What Threat, China?by Kel Kelly
Dec. 01, 2010
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This topic needs no introduction. We hear discussions in the national media weekly about the possible threat an economically resurgent China poses to the United States — and even to other countries. So how concerned should we really be about China's economic and military might? Answer: China's economic development itself is not in any way harmful to us; ultimately, the only threats that exist as a result of its success come from potential actions taken by politicians as a response to its development. In a world of free trade and political isolationism, China could not possibly be a danger.
There are various ways in which China is currently seen to represent a threat to the United States. We will consider each of these threats in turn below.
The Threat from China's New Economic Power
China is seen as a potentially dangerous economic power. But it's naïve to think of a country as possessing economic power over another country, as there is no such thing. An economy is a group of individuals and businesses — and to some degree governments — working to produce goods and services that they then trade with one another and with other economies. This trade involves voluntary exchanges, cooperation, and mutual gain; it does not involve force.
An economy is therefore not "powerful," because the concept of power does not apply to production and exchange: people and businesses producing cannot force anything upon others. It is only with a connection to government power that they could have an influence.
For China to engage with the United States or any country economically, it must engage in voluntary exchange. And when I say "it," I mean hundreds of millions of different people, not a single entity. For the most part, only individuals and individual firms engage in production and exchange; governments do not.
In a context of free trade, no one group gains at the expense of another. Trade is beneficial to both sides, with each side willingly giving up what it has for what the other side has, because it feels that it will be better off. If one side does not think it will benefit from a trade, it will not willingly engage in it.
International trade works the same way: some countries (i.e., the various businesses and industries within a geographical border) focus on producing goods and services in which they have a comparative advantage for reasons of geography, technology, productivity, etc. They then take what they have produced and exchange it for what other countries have produced.
China has a comparative advantage in making items like textiles and apparel, data-processing equipment, and iron and steel. The United States has a comparative advantage in the production of such things as transportation equipment, scientific instruments, telecommunications equipment, chemicals, and other technologies. (It should be noted that both countries also perform different stages of the production process of the same goods.)
When each country focuses on what it is comparatively better at producing, both countries together can produce more total goods. Just as when two or more office workers can produce more by each focusing on a specific task than by each trying to do a little of every task, a division of labor results in more total work getting done.
China is the same as a coworker: it is a partner in producing goods for the world, goods that all of us individuals desire to obtain and consume. Like every country, and like our coworkers, China is our economic partner, not some type of competitor, and should be perceived as such.
This truth is obscured by meddling politicians. Our political leaders would not as easily be able to "lead" us if there were no threats in the world — i.e., if China was merely our peaceful coworker. Domestic politicians need to find foreign politicians to be at odds with. Thus we have statements like the one made in 2007 by then-Senator Barack Obama, who, by preparing for threats precipitates them:
China is rising and it's not going away. They're neither our enemy nor our friend. They're competitors. But we have to make sure that we have enough military-to-military contact and forge enough of a relationship with them that we can stabilize the region. (emphasis added)Contrary to the president's ideas, it is in fact cooperation and exchange that stabilize regions, which is why Southeast Asia is already relatively stable. Military-to-military contact only causes more intense military-to-military conflict.
We should wish for hundreds more countries to become as economically developed and productive as has China. Were this the case, there would be millions more goods developed in the world each year, thus reducing the unit cost of each good. In other words, were hundreds of nations producing as much as China or the United States, there would be a much greater abundance of the things we want and need in our daily lives at correspondingly lower prices, making our standards of living tremendously higher.
Additionally, another country with a billion brains and new ideas creating new inventions and new technologies could only improve our lives. Consider how much worse off the rest of the world would be if they didn't have American (or other Western) technologies and goods. Even the lives of those in the poorest, most backward countries are improved by having Western medicines, automobiles, telecommunications equipment, airplanes, and the like. New creations from China would further our own and others' prosperity. Having not one, but tens of new countries rising into economic adulthood is a thing we should hope for.
The Threat of China Fighting Us for Resources
Under free trade, and without politically oriented government-monopoly militaries, no country would be able to harm another. But with the existence of politicians "leading the country," it's a different story.
Politicians believe, or at least try to get voters to believe, that we need to fight for resources. We don't. Absent this mentality, and absent warring politicians leading national armies to fight, individuals would have no means to obtain resources except by trading their own production.
China and the United States can each obtain all the raw materials and oil they need, or both countries can compete with each other for varying amounts of both of these resources, by bidding the right prices in world markets. Highest bid wins.
Limited resources — and all resources, as well as all other goods, are always limited — are therefore allocated to the various uses in various locations in proportion to the urgency of the need for them. Such competitive bidding is what takes place between firms and industries — as well as between consumers — domestically.
After all, Japan, a country with few natural resources, became much more successful economically by laboring and trading to obtain resources after World War II than it was by stealing them from Korea and China before that.
Crucially and ironically, government protection of domestic resources is often a cause of wars. But when resources are privately owned, they are not kept off the market (not to mention that more of them are produced).
What if there are not enough resources for each country to obtain the amount it needs? Logical thought reveals that this is not possible. The entire earth is comprised of chemical elements: oxygen, hydrogen, nitrogen, carbon, iron, nickel, etc. Man has literally only scraped the surface of the earth's resources, and has not even begun to obtain resources that lie two miles deep in the ocean, under its floor (not to mention those on other planets — billions and billions of other planets). The world is creating more resources, in usable form, daily.
Thus, what we need to do with our national capital is invest it in tools and machines that can dig for new resources, not consume it by having it instead produce tanks and guns to fight for existing resources.
The Threat of China Not Taking Our Exports
Some say that there is a need to "find a distant market." This is false. It would be ideal if other countries were involved in world production and exchange, but if they are not, so be it; they should be left alone. If a country can't find additional export markets because there are no additional trade-oriented countries, it can exchange and consume the remainder of its production in the home country, because there could never be a satiation of goods at home.
But because ignorant government officials and the businessmen who fund their campaigns feel a need to somehow find foreign markets, wars ensue. Industry can find foreign markets by itself; governments usually intervene to try to force foreign markets into becoming "democracies" and "trading partners." This is unneeded and immoral. Besides, because wars destroy goods and resources and the ability to create goods and resources, they are naturally self-defeating.
The Military Threat
As China is becoming more capitalistic and prosperous, and as America is becoming more socialistic and falling further behind, there is a popular concern that China will become dominant. As shown above, to the extent that this means their economy will grow larger per capita than ours, the United States can only benefit.
But to the extent that growing larger means military strength, the concerns are valid. In that case, the roles would reverse: America would now fear China's military might just as China has feared America's potential military aggression for many years (as also did the Soviets, who saw America as an aggressor).
A powerful military can come only from a powerful economy. Countries that have little capital and little ability to produce factories, tools, machines, and consumer goods likewise have little ability to produce tanks, missiles, fighter jets, and satellite systems. The lesson for the United States in this case is that we need to do everything possible to promote capital accumulation and increased labor productivity.
But even that consideration misses the real issue at hand. Military threats come only from political leaders, not from individual citizens. Thus, centrally controlled nation-state structures are the problem.
Individuals and businesses, in contrast to governments, have no incentive to go to war. For they "fight" with entrepreneurial ideas, production, and marketing; they fight with prices and profits — they have no armies. The previous statement, of course, does not apply when businesses are in bed with government — this is why government should simply uphold laws, not impose itself in industry. A separation of government and business would change the world.
Additionally, because the individuals and businesses of each country are engaged in both trade and production with one another, they have every incentive not to have their countries go to war, because their revenues and profits would suffer as a consequence.
Ninety-nine percent of the time, there are no true military threats from other countries. "Threats" usually consist of either (A) a country fearing a military attack only because its own previous hostile actions have either intentionally or unintentionally brought the threat about, or (B) a country building up arms simply because the other is doing so and because each side is afraid the other side will attack first. Both of these cases applied to countries on both sides of the Iron Curtain during the Cold War (after all, the United States and its allies did invade Russia in 1918). And the latter case specifically applies to current US fears of a military buildup in China and vice versa.
Neither scenario would occur in countries that remained neutral and isolationist, because countries that keep to themselves are rarely attacked. And history shows that isolationism usually saves many more lives than does "defending" other countries that are aggressed upon.
With respect to foreign countries and terrorists, we have to ask: If we didn't bother them, what possible reason could they have to attack a country keeping to itself halfway around the world? Would they want to invade us and take our buildings and homes and ship them to their own country? Do they want to steal our bank accounts (in which case massive amounts of dollar bills flowing into their local bank accounts would only raise prices and dilute the effects of their new wealth)? Do they want to reside in Virginia and Oklahoma instead of their native lands? What would they actually gain?
They really have no reason to bother us unless either we have already upset them by interfering in their domestic affairs in the past or there's a threat that we will attack now. Most conflicts are politically contrived; they are certainly not outcomes of the marketplace.
