Postcards From Tomorrow Square (17 page)

But I am saying that for now, Americans shouldn’t worry about an ideological challenge from China, or whether China’s economic rise will soon mean the preeminence of the “Chinese idea.” The people and leaders of China have too much else on their minds. What I’ve learned from China, so far, is that instead of girding to defend the American idea against some new foreign challenge, we should take the opportunity to shore it up, in three ways.

T
he first way is ensuring a particular kind of openness, which at all times has been the essence of America. The country needs to keep making room for its own people, while also continuing to make room for people from outside. It’s not easy to achieve both goals, since in the short run, they conflict. The Americans most likely to be muscled aside by hungry outside talent are those with the odds against them in other ways. That’s a reality. Rather than ignore the tension or use it as an excuse to close the borders, we have to find a way to reduce it. Otherwise, we cut off one of the two strengths (the other being military power) that no other country can possibly match.

A leading Chinese university, Jiao Tong of Shanghai, publishes an annual ranking of the best universities in the world, based on their research excellence. This is a soberer assessment than the fanciful “Best College” charts in U.S. magazines, and it emphasizes America’s complete dominance of the field. On the latest Jiao Tong list, America has eight of the top 10 positions (exceptions: Cambridge and Oxford in England), and 17 of the top 20. (The other exception: the University of Tokyo, at 20.) China has zero of the top 100, and Japan has six. When I asked a Jiao Tong professor about the ranking, he said it was unfairly skewed, because American universities can take talent from everywhere else.
Yes
. We have to keep it that way, and for more than just universities.

Second is being idealistic but not consistent—or not foolishly consistent, as one of
The Atlantic Monthly’s
founders put it 150 years ago. The United States can’t and shouldn’t be a status quo power. Consciously or not, most Americans believe that as the rest of the world modernizes, in crucial ways it will come to resemble us more and more. Let’s skip for a moment the reasons why that belief is silly and instead recognize that it is very strong. It is part of our founding principle. The Declaration of Independence spoke of “the course of human events,” not the complaints of the American colonists. The constant arrival of immigrants reminds us that people from around the world actually do want to become Americans. (A few hours before writing this, I heard from a young woman in the hinterland of Sichuan province: “My dream, to go to America!”) Globalization has had a large Americanizing component—that’s part of the complaint against it. While any sensible person wants to learn as much from other cultures as possible, Americans are bound to think that we have something to tell others about individual potential, about the idea of equality, about respect for civil liberties. The rest of the world understands this, which is why our recent infringements on our own civil liberties are so damaging to our image worldwide.

But retaining that idea doesn’t mean believing two apparently consistent corollaries: that everyone else actually does want to be like us, and that it is within our power to force or entice them to. Believing this makes us believe that other countries—Japan a generation ago, China today—are just about to become America-like, and that if they resist, they can be forced to comply. (To say nothing of Iraq.) Speak for our values, yes, and clearly. Be deluded about them, no.

Finally, we should display the confidence, good humor, and thick-skinnedness befitting a country of our stature. When living in Japan, I heard accounts from many Japanese who had gone to the U.S. for business or study in the 1950s, after the Allied occupation ended. They looked at the factories and the farms and the vastness of America and asked themselves: What were we thinking? How could tiny Japan have imagined challenging the United States? After the Soviet Union fell and the hollowness of its system was exposed, many Americans asked: What were we thinking about “two superpower” competition with the U.S.S.R.? Its missiles were lethal and its ideology was brutal and dangerous. But a rival to America as an overall model? John F. Kennedy was only one of many to suggest as much, in his 1960 campaign references to the prestige gap as well as missile gap that had opened. Eventually, we all learned there had been no comparison at all. I think if more Americans came to China right now and saw how hard so many of its people are struggling just to survive, they too might ask: What are we thinking in considering China an overall threat? Yes, its factories are formidable, and its weight in the world is huge. But this is still a big, poor, developing nation trying to solve the emergency of the moment. Susan Shirk, of the University of California at San Diego, recently published a very insightful book that calls China a “fragile superpower.” “When I discuss it in America,” she told me, “people always ask, ‘What do you mean,
fragile
?’” When she discusses it here in China, “they always ask, ‘What do you mean,
superpower
?’”

Foreign examples are useful spurs to internal action. Sputnik served that purpose 50 years ago, and Japan’s industrial successes led to valuable changes in American corporate and fiscal practices nearly a generation ago. A look at China can help America address its main shortcomings—reckless fiscal and foreign policies, delay in moving away from dependence on oil—and perhaps also suggest ways the nations can work together on challenges, mainly environmental, that threaten them and others.

