo Abe was re-elected Prime Minister, Japan has begun pushing forward with a series of radical financial, fiscal and monetary policies. A few structural reforms, collectively referred to as “Abenomics,” are aimed at ending deflation and re-charging Japan’s economy and national power. In terms of its size, the latest round of fiscal stimulus plans has been the largest ever launched by the Japanese government since the end of World War II. The Abe government has continuously transmitted official messages to depreciate the yen. As far as its monetary policy is concerned, Japan’s central government made a decision earlier to take some loose measures to coordinate the Abe administration’s fiscal stimulus program. In fiscal year 2014, Japan’s central bank is expected to launch an open-ended quantitative easing and lift the middle-term inflation target to 2 percent. In terms of structural reforms, Abe’s cabinet is also preparing a series of measures in a bid to boost Japan’s competitiveness. The new head of Japan’s central bank, since taking office, has put forth a looser monetary policy than his predecessors. Similar to markets in the u.s. and Britain, the ultraloose monetary policy adopted by Japan has also agitated the global financial market. Abenomics, which has led especially to the depreciation of the yen, has had tangible impact on a few Chinese industries but with less substantial

The Strategy of China ’ s Opening-Up Under New Circumstances

211

impact on China’s foreign trade as a whole. Such practices by Japan have also given rise to other concerns: If emerging countries in Asia follow suit and successively embrace their loose monetary policies, which means a new round of a “currency war,” will this significantly affect China? Considering the fact that Asian emerging markets account for nearly 40 percent of China’s total export volumes, this is a reasonable concern for China. Will there be a large-scale currency war among Asian emerging countries? There is, however, little need for excessive concern over this issue, even though the possibility is indeed on the rise based on monetary disputes among emerging Asian markets, especially Korea, Taiwan, and Singapore, whose economies have been considerably influenced by the yen’s depreciation. Aside from its negative influence on China via the trade channel, Japan’s ultra-loose monetary policy will impact China through financial channels, such as its cross-border capital flows. However, the influence produced by Japan’s monetary easing policy on cross-border fund flows are smaller than monetary loosening by the u.s., and its liquidity can only exert limited influence on both direct and indirect China-bound investments. 2 Relations among Developed Countries The above-mentioned analyses of China’s ties with major developed countries indicate that there exist obvious differences among these relationships either in their status quo or in their future trends. Based on these analyses, we can make a general assessment of the ties among these major developed countries. First, the u.s. and Japan enjoy close ties, but that does not mean both are at a seamless front. An alliance has been established between the u.s. and Japan since the end of World War II, with the u.s. holding itself responsible for Japan’s defense in exchange for some economic returns from Tokyo. This relation has lasted more than half a century now. However, u.s.-Japan ties are by no means a monolithic block with few gaps. For example, the u.s. “return to Asia” strategy and its different stance toward the nuclear issue on the Korean Peninsula will possibly weaken the decades-long u.s.-Japan alliance. Second, reforms pushed forward by Abe to stimulate Japan’s economic growth, such as a loose monetary policy and the yen’s depreciation will boost Japan’s competition with Germany in manufacturing, thus resulting in an interest separation and tensions between Japan and European countries. Third, the u.s. is expected to witness new developments in its internal and international strategies. The u.s. economy is poised to further complete the deleveraging process and will realize a high growth but with a moderate inflation. The u.s. is also expected to realize self-reliance in energy supply after 2020, and this will significantly influence the global energy pattern. As the

212

Huang and Zhou

u.s. reduces dependence on Middle East energy, will it withdraw from the Middle East or remain in the region and make itself an agitator of regional situations? The u.s. has been under unprecedented fiscal pressures since the global financial crisis. For the sake of its own economic revival, there is much need for the u.s. to reduce its presence overseas, such as withdrawing troops from Afghanistan. Fourth, China and the u.s. share common interests in Asia. China should strengthen cooperation with the u.s. on the denuclearization of the Korean Peninsula, and prompt the u.s. to exert pressure on Japan on a variety of issues, including China-Japan disputes over the ownership of the Diaoyu Islands. Due to a simmering fiscal deficit back home, any war involving the u.s. will not be its top option within the next few years. On the Middle East issue, China and the u.s. also enjoy a space of cooperation. China might well propose that the u.s. not exit from the Middle East in a rash manner, and thereby support Washington’s aspiration to continuously safeguard the Middle Eastern order. 3 New Trends in International Trade and Investment Rules Various kinds of protectionism in international economic and trade activities have mounted since the eruption of the global financial crisis; trade frictions have intensified and competition involving the market, resources, talents, technologies, as well as rules and standards has become fiercer. Despite no progress made in the Doha round of talks, the world’s major economies have successively adjusted their international strategies, accelerating the construction of higher-standard Free Trade Agreements (FTAs) and strengthening regional or sub-regional cooperation, which has caused current international trade and investment rules to display a different developmental trend than in the past. 3.1

Service Trade and Investment Accords Have Become a Core Content of a New Round of International Trade and Rules Making Currently, economic globalization is changing from trading of traditional goods to trading of services and cross-border investments. The traditional free trade talks in the past were mainly aimed to eradicate tariffs, quota, and the preferential treatment while providing conveniences for goods transactions. With deepening globalization, a new round of international trade talks has put attention on both trade and investment, and in particular, more focus on the construction of service trade and investment rules. Such a change is to give participating parties a full play in tapping their comparative advantages in service trade and investment and push for deeper economic integration among member states and their lasting development. The u.s.-dominated Trade in

The Strategy of China ’ s Opening-Up Under New Circumstances

213

Services Agreement (TISA), which is under negotiations, and the 2012 u.s. Model Bilateral Investment Treaty (BIT 2012), promulgated by the u.s. in April 2012, are two typical cases. TISA: The first round of TISA talks started in March 2013, involving 22 economies, including the u.s., e.u., Japan, Australia, Mexico, Chile, New Zealand, Republic of Korea, Hong Kong, and Taiwan, whose service trade accounts for two-third of the world’s total. All participants had hoped to clinch the final accord in 2013 through five rounds of talks. The main principles due to be established by TISA include: extend full national treatment to foreign capital and all service sectors, (including those that do not exist now but will possibly be set up in the future), and treat foreign capital the same as treat domestic capital, except for those explicitly stipulated by parties concerned; abrogate in principle various limitations or requirements on foreign ventures upon their establishment, and limit the proportion of shares held by foreign capital as well as their scope of operation; and not cancel any new opening-up measures once adopted. At the same time, TISA will also make new free trade rules on domestic regulation, enterprise competition, information and telecommunication technologies, e-commerce, finance, specialized service, ocean shipping, government procurement, service subsidies, and movement of natural persons. As a matter of fact, most of the 22 TISA participating parties have had different free trade accords and kept a relatively high degree of opening-up among each other. Based on this, TISA has put forward higher standards for mutual opening-up, which if implemented, will produce significant influence on international service trade and possibly become a new landmark of future’s international service trade rules. BIT2012: There exist close intrinsic links between accords in investment and service trade. Different from the traditional goods trade, service trade is usually realized through cross-border investment. Service trade liberalization and investment accords, which supplement each other, remain two facets of the same problem. Entering the 21st century, some developed countries, represented by the u.s. and Canada, have advocated establishment of BIT as a way of resolving problems facing cross-border investment. As a result they have gradually formed rules and a series of elements in bilateral investment protection, which has resulted in the establishment of the 2004 u.s. Model of Bilateral Investment Treaty (BIT2004) and its widespread application to bilateral investment protection with different countries. In 2009, the u.s. decided to undertake an internal review, upgrading BIT2004 and promulgating the latest version in BIT2012 in April of that year. BIT2012 not only includes traditional content stipulated by international investment treaties, such as lowest standards for investment treatment, most favored nation treatment, imposition,

214

Huang and Zhou

transfer, loss compensation, and the settlement of investment disputes, but it also has set up new clauses on issues such as on ex-national treatment, stateowned enterprises, labor, environment, and performance. Due to its clauses that would strengthen the protection of investment rights and interests and promote opening-up of investment markets while maintaining fair competition, BIT2012 can be called an international investment paradigm with the highest standards in the world. Most of its rules have not only been advocated and implemented by developed countries, but they have also been accepted and applied by a majority of emerging markets and developing countries in their signing of FTAs with developed countries. 3.2

New FTAs with Higher Standards Will Take the Lead in the Making of New Global Trade Rules In 1990, the number of FTAs in the world reported to the General Agreement on Tariffs and Trade (GATT) was only 20, and the number of FTAs reported to WTO was merely 86 by 2000. However, FTAs have been booming in the first 10 years of the 21st century. The number of FTAs reported to WTO was 159 in 2007 and 324 by the end of June 2012. Prominent among world’s FTAs are the ASEAN Free Trade Area (AFTA), the Andean Community of Nations (CAN) and the planned China-Japan-Korea Free-Trade Area that is still under negotiations. According to the official WTO data, there are currently more than 210 countries and separate tariff zones in the world that have signed over one FTA, more than 30 countries that have joined over 20 FTAs (not including service trade agreements). The FTAs signed by e.u., Mexico, Chile, ROK, and India have involved more than 80 countries or regions. FTAs have generally evolved into a current that has swept across the world, becoming more and more influential. Currently, what have drawn the most attention from the world are the u.s.-dominated Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP), both of which are still under negotiation. One reason why the new FTAs represented by TPP and TTIP are so important is their broad coverage. So far, the TPP membership has extended to include the u.s., Brunei, Chile, New Zealand, Singapore, Australia, Peru, Canada, Mexico, and Japan. Their huge economic size is another reason why they have attracted worldwide attention. For example, the e.u. and the u.s., both of which will be covered by TTIP, have a combined population of 800 million, and account for a half of the world’s economic aggregate. Their trade volume altogether is also nearly a third of the world’s total. u.s. investment in Europe is three times its investment in Asia, and Europe’s investment in the u.s. is eight times of its investment in China and India put together. Once established, TTIP will undoubtedly become the largest FTA in the world. In particular, once merged,

The Strategy of China ’ s Opening-Up Under New Circumstances

215

TPP and TTIP, which are both dominated by the u.s., will re-forge international trade, investment, and global economic patterns. Another reason why TPP and TTIP are so important is attributed to their adoption of higher standards. TPP and TTIP content mainly aims to: 1) eradicate goods trade tariffs and non-tariff barriers; 2) remove restrictive measures on service trade and investment; 3) set rules higher than extant WTO standards in intellectual property rights (IPR), labor, environment and government procurement; and 4) eradicate or reduce all unnecessary “behind-boundary barriers.” In particular, TTIP also contains a radical clause, one that tries to push for the integration of the laws, regulations, and standards between Europe and the u.s. All these upgraded free trade talks, either TPP and TTIP or TISA and BIT2012, are aimed at setting new standards and rules on the environment, labor, IPR, competition, and funds transfer by resolving market access in the field of trade and investment. All these standards and rules are stricter than those contained in ongoing talks or established FTAs. Just as the working group for the Europe-u.s. FTA talks has pointed out, the future TTIP will become “a landmark FTA in the 21st century.” TPP, as the u.s. has also stressed, will break the traditional FTA model, strike a higher standard and forge itself into “version 2.0 of WTO.” 3.3

The World Multilateral Trade System, such as the WTO Will Increasingly Become Marginalized From a general perspective, the u.s., Europe, and other developed countries have demonstrated their trade advantages more in the fields of service and investment. However, the stalled Doha Round of WTO talks, after seven rounds of talks since 2001, has caused developed countries to become impatient over the traditional multilateral trade system while shifting their attention to a higher-standard service trade and investment accord as well as a more flexible bilateral TFA. Since the global financial crisis, the u.s. has signed FTAs with Republic of Korea, Columbia, and Panama based on higher standards and achieved tangible effects. This demonstrates that the establishment of a bilateral FTA is both feasible and fruitful. This is also a context in which FTAs have kept booming. At the same time, a new free trade trend led by TISA, BIT2012, TPP, and TTIP will also to some extent result in the marginalization of the WTO and the formation of higher standards, which will offer a new guidance framework for global trade talks in the future and further aggravate WTO’s marginalization. Increasingly, developing countries will have to make a choice between whether to actively participate in the making of new international trade rules or whether to passively accept them when their drafting is completed.

216 V

Huang and Zhou

Challenges Currently Facing China

Generally speaking, China has scored remarkable achievements over the past 30-plus years since the reform and opening-up was initiated. However, the outperforming economic achievement, especially its success in fending off the impact of the global financial crisis and realizing its economic recovery earlier than the rest of the world, has also fueled a strong sentiment of selfpride and self-conceit among some Chinese. A degree of protectionism and populism remains popular and is even on the rise. In some fields, the country has stopped steps toward further opening up after meeting the standards as required by WTO, feeling satisfied with its economic achievements brought by reforms following its entry into WTO. At the same time it chooses to show ignorance or rejection of the new standards and developments in international free trade. A few players have failed to develop a strategic perception and even hold a stagnant or retrogressive outlook on such strategic issues as whether to widen opening-up and push for the establishment of an open economy. The new FTAs actively advocated and pushed for by the u.s., E.U., and other developed countries in recent years have further widened China’s opening-up gap with the outside world and posed a harsh challenge to its attempts to build an open economy. 1 Misperceptions One misperception may be in China’s own self-conceit in its opening-up achievements, believing that the magnitude of embracing new policies is already high, that the current protectionist measures are all necessary and beneficial to the protection of national industries and economic security, and that there is no need for China to open up further. Another misperception is disregarding new trends, standards, and rules emerging in current international free trade, while believing that these are all but the means employed by developed countries to contain developing ones, including China. With an excessive nationalistic sentiment and Cold War mentality, protectionists usually choose to politicize the issue of international free trade. The intermingling of such two misperceptions has to some extent suppressed calls for further raising standards and expanding opening-up measures. 2 Insufficient Theoretical Preparations China’s theoretical study on international free trade has so far generally stayed within the traditional WTO-led multilateral trade framework. It lacks enough research on a new round of trade liberalization, in which international trade is changing from the traditional trade to service trade and investment agreements.

The Strategy of China ’ s Opening-Up Under New Circumstances

217

It also lacks enough research on ongoing talks on TISA, TPP, and TTIP as well as the frameworks, contents, essential factors and other related concrete problems involving higher-standard international FTAs, such as BIT2012 on which China is holding talks with the u.s. China has not had the chance to fill the gaps in knowledge occurring between current rules, concrete practices, and related institutions with regards to new international standards and rules; it has thus failed to conduct systematic studies on possible influences and risks in introducing these new standards and rules. All of these issues, which are closely related to the above-mentioned misperceptions, have to a large extent put China in a passive position in BIT talks with the u.s., in its judgment and perceptions on TISA, TPP, and TTIP talks, as well as in its efforts to further raise standards and expand upon its opening-up policies. 3 A Low Level of Opening-Up Since its entry into the WTO in 2001, China has meticulously fulfilled its membership commitments. However, we should be aware that China still continued to maintain restrictive measures in certain areas upon its WTO entry. For example, it is still strongly inclined to engage in agricultural protectionism in the field of goods trade. In the service trade in particular, there is still a very strict restriction on market access. The areas that currently cause relatively strong reactions from the u.s., E.U., and other developed countries mainly include: 1) 2)

3) 4)

5)

Banking: Foreign capital is not allowed to hold more than a 20 percent share of China’s banks and no more than 25 percent of shares is allowed for multiple foreign investors combined; Securities: Foreign capital is not allowed to hold over 33 percent shares of a Chinese securities company (the limit has already been raised to 49 percent) and not allowed to engage in share-A stock transaction (such a restriction has been suspended in some regions on a trial base); Insurance: No foreign capital is allowed to hold over 50 percent shares of a Chinese life insurance company; Telecommunications: Foreign capital is qualified to set up joint ventures only with a Chinese partner. Foreign capital is not allowed to hold over 49 percent shares in mobile, fixed and other basic telecommunication business, or over 50 percent shares in the value-added telecommunication business; Postal delivery: Only the parcel delivery business is open to foreign capital and the state-owned correspondence business model is still maintained. Foreign-funded enterprises still face restrictions in the number of stations they can have and where they can be set up;

218

Huang and Zhou

6)

Construction: Foreign construction companies are only allowed to undertake projects funded by Chinese investors or only under those conditions in which Chinese companies cannot undertake due to technical factors; Legal services: Foreign law firms can set up representative offices in China but are not allowed to employ China’s certified lawyers.

7)

A majority of participating TISA parties has so far not imposed restrictions on foreign capital in the proportion of shareholding or business scope in the above-mentioned areas. The lack of substantial loosening of restrictions in these areas will substantially lower the level of China’s opening-up, and deprive it of some basic qualifications for participating in a new round of free trade talks. In a market economy, it is the market that should play a primary role in allocating resources. However, in many service fields in China, monopoly of one kind or the other is still prevalent. Some departments have excessively stressed social responsibilities that certain sectors need to undertake, which has led to an extremely strict market access system. For example, domestic banks are believed by some to play a role in economic regulation; likewise, the sectors of science, education, health care, and sports are believed to have a role in promoting social welfare, and the cultural and media sectors are believed to play an ideological role as well. As a result, the development of China’s service sector is far from meeting the country’s economic development and ever-rising requirement among the masses, which has not only reduced social welfare, but also negatively affected the sector’s own operations and innovation mechanism, thereby lowering its service efficiency and hampering growth. Backward Standards and a Relatively Large Gap with New International Rules Compared with new international standards and rules, China has obviously lagged behind in terms of FTAs, especially in the service trade and investment accords. China has so far signed one regional free trade agreement (Free Trade Agreement of the Asia Pacific), and 10 free trade agreements involving 22 countries and separate customs territories. As far as investment agreements are concerned, China has already signed with 128 countries and regions 130 BITs, but only a minority of them contains a clause on national treatment. China and the u.s. have held nearly 20 rounds of BIT talks since 2007, but no obvious progress has been achieved due to bilateral differences in investment access thresholds, fair competition, and protection of rights and interests; these differences surface especially in the areas of the pre-establishment of national treatment and negative list, state-owned enterprises, transfer of 4

The Strategy of China ’ s Opening-Up Under New Circumstances

219

foreign exchange funds, labor rules, financial service, performance requirements, taxation, legal transparency, as well as environment clauses. The same reason has also kept China some distance away from participating in the TISA and TPP talks. As a matter of fact, the principles forcibly pushed for by the u.s. in the making of new standards and rules, such as the pre-establishment national treatment and the negative list and the principle of neutrality for state-owned enterprises, are all targeted at China’s insufficient investment protection in some areas, the monopolies held by state-owned enterprises in some sectors, as well as China’s failure to comply with Western oversight rules. From a general perspective, most of TISA, TPP, and TTIP participants in emerging countries like ROK and developing countries like India and Brazil, have to a large extent endorsed the new standards and rules made for a new round of FTAs talks, especially for service trade and investment agreements, and have tried to involve themselves in the talks and rules making. In comparison, many FTAs and BITs signed by China still have lower international standards and demonstrate being far apart from new international rules and standards, which makes it natural for China to be denied access to TPP and TISA. Generally speaking, the new trends emerging in the development of international trade and its own delayed opening up in certain areas have posed a harsh challenge to China’s further opening-up and participation in the making of international rules. If China continues to refuse to take steps toward opening its policies a little wider, it would be detrimental to its international image and “go overseas” strategy; it would also hamper efforts to promote domestic reforms and institutional improvements through broader opening-up measures. More importantly, it would possibly result in China’s marginalization in a new round of international trade liberalization, which, if true, would undermine China’s capability of making full use of its strategic opportunities and put it in a disadvantageous position in a new round of international competition. VI

To Promote Reforms through Opening-Up

To make full use of historical opportunities brought about by new international, political, and economic conditions and better cope with new challenges, China needs to clearly discern the strategic and historical opportunities bred by the international economy and market and grasp these opportunities. At the same time, it also needs to better handle domestic matters and push forward reforms and opening-up. Through the reforms over the past 30-plus years, China has successively introduced needed fund and management methods,

220

Huang and Zhou

encouraged talent, and expanded its exports. It has also expanded its foreign reserve, reformed banks and the real economy, and boosted its international stature. In the future, these reform dividends will continue to exist, but their marginal contribution is expected to decline. That makes it necessary, therefore, for China to pursue new areas of growth and push forward new reforms. Currently, China’s development is still at a critical juncture, and thus it should continue to take hold of and well utilize strategic opportunities to advance and expand its entry into the sectors where excessive restrictions are still in place. It should participate in global resource allocation, rules making, and governance to a broader extent and at a higher level in order to create a favorable external environment for its economic development and upward trajectory as an international power. 1 Discard Wrong Perceptions and Strengthen Publicity and Education China should first fully realize the urgency and importance of new steps to widen opening-up, raising standards, and more deeply participating in the new current of global trade liberalization. It should unite domestic perceptions and look at opening-up expansion from the perspective that wider opening-up will help China maintain its momentum of strategic opportunities and realize its long-cherished dream for rejuvenation. China should also develop a more modified perception on the u.s.-dominated TISA, TPP, and TTIP. It should not overstate the Cold War mentality, or agitate a nationalistic sentiment and demonize or politicize these talks. Instead, it should take an active and open approach and realize that these trade agreements to a large extent represent the new directions of the current international trade liberalization trends. China should try to draw itself closer towards this bent and push for higher opening-up standards. At the same time, it should promote the cause for more liberal policies. Around the time of its entry into WTO, China had launched a nationwide publicity campaign for needed reforms to accommodate itself to the WTO membership and some good effects were achieved at the time. However, it has so far failed to execute systematic and extensive publicity, as well as training and popularization that support a new round of FTAs. Many domestic departments and enterprises are still unfamiliar with the concepts of BIT, TISA, TPP, and TTIP, which, in addition to some misleading publicity, have easily led to a psychological aversion to Western-led trade agreements. 2 Strengthen Theoretical Studies and Technological Preparation FTAs involve numerous countries and regions with extensive content and a variety of clauses, all of which will change rapidly. In order to conduct

The Strategy of China ’ s Opening-Up Under New Circumstances

221

pragmatic, deliberate, and in-depth studies, it would mean the need for enhanced input of manpower and resources. On the one hand, meticulous studies should be conducted of all concrete standards, rules, and clauses contained in FTAs to identify China’s insuffiencies. On the other hand, a variety of domestic fields experiencing delayed reforms should be investigated as a way to offer concrete proposals for these fields. For example, domestic sectors lacking international trade standards can be divided into three categories: 1) areas where unreasonable obstacles to opening-up can be removed; 2) areas where higher opening-up standards can be implemented on a trial basis; and 3) areas where immediate opening-up measures cannot be taken and only supplementary reform measures can be made to gradually raise opening-up standards in order to adapt to international practices. Based on this analysis, a timetable and roadmap for China to extend opening-up measures in key areas can be drafted. 3 Push for Higher Opening-Up Standards in Related Fields China should actively push forward Sino-u.s. BIT talks that already have a firm footing, to achieve some degree of progress as a way to finally strike a deal. This is needed if China wants to follow the new trends in the development of international trade and prevailing rules. Currently, China should conduct assessments of each of the three fields of investment access, fair competition, and the protection of interests and rights. It should also evaluate the 14 specific clauses that Sino-u.s. BIT talks are based on, including the pre-establishment national treatment, the negative list, state-owned enterprises, the transfer of foreign exchange funds, labor rules, financial services, performance requirements, taxation, legal transparency, and environmental clauses. While some of these should be maintained, there are those that can be discarded. In areas such as the pre-establishment national treatment, the negative list, stateowned enterprises, foreign exchange management, and financial services, for example, China can make concessions and make efforts to proceed with related work. In spite of the disputes existing between China and the u.s. on numerous issues, the Sino-u.s. BIT, once clinched, will be generally beneficial to China, and the risks arising from it will be under control. If China develops a feasible working program that conducts meticulous assessments and well-conceived steps to design the negative list, improves the national security review system, and takes additional precautionary measures, then it can potentially narrow its differences with the u.s. and finally reach a state of common consensus on this issue.

