Unlikely allies

China and the United States have been brought together by terrorism. David James and Al Reyes analyse the implications for the region.

THE TERRORIST ATTACK on the United States has brought military issues to the fore and cast economic concerns into the background. In terms of America's relationship with China, it may lead to a mutual recognition that they have more interests in common than there are forces driving them apart.

The military tensions that have characterised US-China relations - especially since the incident when a Chinese spy plane collided with a US spy plane near Hainan Island - may ease. It was noticeable that President Jiang Zemin was quick to express "deep shock" at the attacks in the US, and it is not inconceivable that faced with a stateless terrorist threat, sovereign states may discover they have a common enemy and pursue previously unimaginable loose alliances.

At the very least, the Westphalian model, in which all power is thought to be expressed through the nation-state, is being shown to be inadequate. In future, the tensions will be played out in a far more complex environment of national, transnational and stateless interests. The world's two premier nation-states - the US, the dominant superpower, and China, the emerging giant - are likely to have a mutual interest in finding ways to respond to this probable decline in national hegemony.

The change of the US administration's focus is bad news for the world economy. The enormity of President George W. Bush's treatment of China in current world economic conditions is easy to grasp. For the first time since 1973, all the big economies of the world - Japan, the US and Europe - are either in recession or on the verge of recession.

The terrorist attack in the US is only likely to accelerate a downturn. The engine of the world economy has been US consumer demand: it accounts for two-thirds of the US economy; and the US economy produced two-thirds of world economic growth in the second half of the 1990s. This was already looking under threat, with household savings near zero in the US.

It was only the extent to which consumers thought their assets in the stockmarket and housing market were appreciating (household savings at the time of the attack were about 14 per cent when adjusted for realised capital gains) that gave them the confidence to buy.

The psychological effects of the terrorist attack and probable further declines in the stockmarket (and possibly also the housing market, although the easing of interest rates makes this less likely) suggest that consumer demand in the US will drop.

This leaves China's domestic economy as the only bright spot in the world economy. Building China's domestic strength increasingly looks to be the only way that the big economic powers can work out their massive imbalances.

The importance of China's continuing its economic growth is evident when looking at the level of debt in the Asian region, with debt in non-Japan Asia and Japan at $US2 trillion each (total debt in Japan is the equivalent to 500 per cent of GDP). With non-performing loans in many parts of Asia, including Japan, at around 30 per cent, it is small wonder that the pundits are describing the situation in the region as "the heaviest debt work-out in history".

Bush had derided the idea that China could be a strategic partner. He may feel differently when faced with an elusive adversary that does not represent a state but a civilisation. Indeed, viewed through the prism of civilisation, the US's Christian and secular culture sits in far less obvious conflict with China's Confucian, and increasingly capitalist, culture. And in the economic sphere, not taking a partnership approach to China implies a level of choice that is probably not available to the Bush administration. With global economies becoming more interdependent - and China choosing to participate by continuing to open up its economy - even the powerful US has less capacity to act as if it were alone.

And the US is scarcely free of debt problems itself, with a current-account deficit that has widened to a record 4.3 per cent of GDP. The only pain-free way to get out of indebtedness is economic growth; and the only country displaying that kind of growth currently is China.

The most crucial event is the November meeting in Doha, Qatar, of the World Trade Organisation's (WTO's) 142 member countries, when there will be an attempt to launch a new global trade round.

After the terror attacks, that this meeting is to take place in the Middle East takes on much more than economic significance. The terrorists targeted, in the World Trade Centre, one of the premier symbols of economic globalisation. The WTO's response will be a seminal political signal: if the members choose to go ahead with the meeting and "stand firm" in continuing the globalisation process, it could well be the basis for new forms of international coalitions against all global threats, not just terrorism.

Whereas the political implications of globalisation have tended to be in the background - merely a consequence of economic change best ignored - now they are crucial. A more "normal" situation in world affairs has emerged, in which politics takes precedence over economics. The Bush administration's former focus on achieving Trade Promotion Authority (TPA) was due to a realisation that if Bush did not achieve TPA now, he would have to wait for another four years. He also had to overcome objections in both the Senate and the Congress, whereas usually it is only the Congress that provides significant opposition.

