February 27, 2007

The Chinese Interconnection

Hatched by Dafydd

By now, everybody reading these words knows about the huge sell-off on Wall Street today (ah, the joys of e-communications!); the Dow dropped 416.02 (3.29%), S&P was down 3.47%, and NASDAQ fell 3.86%.

I'm certain that the Democrats will immediately pounce, saying "this shows the terrible economic stewardship of the Republicans, who have left America in the worst financial situation in our nation's entire history!"

But of course, the American economy is excellent. Consider this:

The decline was the Dow's worst since Sept. 17, 2001, the first trading day after the terror attacks, when the blue chips closed down 684.81, or 7.13 percent.

From that figure (that 684.81 was 7.13% of the Dow then), I deduce that just before 9/11, the Dow stood at 9,605; after today's tumble, it's 12,216. That is a rise of more than 27% over the past 5.5 years -- about 5% per year. Considering that stocks actually sagged for months after the attacks, that actually means a recovery of closer to 6.2% per year in the market.

Not bad for a "miserable failure" of a president, Mr. Gephardt, eh?

And of course, there are the millions of jobs added to the payroll since Bush was inaugurated, the huge run-up in the GDP, and so forth. (President Clinton also did quite well on the economic front: he benefitted from a GOP Congress, no attacks on the American homeland by Islamist fanatics, and that whole personal-computer/internet fad.)

But none of this is new or startling; my theory is that anyone who reads center-right blogs is more interested in the news than the average news consumer; he knows about world events before the morning newspaper or even the evening news can tell him. In fact, he probably knows about most world news before it even happens, such sagacity has he (the Lizard writes, to thunderous applause from those who have just been complimented). So what is the point of this post? Does it even have one?

Actually, yes; there is a point. Here is the lesson that I took away from today's stock action...

The drop today was caused by a number of factors; but it was actually triggered by a massive stock sell-off in China. (The reason for the Shanghai sell off was the fear that China may raise interest rates, but that's not really relevant here.) What does that tell us?

Thomas P.M. Barnett has argued for some time that China is trying desperately to enter the "Functioning Core," and has by and large succeeded. He defines the Functioning Core as those countries that have fully integrated their legal systems, their communications, and their economies into the burgeoning globalist system. Nations within the Functioning Core have not fought each other since World War II; thus Barnett argues that China is simply not a credible threat for the next "big enemy" of America.

(Note: "fully integrated" doesn't mean everybody has the same rules; our legal system is different from the Napoleonic Code of France, for example. But all modern, civilized countries have legal systems whose core elements agree: rule of law, no ex-post-facto crimes, no double-jeopardy, accused has the right to an attorney and to see and confront evidence against him, etc. So don't get excited; I'm not proposing we jettison the Constitution and join the EU.)

China's legal system has a long way to go before it's integrated with that of the civilized world. China has problems not only with regard to the rights of the accused, but also with their willingness to share information with other countries. They're not even up to the standards of France, let alone Great Britain or the United States. Similarly, China's repeated attempts to censor the internet demonstrate that they're still frightened of allowing their citizens full access to communications around the world.

But the fact that an 8.8% drop in the Shanghai Index could trigger a 3.5% - 3.9% drop in American markets, plus a significant (but somewhat smaller) plunge in European markets as well, is very solid evidence that the Chinese economy, at least, is strongly integrating into the global economy; full integration is not that far into the future, if things keep going the way they have been.

Does this mean that China is already in the Functioning Core? No, I wouldn't say so. But of the three criteria Barnett cites -- economy, communications, and legal system -- I believe that the first is the biggest stumbling block for most countries that try to move from the Non-Integrating Gap to the Functioning Core: the other two are easily within the reach of the government, which can simply lift restrictions on communications and ram legal reforms through parliament, the Supreme Council, or the Central Committee, as the case may be.

But a nation's economy depends upon many factors beyond the immediate control of the government:

  • Material resources -- land, water, agriculture, mineral deposits, energy sources;
  • Human capital -- birthrate, labor, education, religion, scientific advances, technological innovation;
  • Military machinations -- is the country surrounded by hostile neighbors who constantly invade? Are they pawns in the larger struggles surrounding them?
  • Monetary matters -- do they labor under a crushing international debt load bequeathed them by a previous government? Is their currency accepted in international markets? Will other countries extend them credit without imposing undue socialist burdens?
  • Their index of leading cultural indicators (to borrow a phrase from Bill Bennett) -- does the national culture support innovation, good work habits, the honoring of contracts, rule of law, and a belief in the future?

These cats are much harder to herd than simply conforming their legal system to that of the civilized world or merely taking their grubby mits off of international communications. So the fact that China seems well on its way to fully integrating its economy into the globalization of world markets gives me great hope that fairly soon, they will go "all the way." They're already members of the World Trade Organization (since December, 2001), and they're slowly opening their markets to foreign imports.

