With a history dating back thousands of years, China tends to take a long view when it comes to politics and power. After a tough century or two, time is turning in favor of the world’s most populous nation. China has emerged as a global powerhouse, which gives the country a certain confidence on the political stage. A new book from columnist Gideon Rachman of the Financial Times looks at the rising economies of Asia, particularly China, compared with the relative decline of the American economy. Rachman joined Knowledge at Wharton to talk about the book, Easternization: Asia’s Rise and America’s Decline from Obama to Trump and Beyond, on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
An edited version of the transcript appears below.
Knowledge at Wharton: What is your take on the recent talks between President Trump and Chinese President Xi Jinping?
Gideon Rachman: I think the most striking thing about the Xi-Trump summit was the extraordinary shift in Trump’s rhetoric about China after the meeting compared to the kind of thing he had been saying running up to his election, during the campaign and immediately afterwards. During the campaign, Trump adopts a very anti-Chinese position, says that China is raping the U.S. economy, that they are unfair traders, that he will name them as currency manipulators, threatens to slap huge tariffs on Chinese goods. He also wants to confront China geopolitically over Taiwan, over the South China Sea and so on.
In a way, it is summarized by one of the things he says in the campaign: If I meet the Chinese leader, I’m not going to treat him to a fancy banquet. I’m going to just take him to McDonald’s and then we’re going straight back to the negotiating table. The first summit is rather different. He does give him a fancy meal. I looked at the menu and I think it was Dover sole seared in champagne. The change in many ways also applies to policy, where although Trump says he is worried about the very large trade surplus China has with the U.S., in the end there weren’t any tariffs.
There was just a joint study committee set up, and Trump comes out of the summit saying that he has a wonderful relationship with Xi, that they got along very well. It’s a much, much more cooperative tone. Whether that lasts over the long run, we will see. Because one thing we’ve learned about the Trump presidency is that he is a very volatile person who can change his views on things pretty quickly. But for the moment, some of that threatening language towards China and towards Asian countries in general has been downplayed.
Knowledge at Wharton: Because of this recognition of the importance of China, what role do they take as a world leader going forward?
“One thing we’ve learned about the Trump presidency … he can change his views on things pretty quickly.”
Rachman: One of the significant things about President Xi is that he came in to power in 2012, so he’s been there coming up for five years and will almost certainly be renewed for another five years. He’s a different sort of Chinese leader. For about 30 years when China began to embrace capitalism, you’ve had Chinese leaders who were very careful not to upset their neighbors, not to upset the United States because they thought the number one priority for the country was very rapid economic growth, and the root to that economic growth was to have access to global markets. If you’re going to have access to global markets, you don’t upset the United States, you don’t upset your neighbors. You just kind of keep it cool.
Whereas I think with Xi, China is now such a large economy that it is able to be more assertive and more ambitious politically, and you’ve seen that with him. China has got a whole set of unresolved territorial disputes with its neighbors, with Japan, with India, with a lot of the southeast Asian countries.
In broad terms, I also think he is not really comfortable with the idea that America should be the dominant power in the western Pacific. It’s China’s immediate neighborhood. They hadn’t really done much of that in the pre-Xi years, but they are beginning to do stuff. They’ve started this program of island building, which is basically taking little reefs in the South China Sea and dredging and literally building them up, and then turning them in to military installations. It’s a very dramatic kind of grab. We might say, well who cares about the South China Sea? It’s a long way from the United States. Well, the U.S. has said it cares, and there’s a reason. It has to do with this shift in economic power to Asia.
Hillary Clinton wrote a piece saying this was going to be America’s Pacific century in 2011. Fifty percent of the world’s merchandise traffic goes through the South China Sea, and 30 out of the 40 busiest shipping routes in the world go through the South China Sea. It’s not insignificant, to put it mildly, if China says, “These are all our territorial waters.” That’s just one pretty important example of how under Xi you’ve got a China that is prepared to use its economic and military muscle much more than it has been before he came to power.