222

Huang and Zhou

4 Implement a FTA Strategy with Higher Standards China has benefited substantially from its WTO membership over the past decade. Can it take further the opening-up strides it has made and forge closer and higher-grade economic and trade ties with other countries? Generally speaking, China has made slow progress in the establishment of FTAs with other countries. In 2011, the trade volume between the u.s., E.U., ROK, and Mexico with their FTA partners accounted for 37 percent, 27 percent, 35 percent, and 73 percent of their total trade volumes, respectively. However, the trade volume between China and its FTA partners only accounted for 24 percent of the total volume of its trade. The proportion is at only 11 percent if Hong Kong, Macao, and Taiwan are excluded. This means that China’s considerable gap at the international level is also not commensurate with China’s current international trade status. To accelerate the implementation of its FTA strategy also will serve as an important path for China to promote and raise its opening-up standards. Within the context of the Doha talks where little progress has been made, developed countries are eager to promote their economic recovery, pushing forward talks on FTAs. Of these, TTO and TTIP have become a top choice for developed, emerging, and developing countries. Given that China has so far lagged behind in this effort, the time is ripe to double these efforts. 5 Push for Expanded Opening-Up in the Service Sector The history of China’s WTO membership indicates that whatever sectors engage in full-fledged opening-up and actively participate in global resource allocation, (such as the manufacturing or service sector), that sector will thrive and enhance its competitiveness. Therefore, what China should do now is to conduct a thorough review of the restrictive measures it has put into place since entry into the WTO, and accelerate reform of these sectors. 5.1 To Attach Importance to Opening-Up in Services Since its entry into WTO, China has won the title of the “world’s factory,” having a strong competitiveness base in manufacturing, but not so much in the service sector. Currently, China’s economy has entered a period of transformation, which will shift the country’s focus from expansion in terms of economic size to a consolidation of economic quality. Robust development of the service sector is an important process of the transformation, and indeed the development of a full-fledged service sector will also symbolize China’s successful economic transformation in the future. China enjoys wide spaces and also huge potential for opening its service sector to the outside world. The country should fully open market access to banking, securities, insurance,

The Strategy of China ’ s Opening-Up Under New Circumstances

223

telecommunication, postal delivery, construction, and legal services, and also suspend limitations on shareholding of foreign investors or their scope of business to promote substantial opening-up. At the same time, the country should also pay attention to risk control strategies. It should adopt corresponding investment reviewing systems that help to strengthen oversight, transparency, and fairness while ensuring national economic security and stability at the same time. For example, a small amount of foreign investment can be approved after it is registered with the relevant department. For significant investment in some important fields, a non-regular security reviewing mechanism can be applied based on concrete conditions for the sake of national security. General terms can be formulated to define the scope of the national security reviewing mechanism in order to better handle relations between foreign investment and national security. Such a national security reviewing mechanism is applicable to not only foreign capital acquisitions and newly established projects, but also national defense, economic, and industrial security. 5.2

To Gradually Open the Financial Sector and Promote the Internationalization of RMB 1) It is very important for China to further gradually open the financial sector and firmly promotion the internationalization of RMB. China should choose a proper time to open its capital account; it should, on the basis of a full knowledge of international capital flows, take advantage of domestic economic slowdown to promote the transfer of China’s colossal foreign reserve from the government to the private sector and stabilize the RMB’s exchange rate. At the same time, restrictions on overseas investment by domestic enterprises and residents should be lifted and efforts should be made to increase the rate of return of China’s overseas investment and the utilization efficiency of its foreign reserve. Opening capital accounts will also facilitate crossborder fund allocation. At its current stage, a moderate sum of foreign fund inflow will benefit the financing of small and medium-sized enterprises; its impact on China’s monetary supply increase can be offset through tightened control of the banking credit; 2) China should avoid drastic RMB appreciations. While dealing with the loose monetary policy across the world, China should control the rhythm of the RMB’s appreciation within a short period to prevent its drastic appreciation from increasing the risk of a downturn in the domestic economy; 3) To push for the internationalization of the RMB and, through such a process, lower risks and friction costs stemming from the RMB’s exchange rate, which will in turn further integrate China into the global economy.

224

Huang and Zhou

5.3

To Expand the Opening-Up Trial in the Educational, Health Care, and Cultural Sectors With an accelerated upgrade of China’s urban and rural consumption structure and a rapid rise in domestic consumption demands for health care, education, and cultural resources, China’s current education, medical, cultural, and other public services are in serious short supply. The lack of a scientific orientation of government function has led to insufficiencies in the supply of these public service products. It is true that health care, educational, cultural, and other public services have played their social role and the government should offer a good environment, necessary public resources, and much needed policy support for their development. However, the Chinese government has set up a very high access threshold in these fields and put in place some discriminatory regulations against non-public sectors, which have to a large extent hampered the improvement in the level of social services and the development of related industries. Due to limited government capabilities and public resources, such a practice has made it difficult for the government to provide sufficient, equitable, and highly efficient public services in the sectors of education, healthcare, and other basic facilities. 5.4

To Expedite the Reform of Institutions and Promote the Parallel Development of Public Services and Marketized Services China should accelerate its marketization process and try to separate public services provided by the government from the market. For those services to which market rules can be applied, the government might well direct the entry of non-governmental and foreign capital to increase their supplies and promote their industrialized development. When it comes to those services that play a social role or can help promote social equity, efforts should be accelerated to promote their innovation, providing models, for instance, to change the unitary government-provided manner as in the past to one that is diversified and involves the government and other social forces. While extending continuous support to institutions to play their role, the government should also encourage non-governmental organizations and non-profit agencies to participate in the supply of public services by offering subsidies and government procurement. Reform of institutions, such as the governance structure of legal persons, should be expedited so that a board of directors system can be established to help in business development, financial and budgetary programs as well as personnel management and transformations to non-profit organizations or modern enterprises. At the same time, practical measures should be taken to actively encourage private capital to participate in the reform of institutions through shareholding, mergers, and acquisitions.

The Strategy of China ’ s Opening-Up Under New Circumstances

225

5.5 To Actively Put Forward Reforms on a Trial Basis in Some Regions Considering the complicated and diversified problems that industries face today across different geographical regions and within their own sectors in China, a priority should be made to accelerate experimental reforms, which can serve as a pathway for the eventual implementation of more comprehensive reforms. Key efforts should be made to promote comprehensive reforms, including oversight systems, as well as developing a diversified market of players and related market mechanisms. Some large and economically thriving cities might well be chosen for experimental reforms so that they can set examples for regional and even nationwide reforms and accumulate experiences for the development of the service sector and promoting regional economic structural adjustment. 6 Push for Agricultural Opening-Up While continuously lowering its tariffs on agricultural imports, China has also kept in place import quotas and some non-tariff measures since its entry into WTO. These include management regulations on agricultural biotechnological safety, import licenses, inspections, and quarantine of certain animals and plants, food hygiene quarantines, as well as several technical trade measures restricting the import of land-intensive agricultural products. According to estimates, the adoption of China’s non-tariff measures aimed at imposing agricultural trade restrictions and import protection has been equivalent to a 42.6 percent import tariff imposed on agricultural products. Excessive protection extended to domestic agriculture has hampered the development of industries that use such agricultural products as their raw materials and has compromised the interests of consumers. At the same time, it has also obstructed China’s bid to play its comparative agricultural advantages in international competition, improve its agricultural technological level at home, and boost its agricultural productivity. To further expand agricultural opening-up will only promote higher agricultural production in China. It will facilitate the participation of the domestic agricultural sector in the global labor market to become not only more competitive, but also to better support grain safety guarantees, and help the country conserve limited land and water resources. The main measures towards the goal of agricultural opening-up should include: 6.1

To Cancel Redundant Restrictive or Protective Measures on Agricultural Imports In order to facilitate agricultural opening-up, China should first adopt structural guaranteeing measures based on national conditions and put emphasis

226

Huang and Zhou

on guaranteeing the basic self-reliance of rice and wheat. Following these measures, it can moderately import bean, corn, and other agricultural products, and explore establishment of an agricultural strategy that better utilizes international and domestic markets and resources. This will to some extent ease domestic pressures caused by the shortage of agricultural resources and will be of great significance to China’s bid to pursue agricultural self-reliance, and ensure grain safety and the supply of main agricultural products. 6.2

To Make Use of the Comparative Advantages China’s Agricultural Production Enjoys, Adjust the Agricultural Products Export Structure and Push for Liberalization of Agricultural Products Trade with Higher Standards Practical measures should be taken to optimize and adjust the export structure of China’s agricultural products and set up a labor-intensive agricultural products exporting system. 6.3

To Optimize and Combine China’s Agricultural Products-Assisting System Reasonable pricing supports should be extended to important agricultural products, and a minimal living allowance should be offered to agricultural growers. Practical measures should be continuously taken to increase direct agricultural subsidies to farmers so as to reduce low pricing distortions of some agricultural products. 6.4 To Actively Expand the Go-Overseas Agricultural Strategy How China has been able to resolve its food problem to feed 1.3 billion of its people with limited land resources lies in its relatively high agricultural productivity. China’s self-supporting agricultural ratio and its agricultural output per unit of land are far higher than those in Africa, Oceania, Central and South America, and the rest of Asia. This means that China enjoys a certain potential for agricultural development and cooperation with a host of regions beyond North America and Europe. Of these, African countries south of Sahara, other Asian countries, and North Africa will be key areas with which China can conduct agricultural cooperation. For Oceania and Central and South America where the economy is generally developed but agriculture is in a relatively backward state, the abundant land resources can also make them become the destination for China to push forward its go-overseas agricultural strategy. Domestic agricultural enterprises can be encouraged to invest in these countries and regions to help develop local agriculture practices and boost local food production, thus realizing mutual cooperation for all countries concerned.

The Strategy of China ’ s Opening-Up Under New Circumstances

227

At the current stage, China’s agricultural enterprises that have gone overseas, however, are generally not powerful in terms of their comprehensive strength and they still face a series of problems, such as financing difficulties and shortage in talent and experiences. On the one hand, the Chinese government should adopt some preferential fiscal, tax, and financial policies, and measures to encourage and support overseas activity. On the other hand, domestic agricultural enterprises should also try to improve their competitiveness and innovation capabilities and become more active and enthusiastic toward the go-overseas strategy. Aside from the export of agricultural products and labor and setting up of flexible marketing channels, domestic agricultural enterprises can also implement the go-overseas strategy through direct outbound investment, the exploitation of overseas agricultural resources and project contracting, as well as through setting up of overseas R&D centers, an international marketing network, and offering overseas consultation services. 6.5

To Set Up a Global Center for Commodity Transactions and a Risk Control Mechanism Based on the current commodity exchanges, China should push for the establishment of a global center for commodities transaction to gradually gain a deserved say in the pricing of global commodities and better utilize international and domestic markets and resources. At the same time, a risk control mechanism should also be implemented. China’s current domestic risk management is at a relatively low level and a sound futures market is yet to materialize. This implies that moderate interventions into its grain circulation system are still needed to prevent excessive fluctuations of grain prices. In addition, China should also raise its agricultural anti-subsidy, anti-dumping, and trade disputes settlement capabilities while strengthening the construction of earlywarning agricultural disaster mechanisms to maintain its international trade rights and interests and national economic security. 7 Expedite the Convertibility of RMB Capital Account Capital account convertibility refers to the free convertibility between a country’s currency and foreign currencies and the free use of its own currency or foreign exchange to conduct cross-border capital account transaction. The Third Plenary Session of the 14th CPC Central Committee held in 1993 for the first time put forward that the RMB would become a freely convertible currency. In 1996, China fulfilled its commitment to Clause Eight of the IMF and formally announced its current account convertibility. With the rise in its national strength since the onset of the 21st century and widespread reform of its interest rates, exchange rates, state-owned banks, and financial

228

Huang and Zhou

markets, the conditions are now ripe for China to push forward its capital account convertibility. Currently, the relatively low level of China’s capital account convertibility has been negatively impacted, bringing inconveniences to its foreign trade and outbound investments. The numerous limitations imposed on its inbound and outbound capital investments have hampered China’s integration into a new round of international trade and investment liberalization. At the same time, the low-level of capital account convertibility has plunged China’s financial market into a closed-door state, which will be unfavorable to domestic financial institution bids to extricate themselves from the inertia as it continues to undercut the country’s capability of channeling financial funds to the real economy. Under new conditions, China is in dire need to accelerate its RMB capital account convertibility to further expand opening-up, create more conveniences for trade and investment, goad the financial sector to serve the real economy, raise the capability and efficiency of China’s participation in global resources allocation, and improve its people’s welfares. 1) To draft and publish a roadmap and timetable for RMB’s convertibility and make it clear that RMB will be convertible by the end of 2015. 2) To sort out current policies and further consolidate projects that are already or basically convertible, such as foreign exchange collection and payment for merchandise and service trade, and most cross-border foreign exchanges collection, payment, and remittance under direct investment projects. Practical measures should be taken to considerably simplify approval procedures and lower policy thresholds to offer enterprises more conveniences and a higher degree of freedom. 3) To accelerate the reform of cross-border trade settlement and cross-border capital investment as soon as possible. Practical measures should be taken to push for the use of RMB as a trade and settlement currency, and promote reform of China’s capital market. Several areas of capital market reforms are needed, such as green-lighting the Qualified Domestic Institutional Investors (QDII2), the international board of China’s stock market and overseas issuance of panda bonds, to drive the formation of RMB-denominated international assets and expand their trial and popularization to test the influence brought about by the use of RMB as a settlement currency on China’s financial system. 4) To push for the full opening-up of China’s foreign debt and capital markets as a medium-term goal. China should allow entry of some foreign financial institutions into its inter-bank market and further expand the qualification for QDII and QFII candidates and raise the upper ceiling of their investments. Domestic banks and enterprises should also be permitted to invest in the overseas derivatives market and foreign investors to invest in the domestic

The Strategy of China ’ s Opening-Up Under New Circumstances

229

derivatives market. At the same time, individuals should be permitted to accept or issue cross-border loans allowing also for a legitimate transfer of their funds. Practical measures should also be taken in the construction of a cross-border funds flow monitoring and early-warning system, adaptable to the country’s free capital flow. This will be one way to strengthen the country’s exposure to risk. In addition, the plan for capital account convertibility should be included in the country’s legal framework to accelerate the clearance and demolition of its obsolete laws and regulations. Capital account convertibility does not necessarily mean unrestricted cross-border flows. Although a majority of currency exchanges and crossborder transactions can be conducted freely, some still need to be regulated and conducted according to specific laws and regulations. Therefore, capital account convertibility is an institutional arrangement that enjoys certain elasticity and space for adjustment, instead of the “either white or black” choice. International experiences indicate that even after the implementation of capital account convertibility, a macro prudent management is still needed to oversee suspicious funds, foreign debt, and short-term capital flow for the sake of financial stability; setting up a management structure will also help to effectively forestall possible risks brought on by cross-border capital flows and will also enable capital account convertibility to play a positive role. Finally, flexible timing arrangements should be made for the implementation of various opening-up measures, and ensure that each is in step with changing economic and financial conditions at home and abroad. 8 Promote Domestic Reforms through Expanding Opening-Up China’s economic system has undergone various stages in planning, transformation, and development over the past 30-plus years. It is poised to enter a more stable institutionalized stage within the next few decades. A standardized economic system needs to focus more on the pursuit of equity, innovation, and rule by law. In 2005, the State Council, China’s cabinet, promulgated a guideline specifying a series of policies and measures to encourage and support the development of the non-public sector. Five years later in 2010, the State Council once again issued guidelines providing more details to support the private sector. Compared with the 2005 guideline, the one in 2010 relaxed more restrictions on market access. However, a wide range of problems and obstacles still exist in the implementation of these policies and measures, highlighting the need for China to expand opening-up to promote accelerated domestic reform in some fields. China should regard it as an imperative and important task to aggressively push for full opening-up in its financial, educational, health care, and cultural sectors as it continues to expand market

230

Huang and Zhou

access. It should suspend various kinds of restrictions on private capital investment in financial, educational, healthcare, and cultural fields. It should boost investment conveniences to protect investment rights and interests. At the same time, the outbound investment examination and approval system should be abrogated to support domestic enterprises pursuing overseas ventures and direct outbound investment activities through a price mechanism. 9 Strengthen Oversight and Management In the process of China’s opening-up, there will most likely emerge new risks and challenges. The process of opening-up will undoubtedly bring both advantages and disadvantages. While the benefits will bring with it a deeper integration into world affairs, they will also mean that China has to deal with international rules and practices that may do harm to its national interests. How can China evade such risks and pursue a bigger development opportunity? First, it should focus on pushing forward opening-up in the fields of trade and financial investment; then, it should relax and simplify approval procedures to ensure that the opening-up is robust. Second, it should pay more attention to risk control measures. Lack of effective oversight was one of the main causes for the u.s. subprime crisis, which triggered the global financial crisis and dealt a huge blow to the global economy, destroying financial institutions that had built their business on excessive leverage. However, lessons from the u.s. subprime crisis should not become China’s excuse not to expand openingup. Instead, China should pursue new opportunities from the crisis and try to bring opening-up risks under control through appropriate regulations. 10 Confront the Era of Globalization with an Open Approach Globalization remains an important trend in the world’s development. With the many advances occurring in modern science and technology, including means of travelling, popularization of the Internet and transnational companies, globalization is evolving at a faster pace than ever before. It is inevitable that a country’s economic and social development will be a part of global economic development, and a new era of globalization is imminent. Developed and developing countries should make correct policies and actively participate in the globalization process as they continue to protect their national interests. Only by using an open approach that makes use of global resources and talents and meets global demands, can a country realize mutual benefits and thrive both domestically and abroad.

chapter 11

Revisiting the Internationalization of the Yuan Yu Yongding Abstract As the world’s second largest economy, largest trading nation, and the largest foreign holder of United States (u.s.) government bonds, the People’s Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy. However, before the internationalization of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created.

Keywords internationalization of the yuan – capital account liberalization – international currency

I Introduction The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the PRC’s huge imbalances, capital account liberalization has to be pursued in a cautious way. As a result, the internationalization of the yuan is bound to be a long-drawn process. The PRC’s road map for the internationalization of the yuan is flawed with many missing links and wishful thinking. Yuan internationalization guided by the current road map may be proven counterproductive. Since its launch in early 2009, the internationalization of the yuan has been making rapid progress. As the world’s second largest economy, largest trading nation, and largest * The original version of this article was published as ADBI Working Paper 366. Yu Yongding is the first academician of the Chinese Academy of Social Sciences (International Studies). His email address is [email protected].

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�13

232

Yu

foreign holder of United States (u.s.) government bonds, the People’s Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy. While the PRC economists universally support the internationalization of the yuan as a long-term goal, worries about the possible negative impact of the PRC monetary authorities’ current push for the internationalization on the PRC’s welfare and financial stability have emerged since 2010. In fact, yuan internationalization has become one of the most controversial issues among economists in the PRC. This chapter reexamines the endeavor of yuan internationalization since 2009. The main findings are that despite the progress made, the PRC does not have a viable road map for yuan internationalization yet, and perhaps it cannot have one. The much-proclaimed project could prove an anticlimax. In author’s view, at the present, the PRC’s policy focus should not be on promoting the internationalization of the yuan, because there are many other more urgent challenges the PRC has to face. For example, the reform of the PRC’s exchange rate regime and liberalization of interest rates should take precedence over yuan internationalization. To put it more bluntly, to carry out capital account liberalization disguised as yuan internationalization without having met necessary prerequisites is dangerous. Section II is a brief survey of the literature on the definition and characteristics of an international currency. Section III deals with the objectives of the PRC’s efforts in promoting yuan internationalization. Section IV gives critical assessments on the PRC’s road map of yuan internationalization. The fifth section examines the progress the PRC has made and section VI discusses some of the problems arising from yuan internationalization. Section VII discusses the relationship between yuan internationalization and capital account liberalization. The final section offers concluding remarks. II

Functions of an International Currency

There is a large body of literature on the nature of an international currency and the ways to internationalize a national currency. According to Kenen, an international currency is used and held beyond the borders of the issuing country.1 An international currency is not merely used for transactions with residents but is also used for transactions between residents and nonresidents.

1 Kenen, P. Currency Internationalization—An Overview. Manuscript. BoK-BIS Seminar on Currency Internationalization: Lessons from the Global Financial Crisis and Prospects for the Future in Asia and the Pacific. Seoul, Republic of Korea, March (2009): 19–20.

Revisiting the Internationalization of the Yuan

233

Table 11.1 The role of an international currency Function of money

Governments

Private actors

Store of value

International reserves Currency substitution (private dollarization) and investment (portfolio allocation) Medium of exchange Foreign exchange Vehicle currency, invoicing trade and market intervention financial transactions, settlement currency Unit of account Anchor for pegging Denominating trade and financial local currency transactions source: Based on Chinn, M. and J. Frankel. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? NBER Working Paper, No. 11510.

Theoretical discussions of currency internationalization usually begin with the functions of an international currency. Kenen presents some early thoughts on the roles of international currencies.2 Chinn and Frankel provide a list of international functions of an international currency (Table 11.1).3 According to Chinn and Frankel, an international currency should be a store of value, a medium of exchange, and a unit of account for both residents and nonresidents.4 The functions can be further divided into two subfunctions: private use and public use. When an international currency is used for private purposes, it is used for currency substitution, bridging currency trading in foreign exchange markets, and invoicing and denominating trade and financial transactions. When it is used for public purposes, it is used as a reserve currency, an intervention currency, and an anchor currency. The above-mentioned functions of an international currency will be used as a point of reference as this study assesses the progress of yuan internationalization and explores possible routes for the internationalization. A currency can play the role of an international currency on different levels. For example, among all the functions of an international currency, the most supreme is the 2 Kenen, P. The Role of the Dollar as an International Currency. Occasional Papers 13. Group of Thirty. New York, u.s., 1983. 3 Chinn, M. and J. Frankel. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? NBER Working Paper, (New York: NBER, 2005), No. 11510. 4 Ibid. 3.

234

Yu

Table 11.2 Dimensions of an international currency

Unit of account

Private sector

Official sector

Trade invoicing Denomination of financial products

Being pegged by other countries Use in currency baskets of foreign central banks SDR composition currency Denomination of government bonds Currency circulation abroad Government financial transactions (such as ODA) Central bank swaps Currency intervention Foreign reserves (of other countries)

Medium of exchange Trade and financial (settlement) transactions

Store of value

Cross-border deposits Cross-border securities

Notes: ODA = Official Developmment Assistance; SDR = Special Drawing Rights. Source: Ito, The Internationalization of the RMB: Opportunities and Pitfalls. Ito based on the matrix first proposed by Kenen.

role of an international reserve currency. It seems that on the second highest level stands the role of vehicle currency. Understanding differs on the classification of the functions of an international reserve currency. For example, according to Ito, the role of an international currency can be classified as follows (Table 11.2).5 It is worth noting that in Table 11.2, “trade invoicing” is put under the category of “unit of account” rather than “medium of exchange.” It seems that both roles of invoicing trade and denominating financial transactions should fall in the category of unit of account. Another important point is that a distinction between the role of invoicing and that of settlement must be made clear. It is very common that while a currency is used as an invoicing currency in a certain transaction, settlement is made in another currency for the same transaction. As pointed out by Ito, Satoshi, Sato, and Shmizu, Special Drawing Rights

5 Ito, T. The Internationalization of the RMB: Opportunities and Pitfall. Manuscript for CDRF– CFR Symposium. Beijing, 1 November, 2011.

Revisiting the Internationalization of the Yuan

235

(SDR) is a unit of account but not a settlement currency. The recognition of the difference between these two roles is very important.6 As an international currency, the role of the invoicing currency is more fundamental than that of the settlement currency. If exporters’ most important consideration is to avoid exchange rate risks, they would prefer to use their own national currency to invoicing trade. As long as exporters can convert the settlement currency into their own national currency, it does not matter that much what currency is used for trade settlement. In contrast, if trade is invoiced in a foreign currency, then the use of the national currency as the settlement currency will not help exporters to avoid an exchange rate risk. The same is true of importers, though they are exposed to opposite exchange rate risks. If the invoicing currency has been decided, the choice of settlement currency is not entirely irrelevant. Settlement currency as a medium of exchange performs different roles from those of an invoicing currency. Because possible time lags between the settlement of trade and currency exchange and possible changes in the exchange rate during this time, the choice of settlement still makes a difference in terms of profits and losses for exporters and importers. When an invoicing currency is decided, the direction of change in the exchange rate should be a very important consideration. In contrast, when a settlement currency is chosen, the stability of a currency should be a priority. Generally, when exporters are in favor of one currency as the invoicing currency, they would be in favor of the same currency as the settlement currency. This is also true of importers. But in reality, the situation can be more complicated. In many discussions an implicit assumption is made that a settlement currency must be an invoicing currency at the same time. This assumption is misleading, because the causes leading to the use of a currency as the invoicing currency or the settlement currency are not the same. Park points out that a greater usage in financial denomination rather than trade invoicing appears to be a much more important qualification for a major international currency.7 Daily turnover of the world’s currency markets (all instruments included) was close to $4 trillion a day in 2010, while the value of world merchandise exports fell 23% to $12.15 trillion in 2009, and world commercial services exports declined 13% to $3.31 trillion.8 6 Ito, T., K. Satoshi, K. Sato, and J. Shimizu. Why Has the Yen Failed to Become a Dominant Invoicing Currency in Asia? NBER Working Paper. (New York: NBER, 2010), No. 16231. 7 Park, Y. “RMB Internationalization and Its Implications for Financial and Monetary Cooperation in East Asia,” China and World Economy, 18 (2010): 1–20. 8 World Trade Organization (WTO). Press Release. PRESS/598. 26 March, 2010.

