[Viewpoint] China deserves our gratitude

The news that China has overtaken Japan as the world’s second largest economy did not come as a surprise. This is the major geo-political outcome of the Great Recession of the early 21st century - one that carries both economic hope and political fear.

First, the good news: the economic side of the case. China’s response to the world economic crisis is the central reason why the financial turbulence that emanated from the U.S. sub-prime debacle did not completely destroy the world economy and lead to a repeat of the 1930’s Great Depression.

In a famous analysis of the Great Depression, the economic historian Charles P. Kindleberger argued that it arose from a failure of world leadership. Great Britain had been the hegemonic power of the 19th century, but its creditor status had been severely eroded by the cost of fighting World War I.

The U.S. emerged from the war as the world’s largest creditor, but it had a double vulnerability. Its financial system was unstable and prone to panic, and its political system was immature and prone to populism and nativism.

In the Great Depression, according to Kindleberger, the U.S. should have provided an open market to foreign goods. Instead, the Smoot-Hawley Tariff Act closed off American markets and provoked other countries into a spiral of retaliatory trade measures.

U.S. financial institutions should have continued to lend to distressed borrowers in order to prevent a spiral in which credit rationing forced price reductions and intensified world deflation. Instead, U.S. banks, widely blamed for the international lending boom that preceded the bust, were so intimidated and weakened that the flow of American credit stopped.

After World War II, as a leading figure in developing the Marshall Plan, Kindleberger set about applying these lessons: the U.S. should keep its markets and its flow of funds open to support other countries.

How different the 21st century looks! It is as if China’s leaders were the star pupils in one of Kindleberger’s courses. Throughout the crisis, the Chinese economy continued to grow at an amazing pace, in part as a consequence of massive fiscal stimulus.

When anyone wants an example of how effective a Keynesian counter-cyclical strategy can be, internationally as well as domestically, they need look no further than China’s four-trillion-renminbi 2008-2009 stimulus.

Apart from a six-month period after the September 2008 collapse of Lehman Brothers, in which trade finance stopped and the world did look as if it was close to Great Depression circumstances, China and other emerging markets helped those export-oriented industrial economies to recover.

The surprising strength of the German economy, with more vigorous growth than at any time in the past 15 years, is due to the dynamism of emerging-market - particularly Chinese - demand, not only for investment goods, engineering products, and machine tools, but also for luxury consumer products. Germany’s high-end automobile producers are now operating at full capacity.

China also followed Kindleberger’s financial lessons. For a moment, it looked as if a contagious crisis, driven by fears of government over-indebtedness, would destroy the politically fragile compromise that European countries had carefully constructed over a 50-year period.

The turning point in this spring’s euro panic came when big holders of reserve currencies signaled that they saw the need for the euro as an alternative to the increasingly problematic dollar and the equally vulnerable yen. China started to buy European Union governments’ bonds, and a high-profile Chinese team even went to Greece to buy under-priced real assets.

It was not just Europe that benefited from China’s willingness to take on the mantle of “lender of last resort.” The new-found dynamism of African economies is a consequence of the Chinese drive to build up and secure sources of raw materials.

But there is a problem with Kindleberger’s argument. Kindleberger, a kind and well-meaning man, could never see that the world is never entirely grateful to the country that saves it. Being a hegemon is a thankless task.

The beneficent effects of China’s engagement in the world economy are felt much more powerfully farther away from China. In that sense, too, there is a parallel with the story of the U.S., whose leadership was felt much more positively in Europe than it was in Canada, Mexico, or Central America.

It is not surprising that the greatest and strongest ideological opponent of the American way of life was not in distant Europe or Asia, but in Cuba, just 90 miles off the Florida coast. Since the early 20th century, Mexicans have felt worried and threatened by American strength. And, in the same way, Taiwan and Vietnam feel that they will be the Chinese giant’s first victims.

The global hegemon has never been loved by its neighbors. But the U.S. gradually, if imperfectly, built up trust through multilateral institutions. Europeans did much better at reconciliation with their neighbors after World War II, in part because the malign and evil conditions of Nazi rule made it necessary to talk about the past in terms of moral categories rather than power politics.

In contrast to America’s engagement in multilateralism, or Europe’s search for reconciliation through a plethora of common institutions, power politics is much more a part of Asia’s 20thcentury legacy. The real challenge for China’s leaders will be to develop a coherent view of the world that does not scare the people just across the border.

*Copyright: Project Syndicate, 2010.
The writer is Professor of History and International Affairs at Princeton University.

By Harold James