Looking back over my comments, I can see that they are all well within the overall intellectual assumptions about what motivates states and political action called Realism, not neoconservatism at all. Realism is a very broad school of thought in political science and IR theory encompassing everyone from the left-wing Stephen Walt (and to an extent Juan Cole, as well as radical Saul Alinsky) to the right-wing Henry Kissinger. The central thesis of realism in international relations is that the actions of states are necessarily limited by the need for states to maximize power and security, especially when talking about big, empire-like states. This assumption is justified under the simple reasoning that if large states don't seek to maximize power and security in international affairs, they will be soon overtaken, absorbed, or otherwise made irrelevant as independent polities by other large states that do. Political independence, i.e., sovereignty requires states to seek power and security first and foremost.
Neoconservatism, on the other hand, comes from the exact opposite school of thought in international relations theory -- Liberalism. Neocons do not believe that states must maximize power or lose independence. Rather, neocons believe that liberal democracies ought to, not necessarily have to, prioritize power struggles with non-liberal states because it is the right thing to do on social justice grounds. Madeline Albright, in her writings if not by admission, actually belongs to the more liberal wing of this school of thought, as does Condi Rice and a large body body of rightist, pro-Israeli colonization supporters.
With outstanding timing, Stephen Walt has a guest post on this very topic on his blog last week.
The central thesis of realism in international relations is that the actions of states are necessarily limited by the need for states to maximize power and security
Security and power, however, are not entirely coterminous. And increasingly, as both shooting and trade wars become ever more losing propositions for all the belligerents (whether they nominally win or lose), they become conflicting objectives.
The will and ability to enforce your policy preference on somebody else comes with the inherent risk of resistance. And in a world in which resistance, even if you suppress it successfully, is ruinously expensive, exercising power is not conducive to your security. Conversely, in a world in which both trade and shooting wars are expensive propositions, it is perfectly possible to ensure your security without being able to project power - all you have to do is make it sufficiently expensive to infringe on your security while not making your offencive capabilities sufficiently threatening to warrant a first strike or provoke an arms race.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Security and power, however, are not entirely coterminous.
Seems to me that the Chinese have understood that economic power now trumps military power.
My thesis is that the Chinese may well have exercised an economic veto over further US adventurism in Iran in the first half of 2007 in a 'Suez Moment'. They are now quite happy for US 19 year olds to die defending free trade.
The evolution of warfare in an increasingly networked society is an interesting one.
I made a couple of presentations in Lausanne in 2005 - in relation to the energy markets - at a very high level conference on 'Economic Terrorism'. My case was and is that the trend to ever greater market consolidation and centralisation is creating ever more vulnerable 'single points of failure'.
As I said then, the only difference between an economic terrorist - determined on a market coup to bring down the market - and a hedge fund, is motive.
The UK military are well aware of the vulnerabilities of a networked society, and the then head of the UK Defence Academy flew up here to spend a day with me on the subject not that long ago. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
the only difference between an economic terrorist - determined on a market coup to bring down the market - and a hedge fund, is motive the colour of their skin and the language they speak.
There, fixed it for you.
Hypothesis: International trade/investment/communications/migration -- in other words, the elements of globalization -- only occur in significant levels when protected by a sufficiently powerful, transnational political authority, aka an empire-like power.
Falsifiable evidence: What historical examples are there of massive levels of sustained cross-border trade, migration, investment, and communications occurring where there is not an empire-like state both and protecting those relationships?
The implication that China's current, trade-based economic power, like rising Japan of the previous generation, is entirely dependent upon maintaining good enough relations with the United States, without whose protection it cannot maintain the oceanic lines of communication it still needs.
"Good enough relations" means simply that it is more expensive for the US to start a trade war with China than not start a trade war with China (and that it is more expensive for the US to stop securing international trade as a whole than to keep doing it).
That still leaves plenty of room for ultimata to be issued in both directions.
Although it would be at least marginally costly in the short term, the US really can walk away from China and still get by without a serious deterioration in standard of living, national security, etc. Indeed, a very large part of the US labor movement pushes to do that every day. (You seem to think China that what China produces is a lot harder to replicate anywhere else than I do, but I just can't name a single thing that anyone really needs from China. (Steal is easy to make and it is already done in lots of other places that could use the extra business, for instance.) However, in the decade or so since China has engaged in an export-oriented growth strategy, it can no longer walk away from trade to survive. (Almost 40% of GDP is now from trade, up from close to zero just over a decade ago, which means that almost all Chinese growth is due to trade, while only a small part of US or EU GDP growth is due to trade, and that part is the cheap stuff anyway.)
