Washington is Missing the Big Geopolitical Picture

There has been a deluge of bad news for U.S. foreign policy lately – from China’s provocations in Asia to the emergence of a jihadist caliphate in the Middle East and Russia’s predations against Ukraine.  Each of these developments contributes to the erosion of the post-Cold War international order that decidedly privileged America, and each has elicited plenty of discussion about the implications for U.S. engagement in the world and its capacity for global leadership.  So it is passing odd that news about the greatest challenge to U.S. national security – growing concerns about the long-term strength of its domestic economy – has passed in the last few weeks with so little comment.

Read the entire article on the National Interest‘s web site.

[UPDATE, June 25: According to revised Commerce Department data released today, GDP growth contracted a stunning 2.9 percentage points in the first quarter of 2014, far more one percent decline estimated last month.  Many observers blame a combination of one-off factors, such as terrible winter weather and shrinking business inventories, for these dismal results.  But as a New York Times commentator notes, “the fact that the economy as a whole could show such a sharply negative result thanks to a few combined idiosyncratic factors is also a reflection of an underlying weakness.”]

[UPDATE, July 11: The National Association of Business Economists now forecasts that GDP growth in 2014 will only be 1.6 percent, down from the 2.5-percent pace estimated just one month ago.]

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Sorry China – The U.S. is the One Making Space History

This past weekend, China became the third country to land a spacecraft intact on the moon.  The unmanned Chang’e-3 probe subsequently deployed a robot rover that will explore the lunar surface for the next three months, while the landing vehicle will conduct scientific experiments for the coming year.  Beijing’s accomplishment is notable since it was the first time it attempted such a maneuver and the event is an important milestone for Beijing’s aspiring space program.

It’s also being hailed by many in China as a major display of national power.  Referring to the political slogan introduced by Xi Jinping, China’s new leader, the Xinhua news agency exclaimed that “the dream for lunar exploration once again lights up the China Dream.”  Another state-run news agency, sounding a bit like North Korean propaganda, even crowed that “the whole world again marvels at China’s remarkable space capabilities…”

But the hoopla coming out of China is overblown on several counts.  First, the success of the Chang’e-3 comes 41 years after the Apollo 17 mission delivered two astronauts and a rover vehicle on the moon (December 1972) and 37 years after the last unmanned probe landing by the Soviet Union (August 1976).

Second, it elides over the interplanetary efforts by India, China’s rival in the space race that is shaping up in Asia (see here and here for more background).  Six weeks ago, New Delhi launched a probe that is scheduled to reach Mars orbit next September after a 420 million-mile journey.  If all goes according to plan, India will become the first Asian country and the fourth in the world to reach the Red Planet.  Two years ago, a Chinese probe destined for Mars failed to leave Earth’s orbit when its Russian launch vehicle malfunctioned; the probe eventually crashed into the Pacific Ocean.

Finally, it’s the United States that remains the country pioneering the final frontier.  I’ve noted in an earlier post how the U.S. private entrepreneurs are inaugurating a new era in space transportation, taking on tasks that were heretofore the province of national governments.  No other company better illustrates this development than the Space Exploration Technologies Corporation, established by Elon Musk, PayPal’s co-founder and the inspiration for the character of genius billionaire/superhero Tony Stark in the Iron Man movie series.

Three years ago, SpaceX became the first private company to launch and return a spacecraft from orbit.   Then, in May 2012, it began carrying supplies to and from the International Space Station (ISS), filling the void left by cutbacks in the U.S. manned-space program and demonstrating a capability to do what no national government currently can do: deliver and bring back to Earth significant amounts of cargo from orbital platforms.

And two more recent exploits demonstrate how SpaceX remains at the forefront.  In September, after deploying a small satellite in orbit, a SpaceX rocket performed an unprecedented maneuver by re-entering the earth’s atmosphere at hypersonic speed without burning up.  The plan for a controlled descent to the Pacific Ocean went awry, however, when the vehicle spun out of control and fragmented upon hitting the water.  But SpaceX is confident that it can perfect its design for reusable rocket engines and plans to try again in February during its next cargo run to the ISS.

