Americas Quarterly - Winter 2012

China has long
resented the financial
position of the U.S. as
holder of the most
widely accepted
reserve currency, which
makes Chinese trade
dependent on values
it cannot control.
China has long
resented the financial
position of the U.S. as
holder of the most
widely accepted
reserve currency, which
makes Chinese trade
dependent on values
it cannot control.

pable of international force projection. All of this coincided with more assertive claims to maritime territories in the South and East China Seas, with their vast subsur-face hydrocarbon deposits.

These ambitious policies resulted in two maritime altercations that China became embroiled in during the summer of 2010. The first involved a fishing trawler in the East China Sea that collided with a pursuing Japanese Coast Guard boat near the Senkaku/Diaoyu Islets. The second involved China’s contention that the entire South China Sea was part of its “core national interest.” But China’s claim overlapped with the 200-nau- tical mile exclusive economic zones (EEZs)—based on the UN Convention of the Law of the Sea—of Malaysia, Taiwan, Brunei, and—most sharply—Vietnam and the Philippines. The same China that in 2009 set up a $10 billion fund to facilitate the economic survival of its Southeast Asian neighbors in the financial crisis and in January 2010 officially implemented the ACFTA was now, it seemed, demonstrating that China could blow both hot and cold. China’s rival claimants reacted by inviting the U. S. Navy into the region, to China’s chagrin.

CHINA’S DEVELOPING WORLD MODEL

China’s involvement with the developing world has been structurally parallel to the old impe- rialist powers, seeking to import raw materi- als and export manufactured goods. China does not have sufficient oil, natural gas, aluminum, copper, or iron to satisfy its energy and manufacturing needs, so to function as workshop of the world it needs trade partners to sustain its growth. And it has plenty of capital (some $3 trillion, the largest foreign exchange cache ever amassed) to work with.

But there are also differences. Most of China’s international trade is conducted by state-owned enterprises (SOEs) in which national interests are embedded. One result of the state-centric arrangement is that both trade and investment are designed to ensure long-term stability of supply rather than short-term profits, as is typically the case for Western private corporations where shareholders usually demand immediate returns. This facilitates cooperation in projects involving longer investment time horizons.

Another feature is that China’s entrance into a market is often sudden and massive. For example, trade with Latin America rose from $10 billion in 2000 to $150 billion in 2008.

China’s engagement undermines its own terms of trade, as its upsurge in demand drives up the price of the commodities it imports and its upsurge of supply drives down the price of the manufactures it exports. This benefits some countries that trade with China, raising the price of commodity exports while reducing inflationary pressures and improving popular living standards with cheap consumer imports; but the scenario is less beneficial for China. In response, rather than purchasing output at market price, the Chinese SOE often attempts to purchase foreign commodity companies or at least buy a controlling stake. China has made increasing investments in Latin America, Australia, Africa, and Indonesia in a “Going Out” policy of foreign investment initiated at the turn of the century. It prefers to then process those materials in China or in facilities constructed by imported Chinese labor.

China sometimes also gives aid by means of concessionary loans to foster a favorable climate for Chinese businesses, often on quite informal terms. While popular among recipients, the rest of the donor community objects because it leaves the door open to elite corruption. But this has been part of China’s philanthropic modus operandi since Zhou Enlai introduced it in Africa in 1956.

To pay for its surge of commodity imports and investments, China exports labor-intensive consumer goods. Though these goods often improve living standards, Chinese export rebates and an artificially cheap currency also help them to be highly competitive with local industry and to undercut entire sectors. By 2005, the trade surpluses that Latin American countries enjoyed with China had all been reversed by the influx of Chinese exports. The Central American textile industry is also being smothered by Chinese textile exports.

Mexico has been particularly hard hit by Chinese competition. After the North American Free Trade Agreement (NAFTA) went into effect in 1994, Mexico grew heavily dependent on the U. S. market—only to be undercut by China. Trade between Mexico and China has grown spectacularly over the past decade from a little more