Insights

The Paracel (or Xi Sha / 西沙) Islands are now claimed with great passion by both China and Vietnam.  Some or all of the Spratly (or Nan Sha / 南沙) Islands are similarly claimed by China, Malaysia, the Philippines, and Vietnam.  Let me very briefly recount the tangled history of these claims.  Listen closely.  The facts belie the prevailing narratives.

It is hardly surprising that the claimants have reinterpreted their history to make it conform to the once-foreign Westphalian notion of sovereignty.  They have produced reams of paper documenting close encounters with remote rocks by the sailors of long-vanished Chinese and Vietnamese dynasties.  But whatever those sailors were doing, it had nothing to do with either asserting or violating sovereignty, which was not yet an operative concept in Asia.

China first asserted sovereignty in the modern sense to the South China Sea’s  islands when it formally objected to France’s efforts to incorporate them into French Indochina during the 1884 – 1885 Sino-French war.  Chinese maps since then have consistently shown China’s claims, first as a solid and then as a dotted line.

In 1932, France nonetheless formally claimed both the Paracel and Spratly Islands.  China and Japan both protested.  In 1933, France seized the Paracels and Spratlys, announced their annexation, formally included them in French Indochina, and built a couple of weather stations on them, but did not disturb the numerous Chinese fishermen it found there. In 1938 Japan took the islands from France, garrisoned them, and built a submarine base at Itu Aba (now Taiping / 太平) Island. In 1941, the Japanese Empire made the Paracel and Spratly islands part of Taiwan, then under its rule.

In 1945, in accordance with the Cairo and Potsdam Declarations and with American help, the armed forces of the Republic of China government at Nanjing accepted the surrender of the Japanese garrisons in Taiwan, including the Paracel and Spratly Islands.  Nanjing then declared both archipelagoes to be part of Guangdong Province.  In 1946 it established garrisons on both Woody (now Yongxing / 永兴) Island in the Paracels and Taiping Island in the Spratlys.  France protested.  The French tried but failed to dislodge Chinese nationalist troops from Yongxing Island (the only habitable island in the Paracels), but were able to establish a small camp on Pattle (now Shanhu / 珊瑚) Island in the southwestern part of the archipelago.

In 1950, after the Chinese nationalists were driven from Hainan by the People’s Liberation Army (PLA), they withdrew their garrisons in both the Paracels and Spratlys to Taiwan.  In 1954 France ceased to be a factor when it accepted the independence of both south and north Vietnam and withdrew from Indochina.

In 1956 North Vietnam formally accepted that the Paracel and Spratly islands were historically Chinese.  About the same time, the PLA reestablished a Chinese garrison on Yongxing Island in the Paracels, while the Republic of China (Taipei) put troops back on Taiping Island in the Spratlys.  But, that same year, South Vietnam reopened the abandoned French camp on Shanhu Island and announced that it had annexed the Paracel archipelago as well as the Spratlys.

In 1974 South Vietnam attempted to enforce its claims to sovereignty by placing settlers in the Spratlys and expelling Chinese fishermen from the southwestern Paracels.  In the ensuing naval battle at Shanhu Island, China defeated Vietnamese forces.  This enabled Beijing to extend its control to the entire Paracel archipelago, where it has not been effectively challenged since.

Five years later, Hanoi (now the capital of a united Vietnam) repudiated its earlier deference to China’s claims, adopted South Vietnam’s position, and claimed sovereignty over all the islands in the South China Sea.  In the early 1980s, as Beijing, Kuala Lumpur, Manila, and Taipei protested, Vietnam resumed vigorous settlement and garrisoning of the Spratlys.

From 1946 to 1950, Chinese nationalist forces maintained a garrison on Taiping Island, the only habitable island in the Spratlys.  This military presence was reestablished by Taipei in 1956 in response to the activities of a Filipino lawyer and businessman, Tomás Cloma.

In 1956, Cloma proclaimed the establishment of a new country, “Freedomland” in the Spratly Islands.  The sole function of Freedomland turned out to be issuing postage stamps to collectors.  Cloma’s announcement of Freedomland caused both Beijing and Taipei to reiterate China’s claims to the Spratlys.  Taipei sent troops to drive Cloma off Taiping Island.  Its forces are still there.

Cloma’s proclamation of Freedomland was legal in the Philippines because, as Manila noted in its reply to protests of Cloma’s actions from Beijing, Paris, Saigon, and Taipei, the Philippines had made no claim of its own to the Spratlys.  But in 1972 the Philippines did begin to make such claims.  In 1974, President Ferdinand Marcos forced Cloma to convey all his rights (whatever, if anything, these were) to the Philippine government for one peso.  That same year the Philippines occupied five islets in the Spratlys.  By 1978 it had occupied two more, plus two reefs.

Spain and the United States exercised sovereignty in the Philippines consecutively for four centuries (1543-1946) but never annexed the Spratlys.  Manila’s clam to them is based on the fact that, with the exception of Taiping Island, they were unoccupied and up for grabs.  The Philippines’ other argument for owning the Spratlys is that they lie within the 200-nautical-mile Exclusive Economic Zone (EEZ) it unilaterally proclaimed in 1978 in anticipation of the 1982 Convention on the Law of the Sea, which authorized littoral states to create such EEZs off their coasts.

Malaysia also bases its claim to the southernmost Spratlys on their location within the EEZ it proclaimed in 1979.  Malaysia seized Pulau Layang-Layang (Swallow Reef) in 1983 and established a military presence there.  It  has since reclaimed enough land to build an airfield and a small resort hotel on the atoll.

The Filipino and Malaysian cases are politically potent but legally weak.  An EEZ does not determine the ownership of the islands it surrounds.  Under the law of the sea, ownership of land features determines rights over the adjacent waters and seabeds.  “The land dominates the sea,” not vice versa.

But Malaysia, the Philippines, Vietnam, and now China have correctly understood that the key to sovereignty is not legal arguments but physical possession and control – a continuous human presence.  Whether an island generates an EEZ or simply a twelve-mile territorial sea is determined by whether or not it is able naturally to support human life.  Hence the rush to seize and settle any and all land features in the South China Sea and to demonstrate that people can live on them.

In the late 1980s, China belatedly responded to the activities of other claimants in the Spratlys.  After a bloody skirmish with Vietnamese forces at Johnson South (now Chigua / 赤瓜) Reef in March 1988, China seized seven land features and followed other claimants in building fortresses atop reefs and rocks.

Only two islands in the South China Sea were traditionally thought to meet the somewhat vague criterion of natural habitability.  These were Yongxing Island in the Paracels and Taiping Island in the Spratlys, both claimed by China for at least 130 years and held for more than a half century by Chinese forces from Beijing and Taipei, respectively.  But now there is a human encampment on every island, rock, and reef in the South China Sea where one can perch.  There is nothing more for any claimant to occupy without dislodging another claimant.

This leaves claimants with few options for settling the question of who owns what.  Altering the current pattern of possession would require either the expulsion or negotiated withdrawal of one or more of the parties.  No party wants or sees any advantage in war.  But no party’s nationalism will permit it to give up what it now has.  And all want more.

Sovereignty could theoretically be bypassed as an issue through cooperative exploitation of natural resources, as China has repeatedly proposed, but generations of Chinese, Vietnamese, and Filipino schoolchildren have grown in classrooms with maps on their walls showing that all or most of the South China Sea is part of their country.  The peoples of the littoral states seem determined to possess whatever’s off their shores, not just profit from it.  By contrast with Brunei, Malaysia, and Thailand – which are jointly developing areas in dispute between them – in China, the Philippines, and Vietnam economic interest has so far been unable to make a dent in, still less overpower, possessive patriotism.

With neither war, negotiated compromise, nor joint development in prospect, there is impasse.  And, in the South China Sea, impasse entails the entrenching of popular hostility, arms races, and the impairment of other relationships between claimants and their security partners amidst the constant danger of war by inadvertence.  This is not a situation any party should find acceptable.  But it is the inevitable outcome of an approach aimed at preventing conflict by managing contention rather than resolving the disputes that produced it.  Instead of deterring conflict, the claimants need to remove its proximate causes and justifications.

The point of departure for doing this must be recognition that, with no land features left unoccupied, there is nothing more to be had without pushing other claimants off what they now possess.  It is realistic to accept that the status quo is preferable to attempts to upend it.  The requirement for setting aside specific claims so as to exploit resources jointly is no different.  The prerequisite for any sort of resolution is a common understanding of who claims what and how the law of the sea might extrapolate additional rights from it.

In the end, whatever the proposed solution, there is no alternative to the well-known doctrine of international law known as uti possidetis.  This is a Latin abbreviation of the phrase uti possidetis, ita possidetis, meaning “what you have, you may continue to hold,” regardless of how you acquired it.  This understanding is the legal justification both for the retention of territory acquired in war and for peaceful coexistence and acquiescence in inherited frontiers between newly independent states.  It replaces quarrels and controversies with peace, which diplomats define as “restrained tolerance of the status quo by those with the capability to alter it by violence.”

Uti possidetis allows claimants to acknowledge and live with the status quo without having to agree that its establishment was right or proper.  Its application to the land features in the South China Sea would clear the way for the clarification of boundaries on the basis of the law of the sea, supplemented by the demarcation of these boundaries through bilateral negotiations as required to draw median lines.

A total of forty-four features in the Spratlys are currently settled, occupied, or garrisoned: twenty-five by Hanoi, eight by Manila, seven by Beijing, three by Kuala Lumpur, and one by Taipei.  The political difficulty for the claimants of accepting this outcome should not be underestimated.  All sides feel cheated by it.  None is without passion on the subject.

The numbers of features occupied reflect which countries were quickest and most vigorous in seizing them.  So uti possidetis would give Hanoi by far the largest share, with Manila second.  Kuala Lumpur’s claims are already limited to what it actually possesses, so uti possidetiswould represent no sacrifice on its part.  But Beijing – which was late in asserting itself – would be left with very little.  That is a particularly difficult political problem for the Chinese Communist Party.