And earlier this month, SpaceX ventured beyond low-Earth orbit to place a communications satellite into geosynchronous orbit – approximately 22,000 miles above the Earth — for a fraction of the going market rate.  This is the first time that a privately-built launch vehicle has delivered a private commercial satellite into orbit.   According to the Wall Street Journal, the deployment credibly establishes SpaceX “as a low-cost alternative to legacy satellite-launch providers backed by U.S. and foreign governments.”  In recognition of the company’s successes, NASA last week announced that it is leasing iconic Launch Pad 39A at the Kennedy Space Center in Florida to the firm.  SpaceX currently has a backlog of more than 50 missions for NASA and commercial customers, including 10 cargo runs for the ISS.

Beyond just hauling around cargo, SpaceX, along with another start-up called Blue Origin and run by Amazon.com co-founder Jeff Bezos, is in the running for NASA contracts to send humans into space.  A Silicon Valley-based startup called Moon Express plans to send a landing vehicle to the moon in late 2015, with the long-term objective of mining resources.  A new company, called Planetary Resources, has announced plans to extract minerals from asteroids.  Co-founded by Peter Diamandis, the impresario behind the X Prize, the firm has received investment capital from Google executive chairman Eric Schmidt and co-founder Larry Page, as well as James Cameron, the Hollywood director and explorer.

The expanding U.S. commercial space industry illuminates a strategic trend that underscores America’s staying power but which tends to get lost in the hype and hand-wringing about China: How private-sector dynamism is supplementing and in some cases supplanting governmental efforts to push forward the frontiers of science, technology and imagination.  As The Economist puts it, “China is busy re-living the past for much the same reasons that America and the Soviet Union lived it the first time round. [But] the future lies elsewhere.”

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The China Hype is now being tested in Asia

Criticizing the conventional wisdom about the inevitability of China’s global ascendancy and American strategic decline is a regular preoccupation for this page.  Indeed, a recent post took aim at the prevailing notion, subscribed to by a wide-ranging group that includes Barack Obama and Sarah Palin, that Beijing can translate its vast holdings of dollar-denominated assets into policy leverage vis-à-vis Washington.  So, it’s worth underscoring several developments this week that bear on these points.

One is a commentary piece by Ian Bremmer, the high-profile political risk guru who during the height of the China hype a few years ago was advising (herehere and here) that the future belonged to state-managed capitalism that Beijing, among others, practices.  Yet in a New York Times op-ed piece a few days back, he concedes that …

… although China’s economic influence is growing — it is now the lead trade partner for 124 countries, compared to just 76 for the United States — its power to influence other nations is slight. It has achieved little of what policymakers call ‘capture,’ a condition in which economic or security dependence of one country on another allows the more powerful to drive the other’s policy making.

And he concludes that “neither China nor anyone else appears ready and able to fill America’s superpower shoes.”

Bremmer was hardly alone in his prophesying about how the explosive growth rates China was then racking up would reshape the contours of international politics.   Economic policy expert Arvind Subramanian, for instance, colorfully opined that America’s growing financial dependence could eventually allow China to evict the United States from its long-established strategic position in the western Pacific.  Like Bremmer, he too has now walked back this view.

And events currently playing out in the skies over the East China Sea have so far failed to conform to Subramanian’s expectations.  It is unclear what prompted China’s attempt to establish unilateral control over the area’s airspace, though the move could be related to the growing demands in Beijing that Washington show greater deference toward China’s strategic interests in East Asia.  The New York Times quotes a White House adviser as saying:

‘It’s pretty clear this isn’t really about the [Senkaku islands dispute].’ Declining to speak on the record about a sensitive strategic issue, the official added that it was about a desire by some in China, including the People’s Liberation Army and perhaps the new political leadership, ‘to assert themselves in ways that until recently they didn’t have the military capability to make real.’

The adviser added: ‘They say it’s in response to our efforts to contain them, but our analysis is that it’s really their effort to push our presence further out into the Pacific.’

Philip Stephens, the foreign affairs columnist at the Financial Times, has come to the same conclusion.