I think on this point, Barnett has a very strong argument: China is not going to be America's next "Big One," to replace the old Soviet Union. And on a similar note, I personally believe they will not try to seize Taiwan by force; such a reckless act would squander the huge economic gains they have made since the death of Mao Zedong and bring them into direct military conflict with the greatest superpower in the world.

And they're just not willing to sacrifice la dolce vita merely for the satisfaction of conquering a "renegade province" on the Island of Formosa. And that's assuming they would even win; considering the difficulty of transporting troops and weapons of war across a hostile sea and onto a swampy land -- in the teeth of American military might -- the very idea of such a war would be daunting to the Chinese, even setting aside the complete collapse of the Chinese economy that would almost certainly follow.

(In fact, I don't even believe that China would have the eggrolls to carry out another Tiananmen Square massacre; they simply have much more to lose today than they did 18 years ago.)

So that's one upside of a worldwide stock-market correction; I'll leave it to people who actually know what they're talking about to discuss other upsides and downsides -- or even upside-down sides.

Hatched by Dafydd on this day, February 27, 2007, at the time of 3:39 PM

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Comments

The following hissed in response by: Big D

I always chuckle when people say China will be the world's greatest superpower in 10, 20, 30 or 50 years. Maybe because they always say it with such glee, such self satisfaction. Maybe because, as they say in billiards, there is still an awful lotta felt between that ball and the pocket.

China will eventually take over Taiwan, but only after it fully integrates into the functioning core. If Taiwan was smart they would make public a list of requirements for rejoining China. Open communications, voting rights, and a fully functioning legal system. If China implements these, then they get Taiwan without firing a shot. But then they won't exactly be the same China anymore. Such a declaration may prevent the Chinese from doing anything too stupid until it is too late, if it isn't already too late.

Something most people forget - there is a reason why the functioning core has the communications and legal system it does - it is the system that works best with an advanced and growing economy. It was developed over centuries in the cauldron of Europe. Countries that adopted these systems flourished, those that didn't are now footnotes to history.

At some point, China will find it has to adopt the other two legs of the stool, or topple over. People don't get that China MUST keep growing at an unprecedented rate, or it risks implosion. In the end, adopting a open communications and a decent legal system is a small price to pay.

There is a sort of savage economic/cultural Darwinism occurring in the world today. Radical Islam is a symptom of what is occurring - the mass extinction of tribal culture around the world. The death throes of a dying animal are very dangerous, but never doubt that they are indeed death throes.


The above hissed in response by: Big D [TypeKey Profile Page] at February 27, 2007 4:32 PM

The following hissed in response by: Troll

I always enjoy that as well. China is going to take over the world!!!

The same people run economic predictions in a static model and are confused when something changed. Do they really think that Japan, Korea, Vietnam, India are just going to sit there, do nothing and watch themselves get 'taken over'? I mean, most of those countries have a more advanced economy, are more inventive culturally and have a bucket load of people as well (even if Japan's is in decline).

The above hissed in response by: Troll [TypeKey Profile Page] at February 27, 2007 9:04 PM

The following hissed in response by: Terrye

I don't think China wants a war at this point.

As for the stock market correction, a friend of mine said, The Democrats haven't been there for two months and the market is tanking. Figures.

I had to laugh.

The above hissed in response by: Terrye [TypeKey Profile Page] at February 28, 2007 3:00 AM

The following hissed in response by: McnMan

Sorry to go off on a tangent, but I wanted to say a couple of things about Taiwan. I lived there for over a year and my wife is Taiwanese.

First, Taiwan isn't really swampy. It's very mountainous and densely populated. What little countryside there is is dominated by rice paddies, which may be what the wise lizard meant by "swampy". At any rate, it is excellent terrain for defensive purposes.

Second, with regard to Taiwan publishing a list of requirements for China to meet. I was surprised when I started talking to people over there by how divided opinions are with respect to China.

There are a lot of people, especially the aging soldiers who arrived with Chiang in 1948-49, as well as their children and grandchildren, who very much want to rejoin China. They would do it today with a song in their heart.

Then there are others, like my wife's family, who have lived in Taiwan for hundreds of years and feel that China was a briefly occupying foreign power. They want full independence now. There are also some who would prefer to rejoin Japan rather than China.

And of course there are lot of others who are somewhere in between. Maybe they see rejoining China as inevitable, but to be put off as long as possible.

The above hissed in response by: McnMan [TypeKey Profile Page] at February 28, 2007 4:29 AM

The following hissed in response by: Big D

I envision Taiwan evolving into Alsace-Lorraine. Turf eveyone would have died for, until they realized there were easier ways to get what you want.