Since 1949, when Mao Zedong proclaimed the People’s Republic, the Party has staked the legitimacy of its rule in China on its having ended foreign disrespect for Chinese sovereignty, territorial integrity, and national dignity.  Yet, on the Party’s watch over the past forty years, almost all of the land features China long claimed in the Spratlys have been seized, occupied,  and garrisoned by other countries.  This outcome is the direct result of policies of strategic forbearance imposed by Deng Xiaoping and linked to restraint by Beijing on other even more important challenges to China’s sovereignty and territorial integrity, such as how to deal with Taiwan.  Accepting that China has permanently lost territory risks stimulating nationalists in both the China mainland and Taiwan to charge that the Communist Party’s recent foreign policies have undercut rather than served the mandate of Chinese nationalism.

But the alternative to a modus vivendi that accepts a status quo largely defined by other, smaller claimants is not just continuing friction and rancor in Chinese relations with these neighbors but ongoing Chinese military tension with the United States and the constant danger of war by inadvertence.  China is in no danger of being driven from its holds in the Spratlys and Paracels.  Its island-building activities are intended to establish that it’s not just there to stay but entitled to a strong role in the management of the area.  Once this is clear, will Xi Jinping have the vision and courage to say no to impatient nationalists, as Deng Xiaoping did in the interest of conciliating and avoiding conflict with China’s neighbors and the United States?

The chances of Xi and other Chinese leaders doing so would be enhanced by a less confrontational stand toward China by the United States..  The transformation of claims between the South China Sea’s littoral states  into a test of wills between Washington and Beijing has added an unhelpful overlay of great power rivalry to an already complex mix of impassioned disputes.  In 2010 the United States dramatically asserted to a regional meeting in Hanoi that it had a mandate to prevent violent changes in the status quo in the South China Sea.  At the same time, it declared that it took no position on claims there.  This was ahistorical.  It was also disingenuous and unpersuasive.

In practice, as some in the region recall, long before the United States turned against them as part of its “pivot to Asia” in 2010, America had supported China’s claims in the Paracels and Spratlys.  The U.S. Navy facilitated China’s replacement of Japan’s military presence in both island groups in 1945 because it considered that they were either part of Taiwan, as Japan had declared, or – in the words of the Cairo Declaration – among other “territories Japan [had] stolen from the Chinese” to “be restored to the Republic of China.”  From 1969 to 1971, the United States operated a radar station in the Spratlys at Taiping Island, under the flag of the Republic of China..

Neither the Paracels nor the Spratlys ever mattered to the United States at all (except as hazards to navigation) until they became symbols of Washington’s determination to curtail the rise of China’s power along its periphery.  No country with claims to the Spratlys interferes with shipping or peacetime naval transit in the South China Sea.  Nor does any party in the region have an interest in threatening commerce transiting it.  The South China Sea is every littoral nation’s jugular.  China and the other countries on the South China Sea have a far greater stake in assuring freedom of navigation in and through it than the United States does.

It is not in the U.S. interest to perpetuate the antagonisms that now inflame relations between claimants in sections of the South China Sea.  They poison Sino-American relations as well as other littoral states’ relations with China.  China’s neighbors have to live with China, and China has to live with them.

The Cold War seemed to teach the United States that safety lay in deterring conflict rather than in attempting to address its causes.  But applying this timid approach (derived from yesterday’s nuclear standoff and strategic stasis) to the dynamic situation in today’s Indo-Pacific and South China Sea perpetuates rather than controls risk and escalates rather than subdues tensions.  U.S. interests would be far better served by a bold attempt to eliminate the causes of conflict than by continuing the futile pursuit of mechanisms for managing tensions.  Having taken sides against China, the United States cannot now hope to mediate between the parties.  But it can make it clear that it would welcome, accept, and support the negotiated settlement of their differences.

Arguing for the conclusion of a code of conduct to ban land grabs and their fortification makes no sense when all land that can support fortifications has already been seized and is being built on.  Finding a way to apply uti possidetis in ways that minimize claimants’ political difficulties does make sense.  If the United States cannot be part of a solution, it should demonstrate its leadership by encouraging Asian nations to pursue diplomacy that promotes one.  Often, when diplomacy cannot immediately solve a problem, it can create a negotiating process that gives a solution time to ripen and negotiators the opportunity to craft one.

China and its neighbors should see and use American power as backing for peaceful efforts to resolve their disputes, not as an excuse for deferring or avoiding settlement of their differences.  The “rebalancing” of U.S. global strategy toward the Indo-Pacific known as the “pivot” is timely and appropriate.  But it should lower military tensions between the nations of the Indo-Pacific and thus between China and the United States, not lock these tensions in, still less escalate them. Mark Twain once advised: “If you see someone coming down the street with his arms open and a big smile on his face, turn and run like hell!”  Washington should not prove him right about this in the Indo-Pacific.

The issues of the South China Sea are too trivial to be allowed to spark armed conflict or trans-Pacific confrontation.  They are solvable, if those enmeshed in them are willing to make the effort to imagine and pursue solutions to them.  The parties need urgently to get on with this.  And they deserve American encouragement to do so.  

– it became very profitable to produce oil and a great deal of it was found and produced. The major oil companies ramped up capital expenditures and launched big new projects all over the world.

– tar sands – which yield oil at about $85 plus transportation – became a potentially competitive energy source. Hence the Keystone XL pipeline project.

– exploration and production (E&P) in challenging (and therefore expensive) environments like the presalt off Brazil, other very deep waters, and the Arctic became financially feasible.

– oil producers, like Russia and Saudi Arabia, made bundles of money. Venezuela could afford to run its oil company and economy into the socialist ground.

– hydraulic fracking and horizontal drilling to extract oil and gas from shale – techniques pioneered by the US Department of Energy through public-private partnerships – became very profitable, sometimes obscenely so.

Small companies here in North America borrowed $200 billion in bonds and bank loans to go into the fracking business. Their debt grew much faster than their revenues.

Renewable energy sources, like wind and solar, as well as hydro and nuclear energy, became cheap enough to justify investing in them for environmental reasons. Hybrid and electric cars became attractive to wealthy consumers. We became progressively more efficient at using energy of all kinds.

All this has now changed.

Since 2008, North American crude output has risen from 7.5 million barrels per day to over 11 million.

Over that seven year period, Brazil, Iraq, and Russia added another 3 million barrels per day to global supply. Meanwhile, the world economy remained mostly in recession, curtailing demand growth. High oil prices encouraged efficiencies, further reducing demand.

In 2014, supply of 93 million barrels per day exceeded demand by about 1 million barrels.

Supply grew by 1.9% while demand grew by 1%. Inventories began to build up.
This oversupply caused prices to fall to about $45 per barrel. This is having complex effects:

– development of tar sands as well as investment in deep sea and Arctic oil are not economic at current prices and are being postponed. The oil majors have cut their investment plans by about 15%. That means that some of the oil that was expected to be produced in the 2020s will not be. A lot of current projections of future supply and demand will prove incorrect.

– Brazilian production from the presalt layer breaks even at about $45 plus about $7 in transportation costs. It has become iffy.

– the first bankruptcies of overleveraged frackers have already occurred. Some are still profitable but many are staying in production just to service and retire debt.

– fracking depletes fields in a couple of years instead of the 20 – 30 typical of “conventional” reservoirs. In a year or two oil supplies from fracking are going to be a lot less than anticipated.

– the oil majors will snap up many of the smaller companies that have been doing the fracking.

– with prices low, demand for oil is likely to pick up but the increased strength of the dollar relative to other currencies means that foreign countries that import oil will not experience price cuts like those here.

– oil producing countries face austerity. Some, like Venezuela, face bankruptcy. Others, like Iran and Russia, face the double whammy of low oil prices and sanctions.

– some kinds of renewable energy are no longer economic. (On-land wind and some forms of solar power are probably exceptions.) There will be a shakeout in the green energy sector. Demand for energy-saving vehicles will lessen.

– contango – that is, buying for purposes of arbitrage – has set in. Buying oil at current prices for resale at higher prices later makes sense. A lot of oil is therefore going into storage.

– employment in businesses with high energy consumption like airlines or petrochemicals will increase. But a lot of jobs will also disappear, at least for a while. (1.7 million North Americans are now employed in fracking or related industries, like steel, pipe, rigs, and construction.)

– the effects will be felt differently by different regions. Oil producers will suffer. Oil consumers will benefit.

What next?

All things being equal, around September, supplies will begin to contract fairly sharply and the gap between supply and demand will narrow.

Prices will rise but not to levels high enough to save most of the frackers. Say $60 – $65 a barrel. Just guessing.

A year or two later, supply shortfalls will send the price of oil way up again. Think $140 / bbl. That will bring the shale producers – by this time many of them owned by the majors – back. And a year or so later, that will push prices down.

In the longer term, the availability on fairly short order of oil from fracking promises to help stabilize prices. Fracking is likely to supplement and may displace Saudi Arabia from its current role as the world’s swing producer. Eventually – sometime in the 2020s – this should stabilize what will otherwise be a volatile oil market. I’d guess the equilibrium price will be about $75 but your guess is as good as mine.

Of course, all things may not be equal. If pressed too hard, Iran or Russia or both could decide on a breakout strategy, taking out other nations’ oil production with cyber or military sabotage. That would send prices through the roof.

Barring that sort of thing, however, the prospects are pretty sure to be as I’ve outlined them. 

It makes a very big difference whether Russia is on the rise, on a roll, and on the make or in decline, fearful, and on the defensive.  Which is it?  Compromising with a confidently ambitious Russia might stimulate it to seek further concessions.  Compromising with a Russia desperate to fend off perceived threats to its vital interests might help allay its anxieties and enable cooperation with it.

The nature of the Russian role in the European state system is hugely important.  In 1815, reintegrating a humiliated France into Europe on terms that respected its interests ushered in a long period of peace.  In 1919, writing a humiliated Germany out of any role in managing European affairs didn’t work out so well.  What relationship do we and our European allies see Russia having with the rest of Europe? What relationship does Russia seek?

