10 Questions: The Axis Of Evil?

With all the bad news this week from Iraq and Iran, the situation in that other member of President Bush's Axis of Evil—North Korea—actually seemed to improve. Negotiators in the so-called Six Party Talks (between China, South Korea, Japan, North Korea, Russia, and the US) reached an agreement that essentially trades fuel oil for guarantees that the North Koreans will shut down their main nuclear reactor. But this didn't happen in a vacuum. China, which is North Korea's principal sponsor in the world, apparently played a critical role in getting the North Koreans to back away from their nuclear ambitions.

What does all this mean? And is it a good deal? There's been a lot of debate on that this week. So we decided to get some context from Adam Segal, who the Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations, and an expert on East Asia.

1. We've heard a lot this week about North Korea agreeing to disable its nuclear program in exchange for fuel oil. Besides hosting the talks, what role has China played in making this happen?

After North Korea tested its nuclear weapon in October 2006, China signed on to a UN resolution calling for inspections and sanctions. Perhaps most important, China cooperated with a US Treasury Department crack down on banks engaged in counterfeiting and other illegal activity for the Kim regime. This really seemed to hurt the North Koreans, and to damage Kim and those around him personally. All of this increased the pressure on Kim to reach some type of agreement.

At the same time, Chinese pressure would have been of little use if President Bush had not also decided that he needed to conclude an agreement. Beijing appears to have little hand in the specific compromises needed to reach a deal. The breakthrough seems to have occurred at a January 16-17 meeting in Berlin—outside of China and without the Chinese present.

2. More broadly, what is the nature of the relationship between the Chinese and the North Koreans? We know that the North Korean leader Kim Jong Il relies on support from his Communist allies in Beijing—but how conditional is that support?

Historically, the Chinese have described the relationship as "close as lips to teeth." You can bet that there are not many Chinese using that phrase these days. North Korea's recent actions have angered and embarrassed the Chinese leadership. China publicly warned the DPRK not to test a missile in July 2006, but the North Koreans did it anyway. China told North Korea not to test a nuclear weapon and again Pyongyang ignored Beijing. North Korea's reckless behavior undermines China's attempt to display itself as a regional power that can deliver. The Chinese also fear that North Korea's nuclear program could spur Japan, South Korea, and possibly Taiwan to develop their own deterrent.

China supplies 80-90 percent of North Korea's oil and substantial food assistance. Approximately 40 percent of the DPRK's trade is with China. Traditionally the Chinese have defended the North Koreans from global condemnation, vetoing resolutions at the United Nations (that the Chinese voted with the United States after the nuclear test was a good sign of their anger). All of this should give China a great deal of leverage over North Korea. It may, but the Chinese have been extremely reluctant to use it. The Chinese say that a nuclear North Korea is unacceptable to them, but they are extremely worried that too much pressure might cause the collapse of Kim's regime. In Beijing's worst case scenario, Korean refugees streaming across the border into China and South Korean and U.S. troops moving into North Korea in order to stabilize the situation would follow the collapse. Given these calculations, Chinese leader will continue to support Kim, but they must surely be wondering if someday they will be able to cut him loose.

3. What is your view of China 's recent anti-satellite missile test? Is there the potential for an "arms race in space?"

The test was predictable, surprising, and worrying all at the same time. The Chinese military clearly wanted to send a message to the United States. The United State has declared that it is working to achieve and maintain space superiority. The test signals that China will not sit idly by; the United States can expect to be challenged for the control of space. The Chinese also have a more specific scenario in mind. In case of a conflict over Taiwan, the Chinese military would want to eliminate American surveillance and communication satellites, making it much harder for the U.S. military to identify and hit high-value targets.

The timing of the test, however, was very surprising. For at least the last two years, Chinese diplomats have exerted themselves trying to convince the world that China's rise will be peaceful, that China will be a responsible power. The test flies in the face of that. Also, the Chinese leadership is worried that a Congress controlled by the Democrats is likely to take a harder line on trade. This is not a good time to stir things up in the US-China relationship.

The test is worrying for two reasons. First, there is speculation that the civilian leadership in China was surprised by the timing of the test. Outside observers have always assumed that the Party controls the gun—that the Chinese Communist Party (CