The question about the Philippines is a tiny part of a bigger question: what kind of relationship do we want between the U.S. and China? My vote would be to have China as a trading partner, with the balance of trade on our side, rather than as a military rival. So how do we go about making that happen? Do we ring China with military bases and increase military spending? Or do we enter into trade agreements with them?
These waters aren’t uncharted. Most of what is being being said about China vs. U.S. was said about Japan vs. the U.S., circa 1977 to 1990. Back then, Americans were terrified that Japan was supplanting the USA as the world’s economic superpower. America was toast, the pundits said (via TV and newsprint, because there was no internet). The USA, weak and saddled with debt, was a has-been. The 21st Century would be the Japanese Century. Hell, Japan OWNED the U.S., all sorts of self-appointed experts moaned, pointing out the Japanese had bought up immense amounts of our securities, and were snapping up real estate and corporations left and right.
Where is all that talk about Japan being top-dog nowadays? What happened to all those predictions, all the punditry? Where is Japan—the once-anointed superpower of the 21st century— economically nowadays?
Japan’s economy tanked in the 1990’s. It has never recovered. Will likely never recover. Why? Economics and demographics. And those same economics and demographics are working away on the Chinese economy.
Economics: Japan’s largest industrial advantage over the U.S. was cheap labor. The Japanese people were famous as dedicated and skillful workers, who made a fraction of what Americans workers were paid. They did the same job better, for less. But as Japanese prosperity increased, wages rose, until the Japanese lost their price-point on the world stage. By the 1990’s it became cheaper for Japanese corporations to outsource production to other countries—such as China (which in the 1980’s was an impoverished Communist scrapheap). Japan is still an economic powerhouse, but no one is talking about it supplanting the USA as the top economic dog.
Demographics. When modern industrial societies reach a certain level of education and wealth their birthrate decreases. For example, while the U.S. population is increasing, it does so only by immigration. Americans don’t make enough children to replace themselves. The Japanese are the same—except, because Japanese society is xenophobic, no immigration. Result: Japan’s population is falling, The Japanese workforce is aging. It is difficult for an industrial economy to grow with fewer workers every year. Other nations, faced with the same demographic collapse as the Japanese, would be in terrible shape. To their credit, the Japanese, with their peculiar national character, hold it all together with little social distress. So far.
Now what is the economic and demographic situation with China? In terms of their industrial base, the Chinese are roughly at the same place when the Japanese were in the late ’70’s, and they know it. They know their trade advantage lies in cheap labor, as did the Japanese economy. Chinese leaders also know that when their cheap labor becomes not so cheap, their economy will stall. When we read about the Chinese manipulating the value of their currency, they’re doing it to keep their labor cheap, and to keep their price-point on the world’s markets. But they can only manipulate currency so much. When the cost of Chinese labor rises to a certain point—when the average Chinese workers reaches a certain fraction of the average Americans worker’s pay—the Chinese will lose their trade advantage, and the Chinese economy will, with the rosiest of scenarios, experience the 1%-4% annual growth of a mature industrial economy. Or they may plateau out, as the Japanese economy generally has.
Demographics: Beginning around 1980, China had a draconian one-child policy. Each family was allowed only one child. The effect of the policy is being felt in Chinese society now. The Chinese population is stabilizing, which in terms of their economic progress is not so good. They recently changed the one-child policy to a two-child policy.
“The rationale for the abolition [of the one-child policy] is summarized by former Wall Street Journal reporter Mei Fong: "The reason China is doing this right now is because they have too many men, too many old people, and too few young people. They have this huge crushing demographic crisis as a result of the one-child policy. And if people don’t start having more children, they’re going to have a vastly diminished workforce to support a huge aging population.”
India will surpass China in population very soon. Even with the two-child policy China is in trouble, because they are educating their population quickly, and educated people have low birth rates. The best the Chinese can hope for is a stable population, and it is difficult for a stable, aging population to grow an economy. The way you do it is to move away from manufacturing inexpensive goods to manufacturing expensive trade goods, and, then to highly complex trade goods and services.
