Amazon page: http://www.amazon.com/Jaws-Dragon-Americas-Chinese-Hegemony/dp/0312362323

Eamonn Fingleton's In the Jaws of the Dragon: America's Fate in the Coming Era of Chinese Hegemony (New York: Thomas Dunne Books, 2008) strongly challenges the  conventional American view that as Chinese living standards rise, China will become increasingly Western in its politics and economics. Drawing on more than two decades of experience watching East Asia from a vantage point in Tokyo, he argues that China is instead converging to the East Asian econo-political model, a much misunderstood hybrid system that is fundamentally incompatible with Western traditions and values. Pioneered by Japan after World War II and now widely espoused throughout the Confucian world, this model presages massive problems for today's Western-defined world order. Yet, thanks in large measure to the success of trade lobbyists in shaping the attitudes of American policymakers, commentators, editors, and scholars, these problems have hitherto been largely swept under the carpet.

The key to the East Asian model is a firmly authoritarian approach to government and a highly controlled economy. The model's spectacular success in powering economic miracles in one nation after another is based largely on a harsh program of suppressing consumption. The result is a preternaturally high savings rate which has fuelled an extremely fast pace of investment in key industries, particularly export industries. Unfortunately for the West, a major part of the suppressed consumption program is to restrict imports, most visibly imports of consumer goods -- a policy that puts Western exporters at a fundamental disadvantage, even as their home markets are targeted by export-hungry East Asian rivals.

The fact that the East Asian model is highly authoritarian has been largely overlooked because of the historical accident that during the Cold War American observers and policymakers felt obligated to bowdlerize the facts about America's East Asian allies, particularly Japan. By the time the Cold War ended, Japan had extended its influence so deeply into the fabric of American intellectual life (by placing many of its spokesmen and surrogates into top positions in major think-tanks, for instance) that American discussion continued to be seriously distorted or even actively censored.

Basically it has become taboo in the United States to speak the truth about how the East Asian model works. Thus while dupes and collaborators in the Washington trade lobby and in American business continue to present China as inevitably destined to converge towards Western norms, the reality on the ground is that whenever the Western and East Asian systems are pitted in head to head competition, the East Asian one proves decisively more effective in creating trade surpluses and building national economic power.

As In the Jaws of the Dragon shows, if there is to be convergence, the direction will be precisely the opposite of what American commentators assume. Instead of America changing China, China will change America. For some advance praise for In the Jaws of the Dragon and to read Chapter 1, see below.

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Praise for In the Jaws of the Dragon
 
"Eamonn Fingleton demonstrates once again why his analyses of modern capitalism deserve serious attention. As he has done before with Japan, he identifies the elements of China's business model that depart sharply from easy Western assumptions -- and he lays out the consequences of seeing China the way outsiders would like it to be, rather than the way it is." --  James Fallows, Atlantic Monthly, Beijing.

"With capitalism spreading in China, the world expects Communism to be swept away by democracy. Eamonn Fingleton expertly shows why it is not to be." -- Former Senator Ernest F. Hollings. 
 
"The more heavily that U.S. media conglomerates invest in China, the more vulnerable they become to Chinese pressure to censor their U.S. reportage. As Eamonn Fingleton shows, what we don't know can hurt us. This is a fascinating book with truly unique insights."-- Pat Choate, author of Agents of Influence."Filling in the missing pieces of the puzzle that is China, Eamonn Fingleton's riveting and provocative book is required reading for anyone who cares about the US-China relationship." -- Senator Byron Dorgan.
 
"Eamonn Fingleton offers a compelling corrective to the naïve and often self-interested view of U.S. elites that as China grows more capitalistic, it will necessarily grow more democratic." -- Robert Kuttner, Co-editor, the American Prospect.
 
"Fingleton brings his penetrating analytical skills to bear on every dimension of the U.S.-China economic relationship, even the uncomfortable facts that many policymakers prefer to ignore." -- Congresswoman Marcy Kaptur.

"Anyone who cares about the future of American industry needs to read this book." -- Richard L. Trumka, AFL-CIO Secretary-Treasurer.
 
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Chapter 1: A Dragon on Steroids

Two bets are on the table. One has been placed by the Washington policymaking establishment; the other by the leadership of the Chinese Communist Party.Analyzing China's prospects in terms of the currently fashionable globalist ideology, the Washington establishment is betting that a rich China will be a free one.The theory is that the only way China can continue to grow is by embracing Western democracy and capitalism. Moreover the very process of China's enrichment is supposedly serving to undermine the Beijing government's authoritarianism. Thus a feedback effect is said to be at work: more wealth means more freedom means more wealth…..

This view has been championed by many American political figures in the last fifteen years. Here, for instance, is how President George W. Bush put in 2005: "As China reforms its economy, its leaders are finding that once the door to freedom is opened even a crack, it cannot be closed. As the people of China grow in prosperity, their demands for political freedom will grow as well…. By meeting the legitimate demands of its citizens for freedom and openness, China's leaders can help their country grow into a modern, prosperous and confident nation."

Similar optimism is poured forth daily by the American press, not least by the Wall Street Journal. Here is a typical Journal comment from 2006: "Sooner or later China's economic progress will create the internal conditions for a more democratic regime that will be more stable, and less of a potential global rival…. China's burgeoning middle class, created and buoyed by economic growth, will drive internal change."

Abroad too the Washington view is increasingly prevalent. In Britain, for instance, it has now been embraced not only by the media but by many top politicians. After visiting Chinese Premier Wen Jiabao in 2005, then British Prime Minister Tony Blair cited the rise of a huge Chinese middle class and the spread of the Internet as factors that had produced "an unstoppable momentum …towards greater political freedom [and] progress on human rights."

The Washington view's prevalence probably owes something to its implicitly flattering view of Western culture. After all, it is founded on the premise that Western philosophy constitutes universal truth.Those who espouse it moreover often loudly claim to occupy the moral high ground. Skeptics are made to feel either they do not fully comprehend the perfection and universal salience of Western values or they are denying the Chinese people's essential humanity.

Claims to the moral high ground apart, however, the Washington view has also been propelled by something more reliably persuasive: money. The fact is that various powerful interests, most obviously countless multinational corporations, see profit in promoting the Washington view. Thus vast amounts of money have been pumped into a propaganda program to win over key opinion-makers, not least elected officials, top editors, press pundits, government bureaucrats, and think-tank scholars.

As more and more money has been applied to the task, the Washington view has come to be accepted by more and more erstwhile skeptics. In particular many hawkish Sinologists from the Cold War era have now reversed themselves. Up to the late 1990s they had generally held that China's economy diverged too sharply from Western capitalism ever to amount to much. China's continuing export surge in the new century has forced a total rethink -- and corporate America's lobbying money has sweetened this bitter ideological pill.

So widely accepted has the Washington view become that until recently almost no one had noticed there was another bet on the table. This second bet -- that of the Chinese leadership -- is on a disturbingly different proposition: that a future China can be both rich and authoritarian.If the Washington view is right, the future is unclouded and a fast rising, fast Westernizing China can readily be accommodated within the existing Western-defined world order. But what if it is wrong? What if -- surprise! -- China's top leaders turn out to understand the Chinese character better than anyone in Washington? What if in, say, 2025 or 2030 the United States finds itself facing off against a China so rich that it has surpassed all other nations in military technology, yet a China that remains trenchantly opposed to Western values? The implications are hard to exaggerate. Yet so far they have received remarkably little consideration. It is past time this oversight was rectified.
 
New China: Rich Because It Is Authoritarian

In the great debate over China's future, Chinese leaders have more at stake than most. After all their jobs, if not their heads, are on the line. It is reasonable to conclude that they have considered their options carefully.

Moreover they enjoy the priceless advantage of local knowledge. They read and speak the language. They have studied their nation's history and know its mind.By contrast most of those on the other side quite literally know less than nothing about the subject. Even in the matter of  the most basic facts, what they think they know is often demonstrably the opposite of the truth. And as they have never lived in China -- or in any other part of the Confucian world for that matter -- they have had no practice in seeing the world from a Confucian point of view. Even worse, the fundamental ideological framework within which they try to understand China is utterly unrealistic.

