China Cold War or Luke Warm War?

Via ASPI comes Amy King is a senior lecturer at the Strategic and Defence Studies Centre at the Australian National University:

For more than a century, close economic ties between China and Japan have developed in the absence of cooperative political and security relations, suggesting that the first is not a necessary precondition for the second. But the relationship also demonstrates the limits of the thesis that close economic ties can mitigate key sources of bilateral insecurity or political tension.

Following Japan’s victory in the First Sino-Japanese War (1894–95), Japan received a series of valuable but highly unequal economic rights in China: most-favoured-nation status, preferential treatment for Japanese goods, and foreign investment rights for Japanese manufacturers. These economic rights created the foundation for a highly complementary economic relationship that has endured despite colonialism, war, a Cold War divide, historical grievances, territorial disputes and contestation over the future of the US-led order in Asia.

Deep patterns of economic integration between China and Japan offer three critical lessons for thinking about the factors that might help to build habits of cooperation in Asia.

First, individual businesspeople have helped to sustain close economic ties between the two countries despite major changes in governing regimes, political systems and economic ideology over the past century. In the 1930s and 1940s, Japanese business leaders travelled to China as part of Japan’s colonial empire in Manchuria. They established the industries in China that would extract Chinese soybeans and iron ore in exchange for Japanese machinery and steel. In the 1950s and 1960s, these same Japanese were among those who sought to rekindle trading ties between communist China and post-war Japan. They would also develop government and business relationships that flourished following China’s economic reforms in the 1970s and 1980s.

As Kristin Vekasi has shown, Japanese firms with a high degree of familiarity with China’s business and political environment are much less risk-averse than firms that have limited experience in China. Japanese firms that are deeply integrated into Chinese society and business communities have been willing to maintain or increase their economic presence in China, even as they have experienced costly anti-Japanese riots, boycotts and physical damage to their firms and products.

Second, flows of goods and people between China and Japan have been accompanied by flows of economic ideas. Japan has been a major influence on Chinese thinking about industrial-led development, the role of science and technology in a modernising economy, and linkages between the military and civilian segments of an industrialised economy.

As China’s largest-ever provider of official development assistance, Japan played a major role in shaping China’s contemporary approaches to foreign aid and development, including its large-scale Belt and Road Initiative. Beginning in 1979, Japan provided bilateral loans to finance the building of roads, railways, ports and other major infrastructure projects in China.

Japan’s focus on infrastructure-led development stemmed from its own experience of economic development. Japan had a view that infrastructure it provided would enable it to facilitate trade with, and extract natural resources from, recipient countries. Japanese firms also frequently won contracts to build large-scale infrastructure projects in China.

China’s firsthand experience of Japanese development assistance—and the hundreds of Chinese officials who worked closely with Japanese government agencies to administer infrastructure-led development in the 1980s and 1990s—have shaped China’s own infrastructure-based development assistance as it shifted from recipient to donor country.

Third, deep patterns of economic cooperation between China and Japan have created a separate sphere of regional economic activity that has often worked against the grain of the global order. During the first half of the Cold War, when global trading relations became divided into rival US-led and Soviet-led blocs, Japan and China continued to trade across Cold War lines.

Maintaining these trade ties wasn’t easy in the absence of diplomatic relations—a result of the wishes of Japan’s ally, the United States—and given China’s Soviet-style planned economy. But the persistence of China–Japan trade helped to chip away at US expectations that its allies would undertake wholesale economic containment of China. It also provided China with important economic alternatives to the Soviet Union and laid the foundations for supply chains that would later underpin a distinct East Asian economic order.

Japan and China continue to exhibit similar patterns of strengthened regional economic activity in the face of a fracturing global order. Since 2018, they have established mechanisms that facilitate joint investment in third-country infrastructure projects. Agencies such as the Japan External Trade Organization and the China Council for the Promotion of International Trade are collaborating on joint business development in Southeast Asia. The China Development Bank and the Japan Bank for International Cooperation have agreed on common principles, initiated by Japan, to guide ‘high quality’ infrastructure investment.

Ongoing economic cooperation between China and Japan seeks to bring about greater convergence in global infrastructure investment to counter simplistic narratives seeking to pit ‘Western’ and ‘Chinese’ approaches to economic development against one another. This bilateral economic activity shouldn’t be expected to ease the deep-seated political and security challenges in the China–Japan relationship. But the China–Japan infrastructure, investment and trade relationship serves as a critical example of how regional economic activity can resist the march towards economic decoupling or a ‘new Cold War’.