But whatever the Chinese calculus, the prompt pushback by the United States, in the way of dispatching military aircraft unannounced into the zone as well as vocally reaffirming the U.S.-Japan security alliance, is at odds with the Subramanian thesis.

Australia is an excellent case study for whether China can use its economic power to bend policymaking in other countries.  A staunch U.S. ally and an outpost of American influence in Asia, the country has also benefited mightily in recent years from China’s voracious appetite for mineral resources.  A small but prominent group of opinion leaders has sprung up arguing that Washington, for the sake of global stability, needs to strike new power-sharing arrangements with Beijing in the Asia-Pacific region.  Hugh White, a retired senior defense official, has taken the lead on this front, though he is joined (here and here) by Paul Keating, a former prime minister.  Indeed, the release earlier this year of a new defense white paper spelling out a more conciliatory strategic approach to China seemed to exemplify the kind of policy “capture” that Bremmer talks about.

But the “capture” thesis suffered a sharp rebuke with Tony Abbott’s sweeping election victory three months ago.  The new prime minister in Canberra is unabashedly pro-American, suspicious of Chinese economic influence, and has taken to calling Japan “Australia’s best friend in Asia.”  His government also is siding with Washington and Tokyo in the present crisis over the East China Sea, and has banished the just months-old defense white paper from government websites.

Events in Asia are now furnishing a real-world test for ideas that became fashionable at the peak of the China hype, when we were told incessantly that Beijing was all set to rule the world and that America was in danger of becoming China’s bitch.  So far, however, developments have belied what many would have predicted.

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The Conventional Wisdom is Schizoid about U.S. Global Power

The conventional wisdom about America’s global standing wants to have it both ways.  The narrative about last month’s fiscal melodrama in Washington emphasizes how wildly dysfunctional domestic politics are quickening the country’s strategic decline and how China is emerging as the beneficiary.  Yet at the same time the outrage over U.S. global surveillance efforts has produced a contrary image – a technology and security hegemon run amok.

As I note in a new article for Asia Sentinel, the conventional wisdom embodied in the first perception has been consistently wrong about China’s ability to translate its huge financial holdings into policy leverage vis-à-vis the United States.  Curiously, this is a fear shared all along the ideological spectrum within the United States. 

Sarah Palin, the matron of the Tea Party movement, expressed this sentiment the other week when she spoke about the danger of borrowing so heavily from China and warned that “We are going to [be] beholden to the foreign master.”  But Barack Obama famously sounded the same theme during the Senate’s debt ceiling debate in March 2006 when he cautioned that “the more we depend on foreign nations to lend us money, the more our economic security is tied to the whims of foreign leaders whose interests might not be aligned with ours.”

Mr. Obama carried this line into his first presidential campaign.  In July 2008, he argued that taking out “a credit card from the Bank of China” was “unpatriotic.”  A few months earlier, he talked about the changing dynamics of the U.S.-China relationship and conceded that:

It’s very hard to tell your banker that he’s wrong. And if we are running huge deficits and big national debts and we’re borrowing money constantly from China, that gives us less leverage. It give us less leverage to talk about human rights, it also is giving us less leverage to talk about the uneven trading relationship that we have with China.

Secretary of State Hillary Rodham Clinton picked up this line, privately fretting about “How do you deal toughly with your banker?” and suggesting to news media that traditional concerns about human rights had to be put aside in order to work with Beijing on the global economic crisis.

Others, too, joined the chorus.  Two years ago, economic policy expert Arvind Subramanian colorfully opined that America’s growing financial dependence would eventually allow China to oust the United States from its long-established military position in the western Pacific (– a view he has now quietly revised).  And Peter D. Kiernan, a former Goldman Sachs partner, sounded the alarm about how America risked becoming Beijing’s bitch. 

There is no question that the United States needs to get its financial house in order.  The Congressional Budget Office warns in a new report, for example, that America’s long-term fiscal posture looks increasingly shaky.  But the widespread angst about the deteriorating financial balance of power between the United States and China is wildly overplayed.