For a start, contrary to all conventional wisdom, the Chinese economic system is not capitalism, nor is it converging towards capitalism. Thus any deterministic Washington analysis based on the history of Western capitalism is doomed from the start.The truth is that China is operating an adaptation of the so-called East Asian economic system. Launched in the then Japanese colony of Manchuria in the 1930s, this system was perfected in Japan proper in the 1950s and 1960s and has now been widely copied throughout East Asia.As James Fallows has pointed out, the Chinese version differs from the Japanese original in being more atomized; so far at least, the role of government in micromanaging outcomes is far less in evidence than in the mature version of the model seen in Japan. Nonetheless in its key elements it is the same system.

As itemized by the authors Richard Bernstein and Ross Munro in their 1997 book The Coming Conflict with China, these are just some of the more obvious features of the Chinese version of the East Asian economic model:

* A labyrinthine system of trade barriers.
* An artificially undervalued currency.
* An industrial policy that focuses on developing so-called "pillar" industries and uses export subsidies and other unfair tactics to give them a competitive advantage in world markets.
* Systematic pressure on foreign companies to transfer their most advanced production technologies to China.

While the East Asian approach to economic development resembles capitalism in some ways (it makes extensive use of markets, for instance, particularly at the level of small business), its fundamental logic is quite different. A key difference is that whereas authoritarian political controls constitute a hindrance to the full efficacy of capitalism, such controls are really essential to the functioning of the East Asian system.

The ability of top officials to keep tabs on everything is greatly enhanced by the fact that, as James Fallows has pointed out, Confucian econo-political culture diverges fundamentally from the West in its approach to power. In his 1994 book Looking at the Sun: The Rise of the New East Asian Economic and Political System, Fallows wrote: "Anglo-American ideology views concentrated power as an evil ('Power corrupts, and absolute power ...'). Therefore it has developed elaborate schemes for dividing and breaking up power when it becomes concentrated. The Asian-style model views concentrated power as a fact of life. It has developed elaborate systems for ensuring that the power is used for the long-term national good."

One critical way in which power is deployed to economic advantage in China -- as in other East Asian economies -- is in savings policy. However counterintuitive this may appear to Westerners, China's famously high savings rate is imposed on the nation from above. By savings rate, of course, is generally meant the proportion of a nation's total income that is saved by individuals and corporations (in the latter case in the form of retained profits). While Westerners assume that a nation's savings rate constitutes simply the aggregate of millions of freely made savings decisions by consumers and businesses, this overlooks the fact that government can greatly influence the behavior of the nation's savers. In East Asia, various authoritarian policies are deployed to create vast pools of savings. These have provided the principal driver of China's rise, making possible a super-fast rate of growth in investment not only in industry but in the sort of advanced infrastructure needed to maximize the nation's exports.

Top Chinese leaders have been inspired by the now voluminous evidence that, in modernized form, authoritarian Confucianism almost effortlessly outperforms Western capitalism. The impact of the East Asian system on the world economy has already been massive. On figures cited by the Berkeley-based political scientist T. J. Pempel, between 1960 and the early 1990s alone, East Asia's share of the world economy multiplied six-fold -- rocketing from less than 5 percent of total world output to about 30 percent. For several decades to come we can expect East Asia's share to continue to rise as China rapidly catches up with earlier Confucian industrializers in deploying the most advanced production technologies. 
 
Understanding Why We Misunderstand….

As we have noted, the West faces special difficulties in understanding the Confucian world.Part of the problem is ideological. Almost without exception, American opinion leaders hold as a matter of high ideology that Western logic is universal and thus is destined to sweep  the world.

It is an assumption that repeatedly down the centuries has led to disastrous miscalculations. In our own time only the most obvious instance has been the disaster in Iraq. It is a striking fact that many of the top neo-conservative commentators who so insistently sold the Iraq war to the American people have been similarly insistent in promoting the Washington view of China. They include the New York Times's chief foreign affairs commentator Thomas Friedman, the Economist magazine's erstwhile editor in chief Bill Emmott, and Paul Gigot and the late Robert Bartley  of the Wall Street Journal. It is also striking that the main architects of the Iraq disaster, George Bush and Tony Blair, are, as we have noted, leading proponents of the Washington view.

(Conversely, many prescient opponents of the war have been outspokenly critical also of the Bush administration's China strategy. They include James Fallows, Pat Choate, Patrick Buchanan, Paul Craig Roberts, Ralph Nader, and Chalmers Johnson. They also for that matter include me. My analysis of the Bush China strategy will become clear in due course. For  now let's note that on Iraq, my analysis has already proved more than averagely prescient. In the International Herald Tribune two days before the war started, I wrote: "Whatever the merits of America's case for going to war, one aspect of its Iraq strategy seems badly misconstrued: the assumption that the reform of post-Saddam Iraq will run as smoothly as the U.S. Army's occupation of Japan after World War II…..Even in the unlikely event that Iraqis forbear from settling old scores among themselves, their mutual jealousies will make it tough to work together in restoring order to a devastated nation.")

History will record that the major problem with the Bush administration's Iraq strategy has been that ideology was allowed to overrule commonsense. The same is true, if for the moment less obviously, of its China strategy.Misplaced ideology apart, another key problem is that few interpreters of today's China have had any experience in analyzing the rise of the earlier East Asian "miracle" economies. Anyone familiar with the Japanese economy in particular has a major advantage because Beijing is now so clearly copying policies pioneered decades ago by the Japanese. For the most part, however, today's China watchers have paid little attention to Japan. The result is an American approach in China that, to long-term observers of the Confucian world, seems distinctly Sisyphean.

This point has been made in particular by Ivan Hall, author of Bamboozled!: How America Loses the Intellectual Game with Japan and Its Implications for Our Future in Asia. A Harvard-educated cultural diplomat and Japan historian who lived most of his professional life in Tokyo, Hall comments: "We seem to go on repeating with China all the mistakes we made with Japan, having learned nothing from them." That said the West's comprehension problems do not spring primarily from ignorance or feeble-mindedness. Rather they reflect a remarkable policy of obfuscation -- and sometimes outright deception -- by East Asian leaders, and even more so by their many stooges in the Western expatriate communities of the Confucian world.

Some of these stooges have clearly succumbed to illegitimate blandishments or pressures. Others have been misled by the Confucian world's aptitude for Potemkin Village-style dramatics. Not only have East Asian leaders not explained how their economic model works but they have often gone to extraordinary lengths to keep Western policymakers and commentators confused and misinformed about it. For good reason. If the Confucian approach to economic development were more widely understood, it would be seen to be fundamentally incompatible with Western capitalism and as such would long ago have been comprehensively opposed in the West (in much the way that the Soviet system was opposed. In fact, precisely because the East Asian model is so much more successful than Soviet Communism, it entails an even greater problem of political and economic incompatibility for the West. 

Closed Markets and Tall Stories

Seen from a Western point of view, the most immediately obvious problem with the East Asian economic system is its mercantilist approach to trade. To that subject we now turn.The fact that East Asian markets are largely closed is, of course, hardly news to American labor activists, let alone to American industrial exporters. Nonetheless the elites who set American foreign policy have long chosen to pretend otherwise.

Every step of the way as the United States has unilaterally opened its markets to East Asia's concept of "one-way free trade," these elites have argued that continuing East Asian protectionism does not represent a failure of intent by East Asian policymakers, let alone a fundamental philosophical divergence. Rather it supposedly reflects temporary political glitches that East Asian policymakers have been sincerely trying to rectify.

