Mishandling the China Challenge

Mishandling the China Challenge

Donald Rumsfeld, fresh from wrecking U.S.-European relations over the last three years, has decided to try his hand at Asian affairs.

By Fareed Zakaria

If you look at two recent events, you might well conclude that the Chinese are a lot smarter at handling the United States than we are at handling them. This week China National Offshore Oil Corp. (Cnooc) ended its bid for the American energy firm Unocal, scared off by rising opposition to the deal from Congress. The deal would not have given China any special lock on energy supplies. The only real downside to its collapse is that we will never get to see the merger fail, as it likely would have, and recognize that the Chinese had overpaid for a second-tier firm. Recall that before the Japanese went on their real-estate spree in the 1980s (which scared Americans silly and produced the 1988 law that allows the government to block such deals), they bought oil reserves and other such commodities, thinking they'd gain special advantage through direct ownership of them. But markets didn't work like that then and it remains to be seen if that strategy would work now.

More important, the way in which the United States killed this deal has sent a bad signal around the world. It suggests that we're intolerant of China's economic rise and want to stop it. It also suggests hypocrisy. For years the United States has been pushing countries around the world to open up their energy sector to foreign investment. In particular, we've been making this case aggressively to China and Russia. When protectionist officials in other countries want to fend off a bid from an American (or other foreign) company, they invoke national-security concerns. Now they have a perfect precedent. And if the effect of the Unocal affair is to close the energy sector around the world to foreign investment, the damage done to American interests probably outweighs any gains in killing the deal. It also slows the opening of the Chinese economy, which is bad for the United States for both economic and political reasons.

Now take the second event, the recent announcement of the "East Asian Summit" in Kuala Lumpur this December. The summit will include the Southeast Asian countries plus China, Japan, South Korea, India, New Zealand and Australia. In other words, it is not simply an East Asian gathering but rather a broader one encompassing the major nations of the Asia-Pacific, with one notable exclusion: the United States of America. Despite being the dominant military and political player in the region, America has not been invited, the first time it has been excluded in such discussions.

This is how the Chinese challenge presents itself. It is not a crude attempt to corner the world's energy supplies but rather a quiet effort to establish itself as the dominant player in Asia. China pursues this strategy not by making noisy threats, but by making itself crucial to other countries in the region. Consider the turnaround in Indonesia. Ten years ago, when Indonesian officials spoke of their security concerns, China was usually on top of the list. Today, they speak of China only as a partner.

China's growth strategy has been different from that of Japan. When Japan rose to power, it did so in a predatory fashion, pushing its products and investments in other countries but keeping its own market closed. China has done the opposite, opening itself up to foreign trade and investment. The result is that growth in countries from Brazil to Australia increasingly depends on the Chinese market. China is making itself indispensable to the world. Even India, which is wary of China's rise and is a counterweight to it, will not ignore this reality. In three years its largest trading partner will be China, displacing the United States of America.

The Bush administration does not seem to know how to handle this new challenge. Donald Rumsfeld, fresh from wrecking U.S.-European relations over the last three years, has decided to try his hand at Asian affairs. He's off to a characteristically clumsy start. Rumsfeld made a speech in Singapore recently where he complained about China's rising military budget. It's a cause for concern, but Rumsfeld handled it crudely, producing a backlash. Singapore's Straits Times was one of dozens of regional newspapers that reported on the speech by pointing out that "the U.S. military budget consumes more than $400 billion annually [closer to $500 billion if you add in Iraq and Afghanistan] and accounts for almost half of global defense spending." "Experts estimate," the newspaper continued in the next sentence, "that China spends between $50 [billion] and $90 billion on defense." Now instead of talking about China's military growth, Asians are talking about Rumsfeld's paranoia.

China's rise presents great opportunities and great challenges for the world. But they are new and quite complex. There are some in Washington—like Rumsfeld—who seem to see it as a replay of the cold war, with China playing the role of the Soviet Union. This misunderstands both present-day China and the world we're living in.

George Santayana famously observed that those who can't remember the past are condemned to repeat it. Here's my variation: those who only remember the past are condemned to misread the future.