236

Yu

When a currency is referred to as a store of value, it may refer to the currency in the form of cash and deposits, or to the fact that financial assets and liabilities are widely denominated by the currency. Holding a currency in the form of cash and deposits as store of value is different from holding financial assets denominated in the currency. The difference between the two forms becomes obvious during a financial crisis. It should be emphasized that an international currency need not be equally widely used in denominating both financial assets and liabilities of the issuing country of the currency. For example, while u.s. foreign liabilities are overwhelmingly denominated in the dollar, its foreign assets are mostly denominated in foreign currencies. The ultimate test for a currency’s international position is the extent to which the currency can be used to denominate liabilities of the issuance country. III

Possible Benefits of Yuan Internationalization for the PRC

Why did the PRC monetary authorities decided to push the internationalization of the yuan so vigorously? What are the specific results the PRC government wishes to achieve by pushing yuan internationalization? First, the internationalization of the yuan will reduce exchange rate risks, to which the PRC firms are exposed. The internationalization of the yuan means that more foreign trade and financial transactions will be invoiced and settled (paid) in the yuan. As a result, the exchange rate risks for the PRC firms will be reduced or canceled out accordingly. Because of the PRC’s persistent current account and capital account surpluses, yuan appreciation pressure has been building up steadily since early 2003. Many believe that if exports are invoiced and settled in the yuan, the PRC exporters will be able to avoid exchange rate risk while the yuan is in the process of appreciation, and hence the momentum of the PRC’s exports can be maintained.9 Second, the internationalization of the yuan will reduce the PRC’s transaction costs in trade, including the cost of trade finance, and lead to a further expansion of international trade. The rapid increase in the use of the yuan as a settlement currency (payment currency) has greatly boosted the PRC’s border trade. Third, the internationalization of the yuan will improve the funding efficiency of the PRC’s financial institutions, hence increasing their international competitiveness and lead to the expansion of the PRC’s financial 9 Unfortunately, the assumption is likely wrong. With the yuan as the invoicing and settlement currency, its appreciation will lead to loss of market shares by PRC exporters, and hence exports will reduce anyway.

Revisiting the Internationalization of the Yuan

237

services sector. It is conducive to the PRC’s efforts for developing Shanghai as an international financial center. Fourth, the internationalization of the yuan means that the need for the PRC to hold the dollar as a medium of exchange and a store of value will be reduced accordingly, which in turn means that the PRC will be able to reduce seigniorage paid to the u.s.10 Taking into consideration the high probability that in the long run the dollar will devalue further and the u.s. government will inflate away its debt burden by monetizing its budget deficit (such is already the perception of quantitative easing), by reducing the holding of dollar denominated financial assets, the PRC will be able to reduce capital losses on its huge foreign exchange reserves in the future. IV

The Road Map of Yuan Internationalization

Historically, for most countries, the internationalization of their currencies has been market-driven and without any road maps.11 In fact, many countries have resisted the pressure to internationalize their currencies. In Japan, the internationalization of the yen was launched under u.s. pressure. The road map for yen internationalization was essentially a road map for capital account liberalization in line with u.s. wishes.12 It seems that there is no precedent for successful internationalization of a currency that is guided by a predetermined road map. Among those countries with a form of roadmap, Japan failed to promote yen internationalization as planned. Germany succeeded in making the euro an international currency, but it came at the expense of the Deutsche mark and it is abundantly clear in the wake of the Eurozone sovereign debt crisis that Germany was forced into a suboptimal monetary union. Although in the literature some clues for categorizing the routes leading to the internationalization of a national currency can be found, there is no extensive

10

11

12

Seigniorage amounts to the return on the extra assets (real and financial) that a country is able to acquire because of the external holdings of its currency, less the interest paid on the assets in which the foreigners invest their holdings and less any extra administrative costs arising from the international role of its money (Pearce, D. W. The Macmillan Dictionary of Modern Economics, (London: Macmillan Press Limited, 1981), 389. Eichengreen and Flandreau have argued differently. Eichengreen B., Flandreau M. “The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?),” European Review of Economic History, 2009, 13 (3): 377–411. Takagi S. “The Internationalization of the Yen. In “Currency Internationalization: Lessons from the Global Financial Crisis and Prospects for the Future in Asia and the Pacific,” BIS Working Paper, No. 61 (2009): 75–85.

238

Yu

discussion on guiding principles for drawing a viable road map for currency internationalization.13 The PRC’s road map14 for the internationalization of the yuan follows what could be called “a functional approach.” For the designers of the road map, the final destination of internationalization is to make the yuan on par with the dollar in playing the role of an international reserve currency. To arrive at this destination, conditions have to be created to enable the yuan, as much as possible, to fulfill the functions of an international currency. But the journey of the yuan to the world is staged in order of difficulty. Yuan internationalization has to start by making the yuan available to nonresidents. This appears logical. Without making the yuan available to non-residents, how can the yuan be used internationally? The PRC has a specific advantage in the form of the existence of Hong Kong, China—an international financial center and the single most important entrepôt for the PRC. Hence, yuan internationalization starts with the promotion of the use of the yuan for settling imports from Hong Kong, China. The PRC monetary authorities proclaim that no artificial incentives have been provided to encourage the PRC importers to use the yuan as a settlement currency. What it has done is to remove the restrictions on the choice of currency for trade settlement by the PRC enterprises in several steps. However, it has to be asked: although freedom of choice has been given to the PRC importers, why must they choose the yuan instead of other currencies for import settlement, especially when taking into consideration the fact that the yuan has been on the course of appreciation for six years and is likely to continue in the foreseeable future? Of course, Hong Kong, China exporters can be asked a similar question: why would they be happy to accept yuan payments? Unfortunately, in the PRC’s road map, these questions are not asked, let alone answered. There are a large number of theoretical and empirical studies exploring the selection of an invoicing currency.15 According to these studies, trade between 13

Park proposed that the PRC should follow a regional approach to the internationalization of the yuan. See Park Y. C., Song C. Y. “Prospects for monetary cooperation in East Asia,” [R] ADBI working paper series, 2011. 14 The PRC authorities have not published any formal documents to present a roadmap of yuan internationalization. However, based on available documents that are aimed at addressing operational problems with regard to yuan internationalization and talks and papers by those who are close to the decision makers, we still can have a glimpse at what is in the mind of authorities on how they are prepared to push yuan internationalization. 15 Grassman, S. “Fundamental Symmetry in International Payment Patterns,” Journal of International Economics 3 (1973): 105–116. Goldberg, L. S. and C. Tille. “Vehicle Currency

Revisiting the Internationalization of the Yuan

239

industrialized countries in manufactured products tends to be invoiced in the exporter’s currency. Trade between an industrialized and a developing country in manufactured products tends to be invoiced in the industrialized country’s currency. Trade between any pair of countries in primary products tends to be invoiced in an industrialized country’s currency.16 Despite the fact that no conclusive results have been achieved, it is clear that the determinants of the choice of the invoicing currency are multifold. Exchange rates and expectations of exchange rate changes will influence an enterprise’s choice of invoicing currency. Other factors on industrial and enterprise levels, such as a country’s industrial structure, corporation organizations, enterprise business models and marketing strategies, types of products available, and development of relevant financial markets, may fundamentally influence an enterprise’s choice of invoicing currency. The bargaining powers of trade partners also play an important role in deciding the final use of invoicing currency. It is worth noting that in the literature, there are a lot of discussions on the choice of the invoicing currency, but relatively few discussions on the choice of the settlement currency.17 When people talk about the use of the yuan for trade settlement, no one has asked whether the yuan is also used for trade invoicing. For foreign observers, it must be the case. But it is not. When trade is settled in yuan, it is not necessarily invoiced in yuan. In the PRC’s road map, promoting the use of the yuan as invoicing currency has rarely been explicitly discussed. As long as the yuan is used for trade settlement and hence yuan have flown out of the country, the designers of the road map do not seem to worry whether the yuan is used as the invoicing currency. However, if imports are still invoiced in dollars, the use of the yuan for settlement is not a great accomplishment in yuan internationalization. On the contrary, this situation can be a result of some perverse activities such as betting on yuan appreciation and can be easily reversed when circumstances change.

16 17

Use in International Trade,” Journal of International Economics 76(2008): 177–192. Friberg R., Wilander F. “The currency denomination of exports—a questionnaire study,” Journal of International Economics, 2008, 75 (1): 54–69. Kawai M. The Japanese yen as an international currency: performance and prospects, Organization, Performance and Equity (u.s.: Springer, 1996), 305–355. Ito, T., K. Satoshi, K. Sato, and J. Shimizu. “Why Has the Yen Failed to Become a Dominant Invoicing Currency in Asia?” NBER Working Paper, (New York: NBER, 2010), No. 16231. Kawai M. The Japanese yen as an international currency: performance and prospects, Organization, Performance and Equity (u.s.: Springer, 1996) 305–355. Perhaps this is because the chosen settlement currency usually is the same currency for invoicing.

240

Yu

Why does the use of the yuan for import settlement occupy such a central place in the PRC’s road map? There are two possibilities. One is to enable Hong Kong, China residents to hold yuan assets. Another is to enable Hong Kong, China residents to use the yuan to pay for their imports from the PRC. It seems that the PRC’s emphasis is on encouraging Hong Kong, China residents to hold more yuan assets. To achieve this, the PRC government created mechanisms for the recycling of the yuan, soon after the yuan settlement for trade was launched. The essence of recycling is to create channels for Hong Kong, China residents to invest their yuan proceeds received from the PRC importers (and yuan obtained via other channels) in yuan assets provided by the PRC financial institutions.18 Without the recycling, Hong Kong, China residents would have no option but to deposit their yuan with Hong Kong, China banks, which is not a great incentive for them to hold yuan assets due to low interest rates. It is worth noting that the yuan deposits with Hong Kong, China banks end up with the Shenzhen branch of the People’s Bank of China (PBOC), which in turn pays interest on deposits. Generally, investment in yuan denominated assets such as yuan government bonds and yuan corporate bonds, if available, would give investors in Hong Kong, China higher returns. The issue here is not how the yuan can be recycled. The yuan has been recycled when Hong Kong, China residents deposit their yuan proceeds with Hong Kong, China banks. The real issue is, given possible costs, how much freedom the PRC government is willing to give to Hong Kong, China residents to choose yuan denominated assets to invest their yuan and how Hong Kong, China residents would utilize these opportunities, if they become available. This is a matter of capital account liberalization rather than one of yuan internationalization. According to the road map for yuan internationalization, as a result of the accumulation of yuan assets by nonresidents (mainly Hong Kong, China residents), “somehow” incentives will increase for nonresidents to pay for the PRC exports with the yuan, which they obtained from selling goods and services to the PRC. Unfortunately, the road map has mixed two different functions of an international currency—the function of medium of exchange and that of store of value. As a medium of exchange, the yuan should move back and forth across borders constantly19 rather than be withdrawn from circulation and accumulated in various forms of yuan assets. If the objective is to make the yuan a store of value and the objective has been achieved, then there would be no yuan left for Hong Kong, China importers to settle their imports from 18 19

Hong Kong, China institutions also created various types of yuan assets for investment. Or the yuan stays in Hong Kong, China to facilitate trade and financial transactions in Hong Kong, China, if the yuan is accepted to perform these functions.

Revisiting the Internationalization of the Yuan

241

the PRC. For Hong Kong, China residents, the yuan cannot play both the role of medium of exchange and that of store of value at the same time. There is no “somehow” as hoped for in the PRC’s road map. The incentives for Hong Kong, China importers to use the yuan for import settlement should be different from the incentives for them to hold yuan assets. Hence, it is possible that, after a long journey, it is still difficult to encourage Hong Kong, China importers to use the yuan for settlement. Many links between different legs of the yuan’s journey in the road map simply do not exist. As mentioned earlier, an internationalized currency must be widely used not only in invoicing and settling international trade but also in denominating financial transactions. Although since the launch of yuan internationalization, the PRC government has promoted the sale of yuan denominated bonds (both public and corporate), there seems to be no plan for the promotion of the use of the yuan as a denominating currency for financial assets. As pointed out by Park, while there is a large amount of literature on how a currency can be used internationally for trade invoicing, very little has been written on the determinants of a currency for the denomination of financial assets.20 Perhaps, the role of financial assets denomination is difficult to separate from the role of value storage. Hence, the promotion of the use of the yuan for the denomination of financial assets will not be high on the agenda, until headway has been made for the use of the yuan as store of value. Furthermore, the extensiveness of the use of the yuan as the denominating currency for financial assets depends on the role of the PRC financial institutions in global finance. Unfortunately, although the PRC has some of the biggest banks in the world in terms of market capitalization, the PRC financial institutions’ global presence is insignificant. For whatever the reason, the question of how the yuan will play the role of denominating currency for international financial assets has not been explicitly addressed in the PRC’s roadmap. The promotion of the use of the yuan as store of value has taken a few different routes. First, as mentioned earlier, yuan denominated assets are provided mainly for Hong Kong, China residents in connection with the scheme of yuan recycling. Though the PRC has yet to put forward a timetable, the sequencing of the provision of yuan assets has emerged. Different types of yuan assets will be provided corresponding to their possible impact on the PRC’s financial stability. So far, Hong Kong, China residents are allowed to hold yuan deposits, yuan corporate bonds, and yuan government bonds. In the future, they may be able to invest in the PRC “A share” markets. The restrictions on the amount 20

Park Y. C., Song C. Y. “Prospects for monetary cooperation in East Asia[R].” ADBI working paper series, 2011.

242

Yu

of investment will be loosened accordingly. The increase in the holdings of yuan assets by Hong Kong, China residents means that the PRC is borrowing from nonresidents. But with huge surplus capital and $3.2 trillion in foreign exchange reserves, why should the PRC be so keen on attracting more foreign capital, even if these assets are denominated in the yuan? The escape route should be to encourage nonresidents to hold yuan liabilities, for example, “panda bonds,” which is yuan denominated bonds sold by non-PRC issuers. Unfortunately, this route is not fully explored. The PBOC has entered into swap arrangements with some foreign central banks. This can be regarded as a second route. The holding of yuan deposits by foreign central banks with the PBOC has the potential to become an important channel for promoting the use of the yuan as reserve currency, due to the PRC’s strong external position and the liquidity shortage of the global economy. The third route can be the further participation by the PRC in regional financial cooperation. Park (2010: 19) points out, “In the event that the PRC decides on a regional strategy, it has two options to consider. The PRC might move to create a yuan bloc among the members of ASEAN + new 3, which includes ASEAN10, the PRC, Taipei, China, and Hong Kong, China. Alternatively, it could take advantage of ASEAN+3 as a framework for yuan internationalization.”21 The PRC’s current road map is pointing to the direction of the first option in what Park labeled the “regional approach.” The PRC’s promotion of yuan trade settlement with Hong Kong, China can be regarded as the first leg in the long journey in line with the ASEAN + new 3 approach. However, the PRC monetary authorities have not given up pushing yuan internationalization via the second regional approach.22 More precisely, the PRC authorities are still hoping more can be done to consolidate the regional financial architecture within the framework of the Chiang Mai Initiative. Something conducive to yuan internationalization may materialize as a by-product of the PRC’s engagement in regional financial cooperation. Currency swaps between central banks are cases in point. Another important direction in the yuan’s journey to the world is the participation in the reform of the international monetary system. But it seems that the PRC has not yet decided how to participate in the reform. For example, there is not yet a policy on what role the yuan should play in redefining the SDR.

21 Ibid. 22 The PRC’s enthusiasm for yuan internationalization is partially a result of disappointment in the lack of progress in regional financial cooperation.

Revisiting the Internationalization of the Yuan

243

In summary, it is expected by the PRC’s decision makers that with the increase in yuan import settlement combined with policies aimed at facilitating yuan recycling, cross-border yuan flows will increase gradually and so will the stock of yuan held by nonresidents. The continuation of such cross-border flows somehow will eventually make the yuan an international currency that will be able to perform a full scope of functions. Unfortunately, because there are too many missing links in the road map, the yuan’s journey could be very bumpy and even may not end up at the planned destination. V

Progress in Yuan Internationalization

The PRC seems to have made significant progress in the use of the yuan as a settlement currency, in the issuance of yuan-denominated bonds, and in signing currency swaps agreements with foreign central banks. The most talkedabout progress is the exponential growth of yuan deposits in Hong Kong until September 2011. 1 Use of the Yuan for Trade Settlement The PRC announced a pilot yuan trade settlement scheme (PRTSS) in April 2009, with an extension of the scheme announced on 22 July 2010. Now virtually all important PRC firms are allowed to use the yuan to settle trade. The types of trade eligible for yuan settlement have also expanded to include not only physical goods but also services. As a result, the amount of yuan trade settlement has increased dramatically since the third quarter of 2010. According to the Hong Kong Monetary Authority (HKMA), the volume of yuan crossborder trade settlement conducted through Hong Kong reached 1.9 trillion yuan in 2011 (Figure 11.1). The share of yuan trade settlement in the PRC’s total foreign trade is another important indicator for the progress in yuan internationalization. In 2010, yuan trade settlements accounted for only 2.5% of the PRC’s total trade. In 2011, the corresponding figure rose dramatically to 9% of the PRC’s total trade.23 2 Yuan Deposits Held by Hong Kong, China The most direct and immediate result of the increase in yuan settlement for imports is the dramatic increase in yuan deposits held by Hong Kong, China residents. As of July 2011, the total amount of yuan deposits was 580 billion yuan, equivalent to HK$899 billion and accounted for 9.5% of the total 23

People’s Bank of China (PBOC). Financial Statistic Report. (Beijing: PBOC, 2011).

244

Yu

700 587

600 525

493

500 400 311

300

263

200 79

100 2

0

0

1

0Q

1 20

2

0Q

1 20

3

0Q

1 20

4

0Q

1 20

1

11Q

20

2

11Q

20

3

11Q

20

4

11Q

20

Figure 11.1 Increase in the use of the yuan for trade settlement (billion yuan) Source: Zhang, C., “The Development of the Offshore Rmb Business,” Presentation at Adbi-Oecd Roundtable on Capital Market Reform in Asia. Tokyo. 8 February, 2012.

HK$947 billion of deposits in Hong Kong, China—up from less than 2% just a year ago. It was widely expected that the total amount of yuan deposits would reach 1 trillion yuan by the end of 2011 (Figure 11.2).24 However, the momentum in demand for yuan deposits in Hong Kong, China suddenly lost in the third quarter of 2011 (Figure 11.2). As of the end of March of 2012, total yuan deposits held by Hong Kong, China residents was just 554.3 billion yuan. The reason for this change will be explained in section VI. 3 The Issuance of Yuan Denominated Bonds Yuan denominated bonds sold by non-PRC issuers include “panda” bonds and “dim sum” bonds. The first two panda bonds were issued on the same day in October 2005 by the International Finance Corporation and the Asian Development Bank. When foreign-funded enterprises in the PRC are in need of yuan, they can issue panda bonds to borrow yuan to finance their economic 24

As of the end of September 2011, deposits in Hong Kong, China reached 622.2 billion yuan.

245

Revisiting the Internationalization of the Yuan 700 600 500 400 300 200

Jan-12

Oct-11

Jul-11

Jan-11

Apr-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Jul-08

Oct-08

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

0

Jan-07

100

Figure 11.2 Yuan deposits held by Hong Kong, China residents (billion yuan) Source: Zhang, C. “The Development of the Offshore Rmb Business”.

activities in the PRC. The yuan rose though such channels can only be used in the PRC. Another important category of yuan denominated bonds is yuan bonds issued by the PRC entities in Hong Kong, China. The important issuers include the PRC’s Ministry of Finance (MoF), Bank of China (BoC), Export and Import Bank of China (EIBoC), and Ping An China Asset Management. In fact, the BoC and the EIBoC have been issuing yuan denominated bonds in Hong Kong, China for several years. In addition, MoF issued 20 billion yuan in yuan-denominated bonds in Hong Kong, China on 23 August 2011. This particular issuance was regarded as a major boost to yuan internationalization and a “big gift” to Hong Kong, China people by Hong Kong, China and the PRC mass media. The most popular category of yuan bonds are the so-called “dim sum” bonds, which are issued in Hong Kong. China. The amount of each such bond issue is relatively small. Hopewell Highway Infrastructure sold 1.38 billion yuan ($147 million) two-year yuan denominated bonds in July 2010, which were the first yuan bonds sold offshore by a nonfinancial Hong Kong, China-based company in Hong Kong, China. McDonald’s, Bank of East Asia, HSBC, Bank of Tokyo Mitsubishi UFJ, Deutsche Bank, Tesco, and Caterpillar are among the other important issuers. More than a total of 54 billion yuan of dim sum bonds had been issued by August 2011, up from 34 billion yuan for the whole of 2010.25 25

Bloomberg News. 2010. Accessed 20 August 2010. www.bloomberg.com.

246

Yu

4 Yuan Swaps with Foreign Central Banks Central bank liquidity swap arrangements allow the PBOC to provide liquidity support to its counterparts. Foreign banks sell a specified amount of their currency to the PBOC for yuan, at the market exchange rate. Yuan funds obtained by foreign central banks are deposited in accounts held with the PBOC as PBOC liabilities. The countries that have currency swap arrangements with the PRC include Argentina, Australia, Belarus, Brazil, Iceland, Indonesia, Kazakhstan, Korea, Malaysia, New Zealand, Singapore, the United Arab Emirates, and Uzbekistan. To facilitate yuan internationalization, the Hong Kong Monetary Authority (HKMA) has entered into a three-year currency swap arrangement totaling 200 billion yuan with the PBOC. Besides these swap agreements, more countries have expressed their interest in holding yuan assets as investment or foreign exchange reserves. This channel of yuan internationalization may be worth exploring further. VI

Problems of Yuan Internationalization

However, all is not well with yuan internationalization. Since late 2010, yuan internationalization has shown a clear pattern of asymmetry—the use of the yuan as an import settlement currency rose quickly, but not for exports. Yuan denominated bonds met strong demand, yet nonresidents had no incentive to issue them. And, while Hong Kong, China banks are happy to extend yuan loans, they are not welcome by borrowers. Among all manifestations of asymmetry, the most important asymmetry is in the use of the yuan for import settlement in relation to export settlement. This asymmetry has caused much debate among the PRC economists. Before the debate on asymmetry had settled, another anomaly emerged: the yuan suddenly devalued for 11 consecutive days in early December 2011, while the PRC was still running a large current account surplus and a long-term capital account surplus. The asymmetry in the use of the yuan as a settlement currency and the unexpected devaluation of the yuan have forced economists to reconsider the reliability of the road map of yuan internationalization and even about the desirability of internationalization. Asymmetry of Yuan Internationalization and Resulting Welfare Losses to the PRC The asymmetry between yuan import settlement and yuan export settlement (Table 11.3) peaked in the fourth quarter of 2010, when the amount of yuan used for import settlement was 12 times more than that used for export 1

Revisiting the Internationalization of the Yuan

247

Table 11.3 Yuan import settlement to yuan export settlement ratio Time (quarter)

Import-to-export Ratio (yuan settlement)

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3

6.67 7.97 7.97 11.00 8.11 2.90 1.67

Source: China International Economic Consultants Co. Ltd. (CIEC) databank (2012) and People’s Bank of China, Financial Reports, various issues.

settlement. Certainly, the asymmetry has been dramatically reduced since the second quarter of 2011. However, this weaker asymmetry was not a natural development of yuan trade settlement as hoped by the designer of the road map of yuan internationalization, which is an issue to be discussed in next subsection. It can be argued that, given strong expectations of yuan appreciation, internationalization will lead to serious asymmetry in yuan trade settlement. For example, with an undervalued exchange rate and expectations for the yuan to appreciate, it is natural that foreign importers of the PRC exports are reluctant to use the yuan to settle transactions, while foreign exporters are happy to accept yuan. Yuan appreciation expectations no doubt have played an important role in creating asymmetry. However, more recent development shows that the asymmetry is much more than a result of yuan appreciation expectations. Most researchers will assume that in the PRC’s case, if the yuan is used for settlement, it must also be used for invoicing. But, as mentioned earlier, this is simply wrong. Investigations show that while indeed many PRC importers use the yuan for settlement, most of them still use the u.s. dollars for invoicing. This finding partially resolved the puzzle that the PRC importers are willing to use the yuan for settlement when the yuan is in the process of appreciation. Now, it can be seen that, because imports are still invoiced in the u.s. dollars, yuan settlement does not means that the PRC importers need to forfeit potential gains from yuan appreciation. However, even this is not the end of