The Currency and Trade Threats
For more than ten years the United States has been complaining that China pegs its currency too low. The result, American politicians claim, is that we import too many goods from China, and that our jobs are being shipped there so that cheaper labor can replace our more expensive labor. There are many things wrong with this view.
First, it is true to a degree that artificially low production costs in China will move some jobs there. But there are many market-based forces changing constantly that cause jobs to move to different countries each year. Examples are changing technology, production capabilities, supply and prices, time preferences, capital availability, and consumer taste and preferences in various countries.
These forces also cause jobs to be moved to the United States each year. The same is true between different geographical regions in the same country. Such economic changes are part of the market process and have been occurring for hundreds of years.
Moreover, American-policy-based distortions of the marketplace and of market prices cause many more jobs to move overseas than does one country's artificially low currency. Some examples are US corporate and capital-gains taxes (which are among the highest in the world), union-legislated wage controls, federal and state minimum-wage controls, and thousands of pages of regulation that raise operating costs or prevent certain products from being produced and certain production methods from being employed. (An example of the latter would be the prohibition against building oil refineries in the United States, which results in their being built overseas instead.)
Regardless, the absence of available jobs in any country is never due to jobs having been shipped offshore, as there is always more work to be done domestically than there are people to do it. As I explained earlier, different countries have different comparative advantages in producing various products. No matter what market-based or policy-based price signals have been created, the result will always be such that the United States has a comparative advantage in some industry based on current conditions. The United States, like other countries, will always have the right mix of soil, weather conditions, natural resources, technology, skills, or labor prices for some particular types of production.
There will always be work available for everyone to do. The only reason there would be unemployment -- excluding temporary or "frictional" unemployment -- is if (A) there were government-imposed above-market wage rates, or (B) there were mass unemployment stemming from an ongoing economic bust brought about by a central-bank-financed credit boom and kept in place by government policies preventing losses from being realized and preventing labor and capital from moving to where they should be according to market prices.
Both of these conditions are what the United States currently faces and are the cause of our current unemployment. American politicians blame China for our economic problems when they themselves are to blame.
The fact is that China's artificially low currency helps American consumers obtain more goods at lower prices. By pushing China to revalue its currency, our politicians choose to make us pay more for our imports so that politically connected exporters can benefit instead.
Besides, it's China's currency, not ours; China should be able to do whatever it wants with its currency.
But the Chinese leaders are to be faulted as well: a currency is a medium of exchange used by individual people and companies to engage in trade. Its price should be determined by the market, not by government price controls.
The Chinese government believes it must manipulate its currency for the sake of increasing exports. This old mercantilist notion was shown to be fallacious by Adam Smith. By intentionally exporting more than it imports, a country sends out more goods than it takes in, resulting in fewer goods at higher prices domestically. If a country exported all goods and imported no goods, it would be left with a stash of cash but nothing to buy with it. Wealth comes from having more goods, not more paper bills.
Now, with the United States printing money like mad and ensuring future price inflation and currency declines, the Chinese believe they will also be forced to inflate. Their reason is that if the quantity of money — and thus the height of prices — increase in the United States in proportion to the amount of extra bank reserves created by the Fed, China will not be able to maintain its peg to the dollar without increasing its own supply of money and its own inflation rate in response; it must inflate in order to devalue the yuan against the dollar, lest the yuan increase in value against the dollar.
And the Chinese government will indeed be forced to devalue but only because it insists on continuing its illogical mercantilist economic manipulations. The inflationary suffering China will inflict upon its people in this case is wholly unnecessary. Instead of devaluing to be "competitive," it should let its currency rise as the US dollar falls. Such a rise, brought about by market forces adjusting the currencies to the respective prices in each country, would keep the real exchange rate between the two countries constant.
With purchasing-power parity existing between the two nations (i.e., with the yuan–dollar exchange rate kept at market-clearing prices), China's exports would more closely equal imports. In this situation, where as many goods would enter the country as would exit, Chinese citizens would have more goods available at lower prices, and their living standards would improve.
There are no threats from China or any other country becoming more capitalistic and wealthy. To the contrary, having a billion people join in producing and adding to the world supply of goods can only reduce world prices and increase living standards. Everyone benefits from trade. The only reason Chinese and American citizens would want to fight each other is if their dear leaders encouraged them to. The real threats to our national security are politicians, not economic growth in countries around the world.
Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe and in the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail. See Kel Kelly's article archives.
 The majority of firms in China are privately owned; in fact China's progress could not have come about without such privatization. Most state-owned companies operate at losses, i.e., they are consuming more resources than they produce. They are net destroyers of capital and wealth, and therefore cause declining standards of living.