An Interconnected World - Wake Up to the New Reality, America

Mike Moore  (former Prime Minister of New Zealand and former Director-General of the World Trade Organisation)

Napoleon said: "China is a sleeping giant, let her sleep." Well, it is sleeping no longer. Its success has become a clich? But the fear that its success would vacuum up and hollow out the other Asian success stories has been proved wrong: Southeast Asia is now a vital platform in the global supply line.

China's growth has lifted Japan out of its economic stupor and contributed more to global growth than the United States, the EU or Japan over the past few years. China's US$650 billion reserves are being invested offshore.

The west, which strongly pushed for a more open investment regime in China as a condition for its entry into the World Trade Organisation, now faces an aggressive, even bold, Beijing on a buying spree.

Twenty years ago, the fear was of a Japanese takeover of the US, but that fear was misplaced. The big difference now is that Chinese investors are frequently state-owned - while, as one US senator noted, Japan was small and an ally.

What has caused the most concern in the US is CNOOC's bid for Unocal. The offer caught the attention of Washington's ruling elite, and symbolises the new economic fault line. US Congressmen and senators have expressed overwhelming alarm, but is this all overdone? In a word, yes.

The US has partnerships with many state-owned oil companies, and Unocal represents just 1 per cent of American oil consumption. The biggest investors in the US last year were Switzerland (US$878 billion) and Japan (US$431 billion). Beijing invested only US$8 billion, while the US invested US$105 billion in China.

But trade figures and investment perceptions are now out of date: they represent an old reality, from before our more borderless world. What is a trade surplus or deficit? What happens when Dell sells a computer made in China, with some input from elsewhere?

On paper, it looks like a US deficit with China. But when the profits go to Dell and Microsoft (which supplies the operating system), and the chip powering it comes from Intel, what does this mean to the statistics?

The iron laws of economics have not been broken by the Chinese dragon. Yet, politicians respond to complex issues with predictable, tired slogans - a substitute for policy.

Senators, for instance, have threatened China with a tough new 27.5 per cent tariff conditional on Beijing revaluing its currency, which is pegged to the US dollar. But that would slash the profits of Standard & Poor's 500 Index companies by 8 per cent, or US$50 billion.

When China realigns its currency, costs for every business in the global economy will rise; US costs for financing government debt will go up; and the firesale of Chinese businesses will end. If China slows its investment in US Treasury bills, the US will have to raise interest rates. China has said it will examine its currency when it suits its domestic interests. We should believe its leaders.

It was fascinating that Africa's needs dominated the meeting of Group of Eight leaders in Scotland. It is getting interesting when Greece and Turkey announce a joint gas pipeline, with a Greek prime minister visiting Turkey to announce the deal - the first visit by a Greek leader in over 40 years. A pipeline is planned through Pakistan to India, from Bangladesh to India, and from Egypt to Israel, bringing Myanmar and eventually Iran into the global loop.

Russia will soon supply Europe with most of its energy needs. Our interconnected world, where we are all each others' customers and no one can succeed unless everyone succeeds, has changed everything except the slogans.

(Originally appeared in the July 20, 2005 issue of South China Morning Post in Hong Kong, reproduced here with permission.)