How the west should judge a rising China

Advanced countries are hobbled by their inability to manage their own affairs

Martin Wolf

Today’s advanced countries, dominated by the US and Europe, have a preponderant share of the global economy. The 14 per cent of humanity that lives in advanced countries generates 60 per cent of world output at market prices and 41 per cent at purchasing power parity.

This will not last: as recently as 1990, advanced countries generated 78 per cent of world output at market prices and 64 per cent at purchasing power parity. The west must accept its relative decline or engage in a grossly immoral and probably ruinous struggle to prevent it. That is the most important truth of our era.

For this reason, above all, westerners need to consider how those in the rising powers view the world. It is likely that China, in particular, will emerge as by far the world’s biggest economy. We need to evaluate and assess the views of those who lead it. Two weeks ago, I presented what I heard in high-level meetings in Beijing. Now, I will assess what I heard, under the same headings.

China needs strong central rule

A noteworthy fact was the belief of our interlocutors that Chinese political stability is fragile. History suggests that they are right. The past two centuries have seen many man-made disasters, from the Taiping Rebellion of the 19th century to the Great Leap Forward and cultural revolution.

It is quite easy therefore to understand why members of the elite seem convinced that renewal of the Communist party, under the control of Xi Jinping, is essential. We must recall that the upheaval of modernisation and urbanisation through which China is now going, destabilised Europe in the 19th and early 20th centuries.

Yet this tightening of control could derail the economy or generate a political explosion in a country containing an ever more literate, interconnected and prosperous people. China wishes to be a huge Singapore. Can it?

Western models are discredited

The Chinese elite is right: they are, alas. The dominant view among the rest used to be that the west was interventionist, selfish and hypocritical, but competent. After the financial crisis and the rise of populism, the ability of the west to run its economic and political systems well has come into doubt. For those who believe in democracy and the market economy as expressions of individual freedom, these failures are distressing. They can only be dealt with by reforms. Unfortunately, what the west is getting instead is unproductive rage.

China does not want to run the world

On this point, we can express doubts. For the first time, China will become a great power within a global civilisation. Like all great powers before it, China will surely wish to arrange the global order and the behaviour of other states (and private organisations, too) to its liking.

China also has many neighbours, many of them historically allied to the US. It is already trying to expand its influence, notably in the South China Sea. It is also trying to influence behaviour, not least of all Chinese students, abroad. All this represents the inevitable extension of Chinese power abroad.

China is under attack by the US

The Chinese elite is right that Americans increasingly regard their country as a rival, indeed a threat. Americans, in turn, argue that China is attacking them, by extending its military power and undermining allies, notably Japan. The truth is that power is inevitably a zero-sum game.

The rise of Chinese power will be seen as a threat by the US, whatever China’s intentions may be.

Developing countries (Martin Wolf) charts

Moreover, many Americans, indeed many westerners, do not really accept Chinese positions on Tibet and Taiwan, are suspicious of China’s intentions and resent its success. Such mutual mistrust opens the so-called Thucydides trap of suspicion between incumbent and rising powers.

US goals in trade talks are incomprehensible

China is right: they are ridiculous. But within them are genuinely important issues, notably intellectual property.

China will survive these attacks

This is almost certainly true. Unless the US breaks all its commitments and seeks to impose an economic embargo on China, the current friction will not halt Chinese progress, although it may slow it. A greater threat to China would lie in the domestic reaction to a far more hostile external environment. The likely response would be yet tighter political and economic control, rather than the needed shift towards a more market-oriented, more private-sector-led and more consumption-driven economy.

This will be a testing year

It will. In fact, it will be a testing century. The right view for the west to take is that China is indeed a significant competitor. Its rise will create many dilemmas for the west and especially for the US. But China is also an essential partner in ensuring a reasonably co-operative, stable, prosperous and peaceful world.

The west needs to think much harder about how such a world should work. The US administration’s view — that the unilateral exercise of US power is all that is needed — will fail. It will not manage the global commons that way, not that the Trump administration cares about that, at all. It will also not achieve stability: if it doubts that, it should look at the cauldron that the Middle East has become after endless interventions.

It is essential for westerners to realise that our biggest enemy has become our inability to run our own countries well. Meanwhile, the only future for an interdependent world has to be based on mutual respect and multilateral co-operation. This does not mean accepting every Chinese demand as legitimate. Far from it. Principled resistance is essential. But we are moving from a western-dominated past to a post-western future. We have to make the best of it.