Knowledge at Wharton: Trump conducted an air strike in Syria, and a lot of people thought part of that was showing President Xi that the United States would not stand down over what is potentially happening in the South China Sea or North Korea.
Rachman: Absolutely. The big, building question in U.S.-Chinese relations is, if China really pushes its ambitions, would the United States be prepared to go to war with them as a last resort? I think the Chinese think probably not, provided they play it carefully enough. But they have to be careful because Japan, for example, is a treaty ally of the United States, and the U.S. has said that it will defend Japan in the event of a conflict.
Indeed, Obama, who was lambasted for weakness with Syria and so on, was pretty firm on Japan. He went to Tokyo and said the focus of the U.S.-Japan dispute is these uninhabited islands, which are sort of in control of Japan but the Chinese say are theirs, and both navies and air forces buzz around each other in that area. Obama went to Tokyo and was asked, are those islands covered by the U.S.-Japan Security Treaty? He said yes. Essentially, he was saying that we would be prepared to go to war over a Japanese-Chinese territorial clash.
Knowledge at Wharton: What was the overall view of President Obama’s relationship with Asian countries and his relationship with President Xi?
Rachman: It was a slightly complicated, multifaceted thing. To simplify, Obama comes in thinking that it’s in his interest to have a very strong relationship with the Chinese. Not really interested that much in the strategic rivalry, he wanted to work with them on things like climate change, trade, cross-national issues. He then goes through a period of disillusionment, finds it is very hard to work with the Chinese, gets alarmed by this Chinese island building and territorial demands.
By the end of the Obama years, you have a much tenser U.S.-Chinese relationship. And the U.S. responds in particular to the island building by sending the U.S. Navy through what would be the territorial waters around those islands to really make the point that America does not acknowledge the legitimacy of these islands and the territorial claims that flow from them. But Obama is treading a very fine line. He wants to make that point without actually risking getting in to war.
The Chinese don’t really know what to make of Trump. I mean, who does? But I think Trump rather enjoyed being able to tell Xi over the Dover sole, “Oh by the way, I just ordered these military strikes on Syria because of course it sends a message that I’m a person comfortable using military force.”
I think a lot of the American foreign policy establishment will hope that restores a degree of deference to the United States — would make China hesitate to do the next set of island building or equivalent action. But of course there’s always a risk associated with that because the hint that Trump is sending that he will be prepared to use unilateral military force on North Korea is alarming, not just to the Chinese but also to the South Koreans who are American allies, who are scared of North Korea. They don’t like their nuclear program but equally know that if America were to launch a strike on North Korea, it would be South Korea on the frontline.
There is a huge number of artillery pieces lined up, pointing at Seoul and ready essentially to level it if war broke out on the Korean Peninsula. So, it’s one thing to send a message with an almost symbolic, quite pinprick strike on Syria — 60 cruise missiles on an air base. It would be a completely different thing to suggest that shows that I’m prepared to take military action against North Korea, which would be a much bigger and more dangerous conflict.
“There is a huge number of artillery pieces lined up, pointing at Seoul and ready essentially to level it if war broke out….”
Knowledge at Wharton: The International Monetary Fund designated China as the world’s biggest economy. How does that play in to the country’s view of its role in the global spectrum right now?
Rachman: I think it was a big moment. Oddly, neither the Chinese nor the Americans wanted to make a huge fuss about it. This was in 2014. The IMF said there are two basic ways of measuring the size of the economy: a real exchange rate, like what a dollar is worth now, and purchasing power, where you try to adjust for what you buy. Incidentally, purchasing power is the one that my own newspaper, the Financial Times, thinks is the more accurate measure. The IMF said China is now the world’s largest economy by purchasing power.
That was a historic moment in some ways, but the U.S. didn’t particularly want to make a big noise about it for obvious reasons. The Chinese, I think partly because they still have an element of this hesitance of provoking the West by scaring them, did not make too much of a fuss about it. But I think overall there is an increasing consciousness of the economic power of China and the leverage it gives them and the sort of intangible confidence it gives them.
There are other measures. China is now the world’s largest manufacturer, the world’s largest exporter, and it’s increasingly a huge consumer market. It’s the biggest market in the world for vehicles, for smartphones, for oil. It’s potentially the largest foreign direct investor in the world. They’ve got a lot of capital that they are keen to invest, and that gives them confidence. It gives them leverage as well, because they can go to countries around the world and say, “If you are our enemy we can punish you by blocking access to our markets. But if you are our friend, we can invest, we can build roads, bridges, and therefore it is much better to be on our side than the Americans’ [side].”
Knowledge at Wharton: In your book, you take look at how each country views history and the differences between the U.S. and China. China is more cyclical, and the U.S. is more linear. Can you delve into that more?
Rachman: It’s a fascinating interaction to see between the U.S. and China because their histories are so different. I started the book by talking about a meeting that I was present at with President Xi Jinping in Beijing in 2013. One of the first things he says to a group of about 20 foreigners is that the thing to understand about China is that we have thousands of years of history. He sees himself very much as heir to not just the communist party and Mao Zedong, but also to the Song Dynasty in the 1200s, to the Ming Dynasty, the Tang, all the way back to before Christ. This history is very real to them.
It also inclines them to think in cyclical terms so that they think countries can have literally a bad 200 or 300 years. They can have a bad dynasty where things go wrong, and then they come back. So, in the Chinese mind it’s been a bad couple of centuries starting with what they call the Century of Humiliation through the mid-19th century, when the British and then other colonial powers come in and grab trade concessions, take over the running of certain Chinese cities, force Hong Kong to be handed over. This was followed then by the invasion of Japan, of China. This is a very bad period for China. But they now feel very strongly that with this cyclical view of history that they’re coming back and this is the great rejuvenation of the Chinese nation, as Xi puts it, which incidentally is kind of a Chinese version of Make China Great Again.
Contrast that with the American view, which is a much younger country that has only been around since 1776 and has really only moved one way and become more powerful, more prosperous, so it doesn’t have the cyclical Chinese view of you have a good century, a bad century. For America, the idea of progress and more power is built in, and it seems sort of unnatural that that could ever reverse. I think that is a very different way of thinking.
Knowledge at Wharton: What do you make of this run of nationalism that we have seen, not just with the election of Trump but also with Brexit and other changes that may happen in Europe?
Rachman: I think it’s one of the really interesting kind of reactions to globalization. There’s this idea that as trade becomes more integrated and people move around more, travel becomes easier. National boundaries are going to matter less and less, and we’ll move in to an integrated, borderless world.
We’ve now discovered that borders and nations still matter a lot to electorates. One of the reasons that I think my own country, Britain, voted against staying in the EU and wanted to go to Brexit was a sense that the nation’s identity was being eroded by Europe. Also, there was a loss of control that we were no longer able to make our own laws quite the same way we had because of the super national lawmaking of the European Union. There was a sense that we don’t have to accept that, we want to go back to being a self-governing nation insofar as it is possible.
That was the British expression of it, but it’s clearly a transnational phenomenon. You have Trump with the whole America First slogan, and the constant refrain from him and from Steve Bannon and others that America has gone too far in embracing globalism, and that resonated with people far more than I think the more connected kind of elites on the coast realized. That was a very potent slogan.
The interesting thing is those two examples, Brexit and Trump, are drawn from the developed world and from the West, but you see it outside the West as well. You see it in Asia. Xi Jinping is nothing if not a nationalist. Narendra Modi, the prime minister of India, is a Hindu nationalist who also talks about the rejuvenation of nations. The Japanese prime minister, Shinzo Abe, another nationalist figure, is very focused on the idea of rejuvenation of Japan. You can go around the globe. There’s Putin in Russia. What’s he about if not make Russia great again?
There’s something going on in the air, and I think it’s partly a kind of reaction to globalization in the sense that the nation is still the unit that people identify with most strongly. There’s also perhaps a pervasive sense of economic insecurity and social insecurity, which has to do with rapid social change brought about by globalization and immigration, and maybe even physical insecurity related to terrorism. All of that leads to a resurgence of nationalism and looking for strong leaders who can protect the nation and the people within it.
Knowledge at Wharton: With the growth of some of the economies in Asia, and specifically China, what is the reaction to other countries in that region? Japan’s economy is not struggling, but one of their major corporations, Toshiba, said it may have to shut down operations because of its investment in nuclear with Westinghouse that failed so badly.
Rachman: If there is any country that is really terrified by the rise of China, it’s not the United States — it’s Japan because of the historical antagonism between the two countries. If you take the Chinese view, which as I say goes back thousands of years, their view is that China is naturally the center of Asia, the dominant power, the middle kingdom was the phrase.
But then in the 19th century, Japan industrialized much faster and ended up invading China, brutalizing it. That historical grievance has not been forgotten, and indeed a lot of Chinese nationalism is focused on Japan. The Japanese didn’t have to worry about that too much 30 years ago when their economy was absolutely booming. Japan was one of the wealthiest, most advanced countries in the world, and China was stuck in the doldrums of rural poverty. But now that Japan has gone through a 20, 30-year stagnation, the country is aging, the population is shrinking, a lot of its leading companies — such as Toshiba that you point to — are in trouble. The Chinese economy surpassed the size of the Japanese economy in 2010, and the gap between the two is only growing. China is putting a lot of money into its military. It’s quite a scary time to be Japan because you’ve got this huge, fast-growing country with a grievance against you right next door.
Knowledge at Wharton: Is the old term “westernization” a bit of an evil word now because of this global shift in importance placed on China and other countries in that region?
“There is an increasing consciousness of the economic power of China and the leverage it gives them….”
Rachman: Well, I don’t know whether it’s an evil word, but quite a lot of Asian countries, including ones that are loosely allied with the West, in some ways still look to the West in an aspirational way because western economies still have the highest living standards. They may not have the largest economies, because that’s a function of population.
We’re used to the idea that America was both the largest economy in the world and had the highest living standards. Now, America and to a lesser extent the European countries will continue for a long time to have the highest living standards; people will be richer. But they may not have the largest economies because China and India are countries of over a billion people, so they need to only get to roughly a quarter of the wealth levels of the average American per capita and have the largest economy in the world. You can still have people aspiring on an individual level to westernize in the sense that they want to achieve the lifestyle of the West, but they may on a geopolitical level no longer be willing to defer to the West because the aggregate power of an India or a China is huge.
Knowledge at Wharton: Is it your expectation that the first meeting between Trump and Xi will be the start of a fairly good relationship between the United States and China moving forward?
Rachman: I think it’s too unpredictable to say that with great confidence, partly because Trump really hasn’t completely shown his hand. As I said, there was a big shift in rhetoric, and maybe that is it and we will now see that he is going to move towards a more positive relationship with China.
Indeed, that is the sort of Chinese view of how American presidents work. They all start by saying they are going to get tough with China. Bill Clinton did, so did George W. Bush. But in the end, they all realized that China is too important to really behave like that and they come around to a more conciliatory line. The question is whether Trump, because of his volatility and because of his longstanding grievances about trade, will be able to stick with this more conciliatory line or whether he could actually go back to the more hostile line if he finds that, as he sees it, China is not playing ball on trade.
I think the Chinese will offer symbolic concessions, and they will offer more access for American beef and American investment banking, and they will certainly be happy to fund big investments in the U.S. if those are profitable investments. But I don’t think they’re up for a very fundamental change in their thinking about the economic relationships. If that is what Trump is demanding, there could still be trouble ahead.