boomed. China has taught others to attract foreign investment, and in response the total pool of foreign investment has greatly expanded.

Amid the global slowdown following the tech bust, countries like South Korea and the Philippines found themselves saved from recession by Chinese demand. Most importantly, Chinese demand provided the stimulus that lifted Japan out of recession. It

is difficult to overstate the risk the world economy faced from the Japanese situation, where mountainous debt created the risk of a domino-like collapse inside Japan and subsequent rippling collapses around the world. That risk seems to have passed, helped by a critical margin of stimulus from China. Few books are written about global

depressions that never happened, but it is quite possible that China’s globalization saved us from beginning the new century with a drastic global economic squeeze.

Many other peoples have benefited from Chinese demand that rose just as the world economy was slowing. Raw materials producers had become inured to terms of trade that deteriorated inexorably year after year. Suddenly our ally Australia found that its terms of trade have improved to the best in its entire history, largely because of Chinese

demand. Many of the world’s poorest countries, including Laos, Papua New Guinea, and much of Africa, benefited just when they needed it most. No aid programs, no IMF gold sales could have come close to providing the improved livelihoods that resulted from increasing, sustained demand for their products.

In short, the most important results of China’s rise are the same as the results for the world of America’s rise or of the recoveries of Japan and Europe: you are always better off with a rich neighbor than with a denizen of the slums. Benefits and costs for the U.S.

China’s globalization has had numerous impacts on the U.S. Most obviously, China has become a vast market for U.S. goods. Arguments that this is a mythic “China Dream” have proved false. Coca Cola has long since surpassed the fabled goal of selling a billion Cokes. General Motors, once ridiculed by the China Dream theory, sells many Buicks in China, and, despite a current cyclical pause, profits from China have been a critical margin for GM during a difficult time. We gain from billions of dollars of profits remitted back to our country and from the improved health of our most successful companies as they compete against other foreign companies.

Lower prices for basic goods have contributed significantly to American standards of living, particularly for our less prosperous citizens. While we do not yet have definitive studies, indications are that lower-income Americans achieve improvements in their

standards of living of perhaps 5% to 10% as a result of being able to buy lower-priced imports from China. That impact is undoubtedly expanded by the fact that competition from China drives other countries to produce less expensive goods for our consumption. Inexpensive Chinese goods have kept down our inflation rates and enabled us to prolong the upswings of our business cycles because the Fed doesn’t have to raise interest rates so quickly in order to slow inflation. Similarly, Chinese purchases of U.S. Treasury bonds have helped to finance our budget deficits. Without those Chinese purchases we would either have to raise interest rates, slowing our growth, or we would have to run comparable trade deficits with other countries so that they could buy our bonds.

We are just beginning to see another layer of benefits. The Chinese are beginning to invest here. Haier is now manufacturing refrigerators in this country. When China’s Lenovo bought IBM’s personal computer business, it saved jobs in a moribund division, freed IBM to move up into higher-tech markets, and helped finance that IBM move up. So far, this trend is small, but it will grow quickly. China’s goal for this year is to spend $30-40 billion buying resource and distribution companies.

We also benefit indirectly from China’s boost to foreign economies like Japan and

Australia. Having a prosperous partner is invaluable to the U.S. economy. We spent the 1980s fretting about Japan taking over the world, but we spent the 1990s worrying that Japan wasn’t doing its share to boost global growth. Those who worry about China’s success would have far more to worry about if China’s growth slowed drastically. Adjustment problems

China’s globalization and growth also cause stresses for us. Some of these are politically eternal but economically and strategically tired. As countries get rich, the manufacture of textiles, and shoes, furniture and basic consumer electronics mostly migrates elsewhere. The manufacture of socks migrated from here to Japan, from Japan to South Korea and Taiwan, and thence to Southeast Asia and now China. That adjustment will continue. It has been gradual over many decades. We have had ten years to get ready for the current round of textile adjustments. We knew what was coming and we agreed to it, in return for China so stressful that they are virtually beyond Americans’ imagination. Our own adjustments are smaller than those of virtually any other country.

These adjustments are smaller than we tend to believe, because China gets blamed for much that it does not cause. Virtually all of our job loss has been caused by productivity improvements. In fact, productivity gains have been sufficiently large that we should have experienced more job losses than we have. It is conceivable that our job losses have been smaller than they “should” have been because China has helped us adapt. We don’t know, because no lobby has been interested in paying for the research to find out how many jobs have been saved by partial moves to China decreasing the costs of endangered companies. And China is, of course, just part of a global readjustment caused by China, India, and the former Soviet Union joining our economic system.

A more serious policy problem is hyper-competition created by cheap financing in China. The irrationalities of the Chinese financial system mean that in key sectors like steel China builds too many factories, and props up too many moribund companies, causing massive overcapacity. In recent years Chinese financial vagaries have led to excessive construction and huge demand for steel, aluminum, cement and others. For a while this has buoyed the global steel industry, including ours. But it has also led to construction of so many steel factories in China that soon China will have half of all world capacity. That means overproduction and eventually a steel price bust.