Economic cooperation between Japan and China has become habituated in persistent flows of people, goods and ideas. These flows have their own independent momentum that has helped to sustain economic ties throughout periods of bilateral political conflict, serving to weld a fragmenting global order.

That is probably right. Though I certainly see ongoing decoupling from the global economy forced upon China. It’s not just tariffs. It’s human rights, especially as Hong Kong deteriorates. Niall Fergsuon chimes in:

The one big risk with Cold War II would be to assume confidently that the United States is bound to win it. That is a misreading of both the first Cold War and the present situation. In 1969, an American victory over the communist enemy seemed far from inevitable. Nor was it a foregone conclusion that the eventual collapse of the Soviet Union would be so free of bloodshed.

Moreover, China today poses a bigger economic challenge than the Soviet Union ever did. Historical estimates of gross domestic product show that at no point during the Cold War was the Soviet economy larger than 44 percent of the economy of the United States. China has already surpassed America by at least one measure since 2014: G.D.P. based on purchasing power parity, which adjusts for the fact that the cost of living is lower in China. The Soviet Union could never draw on the resources of a dynamic private sector. China can. In some markets — notably financial technology — China is already ahead of the United States.

In short, 2019 is not 1949. The North Atlantic Treaty was signed 70 years ago to counter Soviet ambitions; nothing similar will be set up to contain China’s. I do not expect a second Korean War to break out next year. Nevertheless, I do expect this new Cold War to get colder, even if Mr. Trump attempts a thaw in the form of a trade deal with China. The American president might have been the catalyst behind the big chill, but it’s not something he can just undo when he pleases.

In 2007, the economist Moritz Schularick and I used the term “Chimerica” to describe the symbiotic economic relationship between China and the United States. Today, that partnership is dead. Cold War II has begun. And, if history is any guide, it will last a lot longer than the president on whose watch it started.

That’s partly true though Chinese GDP is probably exaggerated by 30% and has similar problems to the USSR in its massive capital misallocation (empty apartments verus military build up) so its economic power is also over-emphasised.

Melvyn P. Leffler, history professor emeritus at the University of Virginia, rounds us out at The Atlantic:

I am a historian who has been writing about the U.S.-Soviet Cold War for nearly three decades. However tempting the analogy might be as China’s influence and military strength grow, invoking it now is profoundly wrong. The Cold War happened not simply because there were two superpowers in the world, but because of the specific circumstances confronting the United States after 1945. The historical context in which the United States operates today, the prevailing configuration of power in the international arena, and the ideological appeal of the rival regime are all entirely different. In today’s circumstances, Cold War–era policies—starting with the containment strategy adopted in the late 1940s—are not only unnecessary, but likely to catalyze a destructive spiral of heightening tensions that would make the world a more dangerous place.

The Chinese today are not seeking to destroy Americans’ way of life, as the Soviets were said to be doing in the 1940s. Indeed, the Chinese accept fundamental aspects of our capitalist marketplace, and they have similar interests in halting climate change, fighting terrorists, and combatting pandemics. China should be regarded as a serious rival as well as a crucial partner. But despite recent tensions, the rivalry is entirely less dangerous than the one with the U.S.S.R. after World War II—and the potential partnership so much more important to the welfare of both nations and to the global commons.

…Reflecting on this history, Americans should understand the impulses behind Chinese actions and prudently appraise them. But we should not encourage or institutionalize a zero-sum approach to international politics, as Cold War metaphors incline us to do. The United States should solidify its long-standing alliances in the western Pacific; enhance relations with India, Vietnam, and Indonesia; and thwart intellectual-property theft and Beijing’s practice of forcing Western firms to hand over proprietary technologies as a condition of entering the Chinese market. But at the same time, the United States must acknowledge and nurture a mutuality of interests in promoting open trade and freedom of navigation, fighting climate change and preparing for pandemics, and countering the proliferation of weapons of mass destruction and terrorist organizations with global reach.

Americans must not dismiss a rivalry inherent in China’s regional ascendancy and growing global power, but the United States should also seek to avoid a spiraling era of distrust in which both sides will lose.

Again, partly true. But it must be remembered that, even if we see it as defensive in nature, the CCP is intent upon controlling global freedom through the expansion of its surveillance state to ensure its own survival.

That is a fundamental conflict with liberal democracy.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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