Now, his attention is elsewhere, but the economic imperatives have not changed. One of the benefits of Chinese openness is that the country cannot adopt the mercantile (trade-oriented) strategy employed by Japan and much of South-East Asia. The reason is that it is simply too big: China cannot rise to economic strength on the back of trade; it must ultimately aim to become a continental economy like the US.

It should also be clear to the Chinese leadership, when it looks at countries such as Singapore and Taiwan - which depend heavily on exports to the US - that basing economic growth mostly on trade carries with it high economic risk. Many of the smaller Asian economies rely on trade for more than half their GDP. Such risk would be unpalatable in China. For all its recent successes, the Chinese leaders still face the largest economic challenge ever seen.

In short, despite the military posturing, both countries need each other economically, a lot more than either would probably like to admit. China is in a position eventually to become a second "market of last resort", so easing the pressure on the US, which has fulfilled that role for more than two decades. Already, US companies sell more in the Chinese domestic market than they export back to the US.

Commercially, there are signs of an improvement in relations. Bush's choice of Yale classmate and respected Mandarin-speaking commercial lawyer Clark "Sandy" Randt as ambassador to Beijing has gone down well among the American business communities in China, particularly Hong Kong, where Randt has lived for several years.

This month, Bush travels to Shanghai for the Apec summit and then on to Beijing for a state visit and talks with his Chinese counterpart. It was thought that by this time, he needed to be well along the path of achieving fast-track authority. But now, Bush's political interests have changed. He is not likely to eschew the opportunity to include China in the international coalition that he is pursuing in his attack on terrorism. At the very least he will not want to alienate China, given the need for international co-operation in countering terrorism.

For its part, the Chinese leadership is hardly likely to think itself exempt from any such terrorist threats. In recognition of this, Jiang, in a telephone call to Bush, offered to "strengthen dialogue and co-operation" with the US to fight "all manner of terrorist violence" in the world. The great challenge for both sides will be to

pursue their national objectives in parallel with increasingly pressing transnational objectives.

The suicide attacks have also changed the balance of power in the region. Before he took office, Bush indicated he intended to bolster ties with Japan and Taiwan, at the expense of the relations with China. While he supported China's accession to the WTO and the granting of "normal trade relations" status to Beijing, he said that he would be sharper with Beijing on a host of issues, including human rights and the proliferation of weapons of mass destruction. He seemed to take pains to distance himself from his father, who had been accused by Bill Clinton in the 1992 election campaign of being too accommodating to the Chinese.

Bush's strategy of focusing on Taiwan and Japan to counteract the effect of China is likely to be reconsidered. Taiwan is experiencing a dramatic demonstration of the economic dangers of being heavily exposed to the US economy and is likely to look for a more subtle approach that allows an increase of economic ties with the mainland. Japan is not really in a position to help anyone until it finds a way of helping itself. In short, Bush is being faced with the obvious: that it is impossible to sideline China.

And that was before the political priorities were profoundly altered. After a terrorist attack that exposed US shortcomings, high-tech initiatives such as the defence shield have been exposed as part of the problem, not the solution to US defence needs. The president's earlier assertion that the US had an obligation to bolster Taiwan's military capability and to "do what it takes" to defend the island if it came under threat suggested that military tensions between the US and China were based on the old sovereign-state tensions. These have not gone away, but now new conflicts have to be considered.

As the US administration ponders who exactly is its enemy, it is clear that the certitudes of national militarism are fading.

Even before the terror attacks, the challenges faced by China and the US were of a level of complexity never before experienced; even the self-interest of each side was becoming hard to identify. Traditional political structures are not well placed to cope. Military problems are mainly dealt with, inevitably, using the old state-to-state mechanisms.

Commerce is increasingly becoming transnational, which tends to reduce the state to being one player among many, rather than the central overseer.

Yet financial flows, and issues such as terrorism, disease, migration and the environment, are increasingly becoming truly global; literally stateless, outside the ambit of state control. Now that terrorism has been pushed to the top of the list, there will need to be a high level of political skill and judgment on both sides of the Pacific.