The principal problem supposedly has been that petty vested interests in East Asia -- "backwoodsmen" in the jargon -- have been obstructing their more enlightened fellow citizens' efforts to embrace Western economic ideals. In the long run there is no doubt that enlightened leadership will prevail. Thus the right thing for the West to do is simply to be patient, considerate, and statesmanlike while the East Asians work to remove remaining obstacles to free trade.In reality, as this book will show, this train of logic is disastrously wrong.

Opposition to Western-style free trade in East Asia is hardly confined to a few self-serving "backwoodsmen." On the contrary, it is all pervasive and is quietly led by the very top officials who are assumed to be the West's greatest allies in bringing Western economic ideas to the region.Faced with evidence that top leaders in Beijing are backsliding on their commitments to open the Chinese market, advocates of the Washington view tend to urge yet more patience.

The evidence from America's previous experience with other mercantilist East Asian nations, however, is not encouraging. Take, for instance, Japan. As the first Confucian nation to become rich, Japan has also been the first to profess a commitment to Western-style open markets. That was more than forty years ago. Yet all the evidence is that even today Japan continues, in so-called "targeted" industries at least, to pursue a comprehensively protectionist trade policy. True, in some product categories, foreigners in recent years have been permitted a share -- usually a small share -- of the Japanese market. But in many others foreigners find the door slammed in their face.

The Japanese car market, as we will see in Chapter 7, provides a particularly chastening insight into Japan's true trade policies. Thirty-five years after Japan's trade lobbyists first proclaimed the Japanese market "one of the world's most open," car makers on three continents agree that it is still one of the world's most tightly closed. Even Paris-based Renault has never been able to sell in Japan though it ostensibly controls, through a major stake in Nissan, Japan's second largest car distribution network.It may be that China will prove more sincere in its commitment to free trade than Japan -- but a close look at the logic of China's economic strategy suggests otherwise.In any case, from the point of view of the Western-defined world economic order, there is another crucial problem -- the system's parasitical approach to technology.
 
Technology: Heads We Win, Tails You Lose

Throughout the East Asian region, governments pursue remarkably similar technology policies. On the one hand, they avidly suck in other nations' most advanced new technologies. On the other hand they allow few home-grown advanced technologies to leak abroad.

Again Japan, as by far the region's richest economy, has hitherto been the most important exemplar. The Japanese economy has been built largely on foreign technologies, particularly American ones. Yet Japan strictly prohibits its own companies from transferring their most advanced technologies abroad. In the electronics industry, for instance, Japan now monopolizes the manufacture of many of the sophisticated materials and production machinery that have made possible the unparalleled miniaturization of today's electronic gadgets. The techniques for making such products are regarded as national secrets that must not be allowed to leave the country.For now China has few technological secrets to guard. But it is already benefiting handsomely from the other side of East Asian technological policy in that, even more than nations like Japan and Korea before it, it has been expertly winkling key technologies out of the United States and Europe. 
 
How Big Might China Become?

One thing that is indisputable is that the East Asian economic system is palpably far more effective in building wealth -- and, by extension, national power -- than the American system. As we will see, the experiences of South Korea and Taiwan offer strong hints about China's future trajectory. Both nations introduced adaptations of the Japanese system in the early 1960s, at a time when they ranked roughly as low as China does today in the world per-capita income league.

They proceeded in subsequent decades to enjoy some of the fastest sustained growth in world history.As the scholar Robert Wade has documented, in both cases per-capita income measured in current U.S. dollars (that is, before adjustment for dollar inflation) increased by more than twenty times between 1962 and 1986. This compares with a rise of a mere 5.6 times in the United States in the period. Moreover except for a brief interruption during the East Asian financial crisis of 1997-1998, both South Korea and Taiwan have continued to outperform dramatically. Thus as of 2006 South Korea's per-capita income at market exchange rates was $18,400. That is still some way short of America's figure of $44,200 -- but for the Korean people it is a stunning performance. After all as recently as 1998, the nation's per-capita was a mere $6,400 and in 1962 it was a mere $110 (meaning that Korea ranked below Sudan in 99th place in the world income league).

That said, if South Korea's performance seems impressive, it pales by comparison with that of Japan, which by 2006 had reached a per-capita income of $38,500, up from just $610 in 1962.

The ultimate geopolitical point here is that if the Chinese economy were merely to match South Korea's current income level, it would already be by far the world's largest economy with roughly twice America's total output of goods and services. Were it to match Japan's, it would boast four times America's output.

Even with merely a Korea-level per-capita income, the Beijing regime would have little difficulty outspending all other nations in military technology, and thus displacing the United States as the world's premier military power. To say the least we in the West are not prepared for the scale of the geopolitical adjustments entailed by such an eventuality.
 
Chinese Savings: Inexhaustible Wellspring

Asked to identify the secret of China's supergrowth, the best Western economists can do is reflexively point to China's high savings rate. But this is hardly more helpful than positing cloudy skies as the reason it rains in London. We have to ask why the Chinese save; more important, why do they save so much more now than they did in the past?

These are momentous questions yet they have gone almost entirely unaddressed in previous studies of the Chinese economy. Indeed the word "saving" is notable for its absence in the most widely read accounts of East Asia's rise. It does not appear in the index of Thomas Friedman's best selling The World Is Flat, for instance. Nor does it even in Nicholas Lardy's much more scholarly Integrating China Into the Global Economy.

That said, China's savings rate is hard to ignore. Described by the Economist as "the world's highest by far," it is certainly one of the most geopolitically significant phenomena of our time.Western economic commentators such as Nicholas Lardy and Will Hutton argue that the key to modern China's high savings rate is that the Chinese social security safety net is inadequate to look after people in their old age. But this explains little. After all most nations lack an adequate social security safety net, yet their savings rates remain dismally low.In trying to explain the Chinese savings phenomenon, Westerners suffer a crucial blind-spot in that they assume that a nation's savings rate is determined merely as the aggregate of millions of freely made decisions by individual savers. In reality individual decision-making has little to do with it. Rather, in typical groupist East Asian fashion, the key factor is government policy.
 
As this book will show, in their utterly unWestern approach to savings and consumption, Chinese leaders boast a devastating secret weapon. Following in the footsteps of other high-growth Confucian nations, they have established a highly ingenious, almost invisible, administrative ability to force society to save. They do so by dint of a policy of suppressing consumption. To the extent that people cannot consume, they can do only one thing: save.The adoption by one East Asian nation after another of a policy of forced saving and suppressed consumption ranks as one of the great turning points in world history. It is a fair bet that in its long-term geopolitical implications it will prove at least as consequential a geopolitical change agent as the development of the three masted caravel.

Why has it received so little attention? Part of the reason is that -- at least in the more important economies of the East Asian region -- officials have assiduously hidden their true agenda. Instead they have suggested that the region's high savings rates stem from rather quaint, even deplorably backward, cultural eccentricities (such as the inadequacy of China's social security net). These eccentricities moreover are ones over which East Asian leaders disclaim all control.That this "cultural" explanation is suspect is immediately evident from a consideration of East Asian history. The fact is that in earlier times, the region's savings rates were generally modest. In each nation, the savings rate took off at precisely the moment that government adopted the more visible aspects of the East Asian economic system. In the case of China, this point came in the late 1970s. Within four years of China's embrace of an export-led approach to economic growth Chinese savings deposits per capita had rocketed.One of the least understood aspects of modern economics is that government officials can control a nation's savings rate.

The tool of choice is not the Western one of tax incentives. Such incentives have proved almost entirely ineffective wherever they have been tried. Nowhere has this been more obvious than in the United States. As Christopher Swann of the Financial Times has pointed out, though American lawmakers have created at least twenty separate breaks for savers in the three decades after 1974, the American savings rate has fallen from around 10 percent to little more than zero.The reason East Asians save is simple: they are not allowed to consume. Various policies, many of them quite indirect, create artificial barriers to consumption.