I argue that instead of being a real world power, China has become, at least for the time being, a textbook case of the 1970's era dependency theory. It needs trade to keep social forces from overwhelming the state, but it has only marginal capacity to affect the rules and norms of how trade happens.
But if you're talking a 5-10 year time scale, China has the option to walk away as well - it can simply begin dealing bilaterally with the American colonies instead of going through the post-Bretton Woods dollar system. China will still need food imports from the US, but the US will need raw materials inputs from their colonies as well - and unless they can pay better than the Chinese for those raw materials, they will have to buy them via imports of Chinese finished goods. And it would be curious indeed if the US were better at making everything than China is...
The US can take away China's access to raw materials, yes. But only by disrupting global trade institutions rather severely. And without the dollar-based trade and financial hegemony, the US can't secure those raw materials for their own use - as Iraq is so amply and painfully demonstrating. Is the US prepared to bet that Latin America would still be prepared to sell its raw materials under a Bretton Woods II regime? Yes, they have to pay their bills... but quite a substantial fraction of those bills are dollar-denominated loans, which are going to get essentially wiped out if current international trade institutions collapse.
It is possible that the Americans would be prepared to roll those dice, but not unless they were pushed to do so by something rather more substantial than simply having to pay full price for Chinese imports...
Put another way, the US has a poker hand which all the players at the table know that China cannot possibly match in this round, drastically reducing one's options for playing, bluffing, or folding. And those options amount to a certain level of sovereignty enjoyed by the US and not by China. If China wants to regain its pre-trade sovereignty, it will have to ween itself from trade-based growth first. (Which is actually China's long term strategy, but it's far from there yet.) In the meantime, China is just another part of Washington's global constituency, getting in line with Israel, Europe, Latin America, Louisiana/BP, the Tea Party movement, and the rest. (Notice that Russia is not on the list. Russia, Iran, and North Korea are, in fact, as sovereign as the US is, and I think they are the only ones left, since even Cuba now gets a third of its food imports from the US, and Venezuela, bless her heart, still can't find anyone else who will process enough of its low-grade crude oil other than the US.
Mind you, I am not saying that this is in any way a good state of affairs, but I am just really skeptical of the narrative going around here which presumes the US has already gone bust and China has already taken over the world. It just hasn't happened, and given the huge distance China still has to make up before it does, I don't think we can even say it is likely, much less inevitable, even in the distant future.
I just can't identify anything that China makes and that the US, or EU for that matter, needs that would take more than 10-15 weeks to obtain from elsewhere.
I'd love to see that. You're talking about a project on the same scale as the rebuilding of West Germany after the War. In a country whose dominant political factions are universally inimical to the very idea of a coherent industrial policy.
Your timescale of 10-15 weeks is almost certainly true for any individual shipyard or steel plant, but we don't have the kind of cement production or bricklaying capacity or steel production to run all those replacement projects in parallel (and renovate their supporting infrastructure, which hasn't been properly maintained for between one and four decades), nevermind the political institutions to organise such an effort.
Let's be wildly optimistic and say that we have or can create sufficient slack in our industrial plant to re-build ten percent of the Chinese industrial capacity dedicated to exports in parallel. Let's further say that all replacement industrial capacity is immediately dedicated to this project, and that China's domestic industrial plant is roughly equal to the effort that would be mobilised for the reconstruction effort.
Under these wildly optimistic assumptions, it would still take seven to eight iterations, or between 1½ and 2½ years at 10 and 15 weeks per iteration, respectively, to replace the full productive power of China. During which time we would essentially be operating a wartime economy.
And this assumes that you put engineers in charge of the process, so it works as smoothly as can be reasonably expected from a human endeavour. With the crop of lawyers, economists and bookies currently holding the commanding heights of our industrial plant, you'd have to multiply by an idiot factor and add a run-around-like-headless-chickens-for-a-while term.
On that timescale, it would be a great way to get out of the depression. After all, we're starting out from a recession so there is slack that could come online faster.
However, we've become more adept at liquidating plant so some of the redundant plan may already have been dismantled. By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
Another, though cruder and more risky, closing-down trick was arson. Burn the factory down (with consequent damage to machinery) and collect on the insurance (if you can). This one has gone out of favour as the insurance companies started looking seriously at what was going on.
