The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy

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The prevailing view of China is that the country is an economic juggernaut sure to become the dominant power of the twenty-first century. In this provocative and stimulating book critically acclaimed author Will Hutton warns instead that China is running up against a set of daunting challenges from within its own political and economic system that could well derail its rise, leading to a massive shock to the global economy. The United States, he argues, must recognize that it has a vital stake in working to assure this doesn't happen, for if China's political liberalization and economic growth collapse, the United States will suffer crippling consequences.

In today's highly globalized world economy, so much of the economic health of the United States -- our low inflation, high profits, and cheap credit -- rests upon China's economic growth and its massive investment in the United States. A great deal has been said about the economic and military threat China poses. But rather than provoking China with the military hawkishness of recent years and resisting Chinese economic supremacy with the saber rattling of protectionist antitrade policies -- twenty such bills have been introduced in Congress in just the last year -- the United States must build a strong relationship that will foster China's transition from an antiquated Communist state beset with profound problems to a fully modern, enlightened, and open society. Doing so will require understanding and engagement, not enmity and suspicion.

China's current economic model, Hutton explains, is unsustainable, premised as it is on the myriad contradictions and dysfunctions of an authoritarian state attempting to control an economy in its transition to capitalism. If the twenty-first century is to be the China century, the Chinese will have to embrace the features of modern Western nations that have spurred the political stability and economic power of the United States and Europe: the rule of law, an independent judiciary, freedom of the press, and authentic representative government that is accountable to the people. Whether or not China does so rests in large part on how well the United States manages the relationship and persuades the Chinese of the virtues of an open, enlightened democratic system. The danger is that fearmongering will intensify animosities, leading both countries down a path of peril.

Turning conventional wisdom on its head, this brilliantly argued book is vital reading at a crucial juncture in world affairs.

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About the Author:

Will Hutton is the former editor of the London Observer, economics editor of The Guardian, and a BBC economics correspondent, as well as a governor of the London School of Economics. He is currently chief executive of The Work Foundation. He is the author of six previous books, including the critically acclaimed The Revolution That Never Was and The World We're In, which was a number-one business bestseller in the United Kingdom.

Excerpt. Reprinted by permission. All rights reserved.:

The Writing on the Wall

Chapter 1

The Last Great Powers



A GREAT POWER WILL NEVER VOLUNTARILY SURRENDER pride of place to a challenger. The United States is the preeminent great power. China is now its challenger. The great questions of our time are, first, whether China can translate its potential into reality without democracy and without genuine capitalism; and, second, whether the United States will be wise enough to keep its markets and the wider world system open to China as this Chinese drama plays out, and by so doing accelerate the fundamental reform that must come to it. Our prosperity and even global peace depend on the answers.

Every state in the world may harbor ambitions to have the autonomy of the archetypal nineteenth-century nation-state, but most must come to terms with the constraints of their relatively small size compared with the scale of global markets. Only China and the United States with their continental economies, vast populations, and huge military machines genuinely think in old nation-state terms. They calculate their spheres of military, diplomatic, and economic influence. They are prepared to use military power to secure national ends. Each believes its civilization and culture has a special destiny. The world’s future hangs on whether these two powers can resist the temptations of rivalry and find a constructive accommodation that allows them to do business.

For sixty years the United States has overcome its protectionist tradition—no other country in the nineteenth century and the early twentieth century had such tariffs for so long—to lead the development of an open global economy. Flows of trade, investment, and technology have reached an unsurpassed intensity. Growth and living standards have risen remarkably. True, there are disturbing and dangerous new inequalities between countries whose capacity to take advantage of these opportunities varies hugely. But the overall balance sheet is positive. The United States itself is up to $1 trillion richer as a result of globalization.1 The Asian miracle, including the rise of China, would have been impossible without it.

But within the United States, anxiety has grown about the stagnating incomes and financial insecurity of much of its middle class. Because these afflictions have shown up at the same time as globalization, they are too often said to have been caused by it. In fact, the principal causes lie within the United States (see Chapter 11), including the onward march of new technologies; changing tastes of consumers; an epidemic of mergers, takeovers, and acquisitions; and the increasing unwillingness of American businesses and policy makers alike to accept a duty to care for the American workforce.

Even before 9/11, doubts were voiced in the United States about whether the network of multilateral treaties and institutions that had developed under American leadership since the end of the World War II was still working. Was it right for the United States to be constrained by international law, whether over trade or weapons systems? Since 9/11, the historical American tendency toward unilateralism and suspicion of foreigners has been exacerbated. The expensive, deadly, poorly executed involvement in Iraq is reinforcing the distrust of foreign entanglements; and the threat from Islamic fundamentalist terrorism has spurred calls for clamping down zealously on immigration and sealing U.S. borders. The globalizing economy is blamed by critics for the outsourcing of jobs, causing wage deflation in the United States, and for unfair competition from foreign goods, especially from China, resulting in the largest bilateral trade deficit in 2005 with any single country in its history—$202 billion.