As the late J.K. Galbraith has explained, this approach is hardly new. Nor is it exclusively East Asian. Indeed one of its most important early manifestations was not in East Asia at all but in the United States. By acting directly to curtail consumption during World War II, the Franklin D. Roosevelt administration raised the American savings rate from, on Galbraith's numbers, 5 percent to 25 percent in the space of three years. The resulting torrential capital flows underwrote a massive expansion in production of everything from tanks to fighter planes.
 
The lesson was not lost on post-war East Asia. First in Japan and later in South Korea and Taiwan, extensive measures were taken to suppress consumption. In all these economies, of course, people were poor to start with but the effect of the anti-consumption measures was to slow the rise in their pitifully low standard of living. One of the earliest Western observers to understand the enormous geopolitical ramifications was the noted Japan-born scholar Edwin Reischauer. In a book published in 1955, he predicted that suppressed consumption would soon be widely used to boost savings rates throughout East Asia. In retrospect we can see that this was a historic insight. Yet the news travelled remarkably slowly. Indeed there is no record that Reischauer, who went on to become John F. Kennedy's ambassador to Japan in 1961, ever raised the matter again. It may yet come to be regarded as one of the more significant silences in history.

As we have noted, there are several quite different ways consumption can be suppressed. Sometimes, the increased saving arises in the household sector, sometimes in the business sector. In the latter case often this occurs when artificially induced shortages of luxury goods generate huge profits for oligopolistic local suppliers. Provided such profits are reinvested, they count as part of the national savings rate. This helps explain the paradox that while the macroeconomic data indicate that East Asians under-consume, Western news media often run stories about big-spending East Asian shoppers who think nothing of paying exorbitant prices -- far higher than in the West -- for Louis Vuitton handbags or Rolex watches. The key point is that while it is easy in East Asia to spend (because prices of luxuries are so high), it is difficult to consume (because big spenders get so little for their money). The larger economic point is that suppressed consumption creates savings somewhere. Exactly where is secondary. As China's former supreme leader Deng Xiaoping reportedly said in another context, it doesn't matter if a cat is black or white, so long as it catches mice.
 
To understand the Chinese suppressed consumption policy, think of a drain that is blocked by leaves. No one leaf can stop the flow of water but fifty leaves are a different matter. The suppressed consumption policy depends on a panoply of constrictions on consumption. While most of these seem relatively insignificant, in the aggregate they constitute a tight tourniquet. In Chapter 4, we will look in detail at China's version of the East Asian suppressed consumption regimen. For the moment let's itemize some of its key aspects:Trade barriers. The logic is simple: if China does not import things, it can't consume them.Credit controls. Consumer credit hardly exists in China, and for the most part even mortgages for home purchases are unavailable. In practice those who aspire to buy a home have to save a large proportion of their income for many years beforehand. Despite much talk in recent years of financial liberalization, credit for smaller purchases such as home appliances and cars remains strictly rationed.Anti-consumer land policies. China's land zoning policies greatly restrict not only the size of people's homes but the amount of space available for retailing. Home prices and rents are extraordinarily high relative to incomes. China's demand for everything from home heating fuel to Swedish furniture is greatly curtailed.Corporate price gouging. Price-fixing cartels dominate many industries, with the result that living costs are much higher than in other nations at a similar level of development. High prices reduce consumption directly and the cartels' profits add to the national savings rate. As in other East Asian economies, cartels in China are under regulatory pressure to plough their profits into investing in ever more productive manufacturing processes. Commenting in 2006, the management professor Luke Froeb described China as "the last major economy without anti-trust laws." (He could have added that although elsewhere in East Asia anti-trust laws do exist, they are enforced only highly selectively and, as in China,  government officials turn a blind eye to massive rigging of consumer prices.)Travel restrictions. The Chinese travel industry is tightly regulated to make it difficult and expensive to take vacations abroad.

Of course it has to be pointed out that a high savings rate is not a sufficient condition for a nation to grow. It is essential that the savings are not only invested but invested productively. To Western economists, this would appear to the Achilles heel of the forced savings system. After all, Western theory predicts that artificially boosting the flow of capital to industry will result in disastrous gluts in production capacity. In reality there is no problem. East Asian officials organize cartels and other devices to curb overcapacity and ensure that corporations' investment returns are adequate.

All in all, a high savings rate more than compensates for a host of imperfections in other aspects of a nation's economic functioning. This fact was once well understood in the West, not least in the United States. In days gone by, huge savings flows were widely and correctly credited as the main factor behind America's then commanding lead in manufacturing productivity. The point was well made by the famous Austrian economist Ludwig von Mises. In a speech in Milwaukee in 1952, he commented: "The average standard of living in this country is higher than in any other country not because American statesmen and politicians are superior to foreign statesmen and politicians but because the per-head quota of capital invested in America is higher than in other countries."

In our own time, the economic thinker Ralph Gomory has provided a memorable illustration of the point. America's economic superiority in the mid twentieth century, he argues, was exemplified in the fact that American workers were already using back-hoes to dig trenches at a time when workers in Europe and Japan were still using shovels. The American workers were not better educated than their counterparts elsewhere -- just better equipped. Capital investment was the key to their much higher wages.It is a fair bet that few Chinese policymakers have heard of Ludwig von Mises or Ralph Gomory. But the salience of saving and investment in building a nation's prosperity is more fully understood in contemporary Beijing than almost anywhere else. 

China's Apologists Beg the Question

Because ordinary Chinese citizens are condemned to a much lower standard of living than they would otherwise enjoy, the key question in assessing the system's future is how long they will put up with such deprivation. Conventional wisdom in the West says not very long. Supposedly as living standards improve, political conditions will become more liberal and newly assertive Chinese citizens will insist on more consumer-friendly economic policies.

In reality, as anyone who has studied the history of East Asian industrialization can testify, the idea that rising living standards will necessarily lead to political liberalization is a myth. The point has now been convincingly documented by the New York University political scientists Bruce Bueno de Mesquita and George W. Downs. Basing their conclusion on a study of 150 nations, they have found that many authoritarian regimes around the world have developed ways to deliver fast growth while maintaining a tight political grip.Presenting what they described as their "ominous" findings in Foreign Affairs in 2005 and citing China as a prime illustration of their thesis, they commented: "Authoritarian regimes around the world are showing that they can reap the benefits of economic development while evading any pressure to relax their political control…. Economic growth, rather than being a force for democratic change in tyrannical states, can sometimes be used to strengthen oppressive regimes….. Authoritarian regimes are getting better and better at avoiding the political fallout of economic growth."

If this is so, how come so many political scientists have hitherto assumed that a rich China will be a free one? It is a fair guess that they have been merely "mirror imaging" — making assumptions about China based on what they know about the United States. They simply cannot imagine the extent to which in a Confucian society top leaders control the agenda.The problem is that precisely because the Chinese system is so authoritarian, no trend of any significance can develop without at least the tacit approval of those at the top. Thus we can assume that any potential challenge to their leadership will be suppressed in its earliest stirrings. Remember that for any political challenge to get under way individuals have to have some way of coming together and rallying their forces. In particular they need to have the right to set up associations, and to communicate with sympathizers via newspapers and websites. But independent Chinese associations, newspapers, and websites are a contradiction in terms. Those who assume that a political challenge can arise by osmosis are making one of the most elementary mistakes in logic: they are assuming what is to be proved. The fact is that Chinese society is explicitly structured to preclude the sort of bottom-up, liberalization-by-osmosis tendencies assumed by those who predict that political freedom is in China's future.

Certainly it should be clear that China's leaders are unlikely to cooperate in their own downfall. Given that the Chinese Communist Party controls the People's Liberation Army, this would appear to settle the matter. Certainly it did at Tiananmen Square in 1989.In any case authoritarian rulers these days rarely have to resort of massive displays of force to get their way. The tools of modern surveillance and communication greatly facilitate a preferred strategy of "soft authoritarianism." People who pose a potential threat to the establishment can be identified far earlier and either taken out of circulation entirely (via incarceration or worse) or at least rendered ineffectual through denunciation and sabotage. To the extent that they succeed in creating any independent institutional structures these can readily be disrupted by infiltrating agents into their hierarchies and driving wedges between leaders.