Which is more likely to enhance European and Russian security, a Ukraine that is neutral between NATO and Russia or one that is aligned with one or the other of them?  Is it better for the EU or Russia to leave this question open or to resolve it once and for all, one way or the other?  If a viable and prosperous Ukrainian state aligned with neither Russia nor the EU and NATO is in the best interest of all (including the Ukrainian people), how can we create such a Ukraine?  Is the Austrian State Treaty of 1956 a relevant precedent?

Hotheads in Washington and Moscow seem to be pushing the US and Russia toward a new Cold War.  Is the United States prepared to fight a hot war with Russia?  Is Russia prepared to fight the United States?  Given the danger that war between nuclear powers entails, we were careful to avoid armed conflict with each other during the Cold War.  Is such conflict somehow less dangerous now?

These are tough questions.  There is no one better qualified to lead us in a discussion of them than Ambassador Jack Matlock.  Jack is one of the great men of US-Russian relations and the dean of America’s Russia-watchers.  He is a statesman, which means he is a problem solver.  He is a professional diplomat, which means he is a specialist in solving problems through measures short of war.  He is a realist, which means that he has always seen the difference between the glories of Russian literature and the beguiling disinformation of the Kremlin.

Jack Matlock spent thirty-five years in the foreign service of our country, culminating in tours of duty as Ronald Reagan’s ambassador to both Prague and Moscow.  In both posts, he was famously open to a wide range of political contacts.  He knew that one should always be in with the outs.  This served the United States well when first the Soviet empire and then the Soviet Union itself collapsed.

Jack provided the USSR with an elegant but critical eulogy in “Autopsy on an Empire,” his magisterial book on its collapse.  In “Reagan and Gorbachev: How the Cold War Ended” he gave us a gripping eyewitness account of the transformation of US-Russian relations.  In “Superpower Illusions: How Myths and False Ideologies Led America Astray – and How to Return to Reality,” he offered a penetrating analysis of how we squandered the opportunities the end of the Cold War brought and how we might yet seize them.

William Tecumseh Sherman famously said that: “the purpose of war is a better peace.”  Tonight we call on Ambassador Matlock to help us consider how to achieve a better peace rather than a cold or hot war with Russia.

China’s growing weight in global economic affairs is undeniable.  A couple of months ago, the International Monetary Fund (IMF) declared that China’s gross domestic product (GDP) had passed that of the United States if adjusted to purchasing power parity (PPP).  Beijing immediately denied officially that it was number one.  After all, at nominal exchange rates, China’s GDP is still just three-fifths of the European Union’s (EU) and America’s.  (It could pass both as early as the end of this decade.)  PPP equations are not very compelling when you’re on the cheap, discounted end of them.  For now, the Chinese yuan doesn’t buy much that’s priced in either euros or dollars.  Chinese officials must also have feared that accepting the status of the world’s top economy would encourage some foreigners to stick their hands out in anticipation of giveaways while others demanded global leadership China did not want to provide.

Demure as China may be about its achievements, it is now a very big factor in the world economy.  It accounts for about one-fifth of global industrial production.  (Within a decade, this could rise to one-fourth.)  One-fifth of the world’s internet users are in China.  Their numbers are growing fast.  By 2020, China is expected to have a middle class population of 600 million.  It will have the world’s largest online market.  For the past decade, the Chinese economy has contributed one-third or more of global growth.  A 1 percent rise or fall in China’s rate of growth now adds or subtracts 1/2 of 1 percent from the entire world’s growth rate.

Despite its remarkable achievements in recent decades, if China fails to carry out the reforms it is currently attempting, its growth rate will fall significantly and its future power will diminish accordingly.  It cannot hope under any circumstances to grow at ultra-rapid rates.  But, assuming its proposed reforms take hold, China’s economy should continue to expand faster than any other of its size and complexity.  By the centennial of the founding of the Chinese Communist Party (CCP) in 2021, it may well have resumed its millennial station as the largest in the world in absolute terms.  And, given China’s investments in developing its scientific and technological workforce and in research and development, its qualitative impact on the world is likely to be equally impressive.

Chinese spending on R&D is now about two-thirds that of the United States but growing very fast.  It should overtake U.S. levels by 2022, when it will amount to about $600 billion yearly.  By 2025, the Chinese scientific and engineering workforce is projected to total at least 5.5 million persons.  That is the equivalent of the S&T workforce of all of the OECD countries today.  The total for “China” does not include the S&T workforces of Taiwan and Hong Kong, which are increasingly integrated with those of the China mainland.  What’s more, over the past three decades, China has exported a huge number of bright young people to be educated in the West.  Many have stayed abroad and become major contributors to international science and technology.  (Any English-language scientific journal one looks at today has a lot of cutting-edge articles written by individuals or teams with Q, X, and Zh in their surnames.)  These specialists may not live in China, but they are in touch with colleagues there. Meanwhile, many foreign firms are relocating their R&D facilities to China to take advantage of the engineering and technical talent there.

Money plus manpower combined with openness to international collaboration generally yields results.  It is too soon to judge what China’s official focuses on biotech, information technology, telecommunications, energy, lasers, materials science, robotics, space, pharmaceuticals, and infrastructure will produce.  The Chinese Communist Party (CCP) places its hopes on China’s state-owned enterprises (SOEs).  But that’s a mistake.  China’s SOEs are, for the most part, unregulated monopolies, with all the inefficiencies and management difficulties that status implies.

The Party slights the Chinese private sector for ideological reasons.  Outsiders underestimate it because they misunderstand the Chinese economy.  In a triumph of preconception over reality, both imagine that the mainspring of Chinese growth and innovation is state rather than private enterprise.  But it is the private sector that has been driving Chinese economic expansion, job creation, business modernization, and the development of new kinds of goods and services for both domestic and foreign markets.  Venture capital and entrepreneurship in China’s private sector are now accelerating innovation in a widening range of fields.  Just ask cell phone and other telecoms  manufacturers about this.

The Indo-Pacific has over half the world’s population.  It has already become the global center of economic gravity.  Its economies consume more than two-fifths of the world’s energy and produce about one-third of its exports.  In PPP terms, the region accounts for about 40 percent of global GDP, dwarfing the EU’s 23 percent and America’s 20.  Within the region, India is now larger than Japan, contributing almost 17 percent of its economic output.  But China’s economy is over twice as large as India’s, with more than 40 percent of the region’s output.  China has a great deal less to be modest about than it once did.

China seems to be on the way to resuming its historic status as a major source of the world’s new technology, joining Japan and south Korea in this role.  India is coming along too.  But in terms of economic and technological dynamism as well as supply chains, China is and will, for the foreseeable future, remain the region’s hub.

This is in part why one now seldom hears references to Deng Xiaoping’s recommendation that China 韬光养晦 (“taoguang yanghui.”). This is a phrase that has been mistranslated to sound sinister: “to hide one’s capacities and bide one’s time.”  It’s actually a line from a poem by a 2ndcentury official who advised colleagues retired by the emperor to “shroud their brilliance and cultivate obscurity.”  In other words, strive to be unobtrusive.  That’s always been a good way to stay out of trouble.  But it’s hard to remain self-effacing when you’re on a roll.

And it’s even harder for China to continue to sit humbly on the sidelines when its peers – the world’s established economic powers – are unable or unwilling to address issues that matter greatly to its present and future prosperity.  The Chinese have become key participants in the so-called “free world” – the capitalist economic order created by the Pax Americana.  But the United States is now afflicted with unprecedented partisan gridlock and political paralysis.  America’s domestic dysfunction has infected the international institutions it created and for long led.  Like the government in Washington, these institutions are now unable to set priorities, make strategic choices, or manage change.  Europe is almost as stagnant, stodgy, and self-absorbed.  Mr. Abe’s “three arrows” of domestic Keynesian stimulus and regulatory reform notwithstanding, Japan is no better.  The resulting international leadership vacuum has made it impossible for China to remain disengaged from key questions of global and regional governance.

Institutions like the exchange rate and reserve management systems of the IMF and the lending programs of the World and regional development banks need to evolve to remain competent, relevant, and responsive to the massive changes now underway in the global economy.  But the governance of these institutions no longer reflects the actual distribution of global capital and commerce.  Existing arrangements exclude the largest and fastest growing stakeholders in these institutions from roles in decision-making commensurate with their shares in the global economy.  As a result, the international system lacks the capacity either to adapt to altered circumstances or to react effectively to emergencies.  The key institutions of the Pax Americana have not met the changing demands of a world no longer dominated by the developed economies of the West.  The United States retains the strength to lead the world in making necessary adjustments.  It still claims pride of place in shaping the evolution of affairs at both the global and regional levels.  But, so far this century, it has lacked the inventiveness and strategic vision as well as the decisiveness and capital to do so.

China is in the midst of yet another major reordering of its economy.  The difficulty of accomplishing this amidst a  recession in the Organization for Economic Co-operation and Development (OECD) countries has underscored to China’s leaders how dependent on the continued growth and prosperity of global markets their country has become.  China is the world’s greatest trading power.  It is not only the world’s greatest exporter of manufactured goods but its largest importer of commodities.  It has a big stake in the soundness and efficiency  of global transportation infrastructure.  China’s prosperity is linked to the growth of other so-called “emerging markets” as much or more than it is to the established markets of the developed world.

Outbound investment from China now exceeds the flow of foreign direct investment to it.  China has a vital interest in continued global growth and an expanding role in the world economy.  It needs a prosperous international environment as much as it needs a peaceful one. China cannot afford to remain aloof from the reshaping of international arrangements to support these objectives.  Chinese have been frustrated by the American default on reform of existing arrangements to meet the emerging challenges of the 21st century.  The Chinese are not alone in their exasperation at this.

China and other newly powerful participants in the globalized economy of the 21st century have not given up on legacy institutions, but they have lost patience with U.S. procrastination and have begun to supplement existing arrangements with their own. The Asian Development Bank (ADB) has estimated that to optimize growth the region needs at least $800 billion in annual investment in infrastructure.   In early May, China took the lead in establishing an Asian Infrastructure Investment Bank (AIIB) to address infrastructure modernization and expansion requirements that the ADB has been unable to meet.  The AIIB came into being on October 24.  It has an initial capitalization of $50 billion – most of it contributed by China – that is expected fairly quickly to grow to $100 billion, making it two-thirds the size of the ADB.  The AIIB’s second-largest shareholder is India.  A similar bank is contemplated to serve the members of the Shanghai Cooperation Organization (SCO).

World Bank lending has lagged as the United States, Europe, and Japan – which dominate it – have proven unable or unwilling to expand it.  In July, China joined with Brazil, India, Russia, and South Africa – the so-called BRICS countries – in chartering a New Development Bank (NDB) to supplement World Bank investment in infrastructure with authorized lending of up to $34 billion annually.  Each of the founding countries will contribute an initial $10 billion in capital, for a total of $50 billion, rising later to $100 billion.  Each will have one vote.  Unlike the World Bank, where the United States has a veto, no member of the NDB will have veto power.

From the perspective of the so-called “emerging markets,” the Fed’s on-again off-again program of “quantitative easing” has been indistinguishable from currency manipulation.  So in July, the BRICS also created a Contingent Reserve Arrangement (CRA),  This is a framework to limit the impact of domestically dictated U.S. monetary policies on developing country economies and to provide protection against the economic volatility these insouciantly cause.  The CRA parallels and supplements the IMF.  Its initial capitalization is $100 billion, of which China is contributing $41 billion.  It will start lending in 2016.

Meanwhile, in part due to obstruction by India, the World Trade Organization (WTO) is no longer able to achieve the liberalization of global trade and investment regimes.  This has led to efforts to accomplish this at the regional level.  As a case in point, Beijing has stepped up efforts to establish a Regional Comprehensive Economic Partnership (RCEP) for the Indo-Pacific.  RCEP would bring together Australia, China, India, Japan, south Korea, New Zealand, and the ten member countries of the Association of Southeast Asian Nations (ASEAN) in a single free-trade area.  It would include 46 percent of the world’s population, 40 percent of its GDP, and most of its fastest-growing large economies.  China would, of course, be the heavy hitter in RCEP.   The United States would not be part of it.

China is also pressing for a Free Trade Area of the Asia Pacific (FTAAP) that would embrace all members of the Asia-Pacific Economic Cooperation (APEC), including the United States and Canada.  The U.S. has resisted this proposal as a distraction from Trans-Pacific Partnership (TPP), which excludes China despite its status as every other participant’s largest trading partner.  China has pushed to make its inclusive proposal a main topic of discussion at the current APEC summit in Beijing.

These initiatives meet real needs that existing institutions have not met and have no prospect of meeting.  In taking remedial action, China is acting like the “responsible stakeholder” in the international system it has become.  The official U.S. reaction has nonetheless been churlish.   American lobbying appears to have delayed Australia, Indonesia, and south Korea decisions to join the AIIB.  All will eventually do so in order to avoid strategic isolation in an increasingly Sino-centric Asia.  U.S. opposition and dissociation from Chinese-led institutions just deprives Americans of influence and participation in investment programs of great importance to global and regional development.  It erodes rather than reinforces the standards and lending criteria the United States has traditionally favored.  Of course, there is also no reason to rule out the eventual merger of the new institutions with the old.

Washington’s peevishness about the creation of institutions that it and its allies do not dominate and cannot control is understandable if not a little pathetic.  The locations and leaders of the new institutions clearly symbolize both a trend toward Indo-Pacific leadership in global finance and the emerging centrality of China in global and regional affairs.   The ADB may be headquartered in Manila but it has been dominated by Japan and the United States.  The European and American-dominated IMF and World Bank are based in Washington.   The AIIB has its headquarters in Beijing but includes members from South, Central, and West Asia as well as the Asia-Pacific.  It will be led by an experienced Chinese financier.  The main office of the NDB will be in Shanghai.  Its first president is to be from India.  After a couple of bad centuries, the Indo-Pacific is back at the center of global affairs.

Meanwhile, the deterioration of U.S. and EU relations with Moscow is driving Russia away from Europe and closer to China.  This too underscores the extent to which a Sino-centric order is emerging on the Eurasian landmass.  This nascent order is not structuring itself the way the post-World War II Pax Americana did.

So far, Chinese-sponsored amendments to the existing state system are taking the form of loose associations rather than alliances.  They have no leadership hierarchy, weighted voting, or great power vetoes.  They are not supranational organizations. The SCO, which is the closest thing to an alliance that China has contracted, acts as a club directed at countering terrorist and secessionist activities.  It conducts military exercises but has no agreed command structure and embodies no mutual defense commitments.  Its members share no political philosophy other than the principle of non-interference in each other’s internal affairs.

The BRICS and  the Conference on Interaction and Confidence Building Measures in Asia (CICA) are egalitarian consultative groupings rather than organizations. They facilitate but do not require cooperation and embody no client state or satellite relationships.   They also have no ideological identity or aspirations to develop one.  They include almost every variety of political system – from China’s Leninism with Confucian characteristics to India’s rowdy democracy, the presidential dictatorships of Central Asia, the sultanates of Arabia, and everything in between.

The groupings in which China has begun to involve itself are classic examples of cooperative diplomacy.  They connect participants to China but have none of the attributes of spheres of influence.  They emphasize the sovereign independence and equality of states, consistent with the Chinese and Indian-formulated “Five Principles of Peaceful Coexistence.”  China does not claim or assert primacy within them.  The new financial institutions Beijing has helped create are consistent with this pattern of ideological neutrality and decision-making by consultation rather than at Chinese direction.

China is, in effect, working toward new patterns of relationship with other powers, great and small and near and far.  President Xi Jinping’s proposal for “a new kind of great power relationship” appeared initially to be directed only to the United States.  But it soon became apparent that the concept was unworkable unless it was applied to China’s relations with other great powers as well.  China’s not-unreasonable objective is to reshape the international order to ensure that it is responsive to its concerns.

China has shown no desire to dominate emerging institutions and arrangements.  Still its size and dynamism are such that it is a preeminent presence in any grouping it joins from which the United States is absent.  That makes other participants uneasy.  In the case of a country as colossal as China, the distance between being dominant and being perceived by smaller neighbors as domineering is not very large.

China is the new heavyweight in the Western Pacific. It is in this context that its recent activities in the East and South China Seas have alarmed Filipinos, Japanese, and Vietnamese.  Chinese see themselves as belatedly reacting to inroads by others into places they have claimed without challenge since ancient times.  Others see China as trying to bully them into leaving places they currently control and believe are rightly theirs.

China’s recent patrol-boat diplomacy on these disputes in the East and South China Seas has altered its image in the region and around the world.  In the past, China was often represented abroad by the symbol of a panda.  Now it is invariably shown as a dragon.  This is not a friendly image.  Even the best-intentioned of dragons is intimidating to those smaller than it.  Not surprisingly, China’s smaller neighbors have begun to band together to constrain it.  Most have also actively sought American support to balance it.

Some Americans are eager to respond.  Their motives vary.  Some wish to hang onto the politico-military supremacy the United States has enjoyed in the Asia-Pacific since the defeat of Japan in World War II.  Many see it as a matter of national honor to answer requests for back-up by allies and client states.  Some are gratified that, despite many troubling changes in the global situation, the United States is still recognized as indispensable to regional order.  And some see China as a potential global rival whose power must be curtailed in its region before it becomes irresistible.  They seek to assure that Chinese power remains checked by a continuing robust military presence in the region.  Many are in denial about the shifting balances of economic power, military prowess, and political influence that have marked the post, post Cold War period.

By any measure, the return of China to great power status is a momentous development.  It is not surprising that it has raised many questions about how China will behave and what kinds of  relationships it will seek with others in its region and beyond.  Politics in the Indo-Pacific region have never been so intensely nationalistic.  China’s neighbors must learn to live with a China that is no longer weak, poor, or vulnerable.  Beijing must learn to deal sensitively with neighbors who are outspokenly apprehensive about China’s new military strength, economic power, and occasional hauteur.  None of this will be easy.

China’s interactions with its neighbors have a decisive effect on its relationships with countries farther away.  In this context, China has an urgent need to craft a “new type of great power relationship” not just with the United States but with other potential partners or adversaries, like India, Indonesia, Japan, the Koreas, Russia, the EU, and Brazil. What sorts of relationships will these be?  Will the new, polycentric world – in which China will inevitably sit on the board of directors – operate under rules or without them?  If there are rules, who will make them?  We do not yet know the answer to these questions, but they are important.  If there are no rules, every country, including China, will have no choice but to derive its political power from the barrel of a gun.  The norms of international law have been much violated in the early years of this century.  We must hope that the new relationships being forged among the world’s and the Indo-Pacific region’s great powers will help to bring about the reinvigoration of these norms rather than their  final passing.  

The P5+1 and Iranian negotiators are meeting amidst rapidly evolving international and regional circumstances.  Whether they succeed or fail, their discussions will have an impact on much more than just nuclear proliferation in the Middle East.  They will affect the geopolitics of that region, relations between the world’s greatest powers, and the emerging pluripolar world order.

Background

Despite international anxieties about Iran’s nuclear weapons program, the program itself remains a conjecture and allegation rather than an established fact.  The world’s most highly regarded intelligence agencies affirm only that some Iranians were doing some work on nuclear weapons until 2003, when the Islamic Republic ended this.  The official worry is now that Iran’s mastery of the full nuclear fuel cycle and its development of missiles will give it “nuclear latency” – the future capacity to weaponize nuclear materials on short notice.  The intelligence agency consensus is that the Tehran has not made a decision to do this.  Still, the seldom-rebutted popular narrative is that Iran is going all out to build a bomb.  Even those who reject this narrative do not trust Iran not to make a decision to acquire nuclear weapons in future.  This distrust is deep-rooted.  It will not be easy to overcome.  It is also not without its ironies.

