MCLC: how to avoid the Thucydides Trap

[Denton, Kirk]

MCLC LIST
From: Sean Macdonald <smacdon2005 at gmail.com>
Subject: how to avoid the Thucydides Trap
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Source: Asia Times (6/6/13):
http://www.atimes.com/atimes/China/CHIN-04-060613.html

Comment
Accentuate the positive
By Bill Mundell

When Chinese President Xi Jinping meets President Obama tomorrow at
Sunnylands, California, the agenda will likely be populated with the same
issues that have dogged the relationship for years - currency values,
North Korea, protection of intellectual property, human rights - and some
newer ones that have heated up recently, such as cyber-security and
conflict in the South China Sea.

This will all be discussed in the context of China's historic rise and the
seeming inevitability of China eclipsing the US economy sometime in the
next decade - something that no power has managed to do since the US
became the world's largest economy in the 1880s.

History teaches us this can be dangerous. When emerging power confronts
established power, there is potential for conflict, whether actual war or,
as in the case of the Soviet Union's challenge to the US, for proxy wars
and a long, expensive and ultimately draining Cold War.

Both China and the US know how important it is to avoid this so-called
Thucydides Trap. They can minimize that possibility by increasing their
already significant economic interdependence, which creates powerful
incentives to resolve any conflicts and distinguishes the US-China
relationship from other historical power contests.

But they also need a new and more positive interdependence. That would
create what President Xi has called "a new type of great power
relationship".

We need to come up with a new framework that better aligns China's need to
invest its massive reserves - US$3.3 trillion and rising - and America's
need for infrastructure renewal. China already invests in the US, in the
form of 8% or so (and falling) of outstanding government debt. But China
doesn't believe the US-dominated financial system provides adequate
protection against potential losses on these reserves, so it is looking to
invest in US-based hard assets as well.

US infrastructure satisfies this objective and is a sufficiently large and
needy target. Some estimates put the US infrastructure deficit as high as
$3 trillion. It is difficult to imagine America's continued prosperity if
this is not addressed.

China's foreign direct investment may exceed $1 trillion over the next
seven years. Last year, China deployed more of this capital in Australia,
the 12th largest economy, than in the US, the largest.

We are losing out on this historic opportunity to restart America's growth
and maintain our status in the world because of reflexive fears that
permeate our relationship with China. It has prevented us from working out
a rational non-controlling architecture for foreign investment in our
infrastructure as large parts of the rest of the world have done.

If we can accomplish this, we can entice the new power to invest in the
established power, harness the remarkable energy of China into cooperation
not conflict, and finally replace the mutual mistrust with goodwill.
Rising Chinese strength can be leveraged to sustain established American
strength.

The Obama-Xi summit, no matter how optically pleasing, cannot be expected
to change US public opinion enough to pave the way to open up the
floodgates of Chinese investment here. Nor should the Chinese rely on the
billions that they have reportedly spent on slick Madison Avenue campaigns
to soften US opinion towards China.

Rather, the Chinese should realize that this can't happen without changing
the political incentives of our leaders here. That requires the Chinese to
be bolder about their commitment to America.

If the Chinese now announced that they intend to invest say a minimum of
$100 billion per year for the next five years in US infrastructure, they
would create a flurry of US state-level proposals, rather than the trickle
that exists today.

The greater competition for those dollars - in effect a beauty contest
between the states - would transform the political calculus of local
leaders. Chinese investment would become a vehicle for improving the lives
of their constituents rather than something to be feared.

This state-led initiative could open the way for a much freer flow of
investment into the country. The federal government would surely follow
the lead set by the states.

Notwithstanding the chorus of China watchers channeling a Nixon-meets-Mao
moment - and there is at least some possibility of a breakthrough on North
Korea - the real shift in the long-term relationship between China and the
US is more likely to happen between Beijing and the states. President
Obama and President Xi should create the framework for that to happen.

Bill Mundell (www.billmundell.net <http://www.billmundell.net/>) is a
member of the advisory board of the Annenberg-Dreier Commission at
Sunnylands.
(Copyright 2013 Bill Mundell)