Ultimately, of course, the sort of gradual societal metamorphosis the apologists are positing can be led only by individuals. The problem is that in China, as in the rest of East Asia, individuals are tightly controlled ciphers. They always have been. 
 
Eastern Values: The Group Rules, OK

In China as throughout most of the rest of East Asia, the political ethos has been greatly shaped by Confucius, or at least by ideas attributed to him. Born in what is now the Shandong province of Northeastern China, Confucius (or Kong Fuzi, as he is known to the Chinese) was a philosopher who lived about five centuries before Christ. While he seems to have emphasized the importance of benevolence in ruling a nation, the reality is that most of the governments that ostensibly espouse his ideas today are strongly authoritarian.While scholars may argue that such governments are not truly Confucian, for the sake of convenience (and with due apologies to Confucius), we will use the term Confucianism here to refer to modern East Asian authoritarianism because Confucius's ideas unquestionably play a crucial enabling role. While the modern philosophical edifice built on Confucian foundations may differ in important respects from what Confucius might have prescribed, the structure could not exist in the first place without these foundations.

As interpreted in modern East Asia, Confucianism's principal political significance is that it enjoins the populace to obedience, loyalty, and self-sacrifice. As such it clearly plays an important role in legitimizing an age-old East Asian tradition of highly authoritarian control by unelected and unaccountable bureaucrats. Such bureaucrats are the real rulers throughout the region, not least in superficially democratic nations such as Japan and South Korea. Confucianism's most important effect is precisely to perpetuate the governmental status quo and it does so in large measure by enlisting millions of ordinary citizens as collaborators.We draw support for our usage moreover from the fact that all the major East Asian societies attribute their political cultures principally to Confucius. This goes these days even for China, which officially rehabilitated Confucius in the 1990s.Confucius had previously been an intellectual whipping boy, particularly in Mao Zedong's heyday.

As recounted by Willy Wo-Lap Lam, author of The Era of Jiang Zemin, the move back to Confucianism received a strong push from former Chinese president Jiang Zemin. Quoting an unnamed source, Lam reported that Jiang, who led China from 1989 to 2002, was "impressed by how traditional virtues have been a stabilizing factor in Asian countries influenced by Confucius such as Japan, South Korea, and in particular, Singapore."  Confucianism has generally been held in high regard in the West since first accounts of it were presented in the writings of the Italian Jesuit Matteo Ricci four hundred years ago (it was Ricci who Westernized Kong's name as Confucius).

As the New Zealand-based China scholar Xiaoming Huang has pointed out, however, it is not all benevolence. In a recent book in which he traced the Confucian origins of the East Asian economic system, he wrote: "Over time the Confucian model of moral conformity increasingly requires a level of suppression of private interests, mainly through state coercion and social discipline."

The ultimate question here is the seemingly merely mystical one of the relationship between the group and the individual. In China, as in other Confucian societies, the rights of the group are strongly emphasized. Sympathetic Westerners often present this as merely meaning that a Confucian individual is expected to be "considerate" in taking account of the impact of his actions on the community. Stated this way, group ideology may seem little different from the Christian principle of, "Do unto others as you would have them do unto you."

Unfortunately Confucianism -- at least the version of Confucian ideology espoused by top officials in modern East Asia -- goes far beyond this. Too often its concern for group solidarity tends to crowd out all other ethical considerations. This opens the door to quasi-fascist policies utterly at odds with Western ideas of freedom.A key reason Westerners are not more alert to the implications is they fail to understand the East Asian idea of a group. Whereas in the West we think of groups as amorphous, generally leaderless, throngs (exemplified perhaps by the baying mobs of the French Revolution or the wild-eyed crowds that converged on Wall Street when stock prices started tumbling in 1929), the assumption in the East is that a group is a disciplined, hierarchical entity. Its leaders are not only well defined but their right to lead is carefully reinforced by various institutional structures and conventions. Not only are subordinates expected to follow loyally but robust methods are available to pressure anyone who wavers. Moreover the whole of society is seen as composed of hierarchical arrays of groups. Thus superior groups are entitled as of right to lord it over inferior groups.As a matter of the highest priority, the top group -- in the case of modern China that means the Chinese Communist Party -- makes it its business to maintain powerful levers of control over every other group. Any group not under control presents a potential threat to the established order and must be quickly brought to heel. 

A key tool of control in Confucian societies is group punishment. If one individual steps out of line his entire group can expect to be punished by some higher entity. In pre-modern China one manifestation of this was in the practice for a whole family to be punished for the offenses of a single member. This powerfully concentrated the minds of, in particular, political dissidents. Anyone who challenged the established order risked an excruciating death not only for himself but for his entire family -- wife, parents, children, even in-laws. Punishing a family for the offenses of a single individual was revived in the Maoist era and even today in diluted form it is widely used throughout the Confucian world. An important variant on the concept is the punishing of an entire workgroup for the lapses of an individual member. (We should note that though group punishment is a characteristic of the Confucian world, its origins are attributed not to Confucianism but to a more authoritarian early Chinese political philosophy known as Legalism.)

Because modern Confucian societies are structured as hierarchies of groups, administration is far more top-down and authoritarian than in the West. Leaders not only practice a highly manipulative managerial style but preside over societal structures that for untold generations have been honed specifically to cow or at least brainwash the individual.The result is a degree of intellectual claustrophobia that no one who has not lived long term in a Confucian society can fully credit. Few writers have captured the Orwellian implications of group logic in present-day East Asia more graphically than Steven Mosher. In his book A Mother's Ordeal, he provides a devastating account of how the Chinese establishment whips up societal wrath against couples who would flout China's one-child policy. Among other things, the government threatens pay cuts for all workers in an enterprise or division if any of them has a second child. The effect often is to co-opt dozens if not hundreds of workers in pressuring a woman to have an abortion.In recent years this side of Chinese reality has had less attention than it deserves because for the most part foreign correspondents tend to cast developments in China as being grounded less in Confucian authoritarianism than in its polar opposite, Western globalism. Any aspect of Chinese reality that jars with the media's globalist background music tends to be downplayed or misrepresented.Historically greater wealth has tended to hide from Westerners the true workings of Confucian societies. Western residents of the Confucian world have traditionally lived in wealthy ghettos far removed from ordinary life. To the extent that such residents have ever experienced the more negative aspects of Confucian group logic, they have tended to dismiss the problems as merely transitional ones that will soon be swept away by the supposedly inevitable triumph of Western individualism. Yet, as is now becoming clear, the richer the region becomes the more difficult it is to accommodate within the traditional Western-defined world order.All this said, it is only fair to note that Chinese leaders have been working in recent years to shake off their reputation as brutal dictators.

Luckily for them, it is possible for an East Asian government to have its cake and eat it — it can aspire to an increasingly liberal image abroad while maintaining an authoritarian grip at home. 
 
Blackmail as a Power Tool

The key to modern Confucian power is a characteristically Machiavellian concept called selective enforcement. In China these days, as in most of the rest of the Confucian world, the standard regulatory pattern is a paradoxical combination of strict laws and lax enforcement. Enforcement indeed is often so lax that the more naïve sort of Westerner assumes the inmates are running the asylum. For anyone who understands the Confucian bureaucratic mind, however, the coercive implications are obvious: the point is that enforcement is not always lax. On the contrary, officials retain the right to crack down hard on anyone who displeases them.

This is the definitive version of selective enforcement as used not only in China but throughout East Asia. In China officials also often use a less sophisticated variant involving not strict rules but rather the reverse, vague and ambiguous ones. These are interpreted selectively against those the state feels the need to punish.