I just can't identify anything that China makes and that the US, or EU for that matter, needs that would take more than 10-15 weeks to obtain from elsewhere
You can't be serious.
Even for relatively simple manufacturing, 10 to 15 weeks is a bare minimum to find extra manufacturing capacity, transfer production, set-up the supply chain, qualify the new factory...
Double or triple that for more sophisticated manufacturing needing big iron equipment: automobile assembly lines, shipyards, IC's packaging,...
And this is assuming that spare manufacturing capacity is already available elsewhere in the world: buildings, equipments, qualified workforce...
Depending on the industry, China based manufacturing is a significant chunk of WW manufacturing (one third? two thirds? more?). Should you move your manufacturing out of China, who is going to pick up the slack on short notice? SE Asia is already saturated and doesn't have anything near the Chinese capacity.
As for the US and Europe, as pointed out by Andy Grove, not only is manufacturing a dwindling activity, but even the knowledge itself is going out the window.
It's more complicated that it sounds like on CNBC stock tickers. Modern manufacturing is a science: you can't create any significant capacity in a greenfield deployment in less than a couple of years.
No matter how you put it, moving (hypothetically) manufacturing out of China just cannot happen overnight without huge disruption, the kind of which will become painfully apparent to consumers all over the "developed" world. Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
Andy Grove is talking long term, and he's right as far as that goes, but that's not what we're talking about here regarding geopolitical dependency today.
For reference, replacing all of China's steel production gives a doubling time of 25½ weeks, or just a hair over quadrupling every year. Now, some of the Chinese steel goes to cover domestic demand, but most of it is exported either as is or embedded in intermediate or finished manufactures. So let's be excessively generous and say that half of it stays in China. That gives us a doubling time of 46½ weeks, or just about a full European work year.
So what you're claiming is that, if we put our minds to it and iron ore and coal were not constraints, we could somewhere between double and quadruple non-Chinese steel production in the space of a single year. (Or, in a linear rather than exponential model, double or treble it.)
You can repeat those calculations for shipbuilding, semiconductors, polymers and so on, with varying results, depending on sector and assumptions.
Now, does the world really need to replace all of China's exports? In the absolute sense of "can we maintain industrial civilisation in the absence of these goods," we could certainly do without a lot of it. But in the sense of "can we maintain something sufficiently resembling our current social contract to prevent torches and pitchforks," we need rather a lot of it. And it is the latter criterion that is relevant to the Masters of the Universe, since they risk ending up on the business end of a pitchfork...
But you've brought up a really good research question: How dependent, specifically, really is the world on Chinese resources and manufacturing? I'm thinking not at all, but some good data might show otherwise. I might look into this...
Unless you're looking at some data that says otherwise, I'll bet nothing close to doubling of such capacity would be necessary to replace China,
China makes a third of all steel in the world - replacing that capacity means adding half our current capacity, minus what China produces for domestic consumption that remains in China and is not exported as part of other goods.
just marginally increasing currently unused capacity that has been very recently idled
Do you have data suggesting that the displaced production has resulted in mothballed facilities, rather than scrapped facilities?
and it certainly won't be Europe or America that goes without if short term constraints due to trade interruption with China occurred.
Going by nominal GDP, the EU, US and Japan had just a hair over two thirds of the world's consumption ex China. Now, unless you want to postulate that we would be able to completely monopolise all consumption (including Russian and OPEC consumption...), a one-third cutback across the board creates shortages even for white people who speak English.
It would be some of the billion plus slum dwellers who currently can get everything from inexpensive Chinese gas power generators and pumps to Sony TVs who go without things.
This would render most of our colonies inoperational. There goes the raw materials for rebuilding...
China produced, as far as my limited data (said under his breath, wikipedia ) can say, almost 40% of the world's 1.3 billion tons of steel in 2008 (down, actually from 2007). Of that amount, the same source says that China exported, on net, only 33 million tons of steel (though in 2006), or only about 3% or so of total world steel production (maybe 5% allowing for generous growth between 2006 and now). Now Chinese exports of finished products might also account for more of that, but since Chinese exports, as big as they are, also amount to only single digits of total production of finished products worldwide, that tells me that we can probably do without China in the world entirely with little notice from anyone, and probably to the short-term benefit of blue collar workers in most areas as an added policy outcome side effect of a trade interruption with China. Let me know where my math is off here.
