How the U.S. Facilitates the Rise of China and Its Geo-Political Challenges

Edward Luttwak is one of America’s most important strategic thinkers, although less well known to the American public than other ‘strategic celebrities’ such as Henry Kissinger. Luttwak’s recent book, The Rise of China vs. the Logic of Strategy demonstrates his extraordinary grasp of both China and strategic thinking. He argues that China’s rapid increase in wealth has been and will continue to be accepted by the rest of the world. But the military rise of China will be met with pushback from the U.S. and the Asian states subject to pressures from Beijing. Their joint and individual responses will serve to temper China’s rise. That, he argues, is the ‘logic of strategy.’

The economic success (and physical transformation) of China have been stunning. But in large measure it was facilitated by the United States. Luttwak is severely critical of the policies of the U.S. Treasury that have aided China at the expense of the U.S. and of American firms, a criticism made by economists including very powerfully by Ed Guay.

Here are lengthy quotes (Pp. 222-226) that make Luttwak’s case:

“To be sure, technological leakage from aerospace joint ventures is merely as subset of the broader diffusion of U.S. technology to China, most of it not misappropriated, of course, but rather contractually transferred by the leading U.S. corporations. It is not their managers’ proclivity, and still less their responsibility, to calculate the long-term effects on the overall condition of the U.S. economy of all technological transfers to China. . . .

“The great flow of technology transfers to China is in turn merely a subset of the unbalanced U.S.-China economic relationship as a whole, which is beneficial for Americans as consumers, borrowers, and financiers above all, while being harmful to Americans as workers and producers, but which is evidently so beneficial to the Chinese that it shapes the entire “American policy” of the CCP, with the overriding aim of perpetuating that unbalanced economic relationship for as long as possible, or rather until China emerges as the richer and more advanced country.

“. . . the best evidence is the China policy of the U.S. Treasury, which seeks to perpetuate exactly the same unbalanced economic relationship, in spite of the deindustrialization caused by the chronic trade deficit in manufactured goods. Objectively, if not subjectively, the U.S. Treasury, under its current leadership as before, actively favors China’s economic growth and technological advancement –having no departmental responsibility, or perceptible concern, for the inevitable relationship between China’s overall economic and technological capacity and its resulting military aggrandizement. That is simply not part of the Treasury brief, and there has been no presidential intervention to make it so. . .”

Not all of the U.S. Government takes the same position as the Treasury. The State Department, for example, sees China with more clarity of vision:

“Unlike the U.S. Treasury, whose policies are premised on a product-improved China, which should never be penalized because it is perpetually on the verge of allowing the yuan to rise in value, and to finally enforce its own intellectual property laws, the State Department accepts the continuing reality that makes China different from other non-allies, such as India, for example, and similar to the Russian Federation and Venezuela, for example – to wit: China cooperates with the United States only when its interests demand such cooperation, whereas it habitually opposes the United States whenever its interests allow such opposition.”  (p. 126)

What explains the policies of the U.S. Treasury that facilitate the rise of China at the expense of the United States? While Luttwak provides no definitive answer to this question, I would suggest three possible explanations.

First, when China was new to the game of international trade and manufacturing, Treasury, along with many others in the U.S., did not take China seriously. It was almost impossible to imagine how China could develop after the chaos of the Communist revolution, the Great Leap Forward and the Cultural Revolution. It was only in 1980 that China’s first ‘Special Economic Zone’ was set up at Shenzhen and China was still an impoverished and backward country.

Policy makers might have gotten a better sense of China’s future had they looked at other rapidly growing Asian states. Japan and Korea, in particular, were exemplars of rapid growth before China. They demonstrated that the economic transformation that growth brought to them could do the same for China.

Second, many policy makers believed that as China became more prosperous, it would become more like the U.S. Or if not like the U.S., at least China would be willing to accept the post-World War II order that the U.S. had established.

In some ways, largely superficial, Japan and Korea had become more like the U.S. as they grew prosperous – the Western business suit, the love of baseball and gaming in Japan, the widespread Christianity in Korea and its military cooperation with the U.S. But in non-superficial ways, both Japan and Korea became more, rather then less, like Japan and Korea. The essential elements of each country’s culture were strengthened with prosperity. There was every reason to assume the same would be true of China.

Third, as U.S. wages began to stagnate in the late 1970s, decreasing prices of imported manufactured goods from China had a salutary effect on living standards. Further, the declining prices helped maintain U.S. political stability by reducing demands for government action over worker compensation.

When income inequality began to be seen as a problem – at least from the presidency of Bill Clinton and continuing with George W. Bush, the government took steps to ease the plight of Americans whose wages had stagnated. They implemented policies that opened the prospect of home ownership to Americans who had never before been able to realize that part of “the American dream.” China thus played an important role in U.S. domestic politics.

Finally, there have been ardent backers of a perpetually open and welcoming U.S. policy to China, none more important than Henry Kissinger. Since his crucial role in the “opening” of China in the 1970s, Kissinger has remained the most outspoken defender of China among U.S. political elites. That his company, Kissinger Associates, has benefitted immensely from its ability to “open” China to U.S. firms is surely not mere coincidence. (Not incidentally, Timothy Geithner, President Obama’s Treasury Secretary from 2009 – 2013, studied Mandarin in 1981 and 1982 and worked for Kissinger Associates for three years early in his career.)

Whatever the factors that have led the U.S. to adopt the policies of the past that facilitated the rise of China, there is little reason to maintain them now. The U.S., while upholding its commitments to free trade and an open global economy, needs now to hold China to account for its policies that restrain trade from U.S. firms and provide differential advantages and subsidies to Chinese firms.

Marvin Zonis is Professor Emeritus, Booth School of Business, The University of Chicago.