Irrespective of which form is used, selective enforcement is a subtle — and sometimes not so subtle — form of blackmail. Although little publicized in the West, it is a much feared tool of authoritarianism throughout the Confucian world and does much to explain why, though nations like Japan, South Korea, and Taiwan are presented in the West as democracies, virtually all real power resides in the hands of an unaccountable and virtually invisible class of elite bureaucrats.To Western observers the most obvious current illustration of how selective enforcement works is South Korea's notorious technique for protecting its car market: the government simply lets it be known that anyone who buys a foreign car risks a rigorous tax audit. Given that the South Korean tax authorities normally turn a blind eye to a considerable amount of "acceptable" tax evasion, this is a widely feared gambit. As such it is largely responsible for the fact that the combined share of all foreign marques in the South Korean car market as of 2005 had been kept to just 3 percent. (Thus American makers sold only about 4,000 vehicles in Korea that year, whereas Korean makers sold about 800,000 in the United States.)

As for China, selective enforcement is nothing new. It was a tool of unaccountable bureaucratic power in pre-modern times but in the chaos of twentieth century China it was replaced by more vicious forms of authoritarianism. Now it is undergoing a renaissance as Chinese leaders seek discreet ways to maintain their grip. Increasingly since the Tiananmen Square massacre they have worked to introduce at least a semblance of Western-style human rights in the treatment of suspects and prisoners. There have been even efforts to introduce some token democracy at local government level. Behind the scenes this ostensible liberalization has, however, been balanced by increasing resort to various tools of soft authoritarian power such as selective enforcement.

I first noticed how selective enforcement worked as a financial  writer in Tokyo in the late 1980s and, as far as I am aware, my 1995 book Blindside: Why Japan Is Still On Track to Overtake the U.S. by the Year 2000 presented the first extended account of it in the English language. But the idea was evidently already in the air at that time and had been spotted, for instance, by the China-watching journalist Richard Hornik in 1994. Writing in  Foreign Affairs, he alleged that honest Chinese entrepreneurs were often victimized by selective enforcement, and added: "Private businesses are ….subject to arbitrary enforcement of regulations, many of which are unpublished."

More recently the Berkeley law professor Laura W. Young has addressed the phenomenon. In an article in 2004, she wrote: "China's laws are strict but are sporadically enforced."As the scholars C. Simon Fan and Herschel I. Grossman have pointed out, China's anti-corruption laws have offered a particularly fruitful pretext for selective enforcement. On the one hand corruption is rife in China (in a league table of corruption compiled by the Berlin-based organization Transparency International in 1996, China ranked near the top, outclassed only by Bangladesh, Kenya, Pakistan, and Nigeria). On the other hand, China's penalties for corruption are among the world's most draconian.In a paper published in 2000, Fan, of Hong Kong's Lingnan University, and Grossman, of Brown University, noted that because of the pandemic nature of corruption in China, Chinese Communist Party leaders always "have something" on those below them. Echoing an earlier analysis by the San Diego-based Sinologist Susan Shirk, they added: "Because high officials could charge lower officials with corruption at any time, low level bureaucrats offer steadfast political support to those above them. In this way, corruption serves the party's goal of maintaining cohesiveness and absolute power. Indeed, until recently, few corrupt officials were ever punished. The threat of punishment, together with selective enforcement of this threat, was enough to maintain control."One way of looking at selective enforcement is that it creates a culture of self-regulation -- at least self-regulation on issues of transcendental importance to the powers that be. Each actor in the body politic is required to calculate for himself how far he can stick his neck out without risking decapitation.The implications have not been lost on China's most successful business people (who by definition have more occasion than most to buy the cooperation of New China's notoriously venal bureaucrats).

As Charles Lee, author of Cowboys and Dragons, has pointed out, Chinese business people have little to fear so long as they do nothing to challenge the established political order. But it would be a brave Chinese tycoon who dared to fund, say, a sincere effort to introduce democracy in China. He would not remain rich for long — and arguably might not remain alive for long. After all the death penalty, typically administered by a bullet in the back of the head, is not unknown for corruption offenses. A former head of the Guangxi Zhuang region, for instance, was executed in 2000 on charges of accepting $5 million in bribes. Selective enforcement of anti-corruption laws amounts to a formidable — indeed overtly Orwellian — Catch 22.

More important, like several other aspects of New China's workings, selective enforcement flies under the West's radar. For a start, as pointed out by Michael Dutton, a Melbourne, Australia-based expert on the Chinese legal system, it is virtually impossible to document. Worse, it utterly defies efforts by international lawyers to create a level playing field in global business.Yet selective enforcement can readily be adapted to draw foreign companies and individuals into the net of Chinese power. To say the least, a society deliberately designed to entrap people will prove hard to integrate into any American-led world order. In truth it constitutes a deal-breaker for the entire globalism project.
 
Last Days of the American Order?

If the rise of Chinese power were the only thing to worry about, America's geopolitical quandary would be serious enough. But there is another concern here that is at least as significant: American political and economic decline. It is fair to say that the United States is undergoing probably the fastest power implosion of any major nation in history.As I have pointed out repeatedly over the last fifteen years, the economic side of America's predicament alone is far worse than almost anyone in Washington realizes. In recent years several of America's most perceptive business leaders have, if anything, been even more outspoken.

Few witnesses to American decline are better placed to testify than Andrew Grove, chairman of Intel Corporation. As quoted by Newsweek in 2006, he said:  "America ... [is going] down the tubes and the worst part is nobody knows it. They're all in denial, patting themselves on the back, as the Titanic heads for the iceberg full speed ahead."Then there is the world's most successful investor Omaha-based Warren Buffett. He has said: "The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil."Even Jeffrey Immelt, chief executive of General Electric, has joined in the clamor. A trenchant critic of the American education system, he has said: "More people will graduate in the United States in 2006 with sports-exercise degrees than electrical engineering degrees. So if we want to be the massage capital of the world, we are well on the way."

Nowhere is American weakness more apparent than in advanced manufacturing. Leadership in this category has long been a sine qua non for a superpower. Indeed America's effortlessly assured dominance of the mid-twentieth century world order was based on little else. That leadership has now been thrown away as smart-aleck pundits in Washington, many of them funded directly or indirectly by the foreign trade lobby, have embraced an ephemeral intellectual fashion to scorn manufacturing. As we will see in Chapter 2, this fashion flies in the face of fundamental economic logic. The truth is not everyone can be a software engineer at Microsoft or an investment banker at Goldman Sachs. For the broad mass of ordinary workers, advanced manufacturing (that is the sort of manufacturing that is conducted in expensively equipped factories that are well endowed with ultra-sophisticated, generally secret production knowhow) is a far better source of highly productive, well paid jobs than the service industries that Washington has come to consider America's salvation. It was on the world-beating productivity of this broad mass of ordinary workers that America's erstwhile economic dominance was based.Unfortunately so many of America's advanced manufacturing industries have already been eviscerated by foreign -- principally Japanese -- competition that a U.S. Department of Defense report in 2005 pronounced America's security at risk."

There is no longer a diverse base of U.S. integrated circuit fabricators capable of meeting trusted and classified chip needs," the report said. "From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation's strategy to undermine U.S. military capabilities."

To anyone who takes it for granted that corporate America is destined to dominate the world economy in perpetuity, the reality on the ground abroad these days is chastening. Quite simply, apart from a few token American brand-names such as Coca-Cola, America's economic influence has long since disappeared.

Other nations have been quick to fill the void, and among them China is increasingly to the fore. Here is a sampling of how fast China has been turning the tables on the United States:

1. China's foreign currency reserves are now not only the world's largest (China passed Japan in this respect in 2006) but the largest in  world economic history. Totaling $1.2 trillion as of May 2007, they had multiplied more than six-fold just since the end of 2001. As the dominant participant in the world's currency reserve system, China occupies a position that the United States had enjoyed in the early decades after World War II (and did not lose until the early 1980s).

2.  In partnership with other major East Asian central banks, the People's Bank of China effectively controls both the level of American interest rates and the value of the American dollar. This follows from the fact that in an effort to finance America's trade deficits it has become a huge purchaser of American Treasury bonds. Absent this buying, the dollar would collapse and American interest rates would rocket. While China is unlikely to force the issue (for fear of fostering isolationism in the United States), it holds the upper hand in a vast game of chicken in which weak-willed, easily divided American government officials consistently come off second best.