248

Yu

the story. The true motivation behind the PRC importers to use the yuan for settlement is the existence of opportunities for exchange rate arbitrage, which will be discussed further in the next subsection. Since 2011 experience has shown, that if the incentive for the PRC importers to use the yuan for settlement is exchange rate arbitrage instead of more sustainable fundamentals, the willingness of the PRC importers to use the yuan for settlement by the PRC importers can suddenly disappear. In fact, due to the reversal of the spread between onshore and offshore exchange rates, both the increase in the use of the yuan as import settlement currency and yuan assets held by Hong Kong, China residents have stalled since the third quarter of 2011. Of course, if the reversal is reversed again, the fortune will change again. This re-reversal happened in the 4th quarter of 2011. The important point is that without making the yuan an invoicing currency, the progress in using the yuan as a settlement currency is superficial. If there is no way to make the yuan an invoicing currency within reasonable costs, could it be an indication that the conditions for using the yuan as a medium of exchange have not matured yet? One of the most obvious adverse results with asymmetry is that, with the same trade surplus, the PRC ends up with more foreign exchange reserves, which is what the designers of yuan internationalization originally wanted to avoid. It is easy to understand why this has happened: while the PRC continues to receive dollars from its exports, it gets fewer chances than before to spend these dollar proceeds for imports. The fact that Hong Kong, China residents recycle yuan in the form of holding yuan assets instead of using yuan to purchase the PRC’s exports means that they have lent to the PRC. Hence, there is another problem: yuan internationalization leads to extra capital inflows, which makes the PRC’s balance of payments even more imbalanced. In the first three quarters of 2011, the PRC’s capital account surplus was $226 billion, an increase of 110% over the same period of 2010. The PRC’s capital account surplus has surpassed its current account surplus once again since 2005. As a country that has been running a current account surplus for two decades and has accumulated $3.2 trillion, the PRC should not encourage net capital inflows. Another adverse consequence of the asymmetry is the rising currency mismatch on the PRC’s national balance sheet. As a result of the yuan import settlement and recycling, yuan, Hong Kong, China residents have increased their yuan assets, probably at the expense of their dollar assets. At the same time, the PRC has increased its yuan liabilities (recycled yuan) and its foreign assets (mostly dollar assets). In other words, yuan internationalization under the current road map has led to a change in the currency structure of the

Revisiting the Internationalization of the Yuan

249

PRC’s assets and liabilities in disfavor of the PRC. Since the 1998–1999 Asian financial crisis, East Asia has accumulated huge amounts of dollar denominated assets—mainly u.s. government securities. Due to the deterioration of the u.s. fiscal position and the Federal Reserve’s expansionary monetary policy since the subprime crisis, the PRC should replace dollar denominated assets with yuan denominated assets as well as replace yuan denominated liabilities with dollar denominated liabilities. Unfortunately, yuan internationalization has achieved the opposite result.26 By definition, an increase in yuan settlement for imports without a corresponding increase in yuan settlement for exports27 means an increase in yuan liabilities, which in turn means that there must be a corresponding increase in assets in the PRC’s international balance of payments. If the PRC does not wish to see the increase taking the form of an increase in u.s. dollar denominated foreign exchange, what should the PRC do? Assume the PRC originally exports $1 trillion in products and imports $800 billion in products, its total balance of payments surplus is $200 billion. If the PRC pays for $100 billion worth of imports in yuan, it will end up with $100 billion more in foreign exchange reserves. If the PRC extends yuan credits equivalent to $100 billion to foreign receipts that in turn use the borrowed yuan instead of dollars to buy the PRC products worth $100 billion, the PRC’s yuan assets (yuan credits to foreign borrowers) would increase and equal to the increase in its yuan liabilities (yuan deposits or other forms of yuan assets held by nonresidents). As a result, the increase in dollar denominated foreign exchange reserves would remain the same—$200 billion. In this second case, the yuan has been used as the medium of exchange by the PRC’s importers, the store of value by Hong Kong, China residents, the store of value by the PRC’s creditors and, finally, the medium of exchange by foreign importers and the PRC’s exporters. In other words, when the provision of yuan to the global market is realized through a capital account deficit, the PRC would be able not only to avoid further accumulating foreign exchange reserves and causing a perverse change in the currency structure of the PRC’s assets and liabilities, but also give the yuan more room to play the role of an international currency. Of course, this is not to say that yuan internationalization should begin with the PRC running a capital

26

27

It can be argued that if nonresidents invest in yuan assets with the yuan made available by a yuan trade settlement scheme, an equivalent amount of dollar investments in the PRC will be reduced. This substitution between yuan investment and dollar investment is not very likely because the investors are different having varying motivations. This is the most discussed feature of asymmetry in the PRC.

250

Yu

account deficit. The reality is more complicated. But the argument that the yuan internationalization has to begin with yuan import settlement is flawed. 2 Surge in Speculative Short-Term Capital Flows On the surface, the trade settlement scheme merely allows the PRC enterprises to use yuan to settle their trade transactions. In reality it enables enterprises, especially large enterprises with subsidiaries outside borders, to channel funds across the border between the PRC and Hong Kong, China. The starting point of yuan internationalization is supposed to be the use of the yuan for import settlement. But in practice, many PRC importers did not use the yuan to pay for their imports—let alone to use the yuan for invoicing. Instead, they utilize the opportunity provided by the trade settlement scheme, to conduct exchange rate arbitrage. As a result of the launch of the trade settlement scheme, an offshore yuan market, known as the CNH market, was created in Hong Kong, China, side by side with the onshore market, now dubbed as the CNY market. The CNH market is a free market, while the CNY market is tightly regulated by the PBOC. Hence, two yuan exchange rates coexist: an onshore CNY exchange rate and an offshore CNH exchange rate. Due to yuan appreciation expectations and many other factors, until September 2011 the CNH was more expensive in dollar terms than the CNY. The existence of the CNH-CNY spread creates opportunities for the PRC enterprises to benefit from exchange rate arbitrage. Before the introduction of the yuan settlement scheme, importers had to buy dollars onshore—in the CNY market. Now they can sell yuan for dollars in the CNH market, creating appreciation pressure on the CNY and depreciation pressure on the CNH. The arbitrage should have eliminated the CNH-CNY spread fairly quickly. However, the intervention by the PBOC in the CNY market and carry trade conducted by Hong Kong, China residents in the CNH market created offsetting pressure on the CNY and the CNH. As a result, the CNH-CNY spread was maintained and arbitragers and arbitrage activities by the PRC importers continue. It is not unreasonable to conclude that the bulk of yuan used in the name of import settlement actually is used to buy dollars in the CNH market and imports in fact are still settled in dollars. Table 11.3 shows that that yuan import settlement and yuan export settlement has become more balanced since the second quarter of 2011. Would it not be proof for the argument that following the increase in yuan availability across borders, the use of the yuan for export settlement will increase accordingly? Unfortunately, the tendency for a more balanced yuan settlement is deceptive. Since the middle of September 2011, financial conditions suddenly changed in Hong Kong, China. Due to liquidity shortages caused by the European sovereign debt crisis, banks from developed countries, especially

251

Revisiting the Internationalization of the Yuan 0

12

‒0.01

10

‒0.02

8

‒0.03

6

‒0.04

4

‒0.05

2

‒0.06

2010Q3

2010Q4 cnh-cny (lhs)

2011Q4

2011Q2

2011Q3

0

Receive-to-pay Ratio (rhs)

Figure 11.3 Correlation between CNH-CHY spread and yuan import–export settlement ratio Source: Zhang, B. and Q. Xu, “Rmb Internationalization in the Context of Exchange Rate and Capital Account Control.”

European banks with exposure in Hong Kong, China withdrew their funds. As a result, CNH fell against the dollar and the CNH-CNY spread turned negative. The PRC importers stopped buying dollars from the CNH market and returned to the CNY market. The PRC exporters stopped selling dollars in the CNY market and sold dollars in the CNH market instead. At the same time, because of a dramatic rise in funding costs for carry trade and the reduced attraction of holding yuan assets, Hong Kong, China residents started to unwind the carry trade and some dumped their holdings of yuan assets. Statistically, the yuan import-export settlement became more balanced. But this change is not a reflection of the success of yuan internationalization. It reflects the fluctuation of the movements of short-term capital flows across borders. Empirical studies show that the yuan import-export settlement ratio (receive-to-pay ratio) is highly correlated with the CNH-CNY spread (Figure 11.3).28 28

Zhang, B. and Q. Xu, “RMB Internationalization in the Context of Exchange Rate and Capital Account Control,” International Economic Review, 2012, 4: 63–73 (in Chinese). 张斌, 徐奇渊. 汇率与资本项目管制下的人民币国际化[J]. 国际经济评论, 2012 (4): 63–73.

252

Yu

Before the launch of the yuan settlement scheme, capital inflows were under tight control, and nonresidents couldn’t obtain yuan assets freely. Yuan assets are now being made available in Hong Kong, China so nonresidents can obtain yuan assets outside their border. It can be seen that ultimately, questions such as how to promote the use of the yuan for trade settlement and to make the use of the yuan more balanced so that the PRC can avoid further accumulating foreign exchange reserves are the wrong questions. The real question is: after a very big step towards capital account liberalization, how will speculative capital move across borders? Important questions include: what will be the consequences of these movements on the PRC’s financial and macroeconomic stability? VII

Yuan Internationalization and Capital Account Liberalization

According to the trade settlement scheme, currency conversion between the yuan and other currencies is allowed only under the following circumstances:

• • • •

cross-border trade settlement in yuan up to the amount of the relevant transactions; yuan trade finance loans where the customer does not have sufficient yuan for repayment; expenses relating to yuan bond issuance to be settled in Hong Kong, China; transactions allowed by the PRC’s authorities to be ultimately squared by the yuan clearing bank—Bank of China, Hong Kong (BOCHK) in the PRC’s Foreign Exchange Trading Centre in Shanghai. To maintain control over the net cross-border flows of yuan between the PRC and Hong Kong, China, all cross-border yuan flows must be settled via the BOCHK (Figure 11.4). There are quotas for monthly settlements. Initially, the quarterly amount of net buying from or selling to the BoC was limited to 4 billion yuan. Later it was raised to 8 billion yuan. It is worth emphasizing that the quotas are net rather than gross amount of settlement. It is estimated that in 2011 around 70% of the PRC’s yuan cross-border trade settlement was done through the BOCHK’s clearing system.29

29

Zhang, C. (2012): “The Development of the Offshore RMB Business.” Presentation at ADBI–OECD Roundtable on Capital Market Reform in Asia, Tokyo, February 8.

253

Revisiting the Internationalization of the Yuan Hong Kong, China Participating Enterprise Exchange hks → cny

Import Goods from the prc

prc Pilot Enterprise Received payment in yuan

Participating Bank in Hong Kong, China

Settlement Bank in the prc

Remittance rtgs

bochk Clearing Bank in Hong Kong, China

cnaps

Figure 11.4 Yuan settlement system Notes: CNAPS = China National Automatic Payment System; PRC = People’s Republic of China; RTGS = real time gross settlement systems. Source: Shum, Albert. 2012. Renminbi Offshore Market and Future Globalization of Chinese Currency. PPT Presentation at Rotman Master of Finance Speaker Series, University of Toronto, Canada. 15 February. https://www.facebook.com/events/229557757135659/

One might ask how the yuan can be internationalized without first liberalizing the capital account. However, this is the wrong question. The truth is that yuan internationalization is an effort for capital account liberalization in disguise. Each step in yuan internationalization is a step in capital account liberalization. It can be said that if progress has been made in yuan internationalization, it is a result of capital account liberalization. In fact, since early 2002, the PBOC has started to call for a further liberalization of capital account. One can make a thought experiment. Assuming that no effort is made to promote yuan internationalization, but the capital account is partially liberalized so that foreign capital can flow into the PRC’s financial markets to acquire yuan assets, compared to the circumstances where the yuan is used for trade settlement, will there be any differences in the role of the yuan between the two? If the CNH is more expensive than the CNY and the interest rate is higher in the PRC than in Hong Kong, China, dollars will flow from Hong Kong, China into the PRC to buy yuan assets, the PRC importers will buy u.s. dollars in the CNH market instead of in the CNY market, and the PRC exporters will sell their dollar proceeds onshore. It can be seen that under the scenario of partial capital account liberalization, results will be the same as in the event of yuan internationalization. The differences exist only in channels and mechanisms leading to the same results. For example, under the scenario of partial

254

Yu

capital liberalization, Hong Kong, China residents buy yuan assets directly in the PRC’s financial markets instead of in Hong Kong, China. In event of yuan settlement, yuan assets are acquired in Hong Kong, China. After over two years’ effort since 2009, despite the significant increase in yuan trade settlement, the PRC’s trade is still largely invoiced in the dollar and yuan trade settlement is highly asymmetrical. Yuan internationalization has not achieved any of its original objectives, such as sheltering its export industries from exchange rate risks and reducing the holding of dollar denominated assets to avoid capital losses on foreign exchange reserves. In contrast, the PRC’s capital account liberalization has made some progress, which is evidenced by the surge of cross-border capital movements in response to changes in the global financial conditions. Since early 2010, the PRC government actually has been pushing two processes simultaneously— capital account liberalization and yuan internationalization—one by stealth and the other with much fanfare. Because each step toward yuan internationalization is prerequisite upon certain steps in capital account liberalization, an important question is whether the sequencing of capital account liberalization implied by the road map of yuan internationalization is consistent with the sequencing of capital account liberalization, which is well established in the literature and in practice. If the two sets of sequencing are the same, it will not make much difference which process should take precedence. If the two sets of sequencing are not the same, it becomes impossible for the government to have two correct sets of sequencing at the same time. Despite the fact that many steps toward yuan internationalization is conditional on certain steps in capital account liberalization, the issue of capital account liberalization and especially that of the sequencing of capital account liberalization have never been discussed explicitly when the roadmap of yuan internationalization was drawn. Yuan internationalization is widely talked about, while capital account liberalization hides in the shadows. The steps in yuan internationalization that have important consequences on capital account liberalization, are just taken to satisfy the need for yuan internationalization, without taking into due consideration their impacts on capital account liberalization. This situation will easily lead to missteps in capital account liberalization. For example, the starting point of yuan internationalization is the use of yuan for import settlement. This step is conditional on a certain degree of liberalization of cross-border capital movements. However, the roadmap for yuan internationalization has said nothing about the need for interest rate liberalization and a flexible exchange rate regime, which are important steps when capital account liberalization proceeds. This implies, when short-term cross border capital flows are liberalized to a certain degree, no policy has been

Revisiting the Internationalization of the Yuan

255

put forward to deal with problems such as interest rate and exchange rate liberalization. As a result, the cross-border capital flows as a result of yuan import settlement inevitably will create distortions in resource allocation and interruptions in the PRC’s financial stability. In my view, it is much better to draw a road map for capital account liberalization and explicitly discuss the sequencing of the liberalization. The road map of yuan internationalization should be decided on the basis of the road map of capital account liberalization. Capital account liberalization in the PRC is a drawn out process. After having entirely liberalized its current account, the PRC has also liberalized the best part of its capital account. While there is no denying that, on top of a turbulent global financial environment, with a still fragile financial system, capital account liberalization should be pursued cautiously. However, this does not necessarily mean that the PRC should not discuss options for the completion of the few final steps in the long march toward capital account liberalization. If the conclusion is that no further action should be taken to liberalize the capital account, then action aimed at yuan internationalization should not be allowed to lead to a further liberalization of the capital account. It seems that the PRC should first speed up interest rate liberalization so as to eliminate the enormous chances for arbitrage and rent seeking. At the same time, the yuan exchange rate should be liberalized in the sense that it is decided by market demand and supply. The PBOC could stop intervention in the foreign exchange market. It is a much simpler way to stop the accumulation of foreign exchange reserves. If the PRC still does not wish to do so, then there should be no more talk about capital account liberalization. With inflexible interest and exchange rates, capital account liberalization will render monetary policy ineffective and create large welfare losses for the PRC. The argument that exchange rate reform needs a longer time than yuan internationalization is difficult to understand. In my view, due to the Eurozone sovereign debt crisis, and the sudden surfacing of bearish sentiment about the PRC, yuan appreciation expectations have reduced significantly. In the past few months since the last quarter of 2011, yuan devaluation expectations appeared in CNH forward and non-deliverable forward (NDF) markets. In December 2011, the yuan devalued for 11 consecutive days. These changes in sentiment and the new trend of capital outflows from emerging economies have provided the PRC with a rare opportunity to allow the yuan to float. Certainly, because capital account controls in the PRC have not been fully dismantled, the government can always use the prudential rule and other laws and regulations to manage cross-border capital flows to prevent overshooting of the exchange rate. Only when the exchange rate can adjust constantly around its equilibrium level and domestic interest rates are flexible enough in response to the

256

Yu

fluctuations of cross-border capital flows, can the opportunity for exchange rate arbitrage and interest rate arbitrage be minimized. Then the internationalization of the yuan can be preceded in line with market conditions and with minimum welfare losses. VIII Conclusion The internationalization of the yuan is a major challenge facing the PRC government. However, the PRC has yet to give a firm answer on what should be the final goal of internationalization. Fortunately, yuan internationalization does not currently conflict with other possible options, such as the creation of a supra-sovereign currency or a regional currency. While the PRC can benefit from the internationalization of the yuan, its possible negative effects on the PRC’s financial stability may also be serious. The twists and turns of yuan internationalization in 2011 raises a very important question: does the PRC want to take the risk of fully liberalizing its capital account without first putting its own house in order and giving the market force full play in determining the interest rates and exchange rates? The question facing the PRC is not about the desirability of yuan internationalization. It is about the prioritization of the PRC’s financial reforms and regime changes. The question becomes even more acute when taking into consideration the fact that the global financial market is still in turmoil and the PRC’s financial markets are in a messy state. It is risky to pin the hope of the emergence of a healthier and more robust financial system on the creative destruction of external shocks, while the existing system is still too weak to withstand such shocks. The internationalization of the yuan requires convertibility and liberalization of the capital account. Due to the fragility of the financial system and its lack of attractive financial instruments, the PRC’s liberalization of the capital account and hence the internationalization of the yuan must proceed in a gradual fashion. Yuan internationalization should be a natural course of economic development and capital account liberalization. To push yuan internationalization in an artificial way is counter-productive. Policies aimed at promoting yuan internationalization should not be based on yuan appreciation. Otherwise, internationalization will not be sustainable. The PRC’s growing economy and trade volume are favorable conditions for internationalization. However, other conditions, such as the existence of deep and liquid financial markets, have not been met. To create conditions for the

Revisiting the Internationalization of the Yuan

257

internationalization of the yuan, the PRC government should encourage financial markets to play an increasingly important role. Sequencing is important. Without the initial realization of establishing market-determined interest rates and exchange rates, yuan internationalization could easily go astray. The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the PRC’s huge imbalances, capital account liberalization should be pursued in a cautious way. The PRC should first put its own house in order. Before the internationalization of the yuan can make progress, the PRC must speed up the reform of its financial markets. Interest rates should be liberalized. At the same time, the yuan exchange rate should be allowed to float freely. Only when the PRC’s financial reform makes an important breakthrough, can the internationalization of the yuan be able to make meaningful progress. Works Cited Bloomberg News. 2010. Accessed 20 August 2010. www.bloomberg.com. Chinn, M. and J. Frankel. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? NBER Working Paper. New York: NBER, 2005. No. 11510. Eichengreen B., M. Flandreau. “The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?).” European Review of Economic History, 2009, 13 (3): 377–411. Friberg R., F. Wilander. “The currency denomination of exports—a questionnaire study.” Journal of International Economics, 2008, 75 (1): 54–69. Goldberg, L. S. and C. Tille. “Vehicle Currency Use in International Trade.” Journal of International Economics 76 (2008): 177–192. Grassman, S. “Fundamental Symmetry in International Payment Patterns,” Journal of International Economics 3 (1973): 105–116. Ito, T. The Internationalization of the RMB: Opportunities and Pitfall. Manuscript for CDRF-CFR Symposium. Beijing, 1 November, 2011. ———, K. Satoshi, K. Sato, and J. Shimizu. Why Has the Yen Failed to Become a Dominant Invoicing Currency in Asia? NBER Working Paper. New York: NBER, 2010, No. 16231. Kawai M. The Japanese yen as an international currency: performance and prospects. Organization, Performance and Equity. u.s.: Springer, 1996. Kenen, P. Currency Internationalization—An Overview. Manuscript. BoK-BIS Seminar on Currency Internationalization: Lessons from the Global Financial Crisis and

258

Yu

Prospects for the Future in Asia and the Pacific. Seoul, Republic of Korea, March (2009). Kenen, P. The Role of the Dollar as an International Currency. Occasional Papers 13. Group of Thirty. New York, u.s., 1983. Park, Y. “RMB Internationalization and Its Implications for Financial and Monetary Cooperation in East Asia.” China and World Economy, 18 (2010): 1–20. ———, Song C. Y. “Prospects for monetary cooperation in East Asia.” ADBI working paper series, 2011. People’s Bank of China (PBOC). Financial Statistic Report. Beijing: PBOC, 2011. Takagi S. “The Internationalization of the Yen. In “Currency Internationalization: Lessons from the Global Financial Crisis and Prospects for the Future in Asia and the Pacific,” BIS Working Paper, No. 61 (2009): 75–85. World Trade Organization (WTO). Press Release. PRESS/598. 26 March, 2010. Zhang, B. and Q. Xu. “RMB Internationalization in the Context of Exchange Rate and Capital Account Control.” International Economic Review, 2012, 4: 63–73 (in Chinese). 张斌, 徐奇渊. 汇率与资本项目管制下的人民币国际化. 国际经济 评论, 2012 (4): 63–73. Zhang, C. “The Development of the Offshore RMB Business.” Presentation at ADBI– OECD Roundtable on Capital Market Reform in Asia, Tokyo, 8 February 2012.

chapter 12

Challenges Facing the Global Governance Mechanism and China’s Counter-Measures He Fan, Feng Weijiang and Xu Jin Abstract The current global governance mechanism, which originated in the United Statesdominated hegemonic system, has been facing multiple global challenges since the comparative decline of u.s. strength, the rise of emerging countries, and the outbreak of the global financial crisis. In the coming five to ten years, there will be an unprecedented strong demand for global governance reforms in countries across the world. Despite the dilemma that the world’s second largest power has often encountered in the power games of international politics, China is still enjoying an important period of strategic opportunities for full participation in global governance. To offer a better analysis of global governance, this paper breaks down the international rules that pertain to China into three categories: first, the system and rules of current global governance; second, the system and rules of global governance that are facing or may face major reforms; third, the new system and rules of global governance that will be of systematic significance in the future. Targeting various mechanisms of global governance, the authors propose some principles that China should heed, including those of rights matching responsibility, inclusive interest, and differentiated common responsibilities.

