China: Economic Power, Political Enigma

Khao San Road, the Mecca for budget travelers in Bangkok, is one of Asia's finest bazaars of cheap goods. Thai massages, marijuana, and fake journalist accreditation badges that put my ID to shame are among the many items for sale at rock-bottom prices. Compact discs are a particularly excellent value. Last month, I bought five pirated CDs for $4. All were new albums. All offered high-quality sound. All were made in China.

Pirated CDs are but one example of the dilemma facing China—and every other nation affected by the mainland's actions. After entering the World Trade Organization (WTO) in January, China is striving to banish its image as an economic loose cannon full of intellectual property pirates, dogmatic officials, and murky business rules. Beijing wants to be regarded as a normal trading nation. For the first time in decades, China has also begun to assume a leading role in international affairs and is trying to change its image as a diplomatic enigma—sometimes bullying, sometimes strangely silent, and rarely helpful. Beijing would like to be seen as joining the fight against terror and helping to preserve international stability.

A close reading of recent events, however, suggests that the People's Republic is not quite ready for prime time. China is becoming a more responsible international actor only in some areas. On the economic front, China is proving a relatively proactive, reformist, and stable trading nation. In political and diplomatic matters, however, the evidence is less clear; in some ways, Beijing's foreign policy is becoming more unilateralist and more dangerous. Only when Washington comes to terms with this massive bifurcation between economic and diplomatic behavior can it effectively manage both aspects of the relationship with China, helping Beijing consolidate its role as an engine of growth while preempting the most disastrous effects of China's penchant for diplomatic misadventures.

An Economic Player but Not a Gorilla

During the past year, as the U.S. economic boom came unhinged, a raft of stories about China's economy have appeared in the U.S. press. These articles often emphasize China's enormous trade surplus with the United States, discuss the large-scale migration of Taiwan's industry to Shanghai (a development that some fear may force Taiwan to reintegrate with the mainland), and paint scenarios of China's cheap, and sometimes forced, labor prompting global price deflation. Some of these articles are reminiscent of the atmosphere of the late 1980s, when Japan seemed poised to dominate the U.S economy, a development that triggered laughable, anti-Japan books such as Rising Sun and even prompted some Americans to consider Pat Buchanan's rabid xenophobia seriously.

The alarmists need to recalibrate their sights, however, because China's growth is not the major concern. The belief that China's astounding development—averaging 10 percent annually for the past two decades—will decimate Asia ignores both standard macroeconomics and the situation on the ground. Clearly, some Asians are worried. New Delhi is so concerned about Chinese competition that it has forbidden Infosys Technologies, a leading Indian software company, from training Chinese engineers. Nonetheless, despite massive foreign investment into China, the mainland actually imported more from Southeast Asia last year than it exported to the region. Many leading businesspeople are not overly concerned about Chinese goods prompting international price deflation. ¹ Moreover, because China's services industry is so backward, foreign companies should be able to dominate this lucrative market on the mainland. More than 35 million ethnic Chinese live in Southeast Asia, so Asia's services industry is well positioned to grab market share. Indeed, Thailand's tourism industry already is drawing millions of Chinese travelers, who are flocking to Bangkok's fleshpot red-light areas. U.S. services companies also could reap huge rewards. AOL Time Warner has signed a deal to provide cable television on the mainland, and Universal Studios last winter announced it may confer on China the ultimate symbol of globalization: a...