Iran’s supreme authorities have proclaimed that nuclear and other weapons of mass destruction are forbidden by Islam.  They say that Iran is morally barred from building the bomb.  Iran’s history makes it hard to dismiss this declaration out of hand.  After all, despite an estimated 100,000 deaths from Iraqi nerve gas attacks, it was on this basis that Tehran declined to develop its own chemical weapons capability during the 1980 – ‘88 Iran-Iraq war.

The only threats to Iran from countries wielding weapons of mass destruction now come from  those most agitated about Iran’s possible acquisition of them — Israel, the United States, and (to a lesser extent) France and neighboring Russia – all of which have nuclear arsenals and a record of assaulting Muslim states.  It is logical that Iran should want a nuclear deterrent to bar attack by such nuclear-armed enemies.  Powerful interest groups and politicians in Israel, Saudi Arabia, France, and the United States assign more weight to this logic than to the findings of their own intelligence agencies.  Israelis recall that they ran their own clandestine nuclear weapons program decades ago amidst constant denials that they had such a program.  Israel’s government doubts that Iran is any more truthful about its nuclear programs and their objectives than Israel was.

Holocaust-inculcated paranoia disposes the Jewish state to treat the Iranian nuclear issue as a zero-sum game.  The Netanyahu government opposes Iran’s retention of any nuclear industry at all.    It has repeatedly threatened to attack Iran to destroy its nuclear facilities.

Like its Gulf Arab neighbors, Iran plans increasingly to rely on nuclear energy for electric power, freeing fossil fuels for profitable export.  Given past US-led efforts to shut off its access to nuclear fuel and materials, Iran insists on its own control of the nuclear fuel cycle.  The P5+1 objective is to persuade Iran to cut its nuclear activities to the smallest possible scale and the lowest possible level of enrichment over the longest period of time to which Iran will agree.

Israel’s views have decisive influence in Washington and substantial impact in Berlin,  London, Paris, and Moscow.  As a practical matter, if the talks produce agreement, it cannot be ratified by the United States or carried out by the U.S. and most other negotiating parties unless the Obama administration convincingly answers, obviates, rebuts, or rejects Israel’s objections, which are sure to be forcefully advocated by its claque in the U.S. Congress.  In the absence of a deal, Iran will continue to develop its nuclear sector without effective international constraint.

A breakdown in the negotiations or an agreement that falls apart due to opposition from Israel’s American partisans would see the U.S. Congress seek to ratchet up sanctions against Iran.  Israel would be forced to decide whether to mount a unilateral attack on Iran or suffer a loss of credibility as its repeated threats to do so were revealed to be a bluff.  Iran would have to choose between its professed aversion to weapons of mass destruction and its need to deter attack by Israel or the United States.  Those Iranians, including President Rouhani and his government, who had gambled on doing a deal with the United States would be politically humiliated and discredited.  Iran might follow north Korea in withdrawing from the Non Proliferation Treaty (NPT).  The role of international law in non proliferation efforts would suffer a debilitating setback.  The prospects for the proliferation of nuclear weapons in the Middle East would be greatly enhanced.  The struggle to craft a strategy to deal with the spreading phenomenon of Islamist extremism, including the so-called “Islamic State” (IS) now straddling the Iraq-Syria border, would be further complicated.

Another extension of the negotiating deadline would lack credibility and – to one degree or another – entail some of the same negative consequences as a failure to close a deal or to implement one.  There is a lot at stake in the current negotiations.  Recent international trends and developments are both adding to their complexity and magnifying the consequences of their outcome.

The Changing Global and Regional Contexts of the Talks

Over the past year, relations among the P5+1 and the situation in the region have both changed substantially.  Tensions between the EU, US, and Russia have become acute.  Iran is less isolated internationally.  Israel’s influence in France, Germany, and the U.K. has weakened.  The rise of IS and the drawdown of Western forces in Afghanistan have made cooperation with Iran on regional issues more attractive.  Meanwhile, U.S. dollar hegemony has begun visibly to erode.  The net effect of these changes has been to create new diplomatic options and opportunities for future sanctions avoidance by Iran.

As a result of the Ukraine crisis, Washington and Moscow are now barely on speaking terms.  Berlin, London, and Paris have cut back engagement with the Putin government.   Russia has moved to embrace China as an alternative to Europe.  China, for its part, has been eager to secure its inner Asian rear.  (A good relationship with Russia strengthens China’s ability to fend off what it sees as a rising threat from the United States in the Western Pacific.)  These developments have greatly lessened Western influence in Moscow and reduced Russian interest in deferring to Western policies when its own interests in the Middle East and elsewhere suggest a different course.

In August, Russia reportedly agreed to buy an initial 500,000 barrels of Iranian oil for resale on world markets, including China, with an option for twice as much.  This directly undercut Western sanctions restricting Iran’s oil trade.  (Most sanctions on Iran have been imposed by the West without UN Security Council authorization, depriving them of binding force under international law.   In the absence of UN legitimation of sanctions, China has been importing about 675,000 barrels of Iranian oil a day.  India imports almost 300,000.)  In the short term, the reported Russian deal reveals a damaging split in the political solidarity of the P5+1.  It reduces financial pressure on Iran.  In the longer term, it raises questions about the viability of current – let alone future – sanctions against Iran.

Most Europeans want a deal with Iran that reduces the prospects for Iranian development or deployment of nuclear weapons as well as follow-on proliferation in West Asia and North Africa.  The EU has little appetite for more sanctions against Iran.  Moreover, the limited sanctions relief of the interim agreement of November 24, 2013 predictably awakened interest in the Iranian market.  European companies have been especially active in seeking sales and investment opportunities, stealing a march on their more cautious and presumably less-favored American competitors.  (Asian companies have all along been active in Iran.)

European interest in trade and investment in Iran is all the greater because the EU now seeks more than ever to reduce its energy dependence on Russia.  European interest in achieving closure in the nuclear talks with Iran has risen. Meanwhile, distaste for Israel’s domestic and regional policies has grown considerably in Europe but much less so in the United States.  In this atmosphere, an Israeli effort to block or sabotage agreement with Iran would potentially split the P5+1 along yet another axis.

Recent gains by Sunni extremists in Iraq and Syria have served to underscore Iran’s strategic influence in the Fertile Crescent, strengthening incentives for Western rapprochement with it.  So far, deference to Gulf Arab animus toward both Iran and its Shiite clients in the region has prevented the United States and other leading (mostly Christian!) participants in the newly formed anti-IS coalition from active exploration of overt cooperation with Iran.  Much has been made of the bravery of the Kurdish peshmerga, but the Shiite coalition of Iran, the Iraqi and Syrian governments, and Hezbollah has been and remains the main force arrayed against IS on the ground.

In practice, Iran has the same enemies in the region as the West, if not the same friends.  Unlike the Gulf Arabs, Iran has no ideological contradiction arising from a requirement to appease Sunni extremists at home or to oppose democracy in places like Egypt or Bahrain.  Awkward as Western cooperation with Iran may be in terms of relations with the Arabs of the Gulf, the arguments for it are likely to seem increasingly compelling as the struggle against Sunni extremists in the region takes its predictably difficult course.  Iran is about to be admitted to the Shanghai Cooperation Organization (SCO).  The need for Iranian and SCO actions to counter the (Sunni extremist) Taliban in post NATO Afghanistan can only strengthen the case for cooperation with Iran.  Such cooperation is incompatible with anything other than a relaxation of sanctions.

In the absence of consensus in the UN Security Council, most sanctions against Iran rely upon the fact that the dollar is not just the global medium of trade settlement and benchmark for currency exchange but also the U.S. national currency.  Sovereignty over the dollar has allowed the United States to prohibit Iranian transactions in it and currencies linked to it, effectively excluding Iran from global trade and finance except as approved by Washington.  But, as is always the case, the market distortions sanctions entail have created incentives to find ways to work around them.  This means avoiding the use of the dollar in favor of gold, other currencies, or barter.  The need to do this has been especially felt by countries like China, India, and Turkey, which need Iranian oil.

International transactions in the dollar and related currencies are facilitated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), from which the United States engineered the expulsion of Iranian banks in 2012.  The U.S. resort to sanctions against Iran and other countries has inspired a variety of mechanisms designed to avoid not just the dollar but also SWIFT, whose databases enable the United States to monitor and punish transactions it has prohibited.  Recent sanctions against Russia are spawning still greater creativity in this regard. This is reflected  – inter alia – in recent initiatives by the BRICS group of countries to settle trade in their own currencies.  The Chinese yuan, Hong Kong-Shanghai, and China’s UnionPay seem now to be emerging as alternatives to the dollar, New York, and SWIFT in the conduct of interbank transactions supporting international trade.

The Indo-Pacific region’s economies are already 1.5 times the size of either NAFTA or the EU  and are growing more rapidly.   The implications of this are clear.  The era in which the United States and/or Europe can effectively sanction other countries without the support of the UN Security Council and the non Western great powers excluded from it is drawing to a close.  The opportunities for avoiding or undercutting sanctions available to countries like Iran are growing concomitantly with the redistribution of power in the global economy.

The Geopolitical Consequences of No Agreement

Iran has been seriously hurt by sanctions.  But Iran’s pain – which, all too predictably, has not produced changes in Iranian policy – is likely to diminish with time.  Another round of Israeli-inspired, American-led tightening of sanctions will be difficult.  Before long, it is likely to become impossible.  If the current negotiations fail, there is every reason to believe both that Iran will be able to tough out the aftermath and that the strait jacket of sanctions that has constrained the Iranian economy will steadily loosen.

