February 1, 2006  

Rising star

What does China’s economy mean for U.S. strategy?

Did you know that 220 billion text messages were sent over mobile phones in China last year? Or that one in 10 American jobs is at risk of being outsourced to the People’s Republic? And how about the fact that China in 2003 consumed a quarter of the aluminum and steel produced in the world, a third of its iron ore, approximately 40 percent of its cement and half of its pork? Or that the Chinese sex industry alone needs 1 billion condoms a year? If these and other factoids of the “China is taking over the world” variety seize your imagination, you are in luck. Among the many spillover effects of the PRC’s staggering growth has been the rise of a cottage industry of commentators eager to describe its epochal, earth-shaking significance to you. The bad news is that many of these same efforts to delve into the intersection of economics and strategy have been hobbled by the tendency of economists and strategists to talk straight past each other, especially when it comes to China. A raft of recent publications has attempted to break through this dialogue of the deaf — some with considerably more success than others.

Begin with Ted C. Fishman’s new book, “China, Inc.: How the Rise of the Next Superpower Challenges America and the World.” Fishman brims with confidence as he breathlessly reels off statistics to prove that Beijing “can spend, it can bully, it can hire, it can throw old-line competitors out of work.” The rise of China, Fishman insists, “changes the way everyone does business.”

Fishman does a reasonably good job detailing Beijing’s ability to set prices across a range of industries, which he attributes to its vast, cheap labor force and economies of scale. He interviews small- and medium-sized manufacturers across America’s heartland and paints a vivid picture of the problems China presents to these firms.

Yet, as Fishman devotes page after page to cataloging the threat posed by the Chinese industrial goliath, his warnings can’t help but begin to sound a bit shrill. Any economist worth his salt will tell you that America’s trade with China and the PRC’s growing domestic market will improve the lot of a great majority of Americans. Higher-paying jobs replace those lost as each country focuses on its respective comparative advantage. Even a non-economist knows that a job gained in China does not necessarily mean a job lost in America.

Worse yet, a security or military specialist reading “China, Inc.” is left wondering what exactly, besides enhanced competition in manufacturing, Chinese economic growth means for U.S. strategy. Fishman doesn’t offer much by way of analysis here until near the end of his book. In particular, his assessment of Chinese-European relations is off the mark in important respects, as he relies too heavily on the work of Sinologist David Shambaugh, who believes that the Beijing-Brussels worldview is coming together.

While it is true that Beijing tries to play European and American commercial interests against each other to achieve political aims (getting the European Union to lift its arms embargo, for example), a strategic convergence is not in the cards, and Fishman himself describes why: China is still very much interested in the unilateral, muscle-flexing type of great power that Europe is now allergic to.

Indeed, as Fishman notes, China’s “rapid economic ascendancy is transforming its military into a richer, better equipped, technologically improved fighting force and is also giving the country the ever greater clout in shaping its strategic relations with other nations.” Likewise, “on the Taiwan issue China’s rhetoric on the use of force is unambiguous.” No signs of post-historical multilateralism here.

What Fishman grasps correctly is that it is getting increasingly difficult, if not impossible, to separate economics and politics in China. The oft-used term, “China’s rise,” refers not only to the country’s staggering growth rates, but the resilience of its one-party dictatorship, the growing confidence of its global diplomacy, and the progress of its military buildup and modernization. The concern caused by these latter three phenomena is inseparable from the expanding economic strength underpinning them.

But it isn’t just raw wealth that is moving to China. The crown jewels of American industry — Motorola, Intel, Microsoft — are investing heavily in research and development (R&D) and co-production, helping Beijing to build a world-class communications infrastructure and information technology industry. And it is these commercial technologies, to a much greater extent than generally appreciated, that are being leveraged to form the backbone of China’s modern, networked military force.

While it might lack the journalistic verve of “China, Inc.,” the 2005 report of the U.S.-China Economic and Security Review Commission provides much-needed analysis of the linkages between China’s investments in science and technology and its geopolitical aspirations. The so-called National High Technology Research and Development Program, the report notes, “was initiated in 1986 as the guiding ideology to focus national policy on key scientific areas to develop technology and ultimately build national power and military strength.” For Beijing, in other words, high-tech production has long been linked to its international strategic position.

The commission points to a trend in China whereby the marketplace has become just as effective a tool of technological acquisition and development as government-directed research. China now has more than 700 foreign-owned R&D centers and is making great strides in developing indigenous high-tech firms that are globally competitive. Beijing’s focus here is integrated circuitry and software production. While companies such as Intel have tried to protect proprietary information about their most advanced products, they have discovered that China may have already developed a microprocessor as fast as the Pentium II.

A new book published by the Rand Corp., “A New Direction for China’s Defense Industry,” takes a deeper, if narrower, look at why exactly this matters for American security. Since observing the devastating effectiveness of the American military in Operation Desert Storm in 1991, the People’s Liberation Army (PLA) has been enamored of what until recently was called the Revolution in Military Affairs — the leveraging of digital and information technology to make a military force better networked and more joint, collapsing the time it takes to sense, track, target, and shoot, and increasing the lethality and precision of its attacks. This has led Beijing to embark on an ambitious program of strategic military modernization, focused in the short term on precision targeting, information warfare, and C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance).

According to the Rand researchers, the PLA is successfully executing “the wholesale shift to digital, secure communications via fiber optic cable, satellite, microwave, and encrypted high-frequency radio.” The secret of its success, Rand argues, is an approach it terms “the digital triangle” — an alliance among China’s booming commercial information technology companies, the state R&D infrastructure and the military. Under the digital triangle, private Chinese companies such as Huawei are designated “national champions,” allowing them to receive lines of credit from state banks as well as funding and staff from the military and state research institutions. The military, in turn, benefits as a favored customer and research partner. National champions also enjoy “infusions of near state-of-the-art foreign technology, thanks to the irresistible siren song of China’s huge information technology (IT) market, which encourages foreign companies to transfer cutting edge technology for the promise of market access.” Among the main foreign partners of Huawei, for instance, are Motorola, IBM, Intel, Altera, Agere, Sun, Microsoft, Texas Instruments and NEC.

The linchpin that companies such as Huawei form between foreign firms on the one hand and the Chinese military and state R&D institutes on the other is an example of what the Rand authors characterize as China’s new approach to weapons building: “civilianization,” or the use of civilian entities to conduct military research. According to the Rand researchers, the tripartite arrangement has proved mutually beneficial to the PLA’s C4ISR program and the country’s commercial IT sector: “While it is true that the Chinese IT industry is commercially oriented, the research and financial apparatus underlying its success derives significantly from state research and development institutes, including those affiliated with the defense industry and military units. In this sense, the information-technology sector, particularly those firms supplying finished C4ISR and related products to the PLA could be seen as a new defense-industrial sector in China … .”

Fishman likewise observes in “China, Inc.” that Motorola, Intel, Mitsui and some of the world’s other leading research-driven companies have set up development centers in Chinese cities like Chengdu, and that foreign investors have pledged or invested $15 billion in new semiconductor factories there. But what troubles him is less the strategic implications of these investments than their potential to exert downward pressure on the price of the global microchip market.

Thankfully, not everyone is so myopic. Pentagon official Lisa Bronson has publicly identified the connection between China’s growing microelectronics industry and its production of the kind of advanced phased array radars that causes headaches for U.S. Air Force planners. For that matter, there may be no causal link between the terminal guidance capabilities of Chinese DF-31 ballistic missiles and foreign investment in the PRC’s semiconductor industry, but it is no coincidence that the PLA seeks state-of-the-art integrated circuit technology to improve its radars, sensors and precision munitions. This is not to say that the conversion of civilian technologies to military uses is a trivial matter. And because China’s progress in science and technology is the result less of indigenous innovation than of technology transfers, Beijing is faced with some unique strategic vulnerabilities. But because the PRC’s defense expenditures are so opaque, it is difficult to get a sense of how much China is spending on R&D — and thus, just how devoted it is to closing the technology gap between the PLA and the Pentagon. This uncertainty has the unfortunate, but predictable, consequence of polarizing U.S. attitudes, which tend to oscillate between a sense of complacency about high-tech trade and hysteria each time Beijing buys into a U.S. company that manufactures sensitive technology. Security specialists want to know if the sale of IBM to Lenovo threatens American security. Economists want to know what all the fuss is about.

Despite the many obstacles to finding clear answers at the bloody crossroads of trade and security, the Rand researchers draw some compelling conclusions. First, they note that the PLA’s use of commercial off-the-shelf technologies has already rewarded it with quick strategic dividends, such as the expansion of its fiber-optic networks. Second, they argue that the increasing sophistication of Chinese commercial semiconductor manufacturing facilities “provides the base production capacity necessary for the military to implement design ideas in a secure, domestic environment.” Given Chinese reliance on technology transfers to develop expertise in both of these fields, it seems fair to conclude that foreign companies have provided a lift to at least some of the PLA’s top goals.

An analyst contrasting the sheer amount that the United States spends on R&D and its defense budget with that of the PRC may be tempted to dismiss concerns about Beijing’s military as paranoia. Total Chinese R&D expenditures are, after all, less than a quarter of America’s, and even assuming the U.S. government’s most liberal assessment of Chinese defense spending — roughly $80 billion a year — it remains minuscule next to the over-$400 billion the Pentagon enjoys. But from a strategic perspective, the right analytical framework is not how soon the PLA will close the technological or spending gap with the United States, but what kind of asymmetric challenges it can pose to a technology-reliant American military. PLA capabilities that degrade the American military’s information network, hold regional air bases at risk or blind U.S. satellites have the potential to greatly complicate America’s strategic tasks.

One of the rare “bilingual” sinologists — i.e., someone able to speak both about economics and security — is Harvard professor Dwight Perkins. His chapter in the latest volume of Strategic Asia, the always informative, annual publication of the National Bureau of Asian Research, examines the complex interplay between China’s economic and military conditions.

Perkins does here what the Fishmans of the world do not: He acknowledges the vast problems that the Chinese economy faces. From a troubled banking system saddled with nonperforming loans made for political purposes (proof again of the difficulty in separating politics and economics in China) to the massive migration of rural workers to the cities, China’s long-term growth is far from preordained. That being said, barring external or internal shocks, Perkins argues that it is reasonable to expect China to maintain an annual growth of 7 percent over the next decade thanks to solid capital, labor and exports markets.

Perkins then conducts a sophisticated analysis of what this growth means for China’s military, essentially confirming projections made by the Pentagon’s Office of Net Assessment in the late 1990s. China, he notes, has foreign exchange earnings clearing $600 billion per year (exports plus foreign direct investment), which have enabled it to purchase up to $10 billion of foreign military equipment per year — half of that amount from overseas. The bottom line? If China continues to grow at 7 percent, Beijing will be able to accelerate its military buildup without damaging growth in gross domestic product (GDP). In fact, Perkins argues, China could spend up to 6 percent of GDP per year and barely affect its underlying economic strength. Perkins concludes that beyond prohibiting the sale of technology with military applications by either Washington or Europe, there is little America can do to slow the growth of the Chinese military.

This conclusion appears both troubling and realistic. As it is becoming more difficult to draw the exact boundaries between civilian technologies and military applications, it is evident that a sound scientific and technological base is the ingredient for military power. And China — with the help of the United States, Japan and the European Union — is developing just such a capability.

America thus faces a challenge today it has not confronted in over a century: strategic competition with a country that is economically and technologically dynamic and with which it is also deeply interconnected economically. The challenge for Washington is therefore to maintain strategic pre-eminence without needlessly harming the most advanced sectors of its economy or causing a protectionist backlash.

In the near term, one can expect more heated debates about China’s purchase of American companies, as well as more dust-ups with Europe about the sale of dual-use technology to Beijing. It will take time — or in the worst case, a crisis — for America to sort out its China policy. But ultimately, if the United States is to develop a coherent set of policies toward China, it will require that the dialogue of the deaf between economists and strategists should end.

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• More information about “China, Inc.: How the Rise of the Next Superpower Challenges America and the World” and author Ted. C. Fishman, go to the book’s Web site.

• The U.S.-China Economic and Security Review Commission’s annual report to Congress is available on the Web.

• “A New Direction for China’s Defense Industry” can be downloaded at no cost, or a print version can be purchased, from the Rand Corp.

• Information about “Strategic Asia 2005–06: Military Modernization in an Era of Uncertainty,” which includes the chapter “China’s Economic Growth: Implications for the Defense Budget,” by Dwight Perkins, is available from the National Bureau of Asian Research.

Dan Blumenthal served from 2002 to 2004 as country director for China and Taiwan, and in 2004 as senior country director for China, Taiwan, Hong Kong, and Mongolia in the Secretary of Defense’s Office for International Security Affairs. He is a resident fellow with the American Enterprise Institute.