But let’s not panic. Let’s show the patient confidence—Lincoln, Marshall, Eisenhower—that is part of the American idea. Let’s not look for slights or imagined insults to react to. Among our worst enemies at the moment is our own hair-trigger mentality about foreign challenge, and the enemies that outlook generates. Our idea is strong. We should act as if we know that.

THE $1.4 TRILLION QUESTION

JANUARY 2008

S
tephen Schwarzman may think he has image problems in America. He is the cofounder and CEO of the Blackstone Group, and he threw himself a $3 million party for his sixtieth birthday in 2007, shortly before making many hundreds of millions of dollars in his company’s IPO and finding clever ways to avoid paying taxes. That’s nothing compared with the way he looks in China. Here, he and his company are surprisingly well-known, thanks to blogs, newspapers, and talk-show references. In America, Schwarzman’s perceived offense is greed—a sin we readily forgive and forget. In China, the suspicion is that he has somehow hoodwinked ordinary Chinese people out of their hard-earned cash.

Last June, China’s Blackstone investment was hailed in the American press as a sign of canny sophistication. It seemed just the kind of thing the U.S. government had in mind when it hammered China to use its new wealth as a “responsible stakeholder” among nations. By putting $3 billion of China’s national savings into the initial public offering of America’s best-known private-equity firm, the Chinese government allied itself with a big-time Western firm without raising political fears by trying to buy operating control (it bought only 8 percent of Blackstone’s shares, and nonvoting shares at that). The contrast with the Japanese and Saudis, who in their nouveau riche phase roused irritation and envy with their showy purchases of Western brand names and landmark properties, was plain.

Six months later, it didn’t look so canny, at least not financially. China’s Blackstone holdings lost, on paper, about $1 billion, during a time when the composite index of the Shanghai Stock Exchange was soaring. At two different universities where I’ve spoken recently, students have pointed out that Schwarzman was a major Republican donor. A student at Fudan University knew a detail I didn’t: that in 2007 President Bush attended a Republican National Committee fund-raiser at Schwarzman’s apartment in Manhattan (think what he would have made of the fact that Schwarzman, who was one year behind Bush at Yale, had been a fellow member of Skull and Bones). Wasn’t the whole scheme a way to take money from the Chinese people and give it to the president’s crony?

The Blackstone case is titillating in its personal detail, but it is also an unusually clear and personalized symptom of a deeper, less publicized, and potentially much more destructive tension in U.S.–China relations. It’s not just Stephen Schwarzman’s company that the
laobaixing
, the ordinary Chinese masses, have been subsidizing. It’s everyone in the United States.

Through the quarter century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

A
ny economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does. Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.

In the article “Countdown to a Meltdown,” published in the July/August 2005 issue of
The Atlantic
, I described an imagined future in which a real-estate crash and shakiness in the U.S. credit markets led to panic by Chinese and other foreign investors, with unpleasant effects for years to come. The real world has recently had inklings of similar concerns. In late 2007, relative nobodies in China’s establishment were able to cause brief panics in the foreign-exchange markets merely by hinting that China might stop supplying so much money to the United States. In August 2007, an economic researcher named He Fan, who works at the Chinese Academy of Social Sciences and did part of his doctoral research at Harvard, suggested in an op-ed piece in
China Daily
that if the U.S. dollar kept collapsing in value, China might move some of its holdings into stronger currencies. This was presented not as a threat but as a statement of the obvious, like saying that during a market panic, lots of people sell. The column quickly provoked alarmist stories in Europe and America suggesting that China was considering the “nuclear option”—unloading its dollars.

A few months later, a veteran politician named Cheng Siwei suggested essentially the same thing He Fan had. Cheng, in his mid-seventies, was trained as a chemical engineer and has no official role in setting Chinese economic policy. But within hours of his speech, a flurry of trading forced the dollar to what was then its lowest level against the euro and other currencies. The headline in the
South China Morning Post
the next day was: “Officials’ Words Shrivel U.S. Dollar.” Expressing amazement at the markets’ response, Carl Weinberg, chief economist at the High Frequency Economics advisory group, said, “This would be kind of like Congressman Charlie Rangel giving a speech telling the Fed to hike or cut interest rates.” (Cheng, like Rangel, is known for colorful comments—but he is less powerful, since Rangel after all chairs the House Committee on Ways and Means.) In the following weeks, phrases like “run on the dollar” and “collapse of confidence” showed up more and more frequently in financial newsletters. The nervousness only increased when someone who does have influence, Chinese Premier Wen Jiabao, said in November 2007, “We are worried about how to preserve the value” of China’s dollar holdings.

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).