Iran’s talks with the P5+1 have represented a gamble by Iranian moderates that improved relations with the West on terms respectful of Iranian sovereignty and national dignity are possible.  A perceived Western rebuff of this thesis would severely undercut them.  It would also sharpen the contradiction between Iran’s professed moral principles and its military’s perception that it needs a nuclear deterrent.  Tehran might well respond by denouncing the NPT and ending international inspection of its nuclear facilities, as north Korea did.  US-Iranian reconciliation would likely be deferred for another generation or more.

Israel and the Gulf Arabs are disposed to welcome anything that delays or complicates Western rapprochement with Iran, which they judge is likely to come at their expense.  Thus, they might initially welcome a failure by the P5+1 and Iran to reach agreement.  But any such schadenfreude would be short-lived.  The dashing of Iranian hopes for improved relations with the United States and EU would seriously reduce prospects for the political compromises between Iran, its neighbors, and the West necessary to replace sectarian struggle and violent politics with stability in the Fertile Crescent.   A definitive failure of  Western efforts to broker less alarming nuclear policies in Iran would have the effect of exacerbating longstanding strategic antagonisms and increasing tensions in the Persian Gulf.

The lack of any internationally monitored cap on Iran’s nuclear capabilities would be seen by its Arab neighbors as the removal of an essential external check on its imperial ambitions.  In response, the several Gulf Arab states would likely carry out their oft-threatened preemptive acquisition of nuclear deterrents, whether imported or indigenous.  (Once on the road to nuclear capability, they might also feel strong enough to pursue accommodation with Iran.)  The Gulf Arab states would certainly insist on the right to their own nuclear enrichment, paralleling Iran’s programs.  Others beyond the Gulf, like Egypt and Turkey, might well feel compelled to follow suit with their own nuclear programs, leading to a spreading frenzy of nuclear proliferation.  An unmanageably complex tangle of nuclear balances and doctrines would succeed Israel’s current nuclear monopoly in a region notoriously prone to war.

What Might Follow Agreement

By contrast, an agreement between Iran and the P5+1 that survived Israeli and Gulf Arab second-guessing could (and likely would) stall, if not preclude, further nuclear proliferation in the region.  It could also catalyze progress toward Iranian rapprochement with the United States and other Western countries.  Its regional impact would depend in part on whether it was judged as likely to prove effective in curbing Iran’s presumed nuclear ambitions.  If so, it could facilitate the regional accommodations necessary to restore stability in the Middle East and wider Muslim world.  If not, it could trigger efforts by some Arab Gulf states to field their own nuclear deterrents before reconsidering how to coexist with the Islamic Republic.

One way or another, an agreement would produce a chance for all parties to discover common interests in combating and containing extremism, whether Sunni or Shiite in origin, and an opportunity for creative diplomacy to replace military contention with peaceful coexistence and competition.  These opportunities might not be seized, of course.  But they would not exist at all in the absence of a successful outcome to the current negotiations. 

This was published as an article by the Norwegian Institute of International Affairs, and posted at:  http://english.nupi.no/Activities/News/New-article-The-Geopolitics-of-the-Iran-Nuclear-Negotiations

Energy was one of the first commodities to be globalized and trade in it is a constantly shifting picture.  When I served as U.S. ambassador to Saudi Arabia twenty-odd years ago, someone told me that around 1880 American businessmen petitioned the U.S. Department of State to establish a consulate on the Red Sea at Jeddah.  They claimed they needed a U.S. government presence there to support burgeoning sales of Pennsylvania rock oil (what we now call “petroleum”) to the Arabs, who were becoming addicted to imported American kerosene.   Less than seven decades later, those very same Arabs began to export huge quantities of crude oil to the world, including the United States.

Another seven decades have passed, and the release of tight oil and shale gas in North America is making the United States — at least for a time — once again a major exporter of various forms of energy, including not just coal but natural gas.  Tight oil has boosted U.S. oil production by nearly three-fifths since 2008 and cut our annual import bill by about $100 billion. But oil prices are still set by global, not regional markets, and they will continue to be set in this way.  By contrast, gas prices — and therefore the costs of petrochemicals — now differ greatly from continent to continent.  Gas in North America costs one-third what it does in Europe and one-fifth what it does in Asia.  Trade is the exchange of what one has in relative abundance for what one does not.  The U.S. no longer imports liquefied natural gas (LNG).  That’s cut another $100 billion off our trade imbalance. More than twenty applications to export LNG from the U.S. are now pending at the Department of Energy in Washington.

We still import a lot of crude oil, in part because our refineries are designed to handle heavier oils than we are now producing domestically.  We have been selling a rapidly growing amount of petcoke — the highly polluting residue of such refining — to China.  At the same time, we are exporting rising quantities of diesel and other refined petroleum products.  In sum, we are exporting some types of energy and products that incorporate fossil fuel feedstocks even as we continue to import many others.

As this suggests, the ultimate result of what’s happening will not be “energy independence” — as some claim — so much as strategic self-sufficiency in some, but not all, categories of energy.  Our geopolitical autonomy will continue to be tempered by our participation in an increasingly complex pattern of international energy interdependence.

I’ve  been asked to speak to you this morning about how North America’s interactions with China will affect some of these emerging complexities.  Why China in particular?  Well, China is now the world’s largest energy user and its greatest polluter.   Five years ago it became the world’s largest automobile market.  For two years it has been the world’s largest annual investor in renewable energy.  Economists predict that it is about to become the world’s biggest economy, a status it enjoyed for millennia until it was surpassed by Britain around 1850.  A few years after China overtakes the American economy in size, if its growth continues, it will have a GDP larger than the U.S. and Canada combined.  Trade in energy promises to be a major element in North America’s evolving relationship with China.

This year’s Canada-U.S. conference is focused on prospects for the development of environmentally responsible energy sources, for North American participation in the global energy trade, for increased efficiency in the use of energy, for carbon trading and tax schemes, and for the future of the automobile.  I have only a very few minutes to say something about all these issues.  I’m afraid I’ll be pretty superficial.  But that has never bothered me at all.  Years ago, a wise man from the East assured me that, if something is worth doing, it is worth doing superficially.  (He was, of course, from the East Coast of the United States.)  I console myself that the excellent panels at this conference will provide the depth and detail I cannot.

Thinking about the current state of Sino-North American energy relations caused me to recall a famous piece in the Toronto Globe and Mail over three decades ago  In it, Ross Munro, the Globe and Mail’s Beijing correspondent, wrote about his participation in the Beijing marathon.  This was, of course, before that marathon became the slog through the smog that it is now.  As Mr. Munro, who is Canadian, ran the course, he heard the crowd yelling 加油, 加油 (jiāyóu, jiāyóu!).  He was greatly encouraged by this.  He took it to be short for 加拿大朋友 (jiānádà péngyŏu) or “Canadian friend” and reported that China had been seized with s mysterious wave of affection for Canadians.  Perhaps.  But jiāyóu literally means “add oil” — that is, “step on the gas” or “pick up the pace.”  And in our energy relations with China, that’s exactly what we’re now doing.

The boom in shale gas is creating new opportunities for North American energy companies to market fuels to China and for Chinese oil and gas companies to buy into their production here.  Chinese imports of petcoke — the sludge from U.S. refineries — have been growing at 50 percent per year.  China imported U.S. propane for the first time last May.  The U.S. shipped 111,000 metric tons of it to China last year, according to Chinese customs data.  China imported 74,000 tons of propane from the U.S. this January alone.

In the last few years, Chinese energy companies have invested huge amounts of money abroad.  Despite the severe political obstacles we Americans (and, to a lesser extent, Canadians) have put in the way, they have also invested more than $25 billion in oil and gas production in North America.  They are now actively exploring buying positions in the services sector here as well as elsewhere.  In addition to securing resources, they want to master hydraulic fracturing, horizontal-drilling, and oil sand extraction technology as well as other techniques for application both back home in China and in their foreign operations.

Investment in increased energy production, especially environmentally responsible investment, is good for the global economy as well as for Canada, China, and the United States.  Its implications go well beyond the bilateral context in which we usually consider it.  Let me give you a pertinent example that involves Canada, China, and the U.K.  When CNOOC’s newly acquired Nexen unit shuts down the Buzzard oil field in the North Sea for maintenance this July, Britain’s exports will drop enough to have a marked effect on its GDP and job market.  (A shutdown by Nexen in 2012 helped push the British economy back into recession.)   As ownership of the means of production is globalized, we are seeing economic interdependence develop new dimensions.

The sudden abundance of natural gas in the United States has brought about more than opportunities for exports.  It has reduced domestic demand for other fuels, especially coal.  Coal now accounts for less than 40 percent of U.S. electric power generation, down from over 50 percent a decade ago.  For a while, exports to China and Europe  kept U.S. production up and prices high.  China is the world’s largest producer and consumer of coal.  It burns half the coal burned in the world and it depends on coal for around 78 percent of its power.  The result in the great cities of China, as in London from the 1880 through the 1950s, is increasingly unbreathable air and polluted water.  Coal is the source of a lot of China’s environmental problems.  Could  tight oil and shale gas be the answer to these problems?

Most estimates are that China has only half the tight oil but about the same amount of shale gas reserves as Canada and the U.S. combined.  Unfortunately, however, much of China’s unconventional energy is located in relatively remote areas with little or no infrastructure, limited water, and convoluted geology.  You can drill a shale gas well in North America for between $3 and $4 million. It costs nearly $15 million to do that in China.  Given geological and other differences, it won’t be enough for Chinese companies to copy North American practices.  They will need to develop innovative technologies of their own to exploit their country’s reserves.  These include injecting substances other than water to raise reservoir pressure and perfecting new drilling techniques.  All this will take time.

But the Chinese public is quite understandably unwilling to continue to put up with unbreathable air.  Some of the eight-and-a-half million Chinese who have emigrated in recent years are environmental refugees.  They left to spare their children the experience of growing up in a badly degraded environment.  The political salience of the environmental catastrophe in Chinese cities is why Premier Li Keqiang’s state-of-the-nation speech at the recent National People’s Congress came down so heavily on the need to combat pollution.

