February 21, 2011

Chinese Geopolitics

Whither Japan?

He used to seem pretty scary.
Do you remember the big Japan scare in the 1980's?  When it seemed like Japan was poised to take over the entire world?  It was once said that the Imperial Palace of Japan was worth more than all of the real estate in California. Americans were scared.

Fast forward 30 years -- how does Japan look now?  Answer: Fine, still certainly impressive, but not exactly world-dominating.  It has a sluggish economy.  Its Generation-X equivalents have spurned the "salary man" lifestyle (as they call it), and its iron-clad work ethic.

As an aside, it was just reported last week that China overtook Japan as the second largest economy in the world.  Most Americans, the same ones freaking out over Japan in the 1980's, failed to notice.

From what I hear, in the 1960's, even Japan was considered decidedly second-rate.   The Soviet Union was the big concern, in the world-domination department.  As we all know, by the early 90's, this once-biggest fear collapsed under its own weight.   That was before my time, though (I was born in 1972).

Today's Worry:  Made in China

Worry D'Jour
So who are we fretting these days?  China, of course.  Listen to any financial talk show, and it seems China will be taking over the world any day now. 

Let me put your mind at ease:  Don't worry about China.  China has bigger issues of its own.

Within 30 years, China's trajectory may not have fallen as severely as the Soviet Union's between 1960 and 1990 -- but neither will it have fared as well as Japan.  Meanwhile, the United States will remain strong, despite the ever-present doom-and-gloomers.

How can I make such a prediction?  Geopolitics.

Geopolitics 101
Last year, George Friedman, president of the foreign intelligence firm STRATFOR, published his prediction for the next century, aptly titled The Next 100 Years.  STRATFOR produces situational reports on various countries, conducting analysis on who's stable, and who's not.

In this book, he lays out the clearest argument I've observed for why China's star can't continue shining so brightly.

First off, "geopolitics" isn't just a fancy way of saying "international affairs."  It is the study of how geography impacts politics.  Geopolitics explains why Great Britain and Japan amassed empires (and remain two of the most influential countries in the world), despite their small sizes.  It also explains seemingly-strange issues, like why Russia is so obsessed over keeping Chechnya.
    To understand why China will have difficulty remaining a world power for very long, we must first examine the dynamics between internal (land-locked) and coastal areas.  For a variety of reasons (lavishly described in Friedman's book) these areas radically differ from military, economic and cultural perspectives:
    It sure helps to live on the coasts...
    Geopolitics in Action: Red States vs. Blue States
    Still a bit skeptical about how geography can impact politics?  Consider the Red State vs. Blue State issue through the lens of geopolitics.
    Can't we all just get along?
     If we consider the states bordering the Great Lakes to be Coastal, then virtually every Blue State was coastal, and almost every Red States was Internal.

    Alaska is quite coastal, but given its remote location, it acts more like an Internal state.  (Siberia, its sole neighbor across the Bearing Strait, isn't exactly a great trading partner.)   States bordering the Gulf of Mexico act similarly, given that they receive a disproportionately small share of international trade.
    These geopolitical dynamics between provincial Internal areas and cosmopolitan Coastal areas have existed throughout history.  You might have read comparisons between provincial, warlike Sparta vs. cosmopolitan, educated Athens.  Sparta was a land-locked Internal city-state; Athens was Coastal.

    Geopolitical Analysis:  China vs. the United States
    So, let's compare China and the United States from a geopolitical perspective, and see what it tells us.
    In the illustrations below, I annotated each country's richest cities, to show you where the money (and hence influence) is.  For the United Sates, I show every city in the top 25 highest GDP cities in the world (as reported by Wikipedia).  For China, I show every city in the top 100 highest GDP cities in the world. 

    American Geopolitics
    The United States has two coasts, which (as we saw above) share similar values, and contain almost all of the richest cities.  Because both coasts share such similar values, it's much easier to keep the country unified.  

    But the Internal states have their own advantage: central location.  If you're going to distribute goods throughout the country, it helps to be centrally located.  It should come as no surprise that Wal-Mart and Target are headquartered in Arkansas and Minnesota, respectively.   

    Plus, the Internal states benefit from direct access to international trade with Mexico and Canada (our two biggest trading partners).

    Summary:  The Internal and Coastal states make excellent trading partners -- each benefiting from the other's strengths.   So, while they might see the world differently, they get along, and the country stays strong.

    Chinese Geopolitics
    China's geopolitical landscape is completely different.  Here, there is a single coast, and it controls almost all of the wealth.  When people say that China is booming, what they mean is that Coastal China is booming.

    Internal China is not centrally located, and has a dreadful array of neighbors -- mostly impoverished nations with shaky diplomatic relations.  Instead of trading partners like Mexico and Canada, the Internal Chinese provinces get North Korea, Burma, Mongolia, and a handful of other economic disasters. 

    The citizens of Internal provinces of China face a terrible choice: 
    • Stay impoverished, in the middle of nowhere.
    • Move to the coastal cities, which can neither employ nor support them. 
    The Chinese government is working desperately to channel money from the rich coasts to the poor internal states.  So far, they have been able to redistribute the wealth quickly enough to keep the peace.   Most of this redistribution has been in the form of widespread financing Internal public works, which has resulted in massive levels of off-the-books bad debt (i.e., loans that will never be paid back).

    So far, the Chinese government has kept the music playing.  But it can hardly maintain this pace, much less maintain it with an economic slowdown.  What happens next is anybody's guess.

    How Bad Could It Really Get?
    You might be thinking that every country goes through downturns.  The Internal provinces will just have to deal with it, right?   What's the worst that could happen?

    China's history is fraught with this exact problem -- the dissonance caused by rich coastal areas and stagnant internal areas leading to upheaval and massive, forced economic redistribution.   When was the last time it happened?  A scant sixty years ago.   Search online for "The Great Leap Forward", and you can read all about it.  Here is a quick summary:
    • Coastal wealth forcibly redistributed
    • Intellectuals killed or deported
    • 20-30M deaths by starvation, due to enormous resource mis-allocations
    • Greatest destruction of real estate in history (more than all damage from WW2)
    • 2.5M beaten/tortured to death; 1-3M committed suicide
    Summary:  Yet again, China faces intractable geopolitical problems, as it struggles to balance its overheated Coastal provinces and its stagnant Internal ones.  Nobody (with a decent sense of history) wants to see what will happen if its government can no longer maintain this balance.  ...But, at some point, we probably will.

    People have been predicting that the United States' best days are over since July 5, 1776.  And, to be sure, we have no shortage of challenges -- first and foremost, our massive debt.  De-leveraging will be a painful process, and there's really no way around it.

    Yet, we have some permanent geopolitical advantages that will be here long after we've resolved our debt: We have two coasts; we border peaceful, developed trading partners; and we're located between eastern Asia and western Europe.   Plus we remain far and away the most technologically innovative country on the planet.  (More on that later.)

    So, should the United States be worried?  Sure, a little worry is a good thing.  But I don't think the Chinese dragon will devour the US any time soon.

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