Overwrought, too, was the instant analysis about how last month’s U.S. government shutdown and debt ceiling debate is another signpost on the path to strategic decline.  Richard Haass, the president of the Council on Foreign Relations, for example contended that “American political dysfunction is hastening the emergence of a post-American world.”  Yet for all of the histrionics in Washington, it’s worth noting that the yield on ten-year U.S. Treasury bills hardly moved and the risk of a sovereign debt default was exceedingly small.  Noteworthy, too, is that just six months earlier Haass was bucking prevailing opinion and proclaiming that “we could already be in the second decade of another American century.”

The conventional wisdom is a temperamental thing even in the hands of the most skilled experts.  This becomes clear when examining the hue and cry over the National Security Agency’s global electronic snooping.  The general image here is of a highly-organized and well-equipped government taking full advantage of its country’s capacity for technological innovation and big-data processing to develop the world’s most sophisticated surveillance network. 

Whatever one thinks of their utility, legality and propriety, the NSA’s overseas capabilities are astoundingly impressive: monitoring the personal communications of scores of government leaders around the world; scooping up on a monthly basis hundreds of millions of digital communications in Europe alone; ingesting a daily tsunami of data on worldwide banking and credit-card transactions; and harvesting hundreds of millions of contact lists from personal email and instant messaging accounts around the world. 

As the New York Times put it recently, the NSA is “an electronic omnivore of staggering capabilities” which has “an almost unlimited agenda.  Its scale and aggressiveness are breathtaking.”  The distinguished European pundit Josef Joffe notes that the message sent to the rest of the world by the unconstrained exercise of such vast power is “We do it because we can.”

True, disclosures about the NSA’s feats have dented America’s reputation and perhaps undercut its more tangible diplomatic and economic interests.  But it is also the case that the global outrage is partly rooted in envy, as Bernard Koucher, a former French foreign minister made clear in a radio interview: “The magnitude of the eavesdropping is what shocked us.  Let’s be honest.  We eavesdrop, too.  Everyone is listening to everyone else.  But we don’t have the same means as the United States, which makes us jealous.”

Just a decade ago, the conventional wisdom fancied the United States as an űberpower that could easily afford to disregard the sensibilities of its closest allies.  Just a few years later, following the collapse of Lehman Brothers, the perception shifted radically to a wearying hegemon about to be outpaced by China.  And sometimes, as the last month or so illustrates, it just seems can’t make up its mind.

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Private Enterprise and the U.S.-China Power Contest

A central focus of this blog is handicapping the global power sweepstakes between the United States and China.  And a regular theme here is the role private enterprise is playing in revitalizing U.S. strategic power – whether it’s in the resurgence of the manufacturing sector or in launching the oil and natural gas boom (here and here) that is rapidly transforming the global energy scene.  Compare this to the situation in China, where lumbering state-owned corporations threaten to scuttle much-needed economic reforms and are unable to duplicate America’s shale energy revolution.

Recent weeks have brought fresh evidence underscoring this contrast.  The Economist reports that nine of the ten most valuable companies in the world are American, as are over half of the top 50.  Just four years ago, state-controlled companies in China and other countries dominated the ranks of the top ten.  A recent study by PricewaterhouseCoopers tells a similar story, as does a Fortune survey of the world’s most respected companies (in which U.S. firms occupy 28 of the top 30 rungs.)

Of course, rankings like these are snapshots of moving targets and have limited predictive value.  Prosperous Japanese banks were prominent in the standings in the late 1980s just before the country fell into a two decade-long hole of bad debt and deflation.  And America’s current high scores are due, at least in part, to the poor showing of Eurozone companies.

But at the very least, the current scorecard shows how far off are the prophecies (here, here and here) from just a few years ago about the future belonging to state-managed capitalism.  Remarkably, less than two years ago, a major U.S. labor union figure was asserting that China’s superior economic model calls into question the very premises of America’s free market system.

Also worthy of note is a new Boston Consulting Group study highlighting the growing cost advantage enjoyed by U.S. manufacturers vis-à-vis their competitors in Europe and Japan.  It predicts that this edge, combined with the on-going reshoring of production capacity from China back to the U.S., could add 2.5 million to 5 million manufacturing and related service jobs by 2020.  The prospective changes in the global manufacturing landscape are so dramatic that Morgan Stanley’s emerging markets team believes (here and here) that growth prospects are at risk in the emerging countries – including China – that previously feasted on off-shoring.

