Thursday, September 25, 2008

How to lose friends and influence

"Reputation, reputation, reputation! O I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial."

- Shakespeare, Othello, Act 2 Sc. III

The Harvard University professor Joseph S. Nye Jr. first coined the term "soft power" back in 1990 to describe the ability of a political body, such as a state, to indirectly influence the behavior or interests of other political bodies through cultural or ideological means. It's now identified as the third form of power that nations can wield, with the other two being "hard power", military might, along with economic strength. Power is the ability to influence the behavior of others to get the outcomes one wants; you can coerce others by threatening them with a stick, you can induce them with payments, or you can simply attract or co-opt them. The year 1990 could be seen as a high water mark for the USA for all three forms of power: the symbolic defeat of communism with the fall of the Berlin Wall the previous year, the US and its allies were about to unleash the 'Desert Storm' invasion of Iraq and the poor deprived citizens of Moscow were finally able to order their first Big Mac. American hegemony was sealed, the new world order of American led globalization would usher in a new era of peace and prosperity. However, Russian bombers may soon be stationed in Cuba as naval battle groups are sent to Venezuela to perform joint exercises, while Chinese investors are exchanging ideas with Brazilian ethanol producers and Iran can sit tight in the knowledge that the security council will block any meaningful resolution against it at the UN. So, what's happened here?

While the US military hasn't been overwhelming in its performance in Iraq or Afghanistan, you can't deny that it is still the unquestionable hard power force in the world. The trouble is that the group of people who have come into power over the last 20 years or so have seen American military preeminence as a passport to do what they want. This view, that Charles Krauthammer has called “the new unilateralism" holds that the United States is so powerful that we can do as we wish and others have no choice but to follow. They have used that view as a way of applying American military power to all sorts of problems. As for soft power, well the current administration has finally come around in the past couple of years to admit that it is relevant. As recently as 2004, then US Secretary of Defense Donald Rumsfeld professed to not even understand the term soft power, claiming popularity was too ephemeral to be measured. When the actions of the current administration are combined with the popularly held view that they didn't even enter power democratically, the effects are easy to see in a growing tide of anti-Americanism. Oh oh, I'm feeling quite ranty, this could be a long post, bear with me.

That we have come to a point where outright purchases of private sector companies is not only proposed but accepted by many who claim to be defenders of free markets bodes ill for the future of American society - Ron Paul
The most important source of US power for the past century has been its financial weight. Now that the market roller coaster of the past week has resulted in what is essentially the nationalization of the financial industry, that era has officially ended. Time magazine went so far as the refer the the US as the United States of France. Although history may look back at these events as the turning point, the loss in economic power has been a long time coming. On October 26, 2000 you could buy a Euro with 82.52 US cents. While it has bounced off its low, the markets told the US about its confidence in the economy Monday as the Euro rose to US$1.4824 in afternoon trading, up from the $1.4470 on Friday. Meanwhile oil was up over $25 at one point, but settled for a $16.37 gain to end at US$120.92 and gold shot up $44.30 to settle at US$909 an ounce. In that fateful year of 1990, the US also moved from a negative to a positive current account balance as it managed to record its last positive figure in 1991, just shy of $3 billion. This essentially means that the US has been buying more goods (and services) from abroad than it is selling, with the flow of foreign funds into the US financing the difference. In other words, foreigners are purchasing such things as US Treasuries, shares in companies, and even firms or property. The deficit is precisely the amount foreigners must acquire in US denominated assets to keep the dollar from falling. Up to now, foreigners have been willing to finance the shortfall because of their belief in the American way. The past week not only has investment banking died, the American way could die with the proposed banking bailout package, result, goodbye dollar as the world's currency.

The typical knee-jerk reaction to the above problem has been to point the finger at China. Their currency is undervalued, or they aren't importing enough American products. However it's China that is winning the power war where it really matter as coincidentally they have the world's largest current account surplus, $370 billion. Hard power, they've definitely got that. Soft power we can start with the Olympics, where, although the shine was tainted a bit by the Tibet protests, still was an overwhelming success in the world's opinion. Beijing aggressively courts the governments of countries with diplomacy, trade deals, debt forgiveness, and aid packages. China's no questions asked policy is diametrically opposed to that of the US and the EU and has resulted in a spreading Chinese influence globally. Right now, your kids wear Chinese clothes and play with Chinese toys. It is not at all inconceivable that their kids will listen to Chinese pop and prefer Chinese movies. The inhabitants of southeast Asia are already doing so. At least there's always the lingua franca of English to fall back on, right? Wrong, the Chinese are working hard to change that in their favour too. In 2005, China's education ministry announced a new initiative to boost Chinese-language teaching in American universities and language institutes around the world. Beijing University, China's most prestigious, announced a visiting-scholars fund to encourage foreign PhDs to study in China. More than 110,000 overseas students from 178 countries studied in China in 2004. This figure marked a ten-year high, and an increase of over 40 percent from 2003. "There's a belief that to get ahead, it would behoove you to go to China, in the same way that ten years ago people said the same about the United States.