Human Rights and the Fate of the Liberal Order

Joseph S. Nye

Russian Police forces seen arresting a protester during the demonstration

CAMBRIDGE – Many experts have proclaimed the death of the post-1945 liberal international order, including the human-rights regime set forth in the 1948 Universal Declaration of Human Rights. The cover of Foreign Policy recently displayed the white dove of human rights pierced by the bloody arrows of authoritarian reaction.

According to “realist” international-relations theorists, one cannot sustain a liberal world order when two of the three great powers – Russia and China – are anti-liberal. Writing in Foreign Affairs, Yascha Mounk and Roberto Stefan Foa argue that the era when Western liberal democracies were the world’s top cultural and economic powers may be drawing to a close. Within the next five years, “the share of global income held by countries considered ‘not free’ – such as China, Russia, and Saudi Arabia – will surpass the share held by Western liberal democracies.”

There are several problems with this argument. For starters, it relies on a measure called purchasing power parity, which is good for some purposes, but not for comparing international influence. At current exchange rates, China’s annual GDP is $12 trillion, and Russia’s is $2.5 trillion, compared to the United States’ $20 trillion economy. But the more serious flaw is lumping countries as disparate as China and Russia together as an authoritarian axis. There is nothing today like the infamous Axis of Nazi Germany and its allies in the 1930s.

While Russia and China are both authoritarian and find it useful to caucus against the US in international bodies like the United Nations Security Council, they have very different interests. China is a rising power that is highly intertwined with the international economy, including the US. In contrast, Russia is a declining country with serious demographic and public health problems, with energy rather than finished goods accounting for two-thirds of its exports.

Declining countries are often more dangerous than rising ones. Vladimir Putin has been a clever tactician, seeking to “make Russia great again” through military intervention in neighboring countries and Syria, and by using cyber-based information warfare to disrupt – with only partial success – Western democracies. A study of Russian broadcasting in Ukraine found that it was effective only with the minority that was already Russia-oriented, though it was able to produce polarizing and disruptive effects in the political system. And the revival of Cold War-style information warfare has done little to create soft power for Russia. The London-based Soft Power 30 index ranks Russia 26th. Russia has had some success cultivating allies in Eastern Europe, but it is not part of a powerful authoritarian axis such as existed in the 1930s.

China is different. It has announced its willingness to spend billions to increase its soft power. At meetings in Davos in 2017 and Hainan in 2018, Xi Jinping presented China as a defender of the existing international order, but one with Chinese rather than liberal characteristics. China does not want to overturn the current international order, but rather to reshape it to increase its gains.

It has the economic tools to do so. It rations access to its huge market for political purposes. Norway was punished after the dissident Liu Xiaobo was awarded the Nobel Peace Prize. Eastern Europeans were rewarded after they watered down European Union resolutions on human rights. And Singaporean and Korean companies suffered after their governments took positions that displeased China. The Chinese government’s massive Belt and Road Initiative to build trade infrastructure throughout Eurasia provides ample opportunities to use business contracts to wield political influence. And China has increasingly restricted human rights at home. As Chinese power increases, the global human-rights regime’s problems will increase.

But no one should be tempted by exaggerated projections of Chinese power. If the US maintains its alliances with democratic Japan and Australia and continues to develop good relations with India, it will hold the high cards in Asia. In the global military balance, China lags far behind, and in terms of demography, technology, the monetary system, and energy dependence, the US is better placed than China in the coming decade. In the Soft Power 30 index, China ranks 25th, while the US is third.

Moreover, no one knows what the future will bring for China. Xi has torn up Deng Xiaoping’s institutional framework for leadership succession, but how long will Xi’s authority last? In the meantime, on issues such as climate change, pandemics, terrorism, and financial stability, both an authoritarian China and the US will benefit from cooperation. The good news is that some aspects of the current international order will persist; the bad news is that it may not include the liberal element of human rights.

The human-rights regime may face a tougher environment, but that is not the same as a collapse. A future US administration can work more closely with the EU and other like-minded states to build a human-rights caucus. A G10, comprising the world’s major democracies, could coordinate on values alongside the existing G20 (which includes non-democracies such as China, Russia, and Saudi Arabia), with its focus on economic issues.

Others can help. As Kathryn Sikkink points out in her new book, Evidence for Hope, while US support has been important to human rights, the US was not always very liberal during the Cold War, and the origins of the regime in the 1940s owed much to Latin Americans and others. Moreover, transnational rights organizations have developed domestic support in numerous countries.

In short, we should be concerned about the multiple challenges to liberal democracy during the current setback to what Samuel P. Huntington called the “third wave” of democratization. But that is no reason to give up on human rights.

