Saturday, June 2, 2007

The China "Threat"

Recent headlines have focused on the perceived "threat" of China to the rest of the world. Whenever an economy develops rapidly, it's ability to threaten other countries increases. But should the rest of the world be alarmed by China's growth?

Let's start with the assumption that the leadership of China is rational- which seems a plausible assumption. (They may have made mistakes in the past, but in general they seem to have learned from them. At the very least, their worst mistakes have not been repeated.) A rational government will not invade another unless it is in their interests to do so.

The more integrated that an economy is with the rest of the world, the less are the gains from any potential military action. In the case of China, these links are strong. The economy is heavily dependent on other developing countries as the source of inputs for production. In turn, it is heavily dependent on developed countries as markets in which to sell its output. Additionally it has huge capital outflows- in the case of official reserves, largely to the United States. The effect of all these factors is to increase the potential costs to China if it were to ever initiate military action.

The increase in economic ties is a tried and true check on military ambition. It lies at the heart of the increasing integration in Europe following World War II, which was just the last in a long series of intra-europe conflicts, spanning many centuries. I believe that it is also the largest check on Taiwan and Beijing; I cheer whenever I hear of increasing investment and trade flows between the two.

Much of the supposed "threat" from China appears to be manufactured by US politicians, playing to a domestic audience in the run-up to presidential elections. Novel Holdings chief Silas Chou, as quoted in the SCMP, sums up the remedy to this perceived threat quite nicely...

"Forget all that political bull****. If Americans would just come to China and make a bit of money, we'd have a happy relationship."

I think he's right. Maybe we should nominate Economics for the Nobel Peace Prize.

For a related view, read here.

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