China  is shutting down steel, cement, and glass-manufacturing facilities that are heavy polluters.  Air pollution in China is the result of multiple factors, including car engine exhaust and construction dust, but there is no question that coal-burning power plants are the largest cause of the sooty air in China’s cities.  The Chinese government is finally forcing power plants to stop shutting down their scrubbers when the inspectors aren’t looking and cracking down on the corruption that facilitates this.  Coal consumption in China continues to rise but emissions of sulphur dioxide — a health hazard in its own right and a major contributor to acid rain and visibility problems — fell by 3.5 percent last year and should drop by another 2 percent this year in what Western scholars have called “one of the most swiftly effective air-pollution policies implemented anywhere.”

In his speech, Premier Li claimed that the amount of energy consumed per unit of GDP growth would be cut this year by 3.9 percent, following a 3.7 percent drop last year.  China already has some of the toughest efficiency standards in the world for buildings and transport.  But for these standards to be effective, China needs to make further progress toward enforcement under the rule of law.  Accomplishing this is a stated objective of the new Chinese government, though environmental enforcement is not helped by the escalating persecution of non-governmental activists.  All in all, however, China is attempting to move away from a focus on rapid economic growth to address a widening range of quality-of-life issues.

As it restructures key elements of its socio-economic system, Beijing is trying to shift energy production toward renewable sources.  It has just banned new coal-fired power plants in some of its major cities.  It is also building 32 nuclear power plants and hopes to raise the nuclear component of its national energy diet from its current 2 percent to 6 percent by 2020.  (By comparison, the U.S. is about 19 percent nuclear and Canada is a bit more than 15 percent.)

Nuclear power aside, renewable energy sources made up 57 percent of newly installed Chinese generating capacity last year.  China put in 22 gigawatts of hydropower capacity and about 14 gigawatts of wind power.  It is looking to install another 18 gigawatts of wind power this year and to generate 200 gigawatts from wind by 2020.  In 2013, China installed a record 12 gigawatts of photovoltaic panels, more than the total amount of solar power now in operation in the U.S. and Canada together.  This year, another 14 gigawatts of solar power should come on line in China.

In the aggregate, these trends amount to the fastest shift in the structure of a national energy market that history has ever seen.  Shifts in energy supply and demand in China have global consequences.  Their impact is not limited to China and its major trading partners.  For example, China’s subsidies for photovoltaic projects have caused solar-panel prices to tumble worldwide.  This has made solar power competitive with other sources of power in a widening range of environments.  The same sort of efficiency gains and cost reductions are now taking place in wind power. China’s current experiments with carbon-trading regimes in seven cities and provinces and its plans to develop a national carbon-trading system next year are being carefully watched around the world.

Nor is China isolated from policy and legislative trends in other countries.  The Australian government’s declared intention to abandon its carbon tax system is leading to second thoughts about imposing one in China.  In Beijing, there’s now a lot more talk about raising taxes on air pollution, waste water, and solid waste than about a carbon tax.

Meanwhile, with another 90 million people — about 43,000 people per day — expected to move into China’s cities by the end of the decade, the Chinese government continues to emphasize investment in urban transportation, including roads as well as mass transit.  At least 26 Chinese cities are now building or expanding subway systems, while another eleven have begun to plan them.  But the growth in mass transit will moderate but not solve the traffic gridlock on city streets.  The Chinese love affair with the private automobile is new but shows few signs of abating.

Last year more than 20 million new cars and trucks were sold in China, while sales in North America topped 17 million.  Between them, North American, European, Korean, and Japanese companies have 60 percent of the Chinese vehicle market.  So far this year, sales in China are up 18 percent, outpacing expectations of a 10 percent gain.  But, despite subsidies for electric vehicles, most Chinese consumers have so far been as unenthusiastic about them as North Americans.  Perhaps Tesla’s arrival in China, where it hopes to find its largest market, will change this.  Let’s hope so.  1.4 billion Chinese driving cars with internal combustion engines is more than the planet could bear.  The fact that the U.S. is helping China to develop higher emissions standards may help, but it won’t be enough.  Whatever the answer to environmentally sustainable urban transportation systems may be, China is where we will find it, if we ever do.  We all have an interest in China succeeding at this task.

I want to close with a few thoughts about geography and the balance of resources between China and North America as it affects comparative advantage and the prospects for our relations.  No thoughtful Canadian or American would exchange our physical circumstances for those of China.  North Americans use 14.5 percent of the world’s arable land and about 19 percent of its water to feed and clothe a mere 4.9 percent of its population before exporting a huge food surplus.  China must sustain 19.5 percent of the world’s people on about 7.5 percent of its arable land, with less than 7 percent of its water.  It is the world’s largest importer of oil seeds and other food crops.  As the acquisition of Smithfield Foods by Shuanghui shows, Chinese agribusiness is beginning to figure out that it is more efficient to feed animals here than to transport the feed for them to China.  In food as in energy and petrochemical production, North America has the advantage.

Finally, to paraphrase Otto von Bismarck, from a strategic perspective, compared to just about everybody else, but especially the Chinese, we Americans and Canadians are two very lucky peoples.  We are bordered to the south by friendly Mexicans and to the east and west only by fish.  China has the Russians and Mongols to its north, the Vietnamese to its south, the Afghans,  Indians, and Pakistanis to its West, and the Koreans and Japanese to its east.  Those are the kind  of neighbors that make one cautious.

The military-industrial-congressional complex in this country has been doing its best to cure our enemy deprivation syndrome by depicting China as a military peer competitor.  But China is unlikely to live up to the image.  There’s really not much for us to fight with it about.  In the end, we’ll have to look elsewhere to justify military Keynesianism.

Meanwhile, there are multiple energy and environmental partnerships to be struck with the Chinese.  There is cooperative science and technology development to be done with their universities, companies, and scholars.  There are experiences and conclusions from regulatory experiments to be shared.  There is a lot of profitable business to be done.  And there is a conference to get on with.

Thank you very much and best wishes for a successful set of meetings. 

• threats of nuclear war in Korea,
• maneuvering by China and Japan over conflicting claims to the Diaoyu or Senkaku islands,
• intermittent incidents between China and some Southeast Asian nations over claims to islands, shoals, reefs, and seabed resources in the South China Sea, and
• escalated tensions between Japan and south Korea as well as Russia over emotionally-charged maritime boundary disputes.

These tensions reflect unexpiated historical traumas, states of war that have yet to be succeeded by formal peace agreements, and the legacy of past imperial spheres of influence, colonial conquests, and Cold War confrontations.  The flare-up of these disputes after decades of dormancy is the result of shifting balances of capabilities among the region’s powers that have yet to be reflected in readjusted relationships, new equilibriums, and patterns of mutual restraint.  The difficulty all concerned are having in handling their conflicting interests underscores the need to reach closure on historical issues, formally end bygone wars, and settle territorial disputes in the Asia-Pacific region rather than allowing them to fester and stimulate nationalist frictions.

The global stake in this region’s stability is great and growing.  East and South Asia have resumed their historic role as the global center of economic gravity and the Pacific basin has eclipsed the Atlantic as the home of the world’s most dynamic societies.  In economic terms, Asia is now Sino-centric.  China is where the region’s and the world’s supply chains converge.  It has recently joined the United States and Japan as a world economic power, meaning a country whose interests and activities must be taken into account everywhere on our planet.

With Russia, China is also increasingly active in defending the rules of international behavior enshrined in the United Nations Charter through its status as a permanent member of the Security Council.  This places China ,with a few other countries, at the managerial apex of the evolving world political order.  And, for the first time since the eighteenth century, China has a credible ability to defend the approaches to its borders as well as its territorial integrity.  It has reemerged as Asia’s greatest military power.

This is the economic, political, and military context in which the United States has announced a “pivot” to the Asia-Pacific region.  The logic of a shift in American strategic attention to Asia is irrefutable.  Characteristically, having received a directive to emphasize Asia, the U.S. military responded with disciplined speed.  The civilian elements of our government are taking their time to mobilize themselves.  This has left the impression that the “pivot” is all about military deployments.  It has also left the precise import of the “pivot” to be clarified by the passage of time and the direction of events.

In essence, however, the “pivot” or “rebalancing” is simply recognition of the heightened importance of Asia.  This acknowledgment of evolving Asian realities will find ongoing expression in American economic, political, and military strategy and activities.  America’s Asian allies, partners, and friends seek U.S. support for the process of peaceful accommodation of Asia’s new realities. They do not want to divide their region into competing spheres of influence dominated by great powers.  American facilitation of the peaceful adjustment of balances between Asian nations can and should be a constructive part of the “new pattern of great power relations” that Chinese State President Xi Jinping proposes.

The United States has been an essential element of the Asia-Pacific balance of power since the 1850s.  In 1945, America occupied and attempted to reform Japan.  Since then, the United States has filled the vacuum the overthrow of Japanese militarism and Japan’s earlier annihilation of European colonialism in Asia created.  Asian-Pacific states have come to rely on a robust American presence to stabilize their region.

The United States has acted consistently to oppose violent alteration of the status quo in Asia.  For a quarter century, this pitted America against China.  Our two countries fought directly to a standstill in Korea from 1950 to 1953 and indirectly to a U.S. defeat in Indochina, which fell to Hanoi in 1975.  Russia, in the person of the Soviet Union, was indirectly but substantially involved in both conflicts.

The United States stood aside as China used force to convince Hanoi to stand down from empire-building in Southeast Asia.  U.S. policy created a context in which China can and has promoted peaceful change through dialogue across the Taiwan Strait.  At the cost of awkwardness and occasional tension in its relations with China, the United States has opposed coercive measures against Taiwan.  But it has welcomed and supported every advance in the ongoing process of cross-Strait rapprochement and integration.  It has objected to none.  The results speak for themselves.  As a very great Chinese statesman once put it: “practice is the sole criterion of truth.”