Joseph S. Nye, Jr., a former US assistant secretary of defense and chairman of the US National Intelligence Council, is University Professor at Harvard University. He is the author of Is the American Century Over?

Europe’s Economy Throws a Wrench in the ECB’s Plans

International trade conflicts and an economic slowdown threaten to delay the bank’s exit from its bond-buying program

By Tom Fairless

The European Central Bank headquarters in Frankfurt. Threats to the 19-nation currency union are putting investors on edge. Photo: Krisztian Bocsi/Bloomberg News 

FRANKFURT—The outlook for the eurozone economy is darkening at just the wrong time for the European Central Bank.

The world’s number two central bank is preparing to phase out its giant bond-buying program, four years after the Federal Reserve wound down its own quantitative easing program. But threats to the 19-nation currency union are mushrooming. They range from international trade conflicts to a recent economic slowdown to a new governing coalition in Italy that is putting investors on edge.

At the ECB’s latest rate-setting meeting in April, the bank’s senior officials called for patience in phasing out easy money, warning in particular about mounting trade protectionism, according to minutes of the meeting published on Thursday.

Any delay to the ECB’s exit from easy money is risky, however. The central bank is fast approaching the limits of the bonds it can buy under self-imposed rules that aim to prevent excessive market distortions or subsidies for governments. Breaching those rules could trigger fresh lawsuits against the central bank, which has fended off multiple German-led challenges to its stimulus policies.

The ECB’s exit plans appear to be on track, for now. Officials expressed “confidence in the underlying strength of the euro area economy” at their April meeting, according to the minutes. They attributed the recent slowdown to a certain “normalization” from exceptionally fast growth last year, as well as temporary factors such as poor weather, strikes and a wave of influenza.

Still, economic data published since that meeting suggest the slowdown has persisted. A closely watched survey of eurozone businesses, published on Wednesday, showed activity slowed for the fourth straight month in May and more sharply than expected.

Crucially, inflation in the region—which the ECB aims to keep just below 2%—is still far too weak. Core inflation—stripping out volatile energy and food prices—slid to 0.7% in April, around the same level as when the ECB launched its giant bond-buying program in early 2015.

ECB officials also warned that trade conflicts could reduce the confidence of businesses and households, and lead to disorderly movements in exchange rates and heightened volatility in financial markets.

President Donald Trump has threatened to impose tariffs on European Union steel and aluminum imports unless the EU opens its markets wider to U.S. products. Mr. Trump is engaged in similar disputes with other nations, including China.

Speaking in Brussels Thursday, the ECB’s chief economist Peter Praet said the economy was strong despite some clouds, and blamed the recent weakness in part on bottlenecks resulting from high output. He said the impact of Italy’s new government wasn’t yet clear.

The minutes “confirmed that the ECB is in no hurry to change its current monetary policy stance,” said Carsten Brzeski, an economist with ING in Frankfurt.

“The surge in oil prices and Italian politics will further complicate the ECB’s road to taper,” or phase out, its bond purchases, Mr. Brzeski said.

Yields on Italian government bonds have risen by more than 60 basis points over the past three weeks as investors worry the new government could follow through on its promises to challenge European Union orthodoxy. Spanish and Portuguese government bond yields have also been rising.

By extending its bond purchases, the ECB would ease the pressure on southern eurozone governments. But many ECB officials worry about the side effects of continuing the bank’s stimulus policies for too long. Unlike their U.S. counterparts, eurozone households, businesses and governments have made little progress in paying down their debts since the financial crisis.

In a separate report Thursday, the ECB warned of historically high debt levels in the region, and said a slowdown in growth could hurt investor appetite for the bonds of highly-indebted governments.

At their April meeting, ECB officials called on highly-indebted governments to reduce their debts, and urged them to avoid pro-cyclical spending policies.

What Cats and the Gray Tsunami Have in Common

Patrick Cox
Editor, Transformational Technology Alert

Dear Reader, 
I have a favorite joke, and it’s been my favorite joke ever since writer David Foster Wallace told it 13 years ago.

“There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says ‘Morning, boys. How’s the water?’ And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, ‘What the hell is water?’”

The point is that we tend to focus on the details of life in front of us but miss the big picture that’s all around us. Actually, my synopsis doesn’t do the parable justice, which is why it’s so brilliant. You can read to the entire address online.

The truth is that humans are hard-wired to display the behavior described in Wallace’s joke.

When we look at a scene, whether it’s a sunset, a baseball field, or a crosswalk, it’s change and movement that catch our attention. This makes sense because our ancestors needed to notice the subtle signs of predators as well as prey.