Now Chinese exports of finished products might also account for more of that, but since Chinese exports, as big as they are, also amount to only single digits of total production of finished products worldwide, that tells me that we can probably do without China in the world entirely with little notice from anyone
a) Total production by mass, or total production by market price?
b) You're forgetting capital goods and intermediate goods, which amounted to over twice the value of the consumer goods exports in 2005 (according to the IMF), on an upwards trend.
c) "Finished goods" are not fungible - polymers, petrochemicals and semiconductors have a strictly limited value as substitutes for steel in the production of vehicles, pipes, hardware, windmills and industrial machinery. And vice versa.
Chinese production / World Production
and
Chinese Net Exports / World production.
I just think it is going to be hard to come up with figures that show that Chinese net exports of just about anything amount to much more than normal idled production capacity of 10-20% that are standard in most manufacturing sectors and are probably even bigger today and for the near future due to the recession. But that's that falsifiable data that would change my mind on it.
I just think it is going to be hard to come up with figures that show that Chinese net exports of just about anything amount to much more than normal idled production capacity of 10-20% that are standard in most manufacturing sectors and are probably even bigger today and for the near future due to the recession.
I doubt there are many manufacturing sectors outside of China with overall idle capacity anywhere near the 10-20% mark, just waiting for eventual orders. Maybe in relatively simple assembly like textile or shoes: less expensive equipment and lower skilled workers.
For anything that requires heavy and expensive machinery (steel, automobile, electronics assembly...) idle plants just do not exist: they are dismantled and their employees laid off.
Should you want to rebuild that, you'd need Capex (a lot of it in some cases) and workforce training. All of this takes more time and money than seen from Wall Street brokerages...
In some sectors, and electronics assembly is arguably one of those, Chinese net export is definitely above any idle capacity you could come up with elsewhere: just about everybody in that field has moved manufacturing to mainland China, starting with the Taiwanese. Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
In the US, where we would expect asset markets to be the most liquid for idled capacity, the capacity utilization rate is currently only 74%, and 71% in manufacturing. The average from 1972-2009 was 80.1%, so actually I was too generous. Capacity under-utilization worldwide is likely to be at least 20-40%, more than enough slack to pick up the hole in manufacturing that China might leave behind if it closed itself off to trade was was isolated from the world by conflict with the US. (Interesting, isn't it? Chronically unemployed capital is actually a much bigger figure than unemployed labor.)
Chronically unemployed capital is actually a much bigger figure than unemployed labor.
Labor, on the other hand, is almost exclusively unemployed involuntarily. Did the very wealthy not have a strangle-hold on government policy this would be a very good argument, in times like these, for either taxing their idle wealth. This is one of the situations about which Keynes wrote where actions entirely rational for an individual when taken simultaneously by almost all those in the position to act, collectively prove disastrous. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Another good question is what would be the effect on the USA and Europe of the popping of the real estate bubble in China?
New evidence on a Chinese housing bubble Our look at the available data strongly suggests that prices are quite risky at current levels, and that it would take little more than a modest decline in expected appreciation to engender sharp drops in prices. The first foundation of this conclusion is that home prices in China are at their all time highs, and have been appreciating at especially high rates recently. This is documented in Figure 1 which plots real and nominal price indexes developed at the Tsinghua University for newly constructed homes in 35 major cities. Real prices more than doubled over the past decade, with appreciation rates escalating at the beginning of 2007 and then again in early 2009. The most recent data show a record 41% (annualized) growth rate for the first quarter of 2010. Figure 1. Constant quality price index for newly-built private housing in 35 major Chinese cities, 2000-2010 Source: Wu, Gyourko and Deng (2010). The underlying data source is the Institute of Real Estate Studies, Tsinghua University. See the discussion in Wu, Gyourko and Deng (2010) for more on how these indexes are created. But it was not high price levels alone that convinced Case and Shiller (2003) and Shiller (2005) that US house prices had become unsustainable - it was the all-time high price-to-rent and price-to-income ratios. .... Figure 2. Price-to-rent ratio in eight major Chinese cities, 2007-2010 .... Figure 3. Price-to-income ratios in eight major Chinese markets, 1999-2010 From Wu, Gyourko and Deng (2010). See that article for more on the creation of these ratios. .... Figure 5. Real constant quality residential land price index for Beijing, 2003-2010. From Wu, Gyourko and Deng (2010).