As a result, popular support for the idea that the United States should take the lead in further integrating the world economy is eroding. The congressional majority in favor of international treaties and free trade, always hard to put together, is challenged. The hysterical campaign in 2006 against plans to have Dubai Ports World manage six U.S. ports as a consequence of its takeover of the British company P and O is symptomatic of a new attitude. The United States, however, is not alone in this regard. Around the world, almost no country or trading bloc now looks at the global economy as something that needs to be built and sustained for collective benefit. Rather, it’s considered a juggernaut that should exploited to one’s own advantage. The World Trade talks aimed at extending trade liberalization were suspended in July 2006, with none of the key actors prepared to initiate concessions for the sake of a collective settlement.

Yet the global economy is not an unstoppable force. What has been made by political choices can be unmade by political choices. If everyone bends, disobeys, and ignores the rules, soon there are no rules. The architecture that sustains the world’s growing interdependence is under great strain. It needs to be recrafted and reinvigorated, but this requires preconditions that are lacking—intellectual conviction and a high degree of trust and common values between the great powers.

This is why China’s rise is so significant. China’s economy in 2006 is nearly nine times larger than it was in 1978: the fourth largest in the world, after the United States, Japan, and Germany. If current trends continue, it is set to become the second largest within a decade.2 The only comparable rise of an economy as a proportion of world GDP in such a short time is that of the United States at the end of the nineteenth century.3 Between 1981 and 2001, 400 million people had been brought out of poverty.4 Between 1978 and 2003, China’s average per capita income rose by a multiple of six. The proportion of the population living in towns and cities has doubled to nearly two-fifths. Up to 150 million workers have moved to China’s booming cities—the biggest migration in history.5 It is a head-spinning achievement.

China is the new factor in global politics and economics. No global architecture can be constructed without it. By the end of 2006 it will have some $1 trillion of foreign exchange reserves. The United States could not be running a current account deficit of $800 billion without consistent selling pressure on the dollar if Chinese purchases of U.S. Treasury bills and bonds were not so high. China is the world’s second largest importer of oil. Before 2010, it will be the world’s largest exporter of goods.6 It is, comfortably, the world’s second largest military power: the Pentagon believes that China’s defense expenditure is up to three times more than the $30 billion China officially declares. The Pentagon’s four-yearly defense review stated that the scale of China’s military buildup has already put “regional military balances at risk” and that China is the power most likely to “field disruptive military technologies that could over time offset traditional U.S. military advantages.”7 If you are prepared to compare China’s output not on the basis of current market foreign exchange rates but on estimates of the real purchasing power of what China produces, then China already is the second largest economy in the world. On this basis it could overtake the United States within twenty years.8

The problem is that this new great power is communist, and its rise to power has been masterminded by the Communist Party. The party may have made major ideological changes; it praises only 70 percent of Mao’s record, for example, condemning the disastrous Cultural Revolution and the Great Leap Forward in which more than 30 million Chinese died. It now aims to build a “socialist market” economy rather than a planned communist economy. It permitted the dismantlement of 26,000 communes in rural China. Hundreds of millions of peasants are again farming plots on long leases once held by their ancestors. China wants its state-owned enterprises to compete as autonomous companies largely free to set prices as they choose in an open economy.

China’s communists have declared that the class war is over. They now claim to represent not just the worker and peasant masses but entrepreneurs and business leaders, whom it welcomes into its ranks. The party refers to this metamorphosis as the “three represents”—meaning that the party today represents, in the ideological categories in which it thinks, “advanced productive forces,” “the overwhelming majority” of the Chinese, and “the orientation...of China’s advanced culture.”9 Party representatives abroad say that the country wants to rise peacefully, not to play power politics or to aim for any kind of hegemony. China has joined the World Trade Organization and is a judicious member of the United Nations Security Council, using its veto largely in matters that immediately concern it, like Taiwan.

Yet it remains formally a communist power adhering to the doctrines of Marxism, Leninism, and Mao. It is a one-party state with no regular competitive elections, no independent rule of law, no freedom of speech, no right of association, and no entrenched basic human rights. Although it condemns 30 percent of Mao’s legacy, it praises 70 percent. Difficult as this may be for many foreigners and even some Chinese to accept, a majority of China’s 1.3 billion people and its communist rulers regard the communist revolution of 1949 as a significant, important, legitimate event, analogous to the American and French revolutions. The China of 2006 could not have happened without the revolution. Mao’s mass murders are condemned, as the French might condemn Robespierre and the Terror; but Mao is seen as part of a process that also included much good, notably a dramatic increase in male and female literacy, and the shattering of the imperial Confucian system, which had held China back for 150 years. Deng Xiaoping, China’s great pro-market reformer, did not build contemporary China out of nothing; he built on foundations left by Mao and always aimed to preserve the primacy of the Communist Party.