Keywords Global governance – emerging powers – inclusive interest – differentiated common responsibilities

I Introduction Global governance has entered a fragmented stage. The onset of this stage can be dated back to the outbreak of the 1997–1998 Asian financial crisis, while its final formation came after the u.s. subprime crisis broke out in 2007. The eruption of the Asian financial crisis sparked extensive suspicion of the manner

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�14

260

He et al.

of governance adopted by the International Monetary Fund (IMF) and the “Washington Consensus” behind it and expedited an awakening of awareness of regional governance across Asia. The outbreak of the 2007 subprime crisis in the u.s. as well as the 2010 sovereign debt crisis in Europe changed the longestablished belief that emerging economies are always the source of crises that shake up concepts of governance developed by u.s.-led Western countries and questioned the legitimacy of global governance mechanisms dominated by the IMF, the World Bank, and other institutions overseen by the West. The old manner of governance based on neo-classical economic theory has become increasingly incapable of reflecting changes in the distribution of international governance capabilities, but a new manner has not yet fully emerged. This has been the chief obstacle preventing improvement of efficient global governance. Within this context, some regional or cross-regional attempts at governance, such as the broad efforts to establish an Asian economic circle, a cooperative mechanism among BRICS countries, the Trans-Pacific Partnership (TPP), and such long-established international mechanisms as the newly revitalized Organization of Economic Cooperation and Development (OECD), have resulted in the fragmentation of global governance. Fragmented global governance is characterized by the following three situations: 1) Developed countries still dominate the international economic order and global governance, but emerging economies of developing countries have begun to participate in top-level global governance design and thus play an increasingly important role in certain important global institutions. This situation is reflected above all in the rise of the Group of Twenty developing and foremost emerging economies (G20), which acts as a major platform for international economic cooperation, and in the ever-growing respect for developing countries and their expanding voice in the reform of the IMF, World Bank, World Trade Organization (WTO) and other international institutions; 2) The world economic governance framework set up by developed countries since the establishment of the Bretton Woods system has become increasingly incapable of dealing with the detection, prevention and treatment of crises caused by the wave of globalization, while regional or cross-regional economic governance platforms are playing an ever more important role. This development can be seen in the multilateralization of the Chiang Mai Initiative, the strengthening of BRICS mechanism, and the construction of the TPP, spearheaded by the u.s. during its implementation of the economic strategy “pivot to Asia-Pacific”; 3). Untraditional topics as well as currency, finance, trade, and other traditional topics have been receiving ever more attention. Certain global topics, such as climate change, with its growing influences on the economic

Challenges Facing the Global Governance Mechanism

261

system, for example, have become increasingly important to discussions on the global governance platform. Taking into account these changes and new situations, this article aims to sort out the challenges facing the mechanisms of global governance in a systematic fashion and put forward proposals for countermeasures to be taken by China. II

Challenges Facing Global Governance

The political and economic global landscape has undergone enormous changes since the end of the Cold War, especially since the outbreak of the global financial crisis, and as differences in interest among countries have become more obvious. Against this backdrop, new global and regional problems have cropped up and posed a severe challenge to established mechanisms of global governance. The first challenge facing the present mechanism of global governance is the comparative decline of u.s. strength. The u.s. gross domestic product (GDP) was in the lead until 2003 when it was overtaken by the European Union (e.u.). At the same time, u.s. shares in international trade and investment have also declined considerably. According to statistics released by the WTO, u.s. import and export volumes amounted to 18.8% and 12.1% respectively of the world’s total in 2000, both ranking No. 1 in the world. However, by 2011, these figures had declined to 12.3% and 8.3%. u.s. outward foreign direct investment was 33.8% of the world’s total in 2000, but declined to 23.7% in 2010. The deleveraging promoted by American enterprises has seriously weakened the growth dynamic of u.s. outward investment. Despite the hegemonic monetary status that the u.s. dollar has maintained for decades, the creation of the euro has undermined its absolute dominance, which, together with the simmering debt problem plaguing the u.s., will gradually shake its status as a safe “currency haven.” As a lukewarm economy and rising unemployment have become its main topics of concern, the u.s. is no longer capable of driving global economic growth or interested in maintaining a free-trade system or global macroeconomic stability. Irresponsible behavior by the u.s. and some of its unsuccessful economic and diplomatic policies have also caused damage to the international order and the country’s own leadership. The emergence of a “more anti-terror action, more terrorist activities” situation has made the rest of the world lose confidence in the u.s.-led war on terrorism. Double standards have led the u.s. to

262

He et al.

take action only against terrorist groups that seem to threaten its own security. Consequently, though al-Qaida has been crippled, other terrorist organizations have cropped up elsewhere in the world. A pro-Israeli foreign policy and opposition to the establishment of a Palestinian nation have made the u.s. an enemy to all Islamic countries in the Middle East. Its policy in this case, which remains one of the principal causes for terrorism, has not only fueled anti-American sentiments in the Middle East, but also poses a long-term threat to local security. The comparative decline of the u.s. as the sole superpower and the inability of other countries to fill the power vacuum or establish a collective leadership will likely become the key factors in the numerous problems that will emerge in global governance. The second challenge facing the current system of global governance is the rise of emerging powers. Since the onset of the 21st century, emerging countries have maintained rapid economic growth, and their united strength is approaching that of the Group of Seven industrialized countries (G7). According to IMF estimates, in 2001 G7 nations accounted for nearly 48.37% of the world’s total GDP in terms of purchasing-power parity, but in 2012 their share declined to 37.84%. During the same period, the economic share held by BRICS countries has increased from 17.63% to 27.25% of the world’s total. Over the past several years, emerging countries have made tremendous gains in foreign trade, investment, and financial fields, and have become a new driving force in the global economy. Unfortunately, emerging countries have not gained a status or voice commensurate with their strength and the momentum of their economic growth in international politics or economic system. When it comes to creating world rules, developed countries still dominate. The traditional developing camp also places great emphasis on the protection of rights and interests of these small countries.1 At the same time, as developing countries, they face the dilemma of “double identity.”2 This situation is unsustainable. As they expand, emerging countries will exert ever-greater influence on other countries. These too will expect to share opportunities created by emerging powers and will also hope that the latter will undertake more international responsibilities. Emerging countries, in 1 He Fan 何帆, “Chenmo de dakuaitou:guoji zhengzhi jingji tixi zhong de fazhan zhong daguo 沉默的大块头：国际政治经济体系中的发展中大国 [A Group in Silence: Developing Countries in the International Political and Economic System],” China Publishing & Media Journal, (20 Aug. 2004). 2 Li Shaojun 李少军, “Lun zhongguo shuangchong shenfen de kunjing yu yingdui 论中 国双重身份的困境与应对 [An Analysis of China’s ‘Double Identity’ Dilemma and Its Countermeasures],” World Economics and Politics, 4 (2012): 4–20.

Challenges Facing the Global Governance Mechanism

263

turn, look forward to holding a more important position in global governance and to receiving a greater share of power from dominant countries. The redistribution of interests, obligations and power entailed by the rise of emerging countries will have an explosive impact on the international order. The question as to whether or not to accept and manage the rise of emerging countries is key to deciding whether the current international system is elastic and stable. Great Britain successfully accommodated itself to the rise of the u.s. with no major conflict a century ago, but as Joseph S. Nye points out, the world’s failure to deal with the rise of Germany led to two destructive world wars.3 Fareed Zakaria suggests that the u.s. learn from Otto von Bismarck, who maintained good terms with all the major powers of his era and thus successfully turned Germany into the hub of Europe, as opposed to Britain, which did its best to check the rising powers that it believed posed a threat to itself, only to plunge itself into a disadvantageous position on the European continent.4 The third challenge facing the current mechanism of global governance is the new problems that have loomed large since the eruption of the global financial crisis. In the past, the efficacy of the mechanisms of global economic governance was to a large extent related to economic globalization and the sound development of the u.s. economy from the 1980s to the early years of the 21st century.5 During this period, world members adopted reform measures and an opening-up policy, handled international affairs in a cooperative manner, and coordinated effective policies. However, with the fading of globalization in the wake of the global financial crisis, economic imbalances and inequality, which had existed but to some extent had been concealed by rapid global growth, became conspicuous. The side effects of the international financial crisis began spilling from the economic and financial to the social and political sector. As some regions and countries got bogged down by turbulent situations, “turmoil” became a key word in international politics. An article in the Financial Times of 30 August 2011 called 2011 the “Year of Global Anger.” Injustice and inequity remain a deep-rooted cause of the “aftereffect of the global financial crisis.” All the countries suffering from this turmoil face similar economic conditions: an ever-widening income gap, a diminishing 3 Joseph Nye, “The Future of Power,” trans. by Wang Jimei [王吉美], (Beijing: Citic Publishing House, 2012), xxii. 4 Fareed Zakaria, “The Post-American World,” trans. by Zhao Guangcheng and Lin Minwang, (Beijing: Citic Publishing House, 2012), 233. 5 Cao Yongfu 曹永福, “Meiguo jingji zhouqi wendinghua yanjiu shuping 美国经济周期稳 定化研究述评 [A Study of the Stabilization of the American Economic Cycle],” Economic Research Journal, 7 (2007): 153.

264

He et al.

middle class, as well as growing public anger over the corruption and privilege enjoyed by political and economic elites. The Internet and other booming forms of information technology have brought people from different regions together. Worldwide chaos after the global financial crisis indicates that we are entering a new stage in which more emphasis will be placed on equity and justice. Affected by global financial woes, widespread unrest, and internal conflicts in certain regions, people across the world today prefer equity and justice to freedom and equality. Of greater concern now is no longer the insufficiency of competition and production, but injustice in the distribution and consumption of global wealth. The pursuit of equity and justice has become an irreversible and increasingly popular trend. Stronger appeals for reforming global governance will arise in the next five to ten years. In theory, each country, wishing to share with others a just, free, safe and prosperous world, will have its own wishes and demands regarding better global governance. Yet the wishes of different countries will vary or conflict. For example, the most pressing task for the least-developed countries will be how to increase national capability and gain external assistance. Nevertheless, for most developing countries, achieving lasting economic growth and national prosperity will remains a top priority. As far the u.s., its main strategic goal will be to maintain its superiority and safeguard security and peace in the world order through its leadership. All of this means that competition among different models of governance will flare up within the next five to ten years. This competition will be chiefly reflected in efforts to gain a louder voice in the reform of global governance, more specifically, in efforts to seek a greater say in the creation of international rules and their control, application and interpretation. Lingering economic recession and feeble growth have sparked developed countries to reflect on their competitive advantages, economic growth, and security mechanism and prodded them to draft some hasty institutional regulations in the hope that these will help them maintain comparative advantages over emerging countries. In this context, emerging countries, represented above all by China, must take action. III

Strategic Opportunities for China’s Participation in Global Governance

The reform of the global governance system must follow current changes and trends all over the world. With the rapid rise of China to a prominent position in recent years, the “one superpower plus multiple powers” power structure, formed at the end of the Cold War, has been weakened.

Challenges Facing the Global Governance Mechanism

265

China’s economic growth maintained 10.17% growth year-after-year from 2001 to 2012, compared to the mere 3.62% of the world’s average in the same period. China’s economic aggregate was 4.13% of the world’s total in 2001 and escalated to 11.57% in 2012, thus rising from No. 6 to No. 2. If China’s economic growth can maintain 7–8% growth for the next five years, the country will further widen the gap between itself and other economic powers and narrow its distance from the u.s. From a military perspective, China has been increasing military build-up since the u.s. bombing of China’s Embassy in Yugoslavia in 1999. Continuous military input over the past 10-plus years have led to a considerable rise in the armament of China’s troops and their fighting capability. The next five years will be a key period for China’s participation in the reform of the mechanism of established global governance. China’s decision makers are well aware of the advantages and disadvantages that the country faces in its participation in global and Asia-Pacific governance. China does not intend to challenge the dominant status of the u.s. in the established global governance system, or pursue confrontation with or replace the prevailing structure of global governance with an international institutional establishment. Instead, it aims to abide by current global rules and institutions while assuming deserved responsibilities commensurate with its international status. At the same time, it also wants to provide some public products and take a more active and constructive role in the Asia-Pacific and other regional mechanisms. Active participation in global governance is of great significance and necessity to China. First, the country needs to take part in global governance in order to maintain a peaceful international environment for its own development. Generally speaking, emerging powers, including China, have all benefited a great deal from the current international governance and peaceful international environment. No new or better international rules and institutional arrangements will automatically emerge without the joint efforts of all world members. All the same, the current international system must to some extent keep an open attitude towards important emerging economies and not exclude them from its decision-making body. Such an approach has helped current international institutions and regulation maintain sufficient elasticity and adaptability. For example, in the latest round of reforms on the distribution of votes and shares in the IMF and the World Bank, developed countries have recognized the G20’s replacement of the G7 as the world’s most important economic governance platform, thus letting emerging countries become the greatest beneficiaries. Second, insufficient supply of international public products will have a negative effect on China’s interests. A review of the past finds that China remains one of the largest beneficiaries of international public products under the

266

He et al.

current international system. China has been supporting international rules and institutions in playing bigger roles in the ultimate realization of a new international political and economic order that is fair and rational and a new world of lasting peace and universal prosperity and has also injected many resources toward this end. In the domain of politics and security, China has consistently abided by the goals and principles of the UN Charter, protected international laws and codes of international conduct, and generally behaved in accordance with the UN. As a permanent member of the UN Security Council, China has consistently maintained its long-cherished attitude that the dominant role of the UN Security Council should be strengthened in world affairs. For the sake of common development and prosperity with regard to other countries, China has been actively participating in the creation and improvement of multilateral trade rules since its entry in the WTO. Due to its efforts, China has been widely acclaimed as a mature and responsible partner on the international stage. As a WTO member, China has consistently adhered to the policy of expanding an opening-up to the outside world and has gone all out to accelerate the reform of domestic economic institutions, thereby offering the rest of the world enormous chances for market access. In the international monetary and financial domain, China has also made noticeable progress over the past decades. China is now an important member of the IMF, and its economic development has received ever more attention from the agency. China has changed its past status as debtor to its current one as creditor. It has offered endless loans and assistances to the IMF, and its rising status has to some extent helped balance the dominance of the u.s.-led West in the international agency. In 2011, Zhu Min, former vice-governor of China’s central bank, was officially appointed as vice-executive of the IMF, making him the first Chinese to join the agency’s senior management team. The negative influence caused by the power struggle among countries, if there is any, will hamper the efficiency in supplying international public goods, which will directly reduce the benefit that China receives from international public products and will result in a huge waste of the resources it injected to this end. Third, active participation in global governance will also bring China more opportunities for boosting its soft power. The u.s. has established unparalleled influence in the world, but that does not mean that China has no chance of developing and boosting its soft power within the u.s.-dominated world system. In most cases, the rise of an emerging country’s soft power results from a decline in the old hegemony rather than through self-effort. A country’s constitution serves as its fundamental law. The congruity between the constitutions of many countries and that of the u.s. has long been viewed as an important indicator of the country’s unmatchable soft power. Yet a study of

Challenges Facing the Global Governance Mechanism

267

constitutional similarities between other countries and the u.s. over the past 60 years shows that more and more countries in the world no long regard the u.s. constitution as their constitutional paradigm6—a sign of the weakening of u.s. soft power around the world. Society should cultivate a new approach to growth and a competitive outlook restrained by the need for equity and justice, the core value of which is tolerance for the development of other countries. Cultivation of such a core value will help emerging powers, including China, undertake international responsibilities proportionate to their current national strength and historical suffering from colonialism, and prevent them from being trusted with responsibilities and obligations beyond their capacity. At the same time, such an attitude towards the development of other countries will also demand that developed countries undertake due responsibilities, fulfill their commitments, and pay more attention to the reasonable demands of less-developed countries. In this context, China’s proposal to encourage a perspective that tolerates development across the world will likely have global impact and will even translate into a regional and global policy framework or institutional arrangement. If realized, it will not only increase China’s soft power by a large margin, but will also serve the common interests of emerging countries in general. IV

Tactics for China’s Participation in Global Governance

Multiple identities, such as “the world’s second largest economy,” “the largest developing nation” and “a rising power,” make it difficult for China to coordinate interests with other parties while participating in global governance. To push for effective reform of current global governance, China needs to advocate principles that are both in its own interest but also acceptable to other countries. The mechanisms of global governance of strategic significance to China fall into three categories: 1) the current mechanism and rules of governance, including the UN, IMF and the World Bank, all of which are dominated by developed countries; 2) the mechanism and rules of governance being formed or facing ongoing reforms, that is, the ones dominated or developed jointly by developed countries with potential worldwide influence; 3) the new mechanism and rules of governance of possible systematic significance, that is, the

6 David S. Law and Mila Versteeg, “The Declining Influence of the United States Constitution,” New York University Law Review, 87/3 (2012): 762–858.

268

He et al.

ones mainly advocated by or involving the participation of emerging countries but currently exerting limited influence. To participate in the reform of the mechanism of global governance, China should follow the following three basic principles, each with its own target. 1 The Principle of Rights Matching Responsibilities “Rights matching responsibilities” is a widely recognized principle of inter­ national law. All global governance institutions and rules of the extant international political and economic system have been established under the aegis of the developed world, in which the u.s.-led interest group has been the major beneficiary while the majority of developing and emerging countries have failed to enjoy equal treatment or play a role proportionate to their strength.7 Within the general trend of peace and development, the foundations of vested interests are difficult to shake. As there is little possibility for launching sweeping reforms in the system, only marginal reforms can be expected. By emphasizing the congruity between rights and responsibilities, emerging powers wish to obtain a greater say and play a more active role in the established system, a move that will also help boost the declining vigor of the old system. In the next five to ten years, China should act as a player to safeguard, improve and advance the current global governance system rather than one that aims to sabotage and overthrow the established system or seek confrontation. China must fully realize that since it will have to undertake more international responsibility, it should pursue an active and greater say in the mechanism of current global governance and in international organizations. In fields in which it has no discourse power, or in the case of global governance rules or mechanisms that are at risk of being marginalized, replaced or eliminated due to their gloomy prospects, China should try to undertake fewer responsibilities or at least no longer undertake excessive ones. Regarding the reform of the current mechanism and rules of global governance, our policy proposals are as follows: 1.1 Reform of the UN Given the difficulties of expanding its clout in the UN Security Council, China should work to prevent any UN reforms that would result in increasing its obli7 Zhang Yuyan and Xu Xiujun 张宇燕、徐秀军, “Gongtong er you qubie de guoji zeren ‘共同而有区别’ 的国际责任 [Common But Differentiated International Responsibilities],” Guangming Daily, (3 May 2012): 5.

Challenges Facing the Global Governance Mechanism

269

gations within the body. A key problem for the UN lies in reforming the body’s financial system and powerful Security Council. UN financial reform mainly involves the strengthening and oversight of its current financial system. Such reform also aims at seeking a new external source of revenue and changing the body’s sanction mechanism for dues default. The focus of UN Security Council reform lies in the question as to whether or not to add new seats to its permanent members and whether or not to grant veto power to newly appointed permanent members. Since China has never defaulted on its UN membership dues, it should back up UN reforms aimed at strengthening the body’s financial management and oversight, including those involving the dues default punishment mechanism. On precondition that all UN members pay their obligations and dues in a timely manner, moderate differentiations should be made for different countries based on political and economic conditions as well as subjective and objective factors. Any default on UN membership dues based on political or subjective factors should be resolutely opposed. Voting power in the UN should be preserved for countries incapable of paying their dues due to temporary economic difficulties. China should maintain an open approach to reforms such as the imposition of a global tax and the creation of new sources of funding, and take an active role in discussing them. Nevertheless it must refrain from making reckless decisions. China should actively participate in UN reforms aimed at raising the body’s internal fiscal efficiency, strengthen its management measures and endorse international symposiums on the implementation of UN financial discipline. It should also recommend officials with rich experience in these fields for positions related to the reform of the UN’s financial institutions. As far as reforms to the UN Security Council are concerned, China should be aware that an expanded Security Council and the dilution of the veto power exercised by its current permanent members are unfavorable to international security. Hence, it should hold a more conservative or prudent attitude toward the reform of the Security Council if the world will be at huge risk of ineffective governance from the reform. Anyway, a constructive, active and open attitude is required. Any discussions on the expansion of membership in the permanent Security Council should take into consideration whether or not new candidates will enjoy broad regional representation or regional legitimacy. At the same time, the Security Council should consider distributing some of its noncore power more broadly, expanding the representation of developing countries, and extending more power to small countries as well as increasing their chances of entering UN’s decision-making organ on an alternate basis.

270

He et al.

1.2 Reform of the IMF and World Bank China can still expand its voice in the IMF and the World Bank and can thus stick to the tactics of “power expansion” while driving for the reform of the two bodies. While pushing for the implementation of the program to reform the IMF’s funding shares and governance proposed in December 2010, China should also push the World Bank to reform third-stage IMF and WB voting in its review due in 2015 and thus further boost its voice and influence in the two institutions. We also propose that China adopt the principle of China-u.s. “Two-Country Coordination” (C2) in the IMF and WB’s voting reform. During the fourth round of the Sino-u.s. Strategic and Economic Dialogue, held in May 2012, China raised the “C2” concept for the first time, gaining endorsement from the u.s. IMF and WB shares and voting reform may become a concrete field in which China can implement the C2 concept. Accordingly, China should work to raise rather than lower the degree of “unanimity consensus” in the IMF and WB and try to increase its shares and voting power in the two bodies by bidding to acquire veto power. For example, unanimous consensus should be raised from the current 85% to 90% while the share and voting power held by China (or a bloc of countries on which China can exert certain influence) should be raised to over 10% (the increase can be drawn from u.s. concessions). Such an approach to reform will not compromise u.s. voting power in the two world bodies. For Washington, sharing power with China is a more acceptable option than forfeiting veto power (there is already a precedent for such a veto-sharing mechanism in the UN Security Council governance structure). Due to the increase in China’s contribution of funds, such an option will expand the global governance capability of the IMF and WB, from which the u.s. will also benefit. Veto power will also boost China’s ability to balance u.s. dominance, which too will allow it to raise its voice considerably. In addition, China’s veto power can help other countries gain more freedom than they have enjoyed under u.s. dominance and win for them more space to maneuver within the two bodies. In China’s efforts to push for the reform of the IMF and WB, the C2 approach promises more success than the program aimed at cancelling u.s. voting power. 2 Adherence to the Principle of “Inclusive Interest” The so-called inclusive interest principle refers to parties involved in the game of sharing additional interests introduced by the transformation of international rules that do not touch on their vested interests. According to this approach, a country’s effort to maintain its own interest will not compromise

Challenges Facing the Global Governance Mechanism

271

the interest of other parties, and may even help realize or boost their interest.8 To push for a better mechanism of international governance, international society should reach a united front or consensus as soon as possible. This will require the implementation of the principle of “inclusive interest” in the creation of international rules. In other words, the interests of various parties should be taken into consideration regardless of whether the world’s future power structure lies in pro-developed or pro-emerging countries. The following three examples will help demonstrate how China can stick to the principle of “inclusive interest” in its push for the reform of the mechanism of global governance. 2.1 G20 China should appreciate the G20 as a platform for equal consultation on global governance among developed and emerging countries, and play a more positive and constructive role in consolidating its role in the G20. First, it should promote the establishment of a consultation platform for emerging economies within the G20 framework—a platform that excludes the G7, Australia and the e.u., and aims at forming a closer coordinating mechanism among the remaining eleven emerging countries—in a bid to increase the efficiency of G20 as a global governance platform. Second, China should work to prevent the G20, in its capacity as a global governance platform, from being hijacked by specific regional issues, such as the European debt crisis, and instead concentrate discussions on how to prevent trade protectionism, strengthen oversight of capital flow, improve grain safety, upgrade global infrastructure, and other topics of global significance. “Inclusive interest” on the G20 platform will not arise automatically. It will only come into being through arduous joint efforts by E11 countries. China and the other BRICS members should play their role more actively, for example, by extending BRICS membership to other E11 members and thus set up an E11 coordinating mechanism within the G20 framework. 2.2 TPP China should not exaggerate the threat of TPP. Instead, it should take advantage of the “catfish effect” caused by the TPP and actively set new topics for East Asian economic integration, continually pushing for a regional economic merger and raising the level of the already conceived regional economic community with itself at the center. With an active and open attitude, China can 8 Mancur Olson, “The Rise and Decline of Nations”, trans. by Lü Yingzhong (吕应中), (Beijing: The Commercial Press, 1997), 51–52.

272

He et al.

strengthen information communications with parties concerned in the progress of TPP talks on the one hand, and, on the other, improve mechanisms of domestic economic operation to better brace for possible TPP entry. Although China might fail to meet certain TPP requirements, the expected long duration of TPP talks will leave it sufficient time and space to adjust and adapt to its new rules. TPP is undeniably a multilateral trade system whose creation will be dominated by the u.s., but some of its new clauses will drive China’s domestic reforms. TPP can be used as an emergency measure for advancing regional cooperation in East Asia. In the long-term, China should focus on the key problems that need to be resolved before it can enter the TPP as well as the best timing for its entry. 2.3 OECD In recent years, the Organization of Economic Cooperation and Development (OECD) has been pursuing a formal cooperative relationship with China. In March 2001, the OECD invited China to attend its special ministerial-level dialogue meeting. In December of the same year, China became a special observer of the OECD’s committee on scientific and technological policy. In 2005, the OECD invited China, Russia and South Africa as observers of its Committee of Financial Affairs (CFA). China should abide by the following two principles in developing ties with OECD. First, it should consider entering the organization under the principle of “inclusive interest.” The “competition neutrality” advocated by the OECD in recent years will be a testing device for whether or not it will maintain a tolerant attitude toward emerging powers. If OECD-advocated rules were based on full respect for the conditions of emerging powers rather than on the mere duplication of the experiences of the u.s., Britain, Australia and other countries, then the organization would assume a more tolerant approach to other countries’ interests. Second, China should not enter the OECD earlier than other BRICS members do. Even if it does not join the OECD, it, along with other emerging countries, should still actively cooperate with the organization in order to raise their voice and role in global governance via the OECD platform. Adhering to the Principle of “Differentiated Common Responsibilities” in Order to Deal with New Mechanisms of Global Governance That Might Be of Systematic Importance Facing the rise of emerging powers, regional security and development, climate change and other global issues, the world needs to set up a new mechanism for global governance. While participating actively in the creation of 3

Challenges Facing the Global Governance Mechanism

273

this new mechanism, China should adhere to the principle of “differentiated common responsibility” since a mechanism of global governance pioneered with the consultation of emerging powers should be more pro-justice and more pro-legitimacy than are international organizations dominated by developed countries, and so more easily attain substantial equity and extend more institutional assistance to weaker countries. On the one hand, all countries should undertake different international responsibilities based on their various strengths, real conditions, and international law. On the other, all countries, large or small, strong or weak, must make due contributions within their capacity to the settlement of global issues. The principle of “differentiated common responsibilities” not only highlights the unshakable responsibilities of all countries to resolve global issues, but also aims to distribute responsibilities among different countries in a fairer and more efficient manner for the sake of settling global problems. Without such a principle, any claim that all countries must undertake common responsibilities will contravene the principles of justice and reason. However, without a list of common responsibilities, any emphasis on differentiated responsibilities will also lose its basis. In terms of China, the principle of “differentiated common responsibilities” is applicable to its cooperation with other countries on global governance, as well as its cooperation with other BRICS members and neighboring countries. 3.1 Cooperation among BRICS Countries China should take an active stance in strategic cooperation with other BRICS countries in a bid to forge them into an influential platform for economic and political cooperation. BRICS have already formed a framework for a forum, which includes a summit meeting, a meeting of high-level representatives, ministers and representatives of multilateral bodies, as well as pragmatic cooperation among think tanks, industrial, commercial and banking circles. For now, the bloc’s main task is to explore areas of pragmatic cooperation, push forward cooperation as soon as possible, and, based on the condition of economic cooperation among member states, steadily push for the institutionalization of a regular cooperative mechanism. The principle of “differentiated common responsibilities,” which will require institutional innovations on the part of BRICS, should be embodied in the process of this institutionalization. For example, when establishing a development bank, BRICS countries should adopt a differentiated principle rather than the egalitarianism of the “one vote for one country.” At the same time, BRICS should also stress “common nature” and implement fairer shares and voting distribution than do the IMF and the WB, so as better to protect the rights and interests of small investors.

