China’s Real Three Challenges to the United States

What concerns me most is that in worrying about bilateral challenges from China, we are likely focused on the wrong things. And we are missing at least three of the main challenges China presents to our domestic complacency, specifically to our complacency with regard to our global economic, scientific and technological, and — ultimately — our political leadership.

The notion that China could possibly displace the United States at the pinnacle of world affairs may seem preposterous. China is starting from way behind, and no one looks to China as a political model.

But China is trying very hard to excel. And it has registered truly astonishing progress over the past 28 years by demonstrating the capacity for introspection, self-correction and openness to change. These are not qualities we now exemplify.

For most of human history, China was the wealthiest, socially most tranquil, scientifically most advanced and arguably the best governed society on the planet. It is determined eventually to restore itself to these heights.

The possibility that China can achieve global leadership should not be lightly dismissed — especially if we collaborate in that enterprise by undermining our own current preeminence.

The first challenge comes from China’s growing weight in the global economy. The “socialism with Chinese characteristics” that Deng Xiaoping and his political heirs have sponsored is derided by some as “bandit capitalism.”

It has worked wonders at the expense of a growing gap between rich and poor, corruption and the continuing absence of protective mechanisms for disadvantaged social groups.

Despite such Dickensian manifestations at home, however, China is now a huge success in many respects, lauded — and feared — here and elsewhere abroad as both the workshop and potential leader of the capitalist world.

Chinese consumption
The main challenge from China’s economic success lies less in its role as a producer of goods sold throughout the world than in its probable emergence as the world’s largest consumer and capital market.

China’s foreign exchange reserves are around $1 trillion. Its currency is steadily appreciating and moving, with all deliberate speed, toward full convertibility.

Many central banks and private investors would hold large amounts of Chinese yuan now, if they could. The minute the yuan becomes fully convertible, it will join the euro as an alternative reserve currency.

We are likely on the verge of a very different world monetary system, one in which Europe and China play roles commensurate with their economic clout and in which we no longer enjoy the privileges of economic dominance but must share financial power with others.

The yuan also seems likely to become a unit of account for trade in energy and other commodities currently traded solely in dollars.

China already consumes 25-40% of the world’s crude coal, iron ore, steel, aluminum and cement. Its energy imports are growing at 6-7% per year. Rising demand means rising prices for all.

China’s investments in natural resources are rapidly making it the most influential foreign economic actor in Africa and a significant alternative to the United States and Europe as an economic partner elsewhere, for example, in Latin America.

Its capital markets are just beginning to open up but its potential to emerge as a very competitive center of global finance is high — given its openness, dynamism and size, not to mention its spectacularly high savings rates.

China is a capital-exporting creditor nation. Chinese institutions will soon own a lot more than a heap of U.S. Treasury bills. The recent initial investments in global equity markets by the China National Social Security Fund are just the beginning.

I suspect we will be very grateful that our new Secretary of the Treasury, unlike our Secretary of Defense, chose to cultivate relations with the — Chinese rather than give them the cold shoulder.

The second challenge comes from China’s drive to excel in science and technology. Americans have become accustomed to dominating S&T as well as global trade and finance. But only 15% of our undergraduates now receive their degrees in natural science or engineering.

In China, 50% graduate in these fields. In the United States, 34% of doctoral degrees in natural sciences and 56% of engineering PhDs are awarded to international students. A good many of our best in these fields have been Chinese.

Changes in our society and visa policies after 9/11, however, have greatly reduced both our appeal and accessibility to foreigners, including Chinese. Chinese students now number higher in Britain than the United States — and there are many more in the rest of the EU.

Unable to hire Chinese or Indian engineers here as readily as in the past, U.S. firms are relocating their R&D facilities to China or India. And Chinese inventors and entrepreneurs are now proving just as successful in China as they were when they felt truly welcome here.

Again, China is coming from far behind. Only three out of 10,000 Chinese enterprises have intellectual property rights for their core technologies. Ninety-nine percent of Chinese firms have no patents and 60% do not have their own brands.

Time for change
China is determined to correct these weaknesses. Its strategic investment plan for S&T lists dozens of areas where it hopes in time to become the world innovation leader. If it can harness market forces to its objectives, it has a fair chance of achieving many of them.