While the US has focused on using its military to secure influence, particularly in respect to oil, China has signed oil and gas exploration contracts around the world; with Brazil, Ecuador, Bolivia, Colombia, Venezuela and Cuba in the Americas; in the Central Asian states such as Uzbekistan and Turkmenistan, and China's oil exploration interests extend to Burma, Vietnam, and Malaysia in southeast Asia; imports of crude oil also constitutes the bulk of China's imports from African states. The Chinese approach to foreign relations is officially termed "noninterference in domestic affairs." Unlike the hypocritical policies of the US, China doesn't mix business with politics and argue that such attempts by foreign nations to discuss democracy and human rights violate the rights of a sovereign country. While the US disregards international law in places like Iraq or Guantanamo while trying to twist other nations into following their vision of the world, China has its Tibet but doesn't force its ideals on others. As a result, examples of the growth in Chinese influence are not hard to find, even outside their traditional sphere of influence:

South America:
In Argentina, following their disastrous effects “neo-liberal” economic policies backed by Washington and the International Monetary Fund, “You cannot understand the miraculous Argentine recovery after the financial crisis of December 2001 without considering the boom in soy exports to China”. In Bolivia, China will invest $1.5 billion in the onshore oil and gas sector as well as showing interest in developing its largest tin mine, Huanuni. In Chile, China will set up a joint venture with the state copper company, Codelco. Meanwhile, a Chinese-led consortium bought oil and pipeline assets for $1.4 billion in Ecuador. The story is even bigger in Brazil and Venezuela. Farmers have been rushing to plant soy on the fringes of the Amazon rainforest in an attempt to satisfy China's voracious appetite. As for the ethanol politics in Brazil, maybe you can learn more here. It has also imported millions of tons of oil and iron ore from Brazil and has signed a deal to help construct a major natural gas pipeline. Finally in Chile, 2006 saw the Bachelet government sign a free trade deal with China in an effort to boost sales of copper, fruit, and fish oil. The Chilean president boasted of figures showing a $1.4 billion increase in trade between the two nations last year. “When Chile considers how to continue its development, Chile thinks big,” Bachelet remarked. “And to think big means to think China.”

In Africa, where the game was once ideological, it has become purely financial. Che Guevara no longer stalks the Angolan countryside. Where once the government of China would build a 1,100-mile-long railway across Tanzania to support a communist brother, today it's all about profit. The continent sits on 90% of the world’s cobalt, 90% of its platinum, 50% of its gold, 98% of its chromium, 64% of its manganese and one-third of its uranium. It is rich in diamonds, has more oil reserves than North America, and has been estimated to hold 40% of the world’s potential hydroelectric power. Africa is now supplying a third of the oil fuelling China’s economic boom. Angola has overtaken Saudi Arabia as China’s largest supplier of oil. Trade hit $55 billion last year, up 40% from the year before. It is expected to top $100 billion in 2010. China has overtaken Britain as Africa’s third-largest business partner and is fast catching up with France. In Angola, which exported roughly 465,000 barrels of oil per day to China in the first six months of 2007, Beijing secured a major stake in future oil production in 2004 with a $2 billion package of loans and aid that includes funds for Chinese companies to build railroads, schools, roads, hospitals, bridges, and offices; lay a fiber-optic network; and train Angolan telecommunications workers. Sudan, with its vast oil reserves, is the number one recipient of Chinese investment, and sells some two-thirds of its oil to Beijing, while receiving arms in return. Whether rebuilding the infrastructure in Addis Ababa, or building a railway line linking Khartoum to the Red Sea, the common theme across the continent seems to be that China offers "no-strings" aid, a marked contrast to Western donors who impose conditions on aid and tie trade sweeteners to human rights issues. Robert Mugabe said, “We have turned east, where the sun rises, and given our backs to the West, where the sun sets." OK, it's Mugabe, but even a respected leader like President Festus Mogae of Botswana, who may run the best-managed country in Africa said, "China treats us as equals, while the West treats us as former subjects,” he has said. “That is the reality. I prefer the attitude of China to that of the West.”

