Sunday, June 22, 2008

Geopolitics In One Lesson

I just read an absolutely fascinating article in Investor’s Insight, featuring a report by Stratfor on the geopolitics of China.  If you’re a politics geek like me you should read the whole thing, because it really gives a lot of insight into some of the points I’ve made here before. 

In the west we find it hard to understand why Russians would idolize Stalin or the Chinese would idolize Mao, considering their histories, but what each provided their respective nations was stability and power.  The communist ideology has the concept of equality as its alleged backbone.  What they did was make everyone equally poor, but also solidified their nations.  When the USSR fell the country splintered into a number of different countries, because the only thing holding them together was the central Soviet government.  China is exactly the same way, and if democracy were to come to the country it would suffer the same fate.  This is why there is such support among the people for the idea of a strong central government, they view it as essential to providing for China’s future peace and prosperity.

The coastal threat to China is economic, and most would not call it a threat. As we saw, the British intrusion into China culminated in the destabilization of the country, the virtual collapse of the central government and civil war. It was all caused by prosperity. Mao had solved the problem by sealing the coast of China off to any real development and liquidating the class that had collaborated with foreign business. For Mao, xenophobia was integral to natural policy. He saw foreign presence as undermining the stability of China. He preferred impoverished unity to chaos. He also understood that, given China’s population and geography, it could defend itself against potential attackers without an advanced military-industrial complex.

His successor, Deng Xiaoping, was heir to a powerful state in control of China and the buffer regions. He also felt under tremendous pressure politically to improve living standards, and he undoubtedly understood that technological gaps would eventually threaten Chinese national security. He took a historic gamble. He knew that China’s economy could not develop on its own. China’s internal demand for goods was too weak because the Chinese were too poor.

Deng gambled that he could open China to foreign investment and reorient the Chinese economy away from agriculture and heavy industry and toward export-oriented industries. By doing so he would increase living standards, import technology and train China’s workforce. He was betting that the effort this time would not destabilize China, create massive tensions between the prosperous coastal provinces and the interior, foster regionalism or put the coastal regions under foreign control. Deng believed he could avoid all that by maintaining a strong central government, based on a loyal army and communist party apparatus. His successors have struggled to maintain that loyalty to the state and not to foreign investors, who can make individuals wealthy. That is the bet that is currently being played out.

It also explains how trade is an important tool for the west to use to foment change in other nations.

The problem of China, rooted in geopolitics, is economic and it presents itself in two ways. The first is simple. China has an export-oriented economy. It is in a position of dependency. No matter how large its currency reserves or how advanced its technology or how cheap its labor force, China depends on the willingness and ability of other countries to import its goods—as well as the ability to physically ship them. Any disruption of this flow has a direct effect on the Chinese economy.

The primary reason other countries buy Chinese goods is price. They are cheaper because of wage differentials. Should China lose that advantage to other nations or for other reasons, its ability to export would decline. Today, for example, as energy prices rise, the cost of production rises and the relative importance of the wage differential decreases. At a certain point, as China’s trading partners see it, the value of Chinese imports relative to the political cost of closing down their factories will shift.

And all of this is outside of China’s control. China cannot control the world price of oil. It can cut into its cash reserves to subsidize those prices for manufacturers but that would essentially be transferring money back to consuming nations. It can control rising wages by imposing price controls, but that would cause internal instability. The center of gravity of China is that it has become the industrial workshop of the world and, as such, it is totally dependent on the world to keep buying its goods rather than someone else’s goods.

There are other issues for China, ranging from a dysfunctional financial system to farm land being taken out of production for factories. These are all significant and add to the story. But in geopolitics we look for the center of gravity, and for China the center of gravity is that the more effective it becomes at exporting, the more of a hostage it becomes to its customers. Some observers have warned that China might take its money out of American banks. Unlikely, but assume it did. What would China do without the United States as a customer?

China has placed itself in a position where it has to keep its customers happy. It struggles against this reality daily, but the fact is that the rest of the world is far less dependent on China’s exports than China is dependent on the rest of the world.

Fascinating stuff, and definitely a good insight into how to handle future dealings with Iran, North Korea, Cuba, and other potential threats.