274

He et al.

3.2 Cooperation with Neighboring Countries Neighboring countries have always played a very important role in China’s development. Although their prosperity has not inevitably brought benefits to China, their lingering turbulences have certainly spread to China and negatively affected its economic and social development. In view of this, China should take the lead in providing public products to surrounding countries in order to dispel their misgivings regarding its rise. The East Asian Foreign Reserve, set up by the Chiang Mai Initiative, is precisely a public product of this kind. According to the initiative, China and other major regional countries with handsome capital contributions can gain limited assistance if they encounter a significant financial risk, but the reserve is still viewed as playing a positive role in promoting regional financial stability. Aside from the foreign reserve, the construction of regional infrastructure and interconnected mechanisms in Southeast Asia and Central Asia as well as the push for regional monetary and financial integration should also be included in China’s top agenda as it pursues the cooperation of neighboring countries. Considering its sufficient funding and experience constructing infrastructure as well as the fact that RMB, its currency, has replaced the u.s. dollar as the de facto reference currency in seven East Asian economies,9 China has both the responsibility and capability to play a more active role in regional cooperation. 3.3 Climate Change China shares a stance with India on climate change. Common pressures to deal with greenhouse gas emission, a result of economic growth, have brought China and India closer on the issue of climate change. China must insist that developed countries be the first to make considerable cuts in their emissions. It should adhere to the UN Framework Convention on Climate Change and double-track talks, which also include the Kyoto Protocol. At the same time, it should stick to the Second Commitment Period Negotiation of the Kyoto Protocol. In view of equity and historical responsibility, it is incumbent on developed countries to offer funding and technological assistance to developing ones and help them adapt to climate change. China should adhere to its long-cherished stance that developed countries should play a leading role in pushing forward global talks on climate change and try to avoid a passive position on this issue. China has, in fact, put forward some constructive 9 Arvind Subramanian and Martin Kessler, “China’s Currency Rises in the US Backyard,” Financial Times (21 October 2012); Martin Kessler and Arvind Subramanian, “The Renminbi Bloc Is Here: Asia Down, the Rest of the World to Go?” VoxEU.org, 27 October 2012, retrieved from http://www.voxeu.org/article/renminbi-bloc-here-asia-down-rest-world-go.

Challenges Facing the Global Governance Mechanism

275

proposals, for example, that the developed countries that ratified the Kyoto Protocol strive to reach the emission-reduction targets they had promised in the First Commitment Period and commit to making further cuts. At the same time, China should also demand that those developed countries that did not sign the Kyoto Protocol undertake due responsibility for emissions stipulated by the UN Convention on Climate Change and promise to offer funding and technological transfers to developing countries. As for developing countries, they too should take effective measures—based on their capacity and concrete national conditions—to reduce emissions in order to help thwart global climate change. V Conclusion Due to change in the comparative strength of the u.s. versus emerging powers and the rise of certain new global issues, global governance is undergoing considerable transformation. Although society worldwide has exhibited a strong desire for an upgrade in global governance, various countries have expressed preferences for different governance models. All this means that in the coming five to ten years, we will face a period of fierce competition among different governance models at the core of which lies a struggle for a bigger say in the creation, interpretation and application of international rules. Emerging powers, represented by China, should make a forcible response to such competition. As the world’s second largest economy, it is China’s international responsibility to participate in global governance, to maintain its national interests and to boost its comprehensive national strength. In order to participate more effectively, China should stick to the following three principles: 1) the principle of “rights matching responsibilities” to deal with the reform of the mechanisms and rules of global governance; 2) the principle of “inclusive interest” to deal with evolving mechanisms of global governance; 3) The principle of “differentiated common responsibilities” to deal with new mechanisms of global governance that might be of systematic significance in the future. Global governance will involve the redistribution of international responsibility while the reform of established mechanisms of global governance will involve the redistribution of international power. China now faces an important period in global governance and should make practical efforts to take advantage of emerging opportunities for participation in it. China should therefore try not only to increase its share of power in the mechanisms of global governance, but also to assume proportionate responsibility in order to demonstrate to the outside world its positive energy as a responsible power.

276

He et al.

Works Cited Cao Yongfu 曹永福. “Meiguo jingji zhouqi wendinghua yanjiu shuping 美国经济 周期稳定化研究述评 [A Study of the Stabilization of the American Economic Cycle].” Economic Research Journal, 7 (2007). He Fan 何帆. “Chenmo de dakuaitou:guoji zhengzhi jingji tixi zhong de fazhan zhong daguo 沉默的大块头：国际政治经济体系中的发展中大国 [A Group in Silence: Developing Countries in the International Political and Economic System].” China Publishing & Media Journal, (20 Aug. 2004). Kessler, Martin and Arvind Subramanian. “The Renminbi Bloc Is Here: Asia Down, the Rest of the World to Go?” VoxEU.org, 27 October 2012, http://www.voxeu.org/ article/renminbi-bloc-here-asia-down-rest-world-go. Law, David S. and Mila Versteeg. “The Declining Influence of the United States Constitution.” New York University Law Review, 87/3 (2012): 762–858. Li Shaojun 李少军. “Lun zhongguo shuangchong shenfen de kunjing yu yingdui 论中国双重身份的困境与应对 [An Analysis of China’s ‘Double Identity’ Dilemma and Its Countermeasures].” World Economics and Politics, 4 (2012): 4–20. Nye, Joseph. The Future of Power. Translated by Wang Jimei [王吉美]. Beijing: Citic Publishing House, 2012. Olson, Mancur. The Rise and Decline of Nations. Translated by Lü Yingzhong (吕应中). Beijing: The Commercial Press, 1997. Subramanian, Arvind and Martin Kessler. “China’s Currency Rises in the US Backyard.” Financial Times (21 October 2012). Zakaria, Fareed. “The Post-American World.” Translated by Zhao Guangcheng and Lin Minwang. Beijing: Citic Publishing House, 2012. Zhang Yuyan and Xu Xiujun 张宇燕、徐秀军. “Gongtong er you qubie de guoji zeren “共同而有区别” 的国际责任 [Common But Differentiated International Responsibilities].” Guangming Daily, (3 May 2012): 5.

Part Four Sino-U.S. Relations

∵

chapter 13

Building Mutual Trust between China and the U.S. Qian Yingyi, Jia Qingguo, Bai Chong’en and Wang Jisi Abstract China and the u.s. are facing a serious test, and risk the loss of strategic mutual trust as they strive to build an open Sino-u.s. relationship. The instability of bilateral relations will lead to the loss of mutual interest that will be difficult for both sides to endure and will jeopardize the world’s economic development and security. Profound changes taking place in the international arena, along with an increase in shared interests between the two countries have also opened the door for unprecedented strategic opportunities. The two countries should abide by a new strategic approach, namely, that Sino-u.s. relations are by nature a relationship based on mutual benefit and winwin results. They should confront the difficulties and hurdles ahead and work to cast aside old ideas that negatively impact mutual interests, and instead move towards a path of building mutual strategic trust. Economic and trade cooperation, which is at the core of Sino-u.s. relations and forms an important pillar and anchor of its strategic cooperation efforts, is progressing, but with a degree of both cooperation and friction. In this new environment, the two countries should cultivate and build the four major foundations of bilateral economic and trade cooperation from a strategic perspective. This includes free trade, mutual benefit and win-win results, a balanced economic structure, as well as equality and fairness.

Keywords Sino-u.s. strategic relations – mutual strategic trust – Sino-u.s. economic and trade cooperation – mutual benefit and cooperation * The Chinese version of this article was originally published in Guoji Jingji Pinglun 国际经济 评论 [International Economic Review], 2 (2012). Qian Yingyi is Professor and Dean of the School of Economics and Management at Tsinghua University. His email address is qianyy@ sem.tsinghua.edu.cn. Jia Qingguo is Professor in the School of International Studies at Peking University. His email address is [email protected]. Bai Chong’en is Professor in the School of Economics and Management at Tsinghua University. His email address is baichn@sem .tsinghua.edu.cn. Wang Jisi is Professor and Dean of the School of International Studies at Peking University.

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�15

280

Qian et al.

Forty years ago, China and the u.s. started normalizing bilateral relations based on their own security and strategic needs, although both had no economic, social, and cultural interactions. Thus far, Sino-u.s. relations have become the most complicated bilateral relationship in the world’s history. Facing a new turning point in human history, people should re-think the nature and future of Sino-u.s. relations from a global strategic perspective in order to develop a new approach to international politics. I Sino-U.S. Relations: Enjoying Unprecedented Importance but also Facing Major Tests The world political and economic situation has become more complex and changeable in the 21st century, but more so in recent years, starting with the international financial crisis in 2008. Currently, Sino-u.s. relations are unfolding against the following two major backdrops: First, China has successfully tackled the impact of the global financial crisis and is rapidly moving to the forefront of international politics and global governance due to its ever-expanding economic size. Second, with their economic and financial system suffering heavy damage and the European debt crisis deteriorating, developed countries are undergoing a tortuous and slow process of economic recovery. Under such circumstances, the u.s., in order to overcome its own difficulties, has shown its willingness to strengthen cooperation with China, while at the same time seeing to that China also undertakes more international responsibilities. China is also willing to contribute more to stabilizing the global financial situation and boosting the world’s economic recovery so as to ease misgivings and doubts from the u.s. and the outside world towards China. Since China and the u.s. together account for one-third and one-fifth of the world’s total economy and trade volume, respectively, the domestic development of both countries, their foreign strategies, as well as bilateral relations are producing increasingly important influences on the world’s economy and politics. Leaders from both countries have acknowledged that Sino-u.s. relations have become the most important bilateral relationship in the world. At the same time, Sino-u.s. strategic relations are also facing harsher challenges, and have been undergoing some twists and turns since the Cold War ended. The war on terror became the primary task of the u.s. in its global strategy after the 9/11 terrorist attacks. China, however, seized this important period in time to focus more on its own development. With a complex sense of interdependence, China and the u.s. managed to maintain a basically stable bilateral relationship for a decade. Entering the second decade of the new century, China and the u.s. have narrowed the gap in terms of their comprehensive

Building Mutual Trust Between China and the U.S.

281

national power, and their structural confrontation has become more prominent. The conflicts between these countries in the areas of economics, politics, and international security have been more extensive and intensified and their mutual suspicions and wariness have also increased. In recent years, the u.s. has declared its return to Asia in a high profile manner, and it has strengthened its military deployment against China. It has also pushed for the signing of the Trans-Pacific Partnership (TPP). Some political figures in the u.s. have viewed China’s rise as the biggest external challenge to the u.s. and denounced China’s refusal to coordinate with the u.s. on some international issues as an intentional attempt to undermine the u.s. global leadership. These developments have triggered intense debate among the Chinese people and political elites, many of whom, based on the new situation, have accordingly believed that the u.s.’s long-term strategic purpose is to contain China and block its further development; they also believe that China should, therefore, take tough countermeasures against the u.s. in the international arena. Both the Chinese and Americans, who hope to strengthen Sino-u.s. cooperation, are deeply concerned over this fact, namely, that strategic mutual trust between the two countries has declined to such a low point. II

Major Reflections on the Lack of Mutual Strategic Trust between China and the U.S.

Former Chinese President Hu Jintao once pointed out that China and the u.s. should become cooperative partners that respect and trust each other and persistently build upon this mutual strategic understanding. “Mutual strategic trust” in Sino-u.s. relations means that both sides are aware of each other’s strategic purposes while holding positive expectations of each other’s positions and actions on issues of vital interests. Building mutual strategic trust does not mean China and the u.s. deny the existence of interest conflicts and ideological differences that exist between them. On the contrary, it means that both sides would strive to reduce the impact of conflicts and differences on bilateral relationships, and form long-term healthy interactions based on an agreement that they share more common interests than differences. When considering the current state of Sino-u.s. relations, mutual strategic trust lags far behind common interests that have already been formed between China and the u.s. The lack of mutual strategic trust between China and the u.s., which is manifesting itself in many ways, has deep-rooted causes: First, very little sincere communication between China and the u.s. has taken place, with a lack implementation of even some existing bilateral agreements. During President

282

Qian et al.

Hu Jintao’s visit to the u.s. in January 2011, both countries had reached significant new strategic consensus having far-reaching consequences. At present, China and the u.s. have in place a variety of dialogue mechanisms reaching all levels and spanning a wide range of topics. Of particular importance is the “Sino-u.s. Strategic and Economic Dialogue,” which has so far been the highest level of dialogues held between the two countries. However, some of these talks have turned out to be a mere formality, with both sides only expressing their ideas, but not listening to each other. Some bilateral agreements have not even been put into effect or really implemented at all. Recently, Maurice Greenberg, the former chairman and CEO of the American International Group (AIG), published an article in the Wall Street Journal, saying “I have taken part in a number of dialogues over the years between Chinese economists and trade officials and similarly placed economists and officials on the U.S. side. Every time the results are the same. Each side states its problems and concerns and reports the other side’s problems and concerns back to their respective governments. Although the proceedings are cordial, unfortunately nothing is resolved and the frictions that hamper development of a better relationship persist.”1 Many individuals in both countries share this sentiment. The major problem now facing Sino-u.s. relations is not that both countries do not have enough dialogue mechanisms, or that these exchanges do not extend to needed areas or are not conducted at a high level, but that some dialogue mechanisms have failed to get to the point and solve real problems. Second, the politicization of economic frictions has weakened the foundation for building mutual strategic trust between China and the u.s. Economic and trade ties have always been a key pillar of Sino-u.s. relations. However, with increasing Sino-u.s. economic and trade friction and the inevitable politicization that follows, economic and trade ties have sometimes become a stumbling block to bilateral mutual strategic trust. The u.s. has repeatedly proposed to sanction China as an “exchange rates manipulator” and has imposed rigorous restrictions on the export of high-tech products to China, while setting political obstacles for Chinese enterprises to invest in the u.s. During the 2012 u.s. presidential election, some u.s. politicians, motivated by political needs, even blamed China as the scapegoat of the u.s. economic recession. All these activities are harmful and not conducive to the building of Sino-u.s. strategic mutual trust.

1 Maurice R. Greenberg, “Time for a China-U.S. Free Trade Agreement,” http://online.wsj.com/ article/SB10001424052970203471004577143121577631562.html?KEYWORDS=Maurice+ Greenberg (January 9, 2012).

Building Mutual Trust Between China and the U.S.

283

Third, the comparative rise and fall of national strength between China and the u.s. has triggered subtle psychological changes on both sides. With the narrowing of the gap in economic strength of both countries, American politicians, academics, and media, and even the general public have all shown deep concerns and anxiety over the possibility that China’s rise will threaten the global status of the u.s., and China’s model will challenge the u.s. model. At the same time, the Chinese government has also been on high alert against the u.s.’s export of democracy and human rights diplomacy. Political elites in China do not feel that China’s security environment has improved because of the rise of its overall national strength. Meanwhile, they are nervous and concerned over the u.s.’s strengthening of strategic encirclement against China in its neighboring areas. Although high-level officials from both countries reiterate that their own countries’ strategic purposes are not to compromise the other, this is still difficult to dispel against long-accumulated mutual misgivings. III

Abandoning Old Mentalities and Removing Obstacles for Building of Sino-U.S. Strategic Mutual Trust

The foundation of a stable Sino-u.s. relationship can be eroded and even seriously shaken if some outdated mentalities are not forsaken and certain misunderstandings and prejudices not corrected. First, the zero-sum mentality that both countries espouse needs to be abandoned. The largest damage resulting from the zero-sum thinking is that of self-fulfillment. There are those who believe that no precedent exists in modern world history where a major country with a rapidly rising power could peacefully coexist with a hegemonic power. However, historic precedents have existed. China and the u.s. could and should set an example for avoiding hegemonic contestations while maintaining long-term peace. Otherwise, the fundamental interests of both Chinese and American people, and those of the world as a whole could be jeopardized. Just as former u.s. Secretary of State Hillary Clinton once noted, “China represents one of the most challenging and consequential bilateral relationships the United States has ever had to manage” and that “there is no handbook for the evolving u.s.-China relationship, but the stakes are much too high for us to fail.”2 u.s. Vice President Biden also wrote

2 Hillary Clinton, “America’s Pacific Century,” http://www.foreignpolicy.com/articles/2011/ 10/11/americas_pacific_century.

284

Qian et al.

in the New York Times on August 8, 2011, saying “a successful China can make our country more prosperous.”3 Similarly, the recovery and prosperity of the u.s. economy, as well as the positive and accommodating factors in its domestic and foreign policies are also conducive to China’s development. Second, the Cold War mentality should be abandoned. One aspect of this type of thinking is that state-to-state relations should be determined by their similarities in the context of their political systems and ideologies, leading to the setting up of two antagonistic military and political camps. In fact, the forty-year-long history since the normalization of Sino-u.s. relations has proven that differences in political system and ideology have, in fact, failed to prevent them from actually engaging with each other, or even blocking the expansion of bilateral exchanges and cooperation. On the one hand, political and ideological differences between China and the u.s. would continue to exist in the long run, and some of these disparities may even intensify bilateral debates. On the other hand, both sides will undergo continuous changes within their own societies, cultures, and domestic politics, which would then lead to interactive influences on each other. From an international perspective, no country in the world would voluntarily implicate itself in any potential strategic confrontation with China and the u.s., and the time has come and gone when two major opposing ideological camps and military blocs actually dominate world affairs. Third, arrogance and a narrow mold of thinking should be forsaken. Both China and the u.s. are great nations with many advantages. They have both made outstanding contributions to the progress of human civilization. The u.s., in a short time after its founding, has rapidly become one of the great powers in the world, and has maintained its superpower status for over 60 years. Some of its governance experiences are worth emulating by other countries. China has managed to lift itself out of poverty and backwardness over the past few decades and has scored remarkable achievements. Therefore, there must be some undeniable special features and advantages in its political and economic systems, and in its cultural values. As demonstrated by the history of their growth and buildup, China and the u.s. have chosen a development path that is suitable to the practicalities of their national conditions. Therefore, the two countries should treat each other in a modest rather than an arrogant manner. Both countries should not hold a cynical attitude towards each other or revel in some internal difficulties and temporary shortcomings in the other side. It should also be noted that both countries have still failed to develop a global vision, and as such excessively rely on their past experiences when 3 Joseph R. Biden, Jr., “China’s Rise Isn’t Our Demise” in New York Times (September 7, 2011).

Building Mutual Trust Between China and the U.S.

285

addressing international affairs. On bilateral and international issues, China and the u.s. should enhance consultations and coordination, borrow from each other’s experiences and perspectives and respect each other’s attitudes and positions while trying to abandon a narrow-minded thinking. IV

Mutual Benefits and Cooperation Remain Main Themes of SinoU.S. Economic and Trade Ties

Economic and trade ties are at the core of Sino-u.s. relations and serve as the important foundation and stabilizer of Sino-u.s. strategic cooperation. The development of Sino-u.s. relations is mainly based on common interests. As the largest developing and developed countries of the world, China and the u.s., respectively, have had many common and overlapping interests in the economic sphere, and this has always been a strong impetus for the development of bilateral relations. These common interests between China and the u.s. have played an increasingly important role in promoting economic prosperity and well-being of its peoples. China-u.s. trade is the most complementary trading relationship in the world. China and the u.s. are each other’s most important trading partners, with bilateral trade reaching $446.7 billion in 2011, a 188-fold increase from 1979. China has been the fastest growing exporting market for the u.s. for 11 years in succession. China is the u.s.’s second largest trading partner, third largest export market, and biggest source of import. It is expected that Sinou.s. trade will reach over $700 billion and China’s imports from the u.s. will double by 2015. A variety of China-made consumer goods exported to the u.s. have catered to the needs of American consumers. At the same time, China’s growing imports of electronics, aerospace, biological, medical, agricultural, and service products from the u.s. have also catered to China’s developmental needs. China and the u.s. have formed a pattern of mutual interdependence in their economic development. By the end of 2011, accumulated u.s. investment in China had reached $67.6 billion, involving more than 60,000 of its enterprises. The u.s. remains China’s largest source of foreign investment. According to statistics from the u.s. Bureau of Economic Analysis (BEA), subsidiaries of American multinational corporations with direct investment in China became the most profitable u.s. overseas enterprise between 1994 and 2009. In 2010, 85% of China-based u.s. enterprises saw an increase in their profits. China is also the largest holder of u.s. treasury bonds. By November 2011, foreign countries held over $4.74 trillion of u.s. treasury bonds, 23.8% of which were held by China.

286

Qian et al.

China-u.s. economic and trade relations bear an important global influence. Globalization has made economic and trade ties between the two countries closer than ever. Currently, the economic aggregate of the u.s. and China, together with their trade volume account for one-third and one-fifth of the world’s total, respectively, making their economic and trade relations significant not only for these countries alone, but for the world at large. The strengthened cooperation between China and the u.s. in coping with the global financial crisis and the European sovereign debt crisis over the past two years has played an important role in restoring market confidence and boosting global economic recovery. V China-U.S. Economic and Trade Frictions: Foci and Major Causes China-u.s. economic and trade relations have been progressing with both cooperation and a certain degree of friction as well. The frictions are rooted in the following complicated causes. 1 The Focal Point of China-U.S. Economic and Trade Frictions From China’s perspective, there are four focus areas that have created Sinou.s. economic and trade frictions. First, the u.s., by its own standards, fails to recognize China as a full market economy and has been trying to politicize its trade frictions with China. Second, the u.s. has continually imposed antidumping and anti-subsidy sanctions on China’s exports, making u.s.-China trade friction commonplace. Third, the u.s. strictly restricts its export of hightech products to China, and China is still excluded from the 164 countries that enjoy preferential policies in trade with the u.s.. Fourth, Chinese enterprises have been discriminated against in their investments in acquiring American enterprises. There are also four focal points involving Sino-u.s. economic and trade friction from the American perspective. First, some u.s. legislators and a majority of think tanks claim that the exchange rate of China’s Renminbi (RMB) against the u.s. dollar is undervalued. These entities have, as a result, repeatedly proposed to list China as a “currency manipulator.” Second, there have been serious imbalances in the u.s.-China trade structure, whereby the u.s. has a huge trade deficit. Third, China has been lax in enforcing intellectual property laws, causing u.s. enterprises to suffer interest losses from copyright infringements and piracy of goods and products. Fourth, China’s policy of encouraging enterprises to enhance their self-innovation capacity is believed to be discriminatory against u.s. enterprises. China and the u.s. have engaged in multiple rounds of talks and contestations regarding the aforementioned focal issues in recent years.

Building Mutual Trust Between China and the U.S.

287

The Factor of Special Interests Involving China-U.S. Economic and Trade Frictions The primary cause of trade frictions between China and the u.s. lies with special interest groups in the u.s. Take for example, u.s. imposition of punitive tariffs on China-imported tires since Sept. 2009. According to data provided by the u.s. Bureau of Labor Statistics, the rise of tire prices was 5.7 percentage points lower than that of other auto accessories in two years before the tariff was imposed. However, the rise was 3.4 percentage points higher than that of other auto products in two years after such a tariff was imposed. This means American consumers had to pay an additional 9.1% price rise for their vehicle tires. For the u.s. tire market, which has a volume of billions of dollars in annual sales, such a loss from higher tariffs far exceeded the benefit it brought to a handful of u.s. enterprises and their workers. 2

3 The Structural Factor Involving Sino-U.S. Trade Frictions First, structural imbalance in the u.s. economy remains the major cause of its trade frictions with China. In the early 1980s, many American labor-intensive enterprises moved abroad, which, together with the expansionary fiscal policy adopted by the u.s. government, its extremely low interest rate policy, excessive consumption stimulus, as well as large-volume imports, have all caused imbalances in current u.s. accounts resulting in large trade deficits. Second, there is a sizeable statistical discrepancy between the u.s.’s recorded trade deficits and its actual trading structure. As some u.s. scholars have pointed out, the manufacturing cost of an Apple iPad in 2007 was $150, out of which only $4 was the added value created by China; the majority of the added value came from components made in other countries, including the u.s. However, when an iPad, which is assembled in China, is shipped to the u.s., its total cost of $150 is counted as an import from China. 4 The Political Factor behind China-U.S. Trade Frictions In the history of modern international economic and trade relations, China and the u.s. by far are the only two countries in the world whose actions may be perceived as being influenced by strong political factors. Behind the Chinau.s. economic and trade friction, there are rounds of political maneuvering, which are always initiated by the u.s. While China maintains that Sino-u.s. economic and trade issues should not be politicized, the u.s. insists on viewing these issues from a political perspective. Take the exchange rates of the RMB as an example. Ever since China started reforming the RMB exchange rate regime in July 2005, the nominal exchange rate has increased by 30% against the dollar over the past six years and the actual exchange rate risen 40% if inflation is factored in. However, there has been continuous criticism from the u.s., which

288

Qian et al.

believes that the pace of the RMB’s appreciation is too slow and the extent of its appreciation is too limited. On October 12, 2011, the u.s. Senate adopted the “Currency Exchange Rate Oversight Reform Act of 2011,” requesting the government to impose punitive tariffs on major trading partners whose currencies are undervalued. It is widely believed that the Act is aimed to force an accelerated appreciation of the RMB. Chinese scholars insist that the exchange rate between the RMB and the u.s. dollar is not the major cause of the rise in u.s. trade deficit and unemployment, and they also believe the RMB’s appreciation will not help solve the u.s.-China trade imbalance. If the value of the RMB rises considerably against the dollar, as some in the u.s. have requested, American consumers would have to pay higher prices for manufactured goods imported from China (American enterprises in the industrial chain would be affected as well), or these industries would shift from China to countries with lower labor costs. No matter what happens, these manufacturing jobs are not expected to flow back to the u.s., where labor costs will never be lowered to the same level as in China. The exchange rate formation is particularly complicated because of several factors. No theoretical model has emerged so far that can accurately calculate the RMB’s equilibrium exchange rate against the u.s. dollar. Although China has maintained a trade surplus and an international payment balance for a few consecutive years, while maintaining an enormous foreign exchange reserve, its per capita GDP in 2012 was only $4,277. China’s agricultural foundation is still weak and while its industrial sector is large, it is not yet strong. There are still more than 15 million Chinese people in rural and urban areas living beneath the poverty line set by the United Nations. Basic domestic conditions such as these dictate that China’s exchange rate of the RMB against the u.s. dollar cannot be too high and the value of the RMB cannot rise too much under current conditions. More importantly, the issue of the RMB’s exchange rate is within China’s economic sovereignty, and cannot yield to any external pressures. Chinese leaders and political elites have a sober awareness that the country’s economy is far from being on a balanced, coordinated, or sustainable basis, but all these problems are not caused by the RMB exchange rate issue. If there exists some unreasonable factors involving the current RMB exchange rate, it is also a “result” but not a “cause” of China’s economic structural imbalances. The politicization of China-u.s. economic and trade frictions is also reflected in investment of Chinese enterprises in the u.s. When compared with u.s. enterprises that have invested almost $70 billion in China, Chinese enterprises have invested only $4.8 billion in the u.s., demonstrating a huge investment imbalance between the two countries. With the growth of China’s

Building Mutual Trust Between China and the U.S.

289

economy, enthusiasm among Chinese enterprises to invest in the u.s. still stands very high. Moreover, the Chinese government sincerely hopes that it can transfer some domestic exporting industries and enterprises to the u.s. through its u.s.-bound investments; this way, the trade deficit on the u.s. side can be reduced and more jobs created for u.s. workers. This is a win-win solution for both countries. Regrettably, the u.s. has shown more concerns over the security of investment from China than over its own trade deficit and unemployment. VI

Cultivating Four Major Foundations for Sino-U.S. Economic and Trade Cooperation

Promoting the healthy and steady development of China-u.s. economic and trade relations conforms to the current and long-term interests of both the Chinese and American people. Under present circumstances, both sides should work diligently to forge and construct a solid foundation for bilateral economic and trade cooperation having a strategic vision. 1 The Foundation for Free Trade Within the framework of the World Trade Organization (WTO), the principle of free trade means all parties should substantially reduce tariffs and other trade barriers through multilateral talks to boost the exchange of goods and services. China and the u.s. should unswervingly uphold the principle of free trade and abandon all other trade protectionism measures. By loosening restrictions on high-tech exports to China, the u.s. can promote more balanced trade relations with China. Both sides should resolve their trade and investment disputes while avoiding their politicization. The two countries should initiate bilateral negotiations by the signing of a China-u.s. Free Trade Agreement and the creation of a free trade zone as soon as possible. China should continue reforming its RMB exchange rate formation mechanism and should promote marketization of the RMB exchange rate regime; whereas the u.s. should stop exerting pressure on this issue in any form. 2 The Foundation for Mutual Benefit and Win-Win Results China and the u.s. should expand their common interests in all areas across all levels to construct an interest community. Two-way investments between the two countries should be expanded and the safety of China’s investment in the u.s. should be ensured. The two countries should explore new growth points for bilateral economic and trade cooperation, and strengthen effective

290

Qian et al.

cooperation in areas like the use of renewable and clean sources of energy, energy savings and emission reductions, aerospace and infrastructure construction, etc. They should also actively promote bilateral cooperation in fields such as trade, investment, and tourism, and encourage enterprises from both countries, especially cooperation between small- and medium-sized outfits, while working intensively to foster an open, fair, and transparent investment environment. 3 The Foundation for Structural Balance China and the u.s. should push forward structural reforms at a more extensive level. China should also make efforts to expand domestic demand, especially consumer demand, increase household income, reduce savings rates, and increase the contribution of consumption to GDP. As for the u.s., it should increase the share of national savings in its GDP and make efforts to reduce its federal budget deficit to a sustainable level while trying to reduce the dependence of its excessive consumption on imports. To help create a more balanced and new Sino-u.s. economic partnership, China should not deliberately seek a trade surplus, and at the same time, the u.s. should work hard to reduce its external imbalances. 4 The Foundation for Equality and Fairness To promote China-u.s. economic and trade cooperation, both countries should preclude political interference and treat each other on an equal and fair footing without discrimination or exclusion. Each country should offer impartial market access to enterprises. The u.s. should abandon unreasonable policies towards Chinese investment and reduce excessive politicized scrutiny of Chinese investment in the u.s. real economy. It should recognize China’s status as a full market economy as early as possible and substantially relax its restriction on high-tech exports to China. China should recognize the nondiscrimination principle in its government procurement and innovation practices, and delink innovation policies from offering a preferential governmental procurement treatment. VII

Constructing Sino-U.S. Strategic Relations with Innovative Thinking

When meeting with the former u.s. Secretary of Treasury Henry Paulson in December 2011, the then Chinese Vice-President Xi Jinping pointed out that “history has proven that China-u.s. relations are mutually beneficial and win-win in nature and the common interests and need for cooperation between

Building Mutual Trust Between China and the U.S.

291

the two countries far outgrow their differences.”4 Xi’s remarks reflect China’s innovative thinking in dealing with ties with the u.s. With such forward thinking, we will find that intractable problems and bilateral differences on some international security issues cannot fundamentally prevent both sides from communicating and cooperating with each other in areas like global finance, trade, energy, climate change, public health, and regional security issues. Nor could these problems and differences change the long-term tendency of everexpanding bilateral social exchanges and mutually complementary cooperation in areas such as education, culture, and technology. As long as both countries continue to expand their common interests in all areas at all levels and create an interest community, they will surely build a global partnership based on strategic mutual trust. As Chinese scholars who are willing to engage in in-depth and strategic thinking, we have attempted to elaborate on three main points in this essay. First, China-u.s. relations are currently confronted with serious challenges stemming from a lack of strategic mutual trust; both countries should do away with this mind-set and instead advance bilateral ties. Second, an uncertainty in Sino-u.s. relations can result in drastic consequences for both countries and thus jeopardize global security and the development of the world economy. As such, both China and u.s. should focus now more than ever on their everincreasing common interests; profound changes are taking place in the international arena offering unprecedented strategic opportunities for both. Third, upholding the new strategic thinking that China-u.s. relations are mutually beneficial and win-win in nature, both countries should face up to the difficulties and obstacles in their bilateral relations and abandon the old thinking that is not conducive to developing common interests; instead they should gradually set up and consolidate strategic mutual trust. Works Cited Biden, Joseph R., Jr. “China’s Rise Isn’t Our Demise” in New York Times (September 7, 2011). Clinton, Hillary. “America’s Pacific Century.” http://www.foreignpolicy.com/articles/ 2011/10/11/americas_pacific_century. Greenberg, Maurice R. “Time for a China-U.S. Free Trade Agreement.” http://online .wsj.com/article/SB10001424052970203471004577143121577631562.html?KEY WORDS=Maurice+Greenberg. January 9, 2012. http://cpc.people.com.cn/GB/64093/64094/16531149.html. 4 http://cpc.people.com.cn/GB/64093/64094/16531149.html.

chapter 14

Sino-U.S. Relations: Ideological Clashes and Competitions Niu Xinchun Abstract China has successfully integrated into the international economic system; however, it is being challenged with the task of realizing political and ideological integration, which are more difficult and more complicated. The biggest challenge for integrating emerging powers comes from within the United States, therefore, America needs to adjust mentally and change some of the basic diplomatic ideas and principles it has held since 1945. Meanwhile, China should integrate into global political and ideological systems with its particular contributions.

Keywords Sino-u.s. relations – International regime – Ideological system

After the end of World War II, the United Nations, the International Monetary Fund (IMF), the World Bank, and other international institutions were founded under the leadership of the United States, laying the foundation for the postwar international political and economic order. Utilizing this short “unilateral” moment, the United States has been promoting Western values and systems throughout the world since the end of the Cold War, triggering rhetoric such as “the end of history.” At present, with the rise of emerging powers like China, India, Brazil, South Africa, Turkey, and Indonesia, the United States needs creativity and leadership to readjust the existing international institutions and integrate emerging powers while encouraging them to play constructive roles. * The Chinese version of this article was published in Guoji wenti yanjiu 国际问题研究 [International Studies], Number 2, 2012. Niu Xinchun is Senior Research Fellow at China Institutes of Contemporary International Relations. His email address is xinchun@ yahoo.com.

© koninklijke brill nv, leiden, ���4 | doi ��.��63/9789004273917_�16

Sino-U.S. Relations: Ideological Clashes and Competitions

293

However, since President Obama assumed power, the United States has not displayed any creative thinking catering to the needs of the new era, nor has it formed any stable strategic objectives or a strategic consensus in the past three years. Over the next ten years, the world “will be led into an era of multipolarity without multilateralism and the result is terrifying”1—provided that the United States cannot successfully accommodate the entrance of emerging powers such as China into the established international system. In the more than thirty years since its opening up and reforms, China has successfully integrated into the international economic system; however, it is being challenged with the task of realizing political and ideological integration, which are more difficult and more complicated. The United States has not formed any new thinking or taken any new measures as a response, instead, it is riding at full speed in the opposite direction. Since 2011, unable to integrate China effectively, America has sought to coerce China into giving in via deterrence and encirclement; thus changed the direction in its China policy. In November 2011, President Obama traveled to Hawaii, Australia, and Indonesia for a series of nine-day key meetings on the Asia-Pacific, taking his longest and busiest foreign tour that year. During his visit, President Obama sought to isolate China economically by pushing the formation of the “Trans-Pacific Partnership,” to dilute China’s influence politically via the East Asia Summit, and to contain China in the security area by enhancing America’s military cooperation with its Asian allies. Through this remarkable trip, President Obama sent out an important message to Beijing: America’s China policy is undergoing major changes. This would be a systematic shift compared with America’s China policies over the past ten years. “Previously the United States selectively pushed back when it objected to Chinese actions and focused great attention on managing the overall u.s.-China relationship, the November trip marked a significant shift.”2 The new China policies demonstrate that the United States is lacking both confidence and means in accommodating China while becoming increasingly unsure of how to develop a constructive Sinou.s. relationship. Therefore, the United States has started taking preventive and confrontational measures to systematically compel China’s integration into the international system. China’s peaceful and constructive integration depends on good u.s.-China interactions as well as concessions, changes, and innovations made by both sides. In the past 30 years, China has conducted significant policy adjustments 1 Stewart Patrick, “Irresponsible Stakeholders?” Foreign Affairs, November/December 2010: 48. 2 Kenneth Lieberthal, “The American Pivot to Asia,” Foreign Policy, December 21, 2011, http:// www.foreignpolicy.com/articles/2011/12/21/the_american_pivot_to_asia.

294

Niu

in both domestic and foreign aspects to embrace the world and integrate into the international system. In 2005, the then Deputy Secretary of State Robert Zoellick stated at the National Committee on u.s.-China Relations that China had joined most of the international institutions—it had become a member and beneficiary of the existing international system. However, examining America’s behavior after the end of the Cold War, it is clear that all u.s. administrations, from Clinton to Obama, have emphasized integrating China into the existing international system only while restraining and taming it with international regimes. The United States has been unwilling to change international rules or adjust its actions to adapt to China’s rise. President Obama even stated that “the only thing we’ve insisted on, as a principle in that (Pacific) region, is everybody’s got to play by the same set of rules. That’s not unique to China.”3 Undoubtedly, the rules he mentioned were set by the United States. As some American scholars have noted, the biggest challenge for integrating emerging powers comes from within the United States, therefore, America needs to readjust mentally and change some of the basic diplomatic ideas and principles it has held since 1945.4 As a hegemonic power, the basic ideological norms governing u.s. diplomacy include four fundamental principles: hegemony, capitalism, democracy, and Western culture, that is, hegemony is better than a balance of power, capitalism is better than socialism, democracy is better than dictatorship, and Western culture is better than all the rest.5 These fundamentals are out of date and in conflict with the ideological beliefs of emerging powers like China. The fundamental problem in Sino-u.s. relations was caused by a change in national strength. Since this change in strength has been happening against a specific background, the characteristics of the times need to be understood and corresponding measures must be taken to promote the sound development of the Sino-u.s. relationship. The United States has relied upon the containment policy used in the Cold War era to respond to China’s rise, reflecting its conservative attitude, uncertainty, and missteps when facing new situations and new challenges. This is another root cause of fluctuations and uncertainties in Sino-u.s. relations.

3 Fareed Zarkaria, “I Made a Commitment to Change the Trajectory of American Foreign Policy,” Foreign Policy, January 19, 2012, http://www.time.com/time/magazine/article/ 0,9171,2104818,00.html. 4 Stewart Patrick, “Irresponsible Stakeholders?,” 53. 5 Bruce W. Jentleson and Steven Weber, “America’s Hard Sell,” Foreign Policy, November/ December 2008: 43.

Sino-U.S. Relations: Ideological Clashes and Competitions

Ι

295

Sovereignty and Human Rights

The draft resolution on establishing a no-fly zone in Libya was put to vote in the United Nations Security Council (UNSC) on March 17, 2011. China, Russia, Brazil, India, and Germany abstained from voting, enabling the military intervention plan led by the United States, Britain, and France to pass. On February 4, 2012, China and Russia vetoed the UNSC draft resolution condemning Syria, balking the West’s plan of intervening in that nation. Western countries sought to intervene in Libya and Syria on the excuse of avoiding humanitarian disaster while stressing the concept of relative sovereignty displayed in “human rights taking precedence over sovereignty.” China’s abstention from and veto of the UNSC resolutions are based on the principle that sovereignty can not be violated, due to its absoluteness. As shown by the Libya and Syria cases, it seems that the theory of relative sovereignty has been increasingly endorsed by the international community. While voting on the Libya issue, 10 out of the 15 UNSC members voted for the draft resolution and 5 abstained. In the voting on the Syria issue, 13 members approved while 2 vetoed the resolution. However, such results only show the surface of the issue. UNSC voting actually reflects two levels of international competition, one for power and the other concerning ideological beliefs. The United States won majorities in both votes, indicating that it won only the international competition for power but did not take the upper hand in the ideological rivalry. In reality, neither Libya nor Syria has been favored by the international community, which constituted the basis of the UNSC votes. In today’s world, Western countries have supremacy in terms of political, economic, and military power, and have no fear of their sovereignty being infringed upon by others—thus their clamor for relative sovereignty. Since the end of the Cold War, the concept of “human rights taking precedence over sovereignty” has gained more popularity with the advocacy of Western states. According to some proposals of a few Western states, when a disaster affecting human welfare happens within the borders of a sovereign state, the international community can interfere or even overthrow its national government. For emerging powers and many developing countries, sovereignty is their last ditch attempt for survival as nation states, thus relative sovereignty is unacceptable since it imperils international peace and security. In fact, nation states have been disappearing at a much reduced speed since the concept of modern sovereignty was universally endorsed. Based on their historic and cultural backgrounds and realistic interest concerns, developing countries like China will not accept Western views on sovereignty uncritically. Although some states follow the relative sovereignty advocated by the West, absolute

296

Niu

sovereignty is still a mainstream concept right now, insisted upon by China and others. Research findings of some Western scholars indicate that the United States and EU’s influence on human rights issues has been diminishing recently, while the positions of China and Russia are gaining more support in the UN General Assembly. This is closely related to the latter pair’s adherence to absolute sovereignty.6 Human rights and democracy are both valuable beliefs. In modern times, the progress of human society has happened simultaneously with the popularity of democratic ideas, but democracy has not been the sole dominating force promoting social progress. China did not follow the u.s.-style democracy model but has accomplished exceptional progress in promoting social stability and justice. Faced with the international financial crisis, the Chinese government adjusted its economic policies promptly and was out of the plight first. The American government, in contrast, has delayed in responding to issues like budgets, deficits, and economic incentives, instead sinking into partisan disputes. Democracy, individual livelihoods, political stability, religious faith, and national pride are core values of most human beings, although nations with different cultural backgrounds and in varied developmental stages have different priorities. The United States places human rights and democracy on the top of its priorities, viewing them as the guiding principles for its foreign policies. China, however, puts order, stability, and security at the top. Both principles are correct and needed. Since these nations have different historical and cultural backgrounds and are in different stages of social development, it is inevitable that they emphasize different priorities. China has achieved unprecedented accomplishments admired by most developing countries, although it has not met the United States standards in human rights and democracy. Some African, Latin American, and Asian states, although they have been practicing democracy for years, are still in poverty and turmoil today. In 1968, in the first page of his book “Political Order in Changing Societies,” Samuel Huntington asserted that “the most important political distinction among countries concerns not their form of government but their degree of government. The differences between democracy and dictatorship are less than the differences between those countries whose politics embodies consensus, community, legitimacy, organization, effectiveness, stability, and those countries whose

6 Richard Gowan and Franziska Brantner, “A Global Force for Human Rights? An Audit of European Power at the UN,” Policy Paper (London: European Council on Foreign Relations, 2008), 3.

Sino-U.S. Relations: Ideological Clashes and Competitions

297

politics is deficient in these qualities.”7 Over 40 years of historical experiences and the recent financial crisis have demonstrated that democracy and human rights are neither the necessary nor the sufficient conditions for any state’s success. The success of the United States was only one chapter in human history. Samuel Huntington generalized American values as “liberty, equality, democracy, individualism and rule of law.”8 These values are cherished to a certain extent by other states as well. However, when the United States imposes its views about human rights and democracy on others, no one is willing to accept. America’s human rights diplomacy seriously disrupts its diplomatic agenda and undermines Sino-u.s. relations as well. Its current development level and the social reality China is now facing determine that stability is its number-one priority; any foreign intervention endangering China’s social stability, no matter what kind of banner it goes under, is not tolerable for China. As Chinese scholar Wang Jisi noted, “A unique feature of Chinese leaders’ understanding of their country’s history is their persistent sensitivity to domestic disorder caused by foreign threats.”9 The United States will not completely understand China’s basic position on issues like sovereignty, human rights, development, and stability unless it comprehensively understands the founding history of the People’s Republic while analyzing the reality of the development of Chinese society. The United States has difficulty understanding other states’ situations and viewpoints, since it has a relatively uninterrupted history. As renowned American political scientist Louis Hartz has asked: “Can a people ‘born equal’ ever understand peoples elsewhere that have to become so? Can it ever understand itself?”10 The United States has evolved into a stage in which it does not need to be concerned about its sovereignty. America’s unique historical and cultural features also enable it to view human rights and democracy as the foundation of success and thus criticize other states indiscriminately on these issues. However, most countries in the world still struggle to protect their national sovereignty and must endeavor to pursue fundamental rights such as development and social justice. At the end of the Cold War, Western scholars and politicians cheered for the end of history and proclaimed that democracy is 7 8 9 10

Samuel P. Huntington, Political Order in Changing Societies, (London: Yale University Press, 1968), 1. Samuel P. Huntington, American Politics: The Promise of Disharmony, (Cambridge, MA: Harvard University Press, 1981), 4. Wang Jisi 王缉思, “China’s Search for a Grand Strategy,” Foreign Affairs, March/April 2011: 69. Louis Hartz, The Liberal Tradition in America (New York: Harcourt, Inc., 1991), xiii.

298

Niu

the only game in town. Over 20 years have passed and the collective rise of developing countries demonstrates that the Western one is not the only road leading to Rome. The values and beliefs of the international community are becoming more diversified rather than heading toward the Western thought. Due to Western states’ supreme power in political, economic, and security areas, the United States could accumulate enough power to support its positions on specific issues. The costs of doing so, however, are getting higher. In international politics, allowing diversified political thoughts to coexist peacefully and different political forces to share power and coordinate are new challenges all countries have to face. Basic strategic mutual trust cannot be built between the United States and China unless they respect each other’s political values and coexist peacefully. II

Nations and the Market

In recent years, Sino-u.s. trade frictions and disputes have increased, with issues concerning fair trade, exchange rates, labor standards, and intellectual properties becoming more prominent. In the 2012 State of the Union address, President Obama mentioned China five times, reiterating China’s unfair competition in trading with America. However, it is natural for both sides to perceive “fairness” differently since they work under varied contexts. Capitalism and individualism are at the core of the American ideology, as well as being the foundations of the American economic system.11 Both emphasize the market and individuals as the key economic actors. Even compared with citizens of European countries, Americans are more fearful of and concerned about government intervention, and thus demand less state interference in economic affairs. When seeing China’s economy growing rapidly, Washington inevitably gets panicked. The United States does not understand or identify with the Chinese economic system, nor does it recognize the legitimacy of that system or China’s economic status. In the eyes of America, China is a backward but powerful economy. The basis on which China could demonstrate formidable strength in the international market is the state’s intervention in the market, state-owned enterprises (SOEs), the sovereignty wealth fund, state manipulation of exchange rates, government subsidies, low labor standards, and ineffectiveness in intellectual property protection, among 11

Samuel P. Huntington, American Politics: The Promise of Disharmony, (Cambridge, MA: Harvard University Press, 1981), 14; Bruce W. Jentleson and Steven Weber, “America’s Hard Sell,” Foreign Policy, November/December 2008: 43.

