Why America is still insecure of China

The decision of key American allies like UK, Germany, France, South Korea and Australia to join the Chinese-led Asian Infrastructure Development Bank (AIIB) marks another step forward in the shaping of a Chinese-led Asian economic and, possibly, security order. It also underscores the missteps of the US in dealing with the consequences of the rise of China.

The Obama administration actively discouraged its allies from participating in the AIIB, in which countries like India are founder members. The US appears to be defensive in trying to defend the American-led Bretton Woods system that dominated the world order since its creation in the wake of WWII. The AIIB, capitalised at $50 billion is no threat to either the Japan-led Asian Development Bank, or the US-led World Bank, which have higher assets. But the US has been tone-deaf in hearing the voice of the emerging countries call for some readjustment of the world financial order.

Crisis

The G20 was recast by the 2008 financial crisis with a view of promoting coordination between the G8 and the emerging economies, but while declarations have been many, there has been little action. The gridlocked US political system contributes to the US’ sticky footing.

Flush with cash, China is seeking to internationalise its financial clout. In the past year it has helped create the BRICS bank (aka New Development Bank) and laid down $40 billion for the One Belt One Road Silk Route initiative. This process should be welcomed, rather than be opposed. Right from the outset, the US assumed AIIB would not have transparent lending practices and it would be an instrument of Chinese foreign policy. Both charges may have some truth in it, but opposing it was not the best strategy. By joining the bank as founder-members, the various countries will have a say in its running and the ability to shape its behaviour.

The problem with the US is that even though its economy is closely intertwined to the Chinese, it seems to be committed to a strategy of countering China through initiatives like the Trans Pacific Partnership which excludes China. The US has continuing frictions with China over cyber issues, as well as its territorial claims in the South China Sea. No matter how you look at it, American policy seems to suggest that its goal is to contain China.

But there is another way of looking at the Asian giant. This is as a country which is desperately seeking to ensure that it does not become old before it becomes rich and whose foreign policy imperative is to ensure stability and prosperity of the country as a guarantor of the continuing rule of its Communist Party.

Investment

It is to this end that the goal of the party leadership is to shift its economy from an investment and labour intensive model, to one that emphasises innova-tion and entrepreneurship. Those who are looking at the “Make in India” plans of the Modi government will be surprised to note that the workshop of the world — China, too, is raising the slogan for “Made in China 2025” . China’s prowess in manufacturing is well established. But equally it is well known that China is often the integrator of goods made by others. The best example, perhaps, is the iPhone. Its chips and touch sensors are made in Taiwan, display panels in South Korea and Japan, Sony supplies front and rear cameras, TDK Japan provides inductor coils, Toshiba and Hynix of South Korea the storage, and the whole thing is assembled in China. The whole phone costs around $200-250 to make, of which the Chinese reputedly make just $6.

Well, the Chinese are now focusing on moving up the manufacturing food chain. Earlier this month, during the annual meeting of China’s parliament, the National People’s Congress, Premier Li Keqiang unveiled the “Made in China 2025” policy along with an “Internet Plus” plan which will centre around innovation, smart technology, mobile internet, cloud computing, big data and the internet of things. In the meantime, China is undertaking reform of its state owned enterprises. Discussions are afoot to merge the two high-speed rail manufacturers, the China North Railway and the China South Railway. A reshuffle of top leaders at the country's two state-owned ship-builders indicates the government is looking for a merger here as well.

Production

As The Economist pointed out, the era of cheap Chinese labour has passed. In its time it was this cheap labour that gave a fillip to the notion of China being the factory of the world. But as we have seen, China was really the low-cost integrator, dependent on complex supply chains. But now, average Chinese wages are surpassing those of the ASEAN. Chinese manufacturing is also getting better at producing home-designed goods, an example being the Xiaomi smart phone. A lot of low-wage Chinese production is shifting to countries like Vietnam and Indonesia. In an important speech to the Boao Forum on Saturday, China’s president Xi Jinping struck an “Asia for Asians” line emphasising his government’s goal to use China’s economic might to shape a new Asian economic and security order.

In the past few months we witnessed a shift in Chinese policy towards creating financial instruments to promote Asian integration. At the same time, the Chinese are also trying to reshape the security arrangements in the region. Last May, Xi had called for the Conference on Interaction and Confidence Building Measures in Asia (CICA) to come up with a new security architecture for Asia. Compared to China, the moves of the US appear flatfooted and confused.