Let me give you one practical example of what this might mean. Later this year, China will overtake the United States as the world’s largest user of the internet. But, under the system we pioneered and which we still control, 30% of the world’s internet addresses are allocated to Americans — and the Chinese have only 2%.

To put it a different way, under the current system, every American is entitled to six internet addresses while in China a single address must be shared by 26 users. This resource allocation has given China ample incentive to innovate.

Back in 1994, someone came up with a way to expand the number of addresses to a level that is, for all practical purposes, infinite.

This new system, called Internet Protocol V 6 (IPv6), theoretically allows every electrical device in the world to be monitored and controlled through the Internet. IPv6 is still a theoretical possibility here. But in China, and elsewhere in northeast Asia, it is a rapidly consolidating reality.

By the end of next year, the number of broadband users in China will be double that of the United States. At the 2008 Olympics in Beijing, Americans will have a chance to see the extent to which Chinese and other Asians have become world information technology leaders.

Hotel dispatchers, traffic lights, electronic billboards, GPS navigation devices, police and taxis will be networked to speed visitors to and from the Olympic sites.

The Internet will also control all the facilities — everything from security cameras to the lighting and thermostats — and events will be broadcast live over it and so forth. That’s nice, you might say. You already knew that it was written that “the geek shall inherit the Earth.” So what if the geek lives in China?

But the implications of the system China is designing and installing go much beyond just solving traffic problems and adjusting building temperatures.

It will, for example, affect freedom of speech on the
Internet — which is going to be much harder — and capabilities for information warfare, which is going to be much easier, at least for the Chinese People’s Liberation Army.

It is fair to say, however, that these specifics are dwarfed in importance by the power shift implicit in our potential loss of the huge competitive advantages that our leadership of the information revolution has brought us.

It is now almost certain that the next phase of this information revolution will be led by Chinese, Japanese and Koreans. This means that they, not Americans, will own and control the intellectual property and “killer apps” that power it and its evolving technology. We will be paying royalties as we try to catch up with them.

Complacency is the enemy of both excellence and innovation. As a nation, the United States has a bad case of it. China is competing with other Asian nations and itself in a contest we do not even appear to realize is underway.

The third challenge to our supremacy is in the realm of global political leadership. The extent to which our behavior in recent years has disappointed our allies and alienated our friends abroad hardly needs discussion.

Alarming numbers of foreigners now hate our country, not because they have ceased to admire our traditional values but because they believe we are repudiating them or at least failing to honor them.

With a few important exceptions — like our own country and Germany — China has displaced the United States everywhere as the country that people most admire. This is certainly not due to the Chinese political system, which is recognized by Chinese themselves to be highly problematic and in need of managed change.

China, a culture once largely indifferent to the world and diplomacy, has opened up to the international community — while emerging as one of the most diplomatically adept nations.

China is not so much seeking leadership as the national security state we are creating is forfeiting it. Others are turning to the Chinese both to fill the resulting vacuum and to offset the threats they now perceive from us.

Most strikingly, China, a non-Western nation that long headed an explicitly hierarchical state system, is now the staunchest defender internationally of once purely Western stipulations about the sovereign equality of states and the inviolability of their borders.

The People’s Republic of China was created in explicit opposition to the norms on which we and other Western nations built the world order we dominated. It has now emerged as a stalwart defender of that order against American and other Western second thoughts about it.

As Americans, we have new ideas about sovereignty, the authority of multilateral institutions and the rule of law, while China has taken up our old ones. As China’s global influence continues to grow, I would not bet on Washington’s current radicalism prevailing over Beijing’s conservatism.

The east wind may indeed prevail over the west, not in a sudden squall of revolution but — as a steady breeze forcing a return to norms of international law and comity we once championed, but now repudiate.

Global challenge
Much of the momentum for China’s success stems from its emulating the past receptivity of the United States to foreigners and their ideas. Much of our loss of preeminence stems from our new propensity for closing our ears and our borders to ideas and people that are strange to us.

Ultimately, we Americans need to realize that the major challenges to us from China are not, in fact, bilateral. They are global in nature.

China’s return to wealth and power challenges us to reflect, to rediscover the angels of our better nature, to replace unilateralism with partnership, to return to the pursuit of excellence and to reaffirm our traditional values. I think we would be better off — and the world would be a better place — if we did.