Real prices more than doubled over the past decade, with appreciation rates escalating at the beginning of 2007 and then again in early 2009. The most recent data show a record 41% (annualized) growth rate for the first quarter of 2010.
Figure 1. Constant quality price index for newly-built private housing in 35 major Chinese cities, 2000-2010
Source: Wu, Gyourko and Deng (2010). The underlying data source is the Institute of Real Estate Studies, Tsinghua University. See the discussion in Wu, Gyourko and Deng (2010) for more on how these indexes are created.
But it was not high price levels alone that convinced Case and Shiller (2003) and Shiller (2005) that US house prices had become unsustainable - it was the all-time high price-to-rent and price-to-income ratios.
....
Figure 2. Price-to-rent ratio in eight major Chinese cities, 2007-2010
Figure 3. Price-to-income ratios in eight major Chinese markets, 1999-2010 From Wu, Gyourko and Deng (2010). See that article for more on the creation of these ratios.
Figure 5. Real constant quality residential land price index for Beijing, 2003-2010. From Wu, Gyourko and Deng (2010).
I have trouble seeing exactly what all of this means for China, but doubt that it is good. It is even harder for me to imagine what the effects of this situation will be on China's relation with the USA and Europe. But it has got to be part of what is afoot. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Steal is easy to make
I think that in the emerging modern networked "Economy 3.0" as I like to call it, firstly the financial economy has become a multiple of the 'real world' economy, and secondly markets are able to take alternate routes to bypass the former controlling nodes.
So even though a power may exercise physical hegemony and a veto power over physical trade movements, the financial markets have evolved in a way that even the mightiest physical hegemony no longer confers a veto over movements of money and capital.
We are now in a bipolar world with China now having a de facto economic veto power, and IMHO they have probably exercised it in their 'red line' area - which is just the same as that of the US - ie Energy Security.
"Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The catch is that you don't need to keep buying them forever. You only need to keep buying them until the networked system has existed for so long that the previous system has atrophied sufficiently to make the ability to obtain a larger slice of the cake at the cost of diminishing the cake a losing proposition.
Why would people engage in an activity that so obviously undermines their power in the long term? Because people don't think long-term, particularly psychopaths.
Economy 3.0 is even more dependent upon an empire-like power than investment and commerce in less network-dependent economies of the past. And it has nothing to do with physical manifestations of power or resources. It has to do with who is capable of making and enforcing rules because Economy 3.0, as you have described, is even more dependent rules and norms than less networked economies are.
I completely disagree.
Economy 3.0 is what makes empires impossible: the Internet interprets hegemons as damage and routes around them.
A would be hegemon may be able to dominate any one or any half dozen nations, but cannot dominate more than a few of the nodes all of the time.
Interactive partnership-based protocols are key to Economy 3.0: these agreements - eg international trade agreements cofigured around transaction repositories - will act like a form of legal XML linking disparate jurisdictions and legal entities together, rather than disparate hardware and software.
Law is Code.
We are seeing the end of one way, statutory or judge-made protocols - 'contrats de mandat' as the French have it - and a transition to 'contrats de societe'. These are the same sort of two way protocols you find in Japan, and elsewhere in the East, and also the consensual approach of Islamic jurisprudence, which many think underpinned the Napoleonic code.
A hegemon would simply find themselves excluded from participation at worst, or participating on inferior terms, at best. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The point of a hegemony-resistant architecture is to make sure that wannabe hegemons can't exclude other actors without imperilling the core function of the system. Mutually assured destruction works, most of the time.
Historically, there's never been any such thing. At best, relative stability is maintained by cripplingly expensive wars until the economy implodes and the wars are no longer affordable.
Ethically and practically, mutually beneficial relationships are vastly more productive and stable for everyone except the psychotic predator class who would rather cover themselves with scraps and baubles than allow a peace dividend to grow the world economy.
It's self-styled 'realists' who are the biggest brake on progress and innovation.
Not everyone wants to remain a stupid rat chasing other stupid rats for scraps around a barrel. Some of us have more interesting plans.
In short, because realists understand that military power is a crude instrument and that governing alien societies is a costly business, they have argued against such foolishness. Instead, the main advocates of military involvement have been a coalition of neoconservatives and liberal internationationalists, driven by a variety of agendas and infused with a remarkable degree of hubris. The results -- first in Iraq and now in Afghanistan -- have not been pretty.