3. Chinese interests have now established effective control of the formerly American-owned Panama Canal. In particular the key ports at either end of the canal have been quietly bought by Li Ka-shing, a Hong Kong-based tycoon widely regarded as a Beijing surrogate. Li also controls ports on Mexico's Pacific coast that are playing a rapidly increasing role in shipping Chinese goods to the American market. For those who understand history (and Chinese leaders certainly do), America's loss of control of key ports is reminiscent of what happened to China in the nineteenth century, when Western colonial powers established effective control over Hong Kong, Shanghai and other Chinese ports.

4. Chinese and other East Asian interests now largely control the vast network of communications satellites and undersea cables that makes up the world's international telecommunications system. Up to the early 1990s, the system had been under American control. Indeed it was considered a cornerstone of American power (among other things it provided American intelligence services with a unique ability to listen in to the world's telephone conversations). All that changed as a result of America's high-technology stock crash of 2000 and 2001, when dozens of key telecommunications teetered on the verge of bankruptcy and were bought out by East Asian interests. (War on terror note: American intelligence officials still listen to telephone calls but for the most part these days they are limited to calls to and from the United States. For calls from the Arab world to say Europe or East Asia they increasingly depend on the grace and favor of other governments.)

5. Considerably more of the next Boeing plane, the super-advanced 787, will be built in East Asia than in the United States. This will constitute the big-leagues debut for China's ambitious and fast-rising aerospace industry. Of the 787's components, only the vertical fin will be made in Boeing's erstwhile manufacturing base in Washington state. Even the wings, considered to be the most technically difficult manufacturing challenge, will be made in East Asia. Up to the late 1990s Boeing officials had said that wing-making was such an important function that it would never be out-sourced. Full disclosure: for now the Chinese continue to play second fiddle to the Japanese in the East Asian aerospace challenge (the 787's wings will be made in Japan). But it is a fair bet that China is already planning for the day when it will match or surpass Japan's high-precision engineering skills.

Of course, many commentators insist that the United States is finally turning the corner. In particular they often argue that American corporations are holding their own or even gaining in the most advanced areas of manufacturing. Such talk is rarely backed up with convincing figures. Rather it is based on anecdotes, often flimsy or highly misleading ones. Many of the "American manufacturing revival" stories cite, for instance, the Caterpillar bulldozer company. What is rarely mentioned is that much of the most serious added value in its products is created these days by Japan-based Shin Mitsubishi Caterpillar, a joint venture managed by the Japanese partner, Mitsubishi Heavy Industries.

The test of all optimistic manufacturing talk is the international trade figures. Unfortunately these tell an increasingly bleak story.In former times the United States was by far the world's strongest trading nation. On virtually every yardstick it was Number One -- from the size of its exports to the strength of its trade surpluses. It also generally ranked as the largest source of other nations' imports. No longer. With its trade surpluses now a distant memory (the last recorded American trade surplus was in 1991), the United States ranks  Number One in a very different category -- as the world's largest deficit nation.

As of 2007, the United States was passed by China in the total value  of its exports. By contrast as recently as 1997 the United States out-exported China by almost four to one.As for the United States' former status as the largest source of other nations' imports, in many cases China has now taken its place. The trend has been particularly marked in East Asia, where only Malaysia buys more from the United States than from China.The turnaround has been particularly momentous in Japan which as recently as 1991 bought nine times as much from the United States as from China. As of 2006 it bought more than 50 percent more from China than from the United States.Measuring both imports and exports, China has now displaced the United States as Japan's largest overall trading partner. By contrast in 1991, Japan did nearly seven times more business with the United States than with China.

America's loss of position has been even more shocking in South Korea, Taiwan, and Thailand (all of whom now buy far more from both Japan and China than from the United States). Moreover the United States no longer even ranks as China's largest source of imports. That role has been taken by Japan whose exports to China are now twice America's. This despite the fact that the Chinese are supposed to hate the Japanese. As we will see in Chapter 7, the reality of Sino-Japanese relations is a lot closer than is generally understood in the United States and one aspect of the Sino-Japanese rapprochement in recent decades has been a fast burgeoning trade relationship -- a relationship in which the United States has increased been treated as a spare wheel.

Perhaps the most devastating point about America's loss of position is that it is not reflected in any similar trend among other advanced nations. Indeed for the developed nations of East Asia, China's rise has on balance been a boon, as evidenced by the fact that not only Japan but South Korea and even Taiwan enjoy broadly balanced two-way trade with China. China actually runs a deficit with Japan, despite the fact that factory wages in Japan are now higher than in the United States.  China also runs a deficit with Germany, for that matter. The fact is that unlike the United States, Japan and Germany have fought hard to maintain and indeed enhance their position in advanced manufacturing.America's trade position has worsened catastrophically not only with China but with virtually every other major nation. As of 2006, America's current account deficit — the widest and most meaningful measure of the trade position — represented 6.5 percent of gross domestic product. This was not only a record for the United States but it represented a more than three-fold rise on the 1.9 percent ratio recorded in 1989. Indeed the latest figure was the second worst recorded percentage trade deficit ever incurred by any major nation in peacetime. The one worse performance was a figure of 7.7 percent incurred by Italy in 1924, the year before Benito Mussolini seized dictatorial power.For our purposes let's simply note that a nation that cannot balance its trade must rely on other nations to keep its economy afloat.

As Paul Craig Roberts, a former top Treasury Department official who was chief architect of the Reagan administration's economic reforms, has pointed out, all that saves the dollar from total collapse is its role — for a few years longer — as the world's reserve currency. "When the dollar loses its reserve currency role, America will not be able to pay for the imports on which it has become dependent," he has written. "Shopping in Wal-Mart will be like shopping at Neiman Marcus."

No major nation in modern times has become remotely so dependent on foreign creditors. Indeed the closest parallel to America's predicament today is that of the Ottoman empire a century ago. American presidents these days, like the Ottoman sultans of old, are surrounded by flatterers uttering soothing words. Such assurances are no more reliable today than they were in the Ottoman empire's twilight years. 
 
March of the Chocolate Soldiers 

The updated Confucian values by which China is ruled are not only fundamentally incompatible with those of the West but, in head-to-head competition, prove strikingly more robust. At first sight this statement may seem surprising but it requires no more than a moment's reflection to see that more and more Westerners who do business in China are already modifying their behavior -- often quite troublingly -- under Beijing's influence.

This is part of a larger pattern in which for decades Americans have increasingly compromised themselves throughout the Confucian region. Westerners arrive confident not only of the superiority of their values but of the region's receptivity to those values. Their expectations undergo rapid adjustment. As a general rule, they either find an early exit, or they end up espousing the very Confucian values they once scorned.

The pattern is so marked and consistent that it can be aptly compared to a phalanx of chocolate soldiers marching into a blow torch. Several Confucian societies have now had generations of experience in breaking the resolve of even the most apparently strong-willed Westerners. Though China has been slower than Japan and Korea to learn the subtleties of this art, it is catching up. For a start the Beijing authorities provide plenty of carrots for those who compromise themselves. The carrots range from the merely delicately corrupting to the blatantly so. In a society where everyone is just a bit compromised, it is hard for a Westerner to hold the line -- but once he succumbs, he is perpetually thereafter in the authorities' thrall. For a start there is the problem of selective-enforcement: foreigners in China, like their Chinese counterparts, constantly live on the wrong side of Chinese law and know they can be made an example of at any time.

When Chinese leaders feel the need to get tough, moreover, there is little in the Confucian ethical code to hold them back. As the former Wall Street Journal Beijing bureau chief James McGregor has pointed out, they believe the end justifies the means — and not just sometimes, as in the West, but all the time. This view can be invoked to legitimize the use of a multitude of highly manipulative, often frankly Orwellian, techniques for ensuring the citizenry's support in pursuit of national goals.