The above hissed in response by: Big D [TypeKey Profile Page] at February 28, 2007 9:20 AM

The following hissed in response by: ashowalt

Somewhat comparable arguments were made in the years prior to World War I. Clearly, you specifically said that nations within the Functioning Core have not fought one another since World War II, but what factors do you believe make the world today significantly different in this respect than it was in, say, 1910.

The above hissed in response by: ashowalt [TypeKey Profile Page] at February 28, 2007 10:53 AM

The following hissed in response by: Dafydd ab Hugh

Ashowalt:

Clearly, you specifically said that nations within the Functioning Core have not fought one another since World War II, but what factors do you believe make the world today significantly different in this respect than it was in, say, 1910?

World War II.

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at February 28, 2007 11:19 AM

The following hissed in response by: MTF

Leaving aside for a moment Barnett and his "functioning core" construct (I haven't read the book), I'd like to ask people familiar with the subject if China's history of aggression in the Pacific rim gives us any comfort about their tendancies, or should it provoke any discomfort?

Claire Berlinski points out that Europe should always be a source of concern for Americans because it's nearly unbroken history is collectively one of aggression, war and general savagery, and so the risk to us and the world of Europe resuming it's usual behavior is always high. China seems different, and the Nationalist takeover of Taiwan sticks out because China hasn't often acted imperially in the Pacific rim.

The above hissed in response by: MTF [TypeKey Profile Page] at February 28, 2007 11:26 AM

The following hissed in response by: ashowalt

Dafydd:

How does the fact that WWII has occurred increase the extent to which economic interdependence would dissuade countries from going to war with one another?

The above hissed in response by: ashowalt [TypeKey Profile Page] at February 28, 2007 11:56 AM

The following hissed in response by: Dafydd ab Hugh

MTF:

Leaving aside for a moment Barnett and his "functioning core" construct (I haven't read the book), I'd like to ask people familiar with the subject if China's history of aggression in the Pacific rim gives us any comfort about their tendancies, or should it provoke any discomfort?

China doesn't really have much of a "history of aggression on the Pacific rim;" nothing like the aggression of the Soviet Union... or Imperial Japan, for that matter.

China intervened on behalf of North Korea, but only after we did on behalf of the South (I'm sure they had earlier been egging the North on).

But that was half a century ago; I don't think they have done much since then (beyond overrunning Tibet -- which, while it may be emotionally upsetting to Richard Gere, has no particular geopolitical significance). China took over Hong Kong -- but that was via treaty, not by force of arms.

They haven't menaced Japan, for example, or even rattled their sabers; and they have definitely leaned on the DPRK to stop them from threatening Japan and the rest of the Pacific: I think China fears a nuclear Japan and a nuclear RoK.

Even under the Commies, China is just China; it's just... there.

We have only had one unpleasant encounter with them recently:

When Bush first became president, they tested him in the EP-3E incident: While conducting electronic surveillance of China from international airspace, which is traditional, the EP-3E was contacted and "buzzed" by Chinese J-8 fighters -- also traditional.

But one of the Chinese J-8s clumsily touched wings with the P-3. Our larger, heavier, more stable aircraft was damaged but managed to make an emergency landing on Hainan. The Chinese jet splashed; the pilot ejected but was never found.

The Chinese were very embarassed by the incident, which occurred over international waters; they refused to allow the EP-3E to leave for ten days... but eventually they did (after examining the remains -- after crew-initiated destruction -- of the highly classified monitoring, detection, and jamming equipment aboard).

Bush finally issued the "letter of two sorries," in which we expressed regret that the Chinese pilot died and apologized for entering Chinese airspace and making the emergency landing at Hainan without permission. But we pointedly did not apologize for spying on them in the first place.

In a fit of pique, the Chinese wouldn't allow it to be repaired and fly out under its own power; but we cut it up and ferried it out on a Condor. Since then, we have continued reconnaissance flights along the same route without incident.

I believe this was a test of the new president... and when he neither gave in and apologized for the surveillance itself, nor overreacted and threatened a massive attack on China, but stimply stood firm -- China gained new respect for him and for the United States.

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at February 28, 2007 4:50 PM

The following hissed in response by: Dafydd ab Hugh

Ashowalt:

How does the fact that WWII has occurred increase the extent to which economic interdependence would dissuade countries from going to war with one another?

I believe I'll answer with a post; it's too long for an e-mail exchange!

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at February 28, 2007 5:32 PM

The following hissed in response by: brutepcm

Back in the eighties, we kept hearing about what economic powerhouses the Soviet Union and Japan were. I have been waiting for China to follow the same path. I take the stock market slump as an early warning.

The above hissed in response by: brutepcm [TypeKey Profile Page] at March 2, 2007 1:54 AM

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