We continue to see the return of manufacturing to the U.S.  In the electronics sector, Google has decided to assemble its digital earwear in California, and Motorola Mobility (a Google subsidiary) is opening a smartphone factory in Texas that will employ about 2,000 workers.  Apple is investing $100 million in a plant to assemble some of its Mac computers in Texas.  And a number of foreign companies, like Toyota, Siemens and Airbus, are starting to use the United States as a global exporting platform.

Finally, consider how inefficient, and in many cases oligopolistic, state-run companies are dragging down China’s growth outlook.  According to the Wall Street Journal, state conglomerates grew barely half as much as private firms over the past year despite the privileged claim they have on bank financing.  Moreover, state businesses “generated an average 4.6% return on assets last year, compared with 12.4% for private sector firms. One in four state firms operated at a loss in 2012, compared with 8% of private-sector firms.”

It’s much too early to declare a victor in the contest for global power between America and China.  But the evidence presented here and elsewhere on this blog does suggest that too many bought into the “China rising” narrative too uncritically, even as they were overlooking the underlying sources of U.S. power.

UPDATE (September 25, 2013): A just -released survey by the Boston Consulting Group finds that more than half of all large U.S. manufacturing companies are planning to relocate production back to the United States from China or are actively considering the move.

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China and the Dangerous Shoal of Reform

Two recent news items out of China have raised expectations that the new leadership in Beijing intends to push ahead with major market-oriented policies.  The first is an announcement that a key Communist Party conclave will gather in November to set out an economic blueprint for the coming decade.  The second is that Jiang Jiemin, the head of the commission overseeing the sprawling array of state-owned companies, has been sacked for corruption.  Since these well-connected firms have stymied key economic reforms in the past, some view the move as an attempt to bring defenders of the status quo to heel in the ramp-up to November’s meeting.

The country is at a significant inflection point, one that the most ardent proponents of the “China rising” narrative (examples herehere and here) failed to see coming. Continue reading

Will China Miss Out on the Shale Energy Revolution?

Consider this striking paradox: Just as the Energy Information Administration announces that new shale discoveries are driving record increases in U.S. proved oil reserves and near-record additions in proved natural gas reserves, huge energy companies are reporting sagging production and profits.  Royal Dutch Shell, for example, posted a 60-percent drop in second-quarter profits, largely because of drilling disappointments at its North American shale assets.  Exxon Mobil, the largest American energy company, reports a 57-percent drop in quarterly earnings.  It, too, has had trouble capitalizing on the U.S. shale boom.  Ditto for Chevron.

Skeptics will point to Big Oil’s difficulties as evidence that what many have taken to calling the “shale gale” is more hype than reality.  But it more likely confirms the thesis set out a year ago by Philip Verleger, a noted energy expert.  He posits that the winners of the shale revolution will be nimble companies capable of quickly drilling on a vast number of low-cost sites, rather than “Exxon-type” integrated oil companies that “excel at developing a few very expensive, highly productive projects that yield high-cost supplies.”

Verleger’s point about organizational constrains is underscored in a new essay put out by the Center for Strategic & International Studies.  In it, Jonathan Chanis, an emerging markets specialist, argues that:

The proximate cause of the US energy revolution is technological, but the more important cause is better industry organization and a more agile and adaptable oil and gas business culture…

… One of the primary reasons the US natural gas industry is so successful is because it is composed of thousands of independent companies.  These companies are innovative and they are able to deploy nimbly hundreds of rigs and other exploration and production assets.

So far, much of the burgeoning U.S. production of shale oil and natural gas has come from independent companies, and not the well-known multinational giants.  Indeed, a recent survey of 50 of the world’s biggest energy producers found that they are facing sharply rising production costs and shrinking profit margins.  And yet for every Exxon and Shell, there are smaller, more fleet-footed energy companies that have managed to increase output, cash flow and earnings.

All of this has stark implications for China, which is making a big push to increase its shale gas production. Continue reading