Thursday, 11 April 2013

Geography limits China but strengthens the United States

What I see when I look at the world is geography and the very obvious physical constraints inherent in all of the world’s countries. No matter how a nation tries to strengthen itself, be that economically, socially, ideologically, it cannot afford to miscalculate the effects of geography. To break out of these constraints and grow beyond these natural limits often requires nasty things like war. Each country has borders, sometimes well placed as a result of these wars, while other times naturally ordered (mountains, rivers, coast, etc).

For instance, Europe is struggling today precisely because the Northern countries (Germany, France, The Netherlands, etc) are by luck of geography sitting on one of the world’s most fertile landmasses, the North European Plain. And because of their position on this plain they also have access to navigable rivers such as the Rheine and Danube, and deep-water ports, this makes their export trade very cheap and extremely profitable.

However, in the Southern countries of Europe the geography is much less forgiving. Greece and Italy have lived off the wealth of the North and largely outside of their own domestic ability to produce goods and leverage arable land. They inflated too far and are now downsizing to their natural limits as austerity begins to grip those nations. They thought they could develop past the natural geographic limits when they in reality were constrained by them more than they knew.
Greece’s problems stem from a remarkable lack of arable land (their core region is an archipelago of islands and sea). To get to the economic position they had in 2010, they needed to borrow heavily from Brussels and Germany. Naturally, Greece never would have been able to achieve those heights if it had relied on its own power. While Italy has in the past been unable to support its own growth based strictly from goods produced in the Po valley, in much the same way as Greece it has in the last twenty years looked to the European Union to help bridge the economic gaps and stimulate growth outside of Italy’s natural potential calculated solely on geographic constraints. Both countries, and many other peripheral European nations are only where they are today because they could leverage the large powers  in the North and their deep pockets.

This is important because it is exactly the type of issue facing both the United States and China. The Chinese are discovering that their growth is quickly reaching the limits of their geography. They will soon need to wrestle with supporting a population rising to over a billion people while producing less domestic goods and losing the ability to sell to that population as wealth distribution becomes more disparate and more Chinese become poor. To address this fact, Beijing is courting other Asian countries to secure new property rights and cheap resource imports to help their own citizens and country develop past its natural geographical limitations.

What China needs is a fully engaged workforce to minimise unemployment. They need this because historically, an unemployed Chinese workforce is a recipe for instability and potential revolution. This is why Chinese development contracts around the world tend to bring their own labour force to complete them, instead of hiring locals. The contract controllers don’t seem to care that this enrages the local population. All they care about is keeping the mass pools of Chinese labour occupied and paid.

The problem with Chinese expansion is its inherent instability. There’s very little reason to assume the Chinese can significantly continue the growth rates we’ve seen and come to expect in the past decade. Double-digit growth is non-sustainable, no matter how Beijing fudges the numbers. Not only this, but a large percentage of Chinese citizens live in essentially sub-Saharan poverty. They are desperately poor and beginning to move in large numbers towards the coast’s large cities. If Beijing isn’t careful, and they are fixing the Hukou system relatively quickly, large numbers of migrants moving into cities looking for jobs can very soon result in slums and shanty towns as jobs are filled and the workers saturate the market.

The upcoming Chinese middle-class is rising and expanding in China, but there aren’t enough of them yet, and there probably won’t be enough to save the country once the bubble bursts. Strictly speaking, the global financial crisis shrunk consumption to low levels forcing China to reign in their output of low-cost goods, which is in turn strangling profits.

It also forced China to cut their profit margin on many goods to keep them flowing at a functional rate, and keep the Chinese population in jobs and getting paid. Because of this, Beijing has had to loan billions of dollars to Chinese enterprises just to keep them afloat. Obviously these are going to be bad loans as they are extremely unlikely to be repaid, indicating a huge government debt internally. 

This last point is the most important, because without orders from overseas the unemployment situation in China sky-rockets, which could lead to instability. This could happen soon, but will probably be a medium-term future worry. But if the Chinese government did not step in to keep those smaller enterprises viable, China could already have the high levels of unemployment it so desperately fears. There is a ticking time-bomb in China, and the feedback loop can only go on for so long.