Far from seeking to “contain” China, as some in China allege, American policy over the decades since normalization in 1979 has sought to encourage China to come out of its shell and join the councils of global governance.  China’s membership in the World Trade Organization and in the G-20, as well as the unprecedentedly elaborate consultative processes of the U.S.-China strategic and economic dialogue all attest to this.  Much of contemporary China’s success as a modernizing society reflects the welcome America extended to Beijing’s new policies of reform and openness.  The United States has welcomed Chinese students, Chinese products, and Chinese services as well as access to China’s growing market for its own goods and services.

As Russians well recall, “containment” was a grand strategy premised on the calculation that the isolation of the Soviet Union would ultimately produce its collapse, as defects in the Soviet system took their inevitable toll.  Whatever their imperfections, U.S. policies toward China since 1972  have been based on engagement, not containment.  These policies have helped to draw China into a world order it once shunned and to propel it toward ever greater wealth and power.  The Chinese and American economies are now heavily interdependent.  The concept of “containment” is totally inapplicable to China.  No one in the United States advocates applying it.

But everywhere along its borders, in relation to its neighbors, China now appears to have the military upper hand.  If fear of bullying by China is not to provoke the formation of coalitions in opposition to China, smaller, weaker Asian countries must be confident that they will not be subjected  to power politics or the use of force.  In its politico-military dimension, U.S. policy is directed at providing this reassurance.

It is entirely natural that China’s neighbors should seek American backing as they work out new relationships with China and each other that reflect the changing balances of power in Asia.  China also quite reasonably expects that the United States will counsel its allies, partners, and friends to avoid acting provocatively toward China.  America is playing this vital role.  It is a role that is consistent with longstanding American support for peaceful resolution of disputes in Asia.  It is also one that is congruent with China’s interest in managing frictions along its borders by measures short of war as it strives for greater wealth and domestic tranquility.

Of course, China cannot be sure that the “pivot,” might not become the basis for attempted American military coercion of it.  It is logical that China should insure itself against this possibility.  Shoring up China’s long-underdeveloped relationship with Russia, which stands on its other flank, is an obvious part of such an effort.  It has also been no secret that China and Russia share a concern about the potential for U.S. missile defense programs and deployments to undermine strategic deterrence.  It is natural too, given its global interests, that China should wish to reach out to regionally powerful states like Brazil, India, and South Africa as well as to developing countries with mineral and other resources that China needs.  I take it that these factors contributed to President Xi Jinping’s decision about where to make his first calls abroad.

On some topics, bilateral dialogue between great powers is not enough.  China, Russia, and the United States have common interests to which we must all three attend.  Korea is a case in point.  Our three countries need urgently to consider how best to sustain peace and stability in the Korean Peninsula in the face of all the challenges now evident there.  Afghanistan is a Central Asian state with a history of harboring and exporting terrorists. In the year ahead, as NATO and U.S. forces prepare to withdraw from Afghanistan, it will be important for China, Russia, and the United States to consult about how best to deal with the possible consequences of this for regional and global security.

These topics and others, I imagine, will be part of the “new pattern of great power relations” that China and America are committed to explore.  The concept of a new style of great power interaction clearly applies to Sino-Russian relations too.  Who knows?  It might even come to inform and improve Russo-American interaction as well.  We must hope so.

I see one or two notoriously finicky people here. Let me therefore admit at the outset that, while Chinese has many wonderfully descriptive epigrams, the celebrated curse, “may you live in interesting times,” is not one of them. It was apparently coined by the British ambassador to China, Sir Hughe Montgomery Knatchbull-Hugessen KCMG around 1937, after he had the “interesting” experience of being strafed and wounded by a Japanese fighter aircraft in Shanghai. So the curse originates in China but, given the inscrutability of Sir Hughe’s name, no one has ever been able to remember for long who first uttered it or where.

“Living in Interesting times” doesn’t even have a standard Chinese translation. In my view, the energetically vexing uncertainties of modern life in China deserve succinct expression in a snappy four-character phrase. So, by the way, does the other apocryphal Chinese curse, “may you come to the attention of people in authority.” Perhaps the publishers of a future Chinese edition of “Interesting Times” can crowd-source appropriate new 成语.
Let me turn to the book itself.

There is a mythical Chinese animal called the “四不像” – the “beast that is unlike four others.” It has a cow’s hooves but does not moo. It has a horse’s head but can’t be sold as beef in European butcher shops. It has a deer’s antlers but does not live near strip malls in the suburbs. It has a donkey’s body but is not an ass. Some say its bite is fatal and some are horrified by it.

This book may horrify a few people but I doubt it will bite, still less kill anybody. Like a “四不像,” it is tempting to define “Interesting Times” by what it is not. It is not your common Washington suck-up to the administration of the day, work of sinology, think-tank study, or belief-tank polemic. It contains an anecdote or two and, for better or ill, it reflects the author’s place and perspective about things when they happened, but it is not an autobiography. Nor is it a Washington-insider account of how the author invented devilishly clever policies, personally sold the president on them, and imposed them on unwitting foreigners.

The book expresses my views rather than those of any institution or group of like-minded people. In sum, it reflects who I was and who I am and what I saw and see changing in and with China. I was a career diplomat and am a businessman who dabbles in sinology, not a sinologist, securocrat, or policy wonk who dabbles in diplomacy or business.

China has been around for a long time but I first discovered it in 1963 in Widener Library at Harvard, when I sought refuge from the intellectual desert of law school by reading world history. Later, after I entered the Foreign Service of the United States, I fought to get into the Chinese language and area studies program so I could learn Mandarin and Taiwanese. I had convinced myself that geopolitics would force a Sino-American rapprochement. I thought it would be exciting to be part of that. As it turned out, it was. To one degree or another, I have been happily engaged with China for forty-four years.

“Interesting Times” contains observations about a half century or so of developments in Sino-American relations. It looks at changes in the regional and global orders brought about by China’s recovery from its previous catalepsy, convulsions, and foreign incursions. The book documents my efforts at various times to understand and explain what China was up to and to project where it might be going.

In addition to what is in print in the book, there are supplementary materials that reside online. For example, there is a memorandum inspired by a delicious bowl of noodles that I bought in Tiananmen Square in 1979. In the memo, I rashly attempted to forecast what China might be like after another 20 years. A lot of my hypotheses then and on other occasions did not coincide with the conventional wisdom and were controversial. Better analysts than I roundly criticized – sometimes denigrated – me for my views. Sometimes they were right to do so. China is a moving target that is hard to grasp.

It is difficult to overstate the speed and scope of the changes that have occurred in China and its foreign relations over the course of the forty-one years since I first set foot in Beijing. The Cultural Revolution had then shut down China’s foreign relations. China had only one full ambassador abroad – Huang Hua, whom Zhou Enlai protected by not recalling him from Cairo. Today, China is a presence everywhere and a major actor determining the reactions of the international community to events well beyond its immediate periphery. In this regard, consider, for example, G-20 and IMF meetings, peacekeeping operations in Haiti, the Congo, and Lebanon, proposals for foreign intervention in Syria, and sanctions against Iran. That’s before you get to current affairs in north Korea, the Diaoyu or Senkaku Islands, or the Russian armaments industry.

The basis for the huge expansion in Chinese global and regional influence is, of course, mostly economic. In 1972, in current dollars, China’s GDP per capita was about $130. When George W. Bush took office in 2001, this had grown to over $1,000. Last year, it was over $6,000, with purchasing power equivalent to about $9,000. Think about what that means for ordinary people in China! That’s a 47-fold rise in wealth!

In 1972, Taiwan’s 16 million people had a GDP slightly larger than the China mainland’s 875 million. The Chinese economy is now expected to surpass ours in purchasing power terms by 2016, the year in which we will hold our next presidential election. China will almost certainly overtake us in nominal exchange rate terms before the 2021 centennial of the founding of the Chinese Communist Party.

In 1972, China’s worldwide imports and exports came to $6.3 billion, including US-China trade of about $95 million. Last year China’s trade in goods alone was $3.9 trillion. US-China trade in goods and services came to $536 billion. There was no investment by either country in the other in 1972. Now there is US investment everywhere in China and our states and localities are pushing for some sort of Open Door policy for Chinese investment in the United States.

In 1972, there were no Chinese tourists or students in the United States. A few hundred Americans visited China. This year there are over 200,000 Chinese students here. Almost 1 ½ million Chinese tourists will visit and over 2 million Americans will go to China.

You get the point. This is a very consequential relationship that is in the process of becoming more so. I don’t have to drone on for you to appreciate the extraordinary dynamism of China and US-China relations and their effects on Asia and the world. And, having just waxed uncharacteristically numerical, I want to assure you that, while there are many references to facts and figures, there are no dreary charts and graphs or statistical recitations in “Interesting Times.”

The book does, however, contain a fair amount of exploration of how China changed and of the nature of what I call “cadre capitalism” – otherwise known as “socialism (or is it Leninism) with Chinese characteristics.” Cadre capitalism is something new. For ideological reasons, it’s poorly understood in China and greatly misunderstood abroad. Cadre capitalism is a party-based system that links political boosterism to economic entrepreneurship. It makes so-called state-owned enterprises formidably competitive and business in China highly efficient. It’s a unique artifact of Chinese culture that, in my view, cannot be exported as a model or borrowed abroad. Perhaps that’s just as well. If corruption is at heart the result of an inability to separate personal interests from public or enterprise interests, then cadre capitalism promotes corruption as well as business efficiency.

“Interesting Times” spends a lot of time looking at the origins and evolution of the question of Taiwan’s relationship with the rest of China and America’s role in this. One online piece looks at Taiwan in foreign strategies toward China since the 17th century. Mostly, however, the book tracks the evolution of the Taiwan issue in US-China relations, in whose development it remains a significant inhibition. And it examines the effects on China’s neighbors and the United States of China’s remarkable return to wealth and power. It looks back forty years, but it also tries to look ahead another forty.

On that incautious note, let me turn the podium back to Dr. Swaine before we turn to questions and comments.