That foundation is now, however, a profound problem for China, the United States, and the world. It makes China a difficult partner internationally because there is an objective clash of interests over the importance of democracy, the rule of law, and human rights and how they should be represented in the world’s architecture. Meanwhile, at home, China’s communists, notwithstanding their success to date, are confronting limits regarding how far they can develop a pluralist market economy without also instituting pluralist political institutions. The party leadership has not yet embraced the “soft” institutional infrastructure that accompanies successful capitalism: impartial courts, clear property rights, proper commercial processes for bank lending, independent auditors, accountability to a free press, independent trade unions, effective corporate governance, transparent antimonopoly rules, free intellectual inquiry, and even a properly functioning welfare system. The party is also facing a growing issue of legitimacy. If it no longer rules as the democratic dictatorship of peasants and workers, because the class war is over, why does it not hold itself accountable to the people in competitive elections? Answers are not easy for it to find.

China is confronting an ideological crisis. With the collapse of the Soviet Union, communism in China cannot now justify itself as part of an international communist movement whose success is historically and scientifically preordained. Instead it has to justify itself through its domestic accomplishments as well as its historic role in enabling China to regain the pride and international respect that had been lost ever since the Opium war of 1839–1842. Successful economic development has thus been one strand of policy to legitimize the party; the other has been nationalism.

This latter sentiment has deep roots. Confucian emperors portrayed China as the center of the universe. For that reason, China’s reversals during the nineteenth century were felt particularly keenly; by the 1870s there was already a patriotic “self-strengthening” movement, aiming to copy foreign methods to recover China’s power, and the mood intensified after defeat by Japan in 1895. After World War I, when German concessions in China were handed over to the Japanese as part of the treaty of Versailles, with no regard for China’s views, this was felt to symbolize all that was wrong. The spontaneous demonstrations that erupted on May 4, 1919, developed into a loose nationalist political movement that was one of the antecedents of the Communist Party’s own official foundation in 1921. Thus today’s introduction of “patriotic” education to inculcate pride in China and in the party’s achievements builds on long-standing instincts. China has to be permanently on guard against its enemies, who have not essentially changed their spots. “The Chinese people must never again be humiliated by foreign aggressors,” runs the official interpretation of history.10 China must avoid disunity at home and be protected abroad by a vigilant communist government.

The weakness of communist ideology, assuaged only partially by this nationalism, is matched by a growing awareness that the logic of reform is rapidly confronting China with a choice. The current halfway house of trying to retain political control of what is in truth only half a market economy is unsustainable. Is China to accept that economic pluralism, along with an institutional infrastructure to confer political pluralism, is the only way a market economy can flourish? Or can it hold the line and manage today’s ambiguities and economic contradictions?

The economy provides an unwelcome answer for the conservative wing of the Communist Party, which wants to hold the line. So far, China has few great companies capable of competing internationally, and almost no global brands. Its private sector consists of a plethora of small transient companies usually dependent on political patronage. China’a state-owned, state-directed, or state-influenced corporations may have the freedom to set prices and wages, but only within limits laid down by the party. Their productivity is disastrous.

The system that has brought China this far is Leninist corporatism rather than anything approaching a proper market economy, let alone a socialist market economy. It is Leninist in the primacy it affords the Communist Party, and corporatist rather than capitalist because it does not foster capitalist economic pluralism. It is neither a communist nor a capitalist economy. The central argument of this book is that for all China’s success to date, ultimately the system that the communists have created is structurally unstable. The next phase of China’s economic and political development must permit more economic pluralism. But that will set in train a process that must challenge the preeminence of the Communist Party.
The Face-Off


China does not face this conundrum in a vacuum. Its sheer scale forces it into structural tension with the United States. There are three primary flashpoints between the two countries—oil, trade, and currency. Looming over all of them is Taiwan, and the possibility that one day China will test the commitment of the United States to defend Taiwan from a Chinese invasion.

The peak of world oil production is clearly imminent. According to some estimates it is already on us, and if it is not, very few expect it much after 2020.11 So it is hardly a surprise that the last two great powers eye each other’s intentions concerning oil with suspicion. A network of Chinese-financed pipelines is appearing or planned in Canada, Venezuela, ...

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