Sino-U.S. Relations: Ideological Clashes and Competitions

299

others. State interference in the economy allows China to have a competitive advantage in the international market, thus undermining American interests. According to the United States, the problem is called “national capitalism,” for which the existing international economic institutions have no solution. Consequently, in the view of the United States, manipulation of exchange rates and product dumping all reflect the state-market relationship in one country. The Chinese government’s intervention in its market needs to be restrained in order to solve China’s so-called unfair trading practices. In fact, both China and the United States are changing the way they handle the relationship between the state and the market. For China, it is an indisputable fact that the share of its market economy has gradually increased over the past 30 years, while the dominating role of the state and SOEs remain unchanged. During economic crises, the state-led economic model of China displayed an advantage over the market model. Some Westerners, like Seumas Milne, realized another of China’s advantages: China has travelled a vast distance from the socialised economy of the Maoist period and has a huge private sector and large-scale foreign investment. But its hybrid economic model continues to be based around a publicly owned core of banks and corporations. So while in Europe and the United States governments rely on indirect (and so far entirely ineffective) mechanisms to reverse the collapse of private investment at the heart of the crisis, China has the leverage directly to boost investment, jobs and incomes. And that state-owned core has been central to the country’s extraordinary growth over the past three decades.12 At the same time, the American government has taken on large-scale interventions to get out of the financial crisis. To save the stock market, the United States government purchased corporate stocks, thus becoming many companies largest shareholder. In certain sense, these bailed-out corporations are short-run American SOEs. In order to create jobs, President Obama proposed a series of measures, including saving jobs for Americans via taxation, enhancing training of corporate employees, and increasing investments on infrastructure. The share of state-led economy has been increasing in the global market and government intervention in the market has been on the rise worldwide, not merely in China and the United States. Take energy as an example—national 12 Seumas Milne, “China’s Success Challenges a Failed Economic Consensus,” The Guardian, January 17, 2012, http://www.theguardian.com/commentisfree/2012/jan/17/ china-success-challenges-america-britain．

300

Niu

oil companies now own more than three quarters of the world’s known oil reserves, which would have been unimaginable just 15 years ago.13 High unemployment rates and the outflow of jobs from America are the inevitable consequences of globalization, not necessarily caused by China’s “unfair trading practices.” The United States has to adapt to new challenges accompanying globalization while getting used to its own national economy. In the 2012 State of the Union address, President Obama announced that “Over a thousand Americans are working today because we stopped a surge in Chinese tires.”14 However, since over 8 million Americans have lost their jobs in the financial crisis since 2007, 1000 jobs were only a drop in the bucket. America’s unemployment issues are not being addressed even if the total disputed amount of the u.s.-China trade is counted in. On November 11, 2009, then u.s. ambassador to China Jon Huntsman noted that as the world’s second largest trading pair, Sino-u.s. trade as a whole was beneficial for both, with disputes taking only 1% of the total bilateral trade. Actually, the United States has benefited much from trading with China. According to assessments made by Morgan Stanley, China’s trading surplus with the United States was $229.2 billion from 1996 to 2003; on the other hand, American customers saved up to $600 billion by purchasing high-quality Chinese products at reduced prices. In October 2010, the United States Department of Commerce laid out blueprints to boost exports to five of its trading partners, planning to increase exports to Canada by 2.4% annually, to Mexico by 3.7%, and to China by 16.7%. The actual u.s. export to China in 2010 grew by 32%. Of course, while it has benefitted from globalization, the United States has been negatively affected by globalization as well, mainly reflected by its loss of jobs. As the deputy managing director of the IMF, Zhu Min, has stated, structural readjustments and labor transfers previously happened only within one country, but is now happening across the globe.15 Against this background, the United States has not changed its way of thinking, nor is it willing to readjust its economic system or structure. On the contrary, it concentrates on such trifles as exchange rates, market entry, and trade protection. America’s choice to adhere to conservative thinking and neglect 13 14 15

Bruce W. Jentleson and Steven Weber, “America’s Hard Sell,” Foreign Policy, November/ December 2008: 45. Remarks by the President in State of the Union Address, http://www.whitehouse.gov/ the-press-office/2011/01/25/remarks-president-state-union-address. Wu Lejun 吴乐珺, “2012nian Dawosi Reyi Quanqiu Dazhuanxing 2012年达沃斯热议 全球大转型 [The 2012 Davos Forum on Global Transformation],” Huanqiu Shibao 环球 时报 [The Global Times], January 29, 2012, 5.

Sino-U.S. Relations: Ideological Clashes and Competitions

301

the essentials is not conducive to its interests; these actions will disrupt and jeopardize normal economic and trading cooperation between China and the United States. It took the entirety of the 1980s for the United States to accommodate u.s.Japanese differences in economic structures. Now it is time that the United States readapt itself to other new economic systems. In the 21st century, great powers compete not only in resources and innovations, but also in their economic systems. Those who are able to design political and economic institutions to suit the needs of economic growth will be invincible. As Zhu Min has noted, the past three years of economic crisis show that the world has changed profoundly. First, the market system needs to be reexamined, since it enables financial activities to detach from the real economy while widening the income gap. Second, the global weight of new and developed economies has changed, and new economies are faced with the challenge of finding development models suitable to their situation. Third, globalization is leading to extensive readjustment of the international structure. Apparently, America’s traditional way of thinking is not a remedy for these problems, especially when they are caused by such traditional thinking. At present, emerging economies and the United States are faced with the same issue: finding new development models that suit their needs. III

Hegemony and Division of Power

For over half a century, the United States has been the designer and guarantor of “an open and free international political and economic order” for the West.16 America’s hegemonic power has been the means employed to maintain such a structure. This so-called hegemony means no other country could compete against the United States in security issues.17 The way for the United States to maintain its hegemony throughout the world is to safeguard the balance of power to its advantage while avoiding security challenges from other states. From America’s perspective, China’s rise imposes three challenges. The economic challenge is caused by serious deindustrialization in the United States and u.s. dependence on Chinese funds. The political challenge lies in the fact that China may successfully integrate areas surrounding the Indian and Pacific 16 17

Bruce W. Jentleson and Steven Weber, “America’s Hard Sell,” Foreign Policy, November/ December 2008, http://www.foreignpolicy.com/articles/2008/10/15/america_s_hard_sell. John J. Mearsheimer, The Tragedy of Great Power Politics, (New York: W. W. Norton & Company, 2001), 380.

302

Niu

Oceans and ultimately realize political control in this region through a carefully woven trading network, when America’s key objective in Asia is to prevent any one power from exclusively controlling the continent. In the military sphere, while the United States tries to ensure that it can provide assistance to its allies when they are under threat, China has been exploring areas about 1,000 miles away from its coasts. Among the three challenges, the economic challenge is the most prominent and most realistic, and serves as the foundation for the other two; in order to challenge the United States politically, China has to gradually influence its Asian allies via trading networks. Meanwhile, the growth of China’s military strength also depends on its economic development. In general, although America is still the largest economy in the world, its economic advantage is not completely unshakable—this uncertainty weakens its geopolitical influence.18 From the grand strategic and historical perspectives, the 21st century will be the century of the Asia-Pacific, which is the key arena for China-u.s. competition. The United States will definitely return to this region as a response to China’s rise. The so-called Asia-Pacific century is first of all a strong time for the Asia-Pacific economy. The overwhelming priority for the United States upon its returning is to react to economic challenges from China. In this region, America is dominant in terms of military power. It also possesses a relative advantage in terms of political leverage; the biggest challenge lies in the economic sphere. In 2011, America’s total military expenditure was $550 billion (not including the nearly $200 billion spent on wars in Afghanistan and Iraq), taking 3.6% of its GDP but still accounting for over half of the world’s total military spending.19 As a result, the United States will employ its military supremacy while averting its economic weaknesses and make its “return” first in the military arena, then in the political arena, and finally in the economic sphere by showing its interest in the TPP (Trans-Pacific Partnership), given that it is not under any military threat in the region. The TPP appears as an important tool for the United States to return economically, but it is hard for Washington to make any substantive concessions, meaning negotiations on the TPP will not be very promising. America is primarily returning to the Asia-Pacific in a military sense, rather than making a full-scale return to the political, economic, and security spheres.

18 19

Joseph M. Parent and Paul K. MacDonald, “The Wisdom of Retrenchment: America Must Cut Back to Move Forward,” Foreign Affairs, 90, 6 (2011): 36. Ryan Nobles, “Forbes claim on defense spending is deemed mostly true,” http://www .wlox.com/story/15258467/politifact.

Sino-U.S. Relations: Ideological Clashes and Competitions

303

America’s objectives in returning to the Asia-Pacific are to form military alliances that balance China, and to reshape the regional balance of power. As noted in a recently published American strategic guidance report, the maintenance of America’s basic interests in this region will depend in part on an underlying balance of military capability and presence.20 Both President Obama and Secretary of Defense Panetta have reiterated that America’s cuts in defense spending will not affect its security investments in the Asia-Pacific region. Washington’s military focus, or in a more extensive sense, its security concerns, will be re-shifted toward the Asia-Pacific. The United States will deploy 2,500 more troops in Australia while enhancing its security relationship with the Philippines.21 Maintaining a stable balance of military power in the Asia-Pacific is in line with America’s hegemonic thinking, but this will not solve any security problem faced by the region—it may instead cause an unacceptable burden for the United States. Great powers have not engaged in any military conflicts since the end of the Cold War, nor have they employed military threats to solve economic and political issues. The marginal effect of military capabilities has been in constant decline in great power rivalries. The strategic guidance report of the United States indicates that America is at a strategic turning point, thus requiring a smaller, agile, flexible, and technologically advanced military force. In the Asia-Pacific region, instead of engaging in arms races, major powers should cooperate politically on issues like maintaining stability on the Korean Peninsula and solving the South China Sea disputes. Regarding the Korean Peninsula, China and the United States have formulated the cooperation framework of “six-party talks.” On the South China Sea issue, the fundamental task is to reassure all parties concerned that no state would change the status quo by force. Sino-u.s. cooperation is indispensable for solving disputed issues in the Asia-Pacific region. However, if the United States seeks to encircle China, the security environment here will deteriorate. From America’s perspective, integrating China into a u.s.-led security arrangement is conducive to addressing regional security problems while easing neighboring states’ anxieties about China’s rise, thus reducing America’s strategic pressures in the Asia-Pacific. At present, u.s.-led military alliances still play the predominant 20 Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, January 21, Department of Defense, the United States of America, http://www.defense.gov/news/ defense_strategic_guidance.pdf. 21 Sarah Mishkin Kong and Kathrin Hille, “US To base 2,500 troops in Australia,” November 16, 2011, http://www.ft.com/intl/cms/s/0/3ddd6756-102a-11e1-8211-00144fea bdc0.html#axzz2tBReEDZH.

304

Niu

role in the Asia-Pacific security pattern. Discovering how to relieve China’s strategic concerns via “strategic guarantee” and how to integrate China’s growing military power into the existing security framework will be the top priorities of America in the coming years. There are two schools of thoughts regarding American security policies toward the Asia-Pacific. One proposes that the United States should cultivate a lasting compromise with China, accept its rise, and reduce America’s security commitment in the Asia-Pacific. This plan would shift more responsibilities to China but allow it to enjoy more power at the same time.22 The other, however, insists that the United States should take a firmer policy toward China and warn other countries in the region to be alert to China’s increasing power. This way, they can coordinate with the United States to constrain China’s potential changes to the status quo.23 Since the end of 2009, the latter school has gained support from both the State Department and the Pentagon, and the White House has accepted its notion and tactics as well. Apparently, the traditional hegemonic view aims at increasing the u.s. military presence in the Asia-Pacific by exploiting the neighboring states’ anxieties about China’s rise. This kind of mentality treats China as part of the problem instead of part of the solution, which is inconsistent with the facts. Since its opening up and reform, for over 30 years China has been an important contributor to the stability of the Asia-Pacific, rather than a trouble maker. China has delimited land borders with 12 of its 14 land neighbors, thus finishing 90% of the total border demarcation work. Hegemonism not only goes against the historic tide, it is not practically functional. The United States cannot shoulder such a heavy burden while other Asian-Pacific states are unwilling to follow it in its reactionary acts. According to evaluations made by American scholars, between 1999 and 2009, the United States share of the global GDP (measured in terms of purchasing power parity) fell from 23 percent to 20 percent, whereas China’s share jumped from 7 percent to 13 percent. Should this trend continue, China will surpass the United States in economic output in 2016.24 The stronger China becomes, the more resources America will acquire to balance it, whereas other Asia-Pacific countries will be more reluctant to follow the United States and isolate China. 22 23 24

Joseph M. Parent and Paul K. MacDonald, “The Wisdom of Retrenchment: America Must Cut Back to Move Forward,” Foreign Affairs, 90, 6 (2011): 44. Kenneth Lieberthal, “The American Pivot to Asia,” Foreign Policy, December 21, 2011, http://www.foreignpolicy.com/articles/2011/12/21/the_american_pivot_to_asia. Joseph M. Parent and Paul K. MacDonald, “The Wisdom of Retrenchment: America Must Cut Back to Move Forward,” Foreign Affairs, 90, 6 (2011): 36.

Sino-U.S. Relations: Ideological Clashes and Competitions

305

Due to its fiscal restraints, the United States has planned a $500 billion cut in its military spending in the coming ten years, imposing more pressure on its military budgets. Maintaining a military power balance on both sides of the Taiwan Strait has long been the foundation of American policies regarding Taiwan. More recently, with the improvement of mainland-Taiwan relations and the widening of the gap in military strength across the Strait, Washington has become more conscious that it is neither possible nor necessary to keep such a military power balance across the Strait. In the Asia-Pacific, economic integration between China and the United States has been realized, contributing to economic prosperity in the region. In the political field, the two have been able to cooperate with disagreements and coexist peacefully, although they have not fully accommodated or embraced each other. With regard to security issues, containing and confronting China would be an unsustainable policy, since both sides sharing power and responsibilities is likely to be the unstoppable trend. IV Conclusion On whether a rising China will topple the existing international system or integrate into it, in other words, if China is a status-quo state or a status-quo challenger, Western scholars have not reached any consensus.25 Like many other issues, there is no “yes or no” answer to such questions. Under a benign external environment, China may merge into the established international system while pushing for certain changes from within. Toppling the existing international system is not only beyond the capacity of China but also goes against its interests. It is not a matter of whether or not China is willing to fully embrace the existing international system—it is something China simply cannot do. China differs significantly from the United States in terms of historic experiences, cultural traditions, and ideologies, making it impossible to embrace the u.s.-dominated international system without any disagreement. Since the outbreak of the international financial crisis in 2007, people from all around the world have been reflecting upon the defects of the Western system. The continuous global trend of embracing Western values and institutions has stopped for the first time since the end of the Cold War. In the coming years, China 25

Randall L. Schweller and Xiaoyu Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” International Security, Summer 2011: 41–72; G. John Ikenberry, “The Rise of China and the Future of the West: Can the Liberal System Survive?” Foreign Affairs, 87, 1 (2008): 23–37.

306

Niu

faces a period of opportunity when it could contribute to the world by promoting Chinese experiences and Chinese values. Meanwhile, it is the right time for China to integrate into and change the existing international institutions. In order for China to integrate into the global political and ideological systems with its particular contributions, the most fundamental precondition is that China can continue its story of success. China not only needs to lift its 1.3 billion people out of poverty, but also needs to increase their wealth and see them live in harmony. If China continues to be successful, no country could continue to neglect Chinese experiences, thoughts and ideologies. Upon China’s reform and opening-up, Deng Xiaoping put forward the developmental principle of “crossing the river by feeling the stones in the water” to avoid ideological debates and disagreements. The strategy emphasized the importance of practices and trials in economic development. As a result, theoretical guidance lagged behind practical innovations during certain periods of time in China. At the same time, Western values and beliefs were spreading over the globe and Chinese scholars mostly learned from them, while neglecting to build theories based on China’s own practices. As a global power, China needs to familiarize itself with global trends while offering its own theoretical contributions in order to take its deserved position in the world’s ideological sphere and blend into and coexist with the international system. Over 30 years of development has prepared China with plenty to share. China should engage in theory building based on its successful experiences, making contributions to the construction of a new international ideological system. Works Cited Gowan, Richard and Franziska Brantner. “A Global Force for Human Rights? An Audit of European Power at the UN.” Policy Paper. London: European Council on Foreign Relations, 2008. Hartz, Louis. The Liberal Tradition in America. New York: Harcourt, Inc., 1991. Huntington, Samuel P. American Politics: The Promise of Disharmony. Cambridge, MA: Harvard University Press, 1981. ———. Political Order in Changing Societies. London: Yale University Press, 1968. Ikenberry, G. John. “The Rise of China and the Future of the West: Can the Liberal System Survive?” Foreign Affairs, 87, 1 (2008). Jentleson, Bruce W. and Steven Weber. “America’s Hard Sell.” Foreign Policy, November/ December 2008.

Sino-U.S. Relations: Ideological Clashes and Competitions

307

Kong, Sarah Mishkin and Kathrin Hille. “US to base 2,500 troops in Australia,” November 16, 2011, http://www.ft.com/intl/cms/s/0/3ddd6756-102a-11e1-8211-001 44feabdc0.html#axzz2tBReEDZH. Lieberthal, Kenneth. “The American Pivot to Asia.” Foreign Policy, December 21, 2011, http://www.foreignpolicy.com/articles/2011/12/21/the_american_pivot_to_asia. Mearsheimer, John J. The Tragedy of Great Power Politics. New York: W. W. Norton & Company, 2001. Milne, Seumas. “China’s Success Challenges a Failed Economic Consensus.” The Guardian, January 17, 2012, http://www.theguardian.com/commentisfree/2012/ jan/17/china-success-challenges-america-britain. Nobles, Ryan. “Forbes claim on defense spending is deemed mostly true.” http://www .wlox.com/story/15258467/politifact. Obama, Barack. “Remarks by the President in State of Union Address.”(2011). http://www.whitehouse.gov/the-press-office/2011/01/25/remarks-presidentstate-union-address. Parent, Joseph M. and Paul K. MacDonald. “The Wisdom of Retrenchment: America Must Cut Back to Move Forward.” Foreign Affairs, 90, 6 (2011). Patrick, Stewart. “Irresponsible Stakeholders?” Foreign Affairs, November/December 2010. ———. “Sustaining U.S. Global Leadership: Priorities for 21st Century Defense.” January 21, 2012. Department of Defense, The United States of America. http:// www.defense.gov/news/defense_strategic_guidance.pdf. Schweller, Randall L. and Xiaoyu Pu. “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline.” International Security, Summer 2011: 41–72. Wang Jisi 王缉思. “China’s Search for a Grand Strategy.” Foreign Affairs, March/ April 2011. Wu Lejun 吴乐珺. “2012nian Dawosi Reyi Quanqiu Dazhuanxing 2012年达沃斯热议 全球大转型 [The 2012 Davos Forum on Global Transformation].” Huanqiu Shibao 环球时报 [The Global Times], January 29, 2012. Zakaria, Fareed. “I Made a Commitment to Change the Trajectory of American Foreign Policy.” Foreign Policy, January 19, 2012, http://www.time.com/time/magazine/ article/0,9171,2104818,00.html.

Index adjustment of major powers’ Asian strategies 183, 189 Basic platform  3, 34, 38 Bilateral Investment Treaty (BIT)  6, 195, 212–221 Capital account liberalization  231–232, 252–257 Challenges  3, 6, 32, 34, 40–41, 45, 47, 60, 82, 111, 119, 178, 195–196, 204, 216, 230, 232, 259, 261, 291, 294, 300–302 changes  1–2, 5, 13–14, 16, 21, 23–25, 27–31, 35–29, 43–44, 66, 84, 90, 99–101, 111–112, 114–115, 118, 129, 145–147, 149–152, 154, 158–159, 162–164, 168, 171–172, 185, 196–198, 204, 210, 227–229, 235, 239, 254–256, 260–262, 264, 279, 282–284, 291, 293, 304–305 China Diplomacy  2, 16, 27–28, 31, 52, 69–71, 74, 84 Identity  52, 54, 56, 60 China’s rise/the rise of China  5–6, 8, 37, 48, 52–55, 90, 137, 141–143, 151–154, 157–158, 160–161, 163–166, 171, 174, 183–186, 189, 192, 281, 283, 294, 301–304 Chinese characteristics  34, 41–45, 199 claimant states  183–184, 187–191 co-governance  4, 89–92, 105–106, 108–113, 120, 127 Cold War  17, 20, 23, 28, 31, 38, 75, 77, 82, 90, 101–103, 107–108, 138–139, 141, 145–146, 150, 158, 161, 216, 220, 261, 264, 280, 284, 292, 294–295, 297, 303, 305 concentrating on development  55 concept of dynasty cycle  43 constructive coexistence  157 Contemporary China  34–35, 38, 40–45 current order  4, 89, 104, 112 demographic reformation  98–99 Dialectical Thinking  70, 72–74, 84 differentiated common responsibilities 259, 272–273

diplomacy China’s  2, 16, 27–28, 31, 52, 69–71, 74, 84 Institutional  61–62, 67 Power Diplomacy  60 Public Diplomacy  3, 51, 60, 63–65, 67 Revolutionary  13–14, 32 diplomatic strategy  13, 24–25, 90, 184, 187 division of power  301 double identity  262 Dual structure  157, 159–160, 164, 165–167, 169–175, 178 Dual-identity dilemma  3, 51–55, 67 East Asian Order  6, 157–158, 164, 168, 173, 175–179 structure  157–158, 163–164, 167–168, 174–175, 178 economic cooperation  111, 159, 167, 169, 176, 191–192 emerging power  5, 64, 101, 103, 110, 115, 119, 259, 262, 265, 267–268, 272–273, 275, 292–295 Engagement and containment  157, 161, 163–164, 168 Exchange rate risks  235–236, 254 Flexible exchange rate  7, 231, 254 foreign strategies  5, 49, 137, 280 FTA Strategy  7, 195, 222 G20  4, 9, 89, 112–113, 115, 118, 120, 127, 138, 204, 260, 265, 271 geostrategic pillar  129–131 global financial crisis  6, 41, 161, 196, 204, 207, 209, 212, 215–216, 230, 257, 259, 261, 263–264, 280, 286, 296, 305 global governance structure  90 global perspective  32, 42 global political and ideological systems  292 global responsibilities  4, 89–90, 108, 110, 127

310

index

great power  3, 51–56, 62, 71, 119, 132, 134, 301, 303

new international trade rules  196, 215 new Silk Road  131–132, 134

hedge  113, 170, 176 hegemony  23, 27, 43, 46–47, 65–66, 116, 120, 149, 161, 190, 266, 294, 301 holistic view  53 human rights  8, 30, 283, 295–297

peaceful development  3, 34, 38–39, 60–61, 65, 84, 92, 163, 187, 191 peaceful rise  183–184, 187–192 period of strategic opportunity  123, 196 perspective  1, 3–5, 7, 9, 13, 15, 21, 24, 28, 32, 37–38, 41–42, 53, 55, 64, 70–71, 80, 83–84, 91, 95, 99, 105, 108–109, 112, 114, 120, 126, 143, 151, 160, 162, 169–170, 172–176, 178–179, 184, 196, 204, 208, 215, 219–220, 265, 267, 279–280, 284–287, 301–302 political competition among the great powers  55 power shift  84, 137 Power-Politics  19, 39–40, 51, 55–58, 60, 67, 82, 84–85 principle of shelving differences  184–185, 188 promote reforms through opening-up 219, 229

ideological conflicts  31 ideology  1–2, 19, 23, 29, 31, 34–35, 41, 44, 63, 139, 144, 152, 284, 298 improve the funding efficiency  236 inclusive interest  259, 270–272, 275 Independence and peace  13, 16–17, 27, 31 Integrate  7–8, 18, 70, 162, 165, 173, 189, 223, 292, 294, 301, 304, 306 international configuration  137, 146–147, 149–154 International currency  120, 231–233, 235–238, 240, 243, 249 International Environment  16, 18, 22, 24, 26, 51, 56, 58, 132, 160, 197, 207, 265 international institution  4, 89 international norms  5, 47, 137, 146–147, 149–152, 154 International regime  35, 58, 62, 292 International system elements of  137, 145–146, 150, 152 Internationalization of the Yuan  7, 231–232, 236–238, 239–243, 245–255, 256–257 Lewisian Turning Point (LTP)  99–100 Liquid financial markets  7, 231, 256 look westwards  130 march westwards  4–5, 129, 130–131, 132–136 modern revolution  45 multi-polar world  4, 30, 106, 109 mutual benefit and cooperation  30, 279, 285 mutual strategic trust  8, 129, 133, 279, 281–283 Nationalism  1, 13–14, 16, 32, 35–36 Nations and market  298 New China  13–17, 30–31, 45–46, 76, 293

rebalance  1, 111, 143 reform and opening-up  23–26, 28, 34–38, 40–41, 43, 45, 48–49, 52, 54, 80, 130, 196–197, 199–200, 203–205, 216, 219, 293, 304, 306 repositioning China  4, 89–90, 118 return to Asia  129, 211, 281 return to the Asia-Pacific region  185, 302–303 Rights Matching Responsibilities  268, 275 rise of emerging powers  262, 272, 292 rising power  57, 60, 145, 152–153, 179, 263, 267, 283 Scientific development outlook  34, 41 Security Cooperation  69, 84, 166, 177–179 seigniorage paid  237 self-discipline  3, 69–70, 77–79, 82, 84 self-independent reform  45 Separation  8, 164, 211 Sino-U.S. relations economic and trade cooperation  8, 131, 279, 289–290

311

index strategic and economic dialogue  270, 282 strategic relations  153, 279–280, 290 soft power  37–38, 120, 131, 266–267 sovereignty  2, 13, 18, 24, 28, 31, 35, 57, 61, 83, 130, 146–147, 187–188, 190–191, 206, 288, 295–298, 295 speculative short-term capital flows  250 strategic layout of opening-up  6, 196 strategic opportunities  8, 219–220, 259, 264, 279, 291 swaps with foreign central banks  243, 246 terrestrial and maritime territorial issues 183–187, 189 Trade in Services Agreement (TISA)  212 trade settlement scheme  243, 249 n. 26, 250, 252 traditional cultural concepts  69

traditional power  101 Transaction costs in trade  236 Transatlantic Trade and Investment Partnership (TTIP)  214 Trans-Pacific Partnership (TPP)  168, 189, 214, 260, 281, 293, 302 two-pronged policy  157 unified order  4, 89–91, 106–107, 109, 127 welfare losses  7, 246, 255–256 Western Development Strategy  129–131 world centre  137–145, 151–154 world power  3, 47, 106, 112–113, 115, 137, 153, 188 Yuan-denominated bonds  241–246 Zero-sum mentality  283