Right now the Chinese are attempting this transition, before they lose their advantage in labor costs, and before their population bottleneck plays havoc with their economic growth. The Chinese are making entire cities from scratch (on a lot of borrowed credit) as a place to park their soon to be aging populations, so as to minimize social disruption. The Chinese Communist Party has a mandate to rule as long as they can continue to pull huge economic growth out of their collective ass, but when the growth stalls, with no democratic institutions to manage public expectations, look out for typhoons.
China wants wealth and prestige, through commerce. They want to continue to be the world’s industrial superpower. To do that they need to continue to sell goods to the rest of the world, and then bank the profits. They sell us stuff, then take the profits and split it between building infrastructure in China, and investing it in U.S. securities, real estate, corporations etc., just as the Japanese did (I focus on the U.S., but the Chinese are investing everywhere, of course). But China fears its own weaknesses will drag it down before they reach the safe harbor of social stability. We look on China as a behemoth. China looks at itself as a poor country that could be great, but only if does everything right. Their modernization program is on a timetable. Lose their price-point too quickly and India will eat their lunch. (China looks to India with the same unease we look at China). Tamp down wages too long, and they will have social upheaval.
So getting back to our Pacific strategy: what is it for? My vote is for a strategy of keeping the U.S. a superpower by growing our economy and reducing our debt, biding our time until China’s economy plateaus. I don’t think we should fight old wars and think in terms of WW2. In WW2 the situation was simple. Germany and Japan were bent on territorial expansion, and the wealth it would bring. The Axis powers were existential threats for us. Hence we had no choice but to go to war. China would have major territory ambitions, if not for the threat of a shooting war with the U.S. and its allies, or with India, or, worse yet for China, loss of trade. How does it prosper China to go to war with the USA? They would lose their markets. We would seize their U.S. assets. Their delicate economy would collapse.
If we want to fence-in China with more U.S. military bases, fearing war, we must be prepared for the Chinese to make one more military base then we do, one more aircraft carrier than we do. At which point we begin a military escalation with no end in sight, which would bankrupt one or both countries. Moreover the temptation to use all those bases, ship, and weapons, would grow more tempting the poorer we got, in order to justify the cost. This was, in part, the military situation between Britain and Germany right before WW1. The two countries had a massive naval arms race which was bankrupting both sides. They were glad for war to break out in 1914, to stop all the spending Or so they thought, because the war ended up all but bankrupting the UK , and bankrupting Germany, anyway. Or, to cite a more recent example, do we want a return to Cold War spending, on top of what we owe right now?
If you read up on the Pacific Pivot it seems more of a public relations exercise than anything else. Some of our allies have told us thanks but no thanks when it comes to mutual military preparedness. Australia. for example, has China as its biggest trading partner. Australia’s leaders see no reason to endanger their trade by becoming bellicose with China. They have told us they are not interested in an overtly anti-China military posture. So how do we handle that? Do we threaten Australia? Send gunboats into Sydney Harbor (joking)? Do we try to buy the Australians off? Either way we spend money we don’t have. So we advertise to our “Pacific Partners” that we are paying attention, and will aid any country that is afraid of China (Japan and South Korea may be in that group), without getting into an arms race, if we can avoid it. If countries like the Philippines want to “defect” to China there is not much we can do—except to remind them, behind close doors, not to expect any more sugar from Uncle Sam, and not to come running to us when China begins to tug on their leash. We need to maintain the world’s sea lanes by supporting international laws when it comes to right of passage. China may not want gobble up countries but it will press outwards unless it comes up against someone pressing back.
But mostly, I believe ,we have to watch our spending and grow our economy. Ironically, one of the ways we managed our tension with Japan back in the 1980’s was using something called a “trade agreement”. For example: the Japanese auto industry was decimating the U.S. auto industry in the ’80’s. Better cars for less money than Detroit’s product. We didn’t like the loss of American jobs, but we did like the cars. So we entered into an agreement with Japan—we would buy “Japanese” cars, but a certain number of them had to be made in the U.S. The Japanese took the profits, and U.S. workers got jobs. Lower paying jobs than those in Detroit, but jobs nonetheless. That’s an example of how trade agreements can work for the U.S., and how we should be working with the Chinese. Hard-bargained trade agreements that work both ways. Unfortunately trade agreements have a bad odor now, and Congress is busy with the business of Perpetual Outrage, rather than trying to make things work at home.