Many such techniques involve entrapment or blackmail or both. Such techniques can readily be extended to the Western community in China -- and it seems that increasingly they are. Certainly the phones are not secure and the first resort of authoritarian officials in getting tough with an awkward foreigner is to listen in to his telephone conversations for evidence that can be used to pressure him.

What is beyond question is that the carrot alone has already worked wonders in inducing one American corporation after another in China to embrace the Confucian way. As we will see in Chapter 6, in their eagerness to make money in China, American corporations have consented to conduct -- let's put this delicately -- mendacious public relations on Beijing's behalf. They have even acted as enforcers of Beijing's one-child policy, and in that endeavor have coerced women employees into having abortions.In the words of Carolyn Bartholomew, chairman of the United States-China Economic and Security Review Commission, many American companies have struck "Faustian bargains" with Beijing. She has cited such respected American corporations as Yahoo, Google, and Microsoft. As we will see in Chapter 6, these companies have agreed to abide by China's censorship rules in serving Chinese Internet users. Yahoo moreover voluntarily handed over evidence that led to one Chinese Internet user being sentenced to ten years in prison. Bartholomew commented: "Far from capitalism changing the Chinese government, it is the Chinese government changing capitalists. Rather than the birth of freedom with telecommunications and the Internet serving as the handmaiden of democracy, we have the Internet entrepreneurs selling rope to the hangmen." 

Introducing Reverse Convergence

If our concern were merely that Americans in China were being induced to forfeit their values, it would be serious enough. But Beijing is increasingly changing the way Americans behave in America.

Before considering some examples of this trend, let's first consider the historical context. In common with other Confucian nations, China has traditionally been strongly isolationist. For centuries before the arrival of Westerners, all the Confucian nations kept themselves to themselves. This policy was broken only with the coming of Western gunboats in the mid-nineteenth century. First China opened up under pressure from the British in 1842 and a few years later Japan succumbed to pressure from the United States.It is a fair bet that, if it were possible, both China and Japan would be happy to return to the almost total isolation they insisted upon before the rise of the West.

With the best will in the world, however, traditional Confucian isolation is no longer an option. The world is just too small and too dangerous. Most if not all of the world's principal nations, after all, possess the power to launch nuclear war at a moment's notice.The position is further destabilized by the mutual incompatibility of Confucianism and Western individualism. In a world that is now so interconnected, it is hard to see how the two ideologies can continue to co-exist as equals. One will increasingly dominate the other -- and if the authorities in Beijing have anything to do with it, it won't be Western individualism that will prevail.
 

One thing is certain: on present policies, Beijing and Washington are headed for confrontation. Seen from a Beijing point of view, Washington's instinct to "change China" implies, of course, the eclipse, if not the demise, of the existing Chinese Communist Party leadership. Moreover by insisting that Beijing abandon its own institutions and values in favor of American ones, Washington stands accused of interfering in China's internal affairs. This, of course, in the eyes of Chinese leaders, legitimizes a response in kind by Beijing.

Chinese leaders hardly need to be reminded of Clausewitz's maxim that attack is the best form of defense. Indeed an ancient Chinese proverb, "Yi gong wei shou," makes the same point: "Use attack as a defense." Certainly, by proclaiming American institutions and values not only more desirable than those of any other nation but inherently more robust, Washington has virtually guaranteed that Beijing's rejoinder will be a sotto voce, "We'll see." Facing off against what it regards as an overbearing American foreign policy, Beijing is provided with a pretext to do what it probably aches to do anyway: change America. If the world is to be run on Confucian principles, after all, outcomes everywhere will have to be fixed in advance, vested interests will have to be squared, the media will have to be muzzled, dissidents will have to be suppressed, and the public will have to be bamboozled — in perpetuity.

To put this in pugilistic terms, it is as if an American boxing champion challenged a Chinese kung-fu master. Confident that the world is converging to Western values, the American assumes his Chinese adversary will fight by Queensberry rules. The kung-fu master, however, sees nothing wrong with kung-fu rules. Particularly as they give him an unbeatable advantage.

Given the troubling nature of these matters, it is important at this stage to enter some qualifications. For a start, it should be noted that while this book will pull no punches in exposing the Chinese leadership's duplicity and authoritarianism, no hostility is, of course, intended towards the Chinese people. Quite the reverse. It would be ungracious to say the least for the West to begrudge the Chinese people their increasing prosperity or their wish to play a larger role on the world stage.It should also be made clear that, however Machiavellian their intentions, Chinese leaders are not looking for war, at least not against the world's major nuclear powers. That said, they are greatly influenced by the ancient Chinese military theoretician Sun Tzu. One Sun Tzu aphorism seems particularly relevant: "To subdue the enemy without fighting is the acme of skill."

The betting is that China will penetrate American society by stealth in ways that will slowly but surely undermine American values and institutions. Building on the extensive if unobtrusive groundwork laid by earlier East Asian industrializers, China can be expected in the fullness of time to become a major factor behind the scenes in shaping outcomes in Washington. Indeed this can be expected to happen willy-nilly, given the extent to which American elites have already embraced the doctrine of globalism. The effect of globalism has been to create a political vacuum in Washington, where an alert eye to the American national interest used to prevail.Of particular concern is how well Western intellectual organizations will stand up under the strain. Take the Western media. The idea that they might be vulnerable to pressure from Beijing may at first sight seem preposterous, but there is plenty of evidence that things are already going the wrong way. Certainly other East Asian nations have long been known to influence Western media coverage. This explains why key media organizations in the United States have rarely investigated protectionist practices in nations like Japan and South Korea in recent years. When was the last time the American press took a searching look at the car markets of Japan or South Korea, for instance? When, for that matter, did CNN's otherwise refreshingly frank Lou Dobbs program? In truth any attempt by the American media to focus serious attention on Japanese or Korean protectionism would raise the specter of a boycott by key  advertisers (probably acting in concert under covert government leadership -- the fact that both Japanese and Korean economies are dominated by government-guided cartels makes it easy to coordinate such action).In the fullness of time -- give them fifteen to twenty years -- the Beijing authorities will enjoy similar clout in the American advertising market.

It is a fair bet that the American media will prove similarly selective in their coverage of the underside of Chinese economic policies. The key thing here is that Confucian nations enjoy an ability to forge a degree of group solidarity in pursuit of national goals that is rarely if ever matched by Western nations.We are still in the early stages but it is clear that the United States is highly vulnerable to illegitimate Chinese influences. So much so that, in a process that is best called reverse convergence, key elements of American society are already Confucianizing themselves.

Allegations of reverse convergence have actually been around for a while. As far back as 1998, the right-wing policy commentators Robert Kagan and William Kristol thought they detected such a pattern in the actions of the Clinton administration. Writing in the New York Times,  they commented: "The [Clinton] administration has always argued that its policy of engagement will make China more like us. In fact it is making us more like them." Harsh words indeed -- but actually all the evidence is that the administration of George W. Bush has shown even less fortitude in the face of Confucian pressures.

Then there is the ever malleable American business community. Already, as we have seen, top American Internet companies have reneged on Western values in pursuit of lucrative business in China. How long will it be before they prove similarly malleable in their American operations?Meanwhile, as Tina Rosenberg has pointed out, the wider American business community also seems dangerously unreliable. Writing for the New York Times on a conference in Shanghai in 2005, she recounted how top American business leaders openly fawned on Chinese Communist Party officials. She added: "Let's not pretend that foreign investment will make China a democracy. That argument was born out of desperation and self-interest. Because China is too lucrative a market to resist, American and European businessmen have ended up endorsing the party line through their silence  —  or worse. They are not molding China; China is molding them."Any American who understands the power dynamics by which the Chinese empire has been held together over the last three thousand years will not be sanguine about the outcome. It is time Uncle Sam looked over his shoulder: his coattails are caught in the jaws of a dragon.