This cycle creates problems for our industry, just as our Internet mania and tech bubble created problems for much of the world. It is fair for us to complain about such

problems. It is fair to pressure the Chinese to reform their financial practices. It may be fair in some cases to view Chinese bank lending practices as constituting an inappropriate subsidy. The tone of our complaints and the substance of our policies needs, however, to

reflect three facts. First, the Chinese are trying to reform their banks and put them on a market basis. Second, our financial vagaries cause them problems too. Third, the biggest price for their financial mismanagement will eventually be paid by them, because inappropriate lending eventually makes troubled banks much more troubled. China making steel today looks like Japan buying Rockefeller Center two decades ago; if you project their excesses indefinitely into the future, first the Japanese and now the Chinese look as if they are about to take over everything in the world. But when you look at their underlying finances, you see a black hole. The Japanese spent the 1990s in their black hole and are still trying to climb out. China will feel the pain of its recent spree for many years. Having said these things, some excesses may require a policy response by us.

Chinese theft of intellectual property has become a major issue. The IPR problems

presented by China are similar to those presented by other developing countries. In the 1930s, Japan built cars that were half Ford parts and half GM parts, with DeSoto styling. In the early days of Japan’s postwar takeoff, a high proportion of its electronics exports infringed Texas Instruments’ patents. I, like numerous others, accumulated a library of knockoff books from Taiwan in the 1970s, and Taiwan still has the best knockoff watches. When I lived in Singapore in 1998, I could get knockoffs of most Hollywood movies at a six-story building within five minutes’ walk of my office, and indeed well into the 1990s official U.S. government briefings credited Singapore for some 70% of the knockoff computer software in Asia – at a time when China was getting most of the blame. China’s IPR practices today are not very different from those of India and

Russia. But the scale and efficiency of China, and the extent of foreign direct investment in China, make the issue a larger one. Indeed, the IPR losses caused by Chinese practices are probably on a scale with those of other major emerging markets, like for instance American youth. It is appropriate for us to make very strong representations about IPR abuses. It is appropriate for us to implement policies that punish bad behavior and reward better behavior. It is also useful to maintain a certain historical perspective. The other side of the benefits Australia, Africa, Latin America, and other resource

providers (including part of our own economy) have received from Chinese demand is a rise in prices for consumers, and we are more consumer than producer of raw materials. For many key materials, the biggest part of recent price rises has been cyclical. The

Chinese mania for steel, aluminum and cement has peaked. In the case of petroleum, the cumulative increase in demand caused by China, India, Russia, and other developing countries may soon push against long-run supply constraints. This may compel us to make new, potentially urgent decisions about conservation, the kind of energy we use and the degree to which we compete or collaborate with the other major users. This would have happened eventually even without the rise of China, but China is certainly accelerating the issue.

Finally, the rise of China raises questions about whether we face a major challenge to our role in the world or to our way of life. One part of this is easy. We do not face a challenge to our way of life. Unlike the Soviet Union, and unlike China under Mao

Zedong, reformist China does not seek to change the way we organize ourselves or the

world, but rather to join the world system we have created.

Geopolitical competition raises more complicated issues. Like South Korea, as China grows it gets stronger. Its military becomes more modern. In one particular area, the Taiwan Straits, maintaining our dominance will become increasingly difficult. That is a serious and difficult and legitimate challenge for our military to cope with. But theories that China is going to take over the world suffer from the same flaws as theories two decades ago that Japan was going to take over the world. The Chinese military has to defend 11,000 miles of not-always-friendly borders, and its growing military is far from excessive for the tasks it faces. Economically, China is not going to manufacture

everything in the world; no country can have a comparative advantage in everything. In the medium term China faces daunting challenges. Its banks are the worst in the world that we know about. In each generation a population about the size of the United States will move from China’s countryside to its cities. Each year 12-13 million new workers join the work force. The impact of productivity on employment in manufacturing is much more severe than in our country. All these people need jobs. For a considerable period China’s high growth can be sustained, but only through heroic reform measures by China’s leaders. If somehow China powers through these problems, by 2020 its aging population will have the worst ratio of workers to non-workers of any population in the world, including Japan’s. That is to say, without some miraculous new policies the Chinese economy may well hit a wall in that period. In 2020, they will still be a very

poor country by our standards. Even if their success continues until then, they will not be taking over the world.

The emergence of China as a principal advocate of globalization and stability creates a complex geopolitical situation for us. On issues of free trade and investment, and on a variety of economic issues like GMO crops, China is our principal ally. On North Korea, despite differences over tactics, we share the same goal and China is our only effective partner. On terrorism and crime, China is our principal Asian ally. We are now in a novel situation where Japan is our military ally and partial ideological soulmate, but China is effectively our ally on the important political and economic issues, with Japan either ineffectual or in opposition to us. This is a novel historical situation.

Where Chinese influence has increased greatly at our expense, other than the unique situation in the Taiwan Straits, it has been because we and our traditional allies created a vacuum, not because China has aggressively asserted power. But there have been important shifts, and we need to be very conscious of them. On the dangerous North Korean issue, we have been divided at home, and our allies, most notably South Korea, have disagreed with our tactics. We have demanded that China play the central role, and China was hesitant to accept the invitation. In Southeast Asia, we have traditionally earned loyal support by organizing our policies around a core value of economic growth through liberalization and globalization. Today we are perceived as having abandoned that priority in favor of a more military focus on the war on terror, while China is seen having abandoned its Maoist geopolitical priorities in favor of a priority for mutual

economic development through multilateral liberalization. Within our economic policies we are seen as having abandoned multilateral liberalization in favor of highly politicized