It holds true even in the modern world. If you take the time to survey your surroundings, you may appreciate the landscape or architecture, but a rustle in nearby foliage will pull you immediately back to a state of vigilance. To survive, humans learned to filter out the background and react to immediate changes. This trait is programmed into our genomes.

Herein lies the danger. Sometimes, slow, almost imperceptible changes present the biggest dangers (and the biggest opportunities), but they’re difficult to see. This is true of many species, but cats are master exploiters of this characteristic.

We Are Blind to Subtle Macroeconomic Changes

If you’ve ever watched cats hunting, you’ve seen them move openly to the very edge of their prey’s comfort zone. Then they stop and wait without moving until, in the prey’s eyes, they have completely blended into the background.

Source: (Jennifer Barnard)

This is true for all feline species, from house cats to the biggest African and Asian cats. Initially, the prey will be on guard but confident that escape is possible. Eventually, though, the quarry relaxes and the predator pounces. If the target reacts in time to the sudden movement, it survives. If it doesn’t—well, it’s the circle of life.

Humans are similarly wired, which is the only explanation I have for the societal blindness regarding the biggest macroeconomic events of our era: the global debt and population crises.

Years ago, I used to be much more focused on fiscal issues and the debt problem. I switched gears because, as a policy economist and writer, I couldn’t seem to convince anybody that we can’t forever kick the fiscal can down the road.

Another reason for changing my focus was that economics has rightfully been labeled the “dismal science.” A big part of a good economist’s work is telling people who demand magical political solutions to every problem that life entails tradeoffs. As my old friend Robert Heinlein said, “There ain’t no such thing as a free lunch.”

Very few people are willing to hear the TANSTAAFL message that the bill ultimately comes due. I leave that thankless task to el jefe John Mauldin, who is much better at it. And he really delivers it in his last Thoughts from the Frontline, titled, “Train Crash Preview.”

If you haven’t read the column, you should do it now. Go ahead, I’ll save your place.

Government spending has grown so inexorably, though slowly, over the last decades, it has become part of the water around us. There is no more pressing issue, but I won’t try to convince you. That’s John’s job.

Rising Debt + Falling Birthrates = A Recipe for Disaster


Ironically, our debt crisis would have been manageable if it had happened a generation ago when birthrates were high. In fact, the United States did manage a similar level of debt, accrued during the Second World War—but in the post-war years, the US economy and GDP benefited from the growing labor and talent pool of the Baby Boom generation.

Today, the situation is reversed. The global and US debt loads are just as bad, mostly due to the combination of unprecedented growth of the older population and age-related diseases (also known as the “Gray Tsunami”) and falling birthrates in the developed world far below replacement rates. We keep sending our medical bills to our children, and they can’t afford to pay them.
How did this happen?

I think it’s largely because the debt and the demographic deficit have grown so slowly. They’re the water we swim in.

Most people, particularly those in politics and the media, seem to believe that the situation will get better if we continue to ignore it. Unfortunately, it’s getting worse.

A new report by the CDC’s National Center for Health Statistics states that the fertility decline from 2016 to 2017 is the largest single-year drop since the Great Recession. Back then, low birthrates could be explained by hard economic times. Conditions have significantly improved since then.

I’ll cite just two of the dozens of stories about the CDC report.

Here’s a Los Angeles Times story titled, “The U.S. birthrate hits another record low. Even women in their 30s are having fewer babies.”

The New York Times’ contribution is, “U.S. Fertility Rate Fell to a Record Low, for a Second Straight Year.”

By the way, only a few years ago, both publications were warning of the dangers of overpopulation.

According to the NYT article, many observers incorrectly assumed that birthrates had been suppressed by the global economic downturn and would therefore return to higher levels after the crisis:

“Every year I look at data and expect it will be the year that birthrates start to tick up, and every year we hit another all-time low,” said Kenneth M. Johnson, a demographer at the University of New Hampshire. “It’s one of the big demographic mysteries of recent times.”

I agree that it is somewhat of a mystery. We don’t understand all the forces driving down birthrates.

Some are obvious, but I think there’s more to it than we know. It’s clear, though, that birthrates have always fallen as standards of living and lifespans increase.

Expensive government programs in Europe, Japan, and Scandinavia have only marginally slowed depopulation trends. They won’t prevent the failure of programs that depend on transfers of wealth from younger to older cohorts, the biggest component of all developed nations’ budgets.

I realize that almost nobody wants to hear this, so I’m happy that John Mauldin is doing the unpleasant work of delivering tough love to the fish who don’t know what water is. I find it a lot more fun to focus on scientific solutions that can shrink the costs of age-related diseases to a fraction of their current budget-busting size.

I also take comfort in the fact that the “train crash” John is describing will force the adoption of next-generation anti-aging biotechnologies. Those who know it’s coming are in an excellent position to hedge that crash. They can do so by financially supporting the companies and scientists working to give us the health needed to be productive far, far longer than ever before.

John and I both agree that new technologies will enable a “reset” that will usher in a new age of abundance. Unfortunately, it doesn’t seem likely that we’re going to get there until the gales of creative destruction clear out the obstacles to its arrival.

So, how's the wáter?

 Is Oil About To Become Front-Page News? “A Glut That Held Prices Down For Years Is Essentially Gone”

Here’s a new indicator for you: It seems that the difference between the price of oil here and abroad is a measure of tightness in the market, with a rising spread indicating higher prices in the future, with all the inflationary pressures that that implies. From today’s Wall Street Journal:
Trans-Atlantic Oil-Price Spread Soars as Supply Glut Disappears 
U.S. oil prices are lagging behind global oil prices climbing toward $80 a barrel, the latest sign of a market that has gone from glutted to exceptionally tight in the past year. 
U.S. oil futures are trailing Brent, the global benchmark, by more than $7 a barrel, settling at $71.28 a barrel on Friday. The two oil benchmarks are further apart than they have been since 2015, before U.S. crude could be freely exported. 
The divergence is a sign of how stretched global oil supplies have become even as U.S. output has marched higher, overtaking Saudi Arabia and rivaling Russia. That has contributed to soaring U.S. exports, which have hit a record of nearly 2.6 million barrels a day as users clamor. 
“The market is screaming right now, ‘We need every barrel we can get,’ ” said Phil Flynn, an analyst at the Price Futures Group. 
Both benchmarks have been on a tear lately. The Organization of the Petroleum Exporting Countries and its allies have been holding oil off the market for more than a year, and demand has surged as the global economy roared to life. Unexpected disruptions, like plunging oil output from Venezuela, have tightened supplies even further. A glut of oil that held prices down for years is essentially gone. 
Oil price Brent WTI
Higher oil prices are starting to boost inflation and some worry that they will rein in the pace of economic growth, cutting into disposable income. U.S. gasoline prices have climbed to $2.92 a gallon on average, and are already more than $3 in several states.  
Companies like Walmart Inc. have warned that higher fuel prices are starting to threaten margins. 
The political jockeying over higher oil prices has begun. President Donald Trump has pointed the finger at OPEC, blaming the cartel for “artificially Very High” prices in a tweet in April. Sen. Ed Markey (D., Mass.) has said Mr. Trump’s foreign policy is driving prices higher and is calling to reinstate the oil-export ban, which was lifted in 2015. 
“Rather than sending American crude oil abroad to benefit Big Oil’s bottom line and foreign nations such as China, it should be kept here to help insulate consumers from geopolitical uncertainty and benefit American families,” a report to be released by his office on Monday says. 

Some economists have argued that shipping oil abroad wouldn’t contribute to higher prices at the pump. Retail fuel prices have historically been more closely tied to the world benchmark rather than the national one, since gasoline is exported. 
Some analysts said Brent’s push higher may be a signal that U.S. oil can’t fill the void in the global oil market quickly enough.

Soaring oil means several things:

Geopolitically, it’s a big net negative for the US, since the main beneficiaries are countries that are at best frenemies and at worst flat-out threats. Saudi Arabia, Iran, Venezuela, and Russia are all big oil exporters and will, to varying degrees, use the coming windfall to do things that liberal democracies will not appreciate.

Economically, expensive oil means tighter margins for businesses that operate with long supply chains. Food, for instance, tends to travel long distances to reach local grocery stores, so higher transport costs mean more expensive tomatoes and hamburgers. Businesses suffering in this way will raise their prices to compensate, which will combine with tight labor conditions to goose the official inflation numbers.

This in turn will push up interest rates, with potentially serious consequences. See There’s A Number That Ends This Cycle — But What Is It?

And the car companies, well, they’ll find themselves on the wrong side of history once again, going all-in on trucks just as Big Iron becomes too expensive to own. See America’s Dumbest Companies Repeat Their Biggest Mistakes.

For precious metals miners the picture is mixed. Mining is energy intensive, so higher oil means rising costs. But inflation is great for gold and silver prices, which will more-or-less offset oil. The experience of the 1970s, when gold and silver soared along with oil, gives cause for optimism.

Anyhow, rising oil is one more peak-cycle indicator that solidifies the comparisons with past peaks and the carnage that followed.