And yet, if the Chinese businesses raise prices on their exports to recoup some of those profits, they could force those companies to develop factories in cheaper and closer-to-market countries (Mexico, Thailand, Vitenam, etc). So the Chinese are in a bit of a bind. One way sees them increasing profits and losing orders and therefore losing employment. The other way sees them lowering profits and holding employment but being unable to financially pay for their own growth. The miracle might just be coming to a close.

What does this mean for New Zealand’s closer relations with China? Well, Wellington needs to be careful what they’re buying into. It’s very clear the elite Chinese have plenty of money to spend outside their country, investing in enterprises and property all over the world. But the question needs to be asked: why aren’t those Chinese investors spending money on Chinese businesses at home? Perhaps this is because they know something about the future of their economy and the true dynamics underpinning it that we don’t. 

If the Chinese economy is reaching the limits of growth, then exactly how close does New Zealand want to be getting? A slow drift towards Asia could be getting New Zealand into a world of trouble with bad investments if the “Chinese miracle” collapses, as it surely will just like the Japanese miracle before it. The question is not ‘if’, but ‘when’.

The United States faces fewer of these problems. North American geography is far and away the major factor in American predominance over the past half century (and perhaps longer). Americans like to pat themselves on the back about how their clever and free democratic society has created the world power they are today. This is not entirely true. Without access to the Pacific and Atlantic oceans, without the American Midwest (the largest contiguous arable landmass on the planet), and without the Mississippi river network the United States would not be strong at all, not matter how democratic their society is. 

For this reason I disagree profoundly with the idea that the United States is declining from world leadership. Rather I, and others, see America as moving through a temporary rough patch as they figure out how to manage a system that now spreads globally without real competition. But they will retain the fundamental benefits of a extremely beneficial geographic position and therefore will have an advantage over poorer geographical locations around the world.

Far from a bad political move, getting closer to the Americans is going to be more important in the future. With the constant jostling in the Pacific for strategic breathing room, the United States will retain maritime supremacy and security for the foreseeable future. New Zealand cannot protect its own sea-lane trade routes with the Royal New Zealand Navy, so we rely on a good relationship with Washington to do this for us. 

In return Washington has occasionally requested New Zealand military assistance in fighting some of its wars in the past. America also asks Australia for assistance because Canberra relies on American security of the oceans in much the same way as we do. Both of our countries are like entities with their circulation system outside of their bodies. They need protection and the United States offers this, the only thing it asks in return is some reasonable expectation of reciprocity and preferable trading relationships. Just like Britain before it, the United States controls the world’s oceans. And small, isolated countries like New Zealand need good relationships with these world powers for ongoing security.

And it pays to point out that the New Zealand military did not participate in the Iraq war. Whether this was an intelligent political move will be decided in the future, no doubt. This war was indeed poorly conceived, but the initial reasoning behind invasion was not entirely misplaced. As for Afghanistan, Kiwi troops have assisted the Pentagon for ten years in their clean up of the war-torn country. New Zealand, along with many other countries, were not dragged into this war. It was a humanitarian decision made to provide security for the Afghan people as they came out the other side of fighting between al Qaeda and the United States. 

Vietnam and Korea are a slightly different stories altogether. Those wars were set in completely different political climates and geopolitical interactions. But even these wars, and New Zealand’s inclusion in them, can be better understood in the context of New Zealand waterways needing United States’ Naval protection.

Simply put though, the United States can offer New Zealand better security, better economic returns on investment, and better political partnership than China at the present time. And unless Beijing can figure out how to limit the inevitable economic problems looming on its horizon, it will not be able to offer us these benefits in the future either. 

There is no timeline set in stone for when China will need to tackle these problems, but just threat of these issues should be enough to worry long-term investors. If New Zealand wishes to best position itself for an economically successful future it needs to position itself on the correct side of the United States. Washington will be in a similar economic position in 20 years, but probably improved. Can we really say the same for China? 

Perhaps Wellington should be taking notice of how Australia is interacting with the United States and receiving preferential treatment in the Pacific. Canberra understands that it is a better bet to befriend the United States over China, but maintain a close working relationship with Beijing. Wellington would be unwise to alienate Washington any further.

No comments: