First, a quick reminder about the main points I made a couple of weeks ago. There are primarily two ways of analyzing China. According to the first and more conventional school, China’s spectacularly high levels of economic growth will eventually lead to a democratic transition in the country. This argument is, of course, a familiar one based on the modernization theory in political science. According to modernization theory, the basic requirements of democratization are factors such as economic modernization and the emergence of a prosperous middle class that will demand political liberties, and a transition from single-party rule to multi-party elections. In arguing so, modernization theory projects the European experience and trajectory, where the transition from mercantilism to capitalism, the Industrial Revolution, economic development and the emergence of a middle class were factors that preceded democratization. The hope, therefore, is that the emerging Chinese middle class will sooner or later push for political reforms that will democratize the country.
In the other camp are the skeptics who believe Chinese dynamics significantly differ on the ground from 18th- and 19th-century Western Europe, mainly on the grounds that the Chinese model is not based not on private sector capitalism. Instead, what defines the Chinese political economy is the rise of state capitalism where private property rights are not secured. The Chinese Communist Party maintains a solid grip on the political system and controls the political, social and cultural realm in addition to the economic realm. In this system, what creates stability is the ability of the system to provide employment. Since China has an enormous population, the most important factor for the Communist Party is the ability of the capitalist system to absorb the millions of Chinese workers. Unemployment is the nightmare that keeps Chinese officials awake at night. And the best way to keep the millions of Chinese workers employed is constant economic growth. Economic stagnation is likely to create social unrest, and social unrest may eventually lead to a revolution against the political hegemony of the Chinese rulers. According to this second camp, economic modernization and development in China is not the key for democratization. To the contrary, development is the key to stability.
After having summarized the arguments of the two camps, it is clear that the West is facing a difficult dilemma. Most Western countries believe that there is a correlation between democratization and world peace. According to this “democratic peace” theory, democracies do not go to war against each other. There is therefore a strong American belief that if China becomes democratic, the chances of a future Chinese-American confrontation will significantly diminish. But does this mean that a China that remains under the hegemony of the Communist Party is destined to clash with the United States?
The short answer is “no.” The status quo is very likely to end up becoming the norm in Chinese-American relations, mainly because of mutual economic dependence. Let me explain what mutual dependence means in the Chinese-American economic context. The US needs China to buy American treasury bills in order to finance its growing debt. Washington also wants to keep interest rates low in the country in order to stimulate more demand. When China buys US debt by buying treasury bills and bonds, this creates more financial liquidity in the US. And more liquidity not only lowers interest rates but also fuels more consumption by keeping interest rates low. In others words, as long as China continues to invest a major part of its trade surplus in US treasuries, American consumers will benefit from lower interest rates and higher consumption. China, too, will benefit from American growth because Americans are the main consumers of Chinese exports. China wants to keep exporting to the US in order to keep its employment rate stable. Remember, this employment rate in China is what creates economic stability. Moreover, China’s financial and capital investment in the US keeps the American dollar strong. And with a strong dollar, America can import and consume more Chinese products. This is why, at the end of the day, both China and the US enjoy the status quo. In short, confrontation will remain avoidable as long as this mutual dependence continues.