Of course China also continues to sell arms to Sudan, among other African countries. In the period from 2003 to 2006, China's arms sales to Africa made up 15.4 percent ($500 million) of all conventional arms transfers to the continent. Notable weapons sales include those to Sudan, Equatorial Guinea, Ethiopia, Eritrea, Burundi, Tanzania, and Zimbabwe. Beijing has also sent Chinese military trainers to help their African counterparts. Arms sales and military relationships help China gain important African allies in the United Nations, including Sudan, Zimbabwe, and Nigeria, for its political goals, including preventing Taiwanese independence and diverting attention from its own human rights record. The Congressional Research Service reports that China views these sales as a means of "enhancing its status as an international political power, and increasing its ability to obtain access to significant natural resources, especially oil" (PDF). Africa registered 5.8 percent economic growth in 2007, its highest level ever, in part because of Chinese investment. Experts say the roads, bridges, and dams built by Chinese firms are low cost, good quality, and completed in a fraction of the time such projects usually take in Africa. China also contributes peacekeepers to UN missions across Africa, including Liberia and Darfur. It has cancelled $10 billion in bilateral debt from African countries, sends doctors to treat Africans across the continent, and hosts thousands of African workers and students in Chinese universities and training centers.

Again, here the Chinese are winning the game based on what were once American rules. While the US threatens with the stick and carrot, China has won the game of influence. Where the US supported the Shah and paid the price, China doesn't meddle, it does business. Back in 2004 Sinopec group signed a $70 billion deal for Iranian oil and gas over the next 20 years. Annual bilateral trade has reached $20 billion. In September Chinese President Hu Jintao met with Iranian President Mahmoud Ahmadinejad, a man the US refuses to talk to. Result, the blocking of American resolutions to punish the Iranian government for going forward with their nuclear program. "We mutually complement each other. They have industry and we have energy resources" said Ali Akbar Salehi, Iran's former representative to the International Atomic Energy Agency. China has no wish to see democracy flourish in the Middle East and has no problems dealing with the world's only theocracy.

A category onto itself thanks to Hugo Chavez, his trip to China this week is what got me thinking about this post. While the US loathe him, they need him, well, his oil at least, as Venezuela is the 4th largest exporter of oil and 3rd largest exporter of gas products to their market, gobbling up about half of Venezuela's total exports...for now. After first stopping in America's other favourite nation, Cuba, Chavez arrived in Beijing while most world leaders were converging on New York, about which Chavez commented, "It's much more important to be in Beijing than in New York." It's too bad really, as you may recall his 2006 tirade against the US at the UN meeting in which he referred to Dubya as the devil. He hit the ground running in Beijing, announcing plans to build refineries and a fleet of oil tankers as part of a plan to double oil exports to China by 2010. On November 1st China will launch Venezuela's first satellite and according to Chavez will also be selling them a couple dozen fighter planes. Of course this follows Chavez' last trip to China a couple years ago when trade agreements were signed which Chavez referred to as the "Great Wall" against American hegemonism. In return China promised to back Venezuela's bid to join the UN security council (which eventually went to Panama), build houses for 20,000 people as a contribution towards Mr Chávez's policy of reducing homelessness, help build a fibre optic network, modernise a gold mine and develop railways and farm irrigation systems. After Beijing, Chavez plans on visiting Moscow, Belarus, Portugal and France.

So, what's my point? Take my adopted home country of Poland as an example. To a Pole, the US has always been the promised land, where an entrepreneur (a French word by the by) could start with nothing and wind up rich through hard work and business savvy. This vision has given the US a huge supply of soft power, influence. The bailout package now before Congress represents a serious threat to this ideal. The Fannie Mae and Freddy Mac bailouts already brought a nationalized housing market, AIG insurance, the last thing the beacon of free markets needs now is a socialized banking system. Capitalism will always have winners and losers. Just as war results in casualties (another problem the west can't seem to face), business involves bankruptcies. Instead of subsidizing corporations, the US needs to refocus its efforts on regaining its former position in the eyes of the world; China and to a lesser extent Russia are making huge inroads around the world. Even the head of the Pentagon, the hard power centre of the US, Secretary of Defence Robert Gates has argued for more funding for soft power activities. A trillion dollars can buy a lot of friends, why use it to reward failure and increase the power of the central banking system? Thomas Jefferson wrote: "The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution...if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."


AL3x said...

Really in depth post. I cannot help but wonder sometimes why no one thinks to copy china's obviously effective policies as they have done so with our laisez fair economic policies of an earlier era.

I for one welcome the stability that government nationalization may yet bring our banks. Things are horrible in my country and we either know all too well that we are fadeing away or in some cases, my fellow americans choose to remain ignorant.

I hope to read further posts in the future.

Thanks again.


Shane said...

Hey there al3x, thanks for the input. I have to admit of a bit of ignorance myself as to the situation in America today, having been away for most of the last 8 years (I'm Canadian in fact). What surprises me the most is what seems to be the acceptance that the population is showing for the plan as the word socialism seemed to be so evil just a few short months ago. The success of countries like those in Scandinavia really should be emulated, in all areas, not just banking. I'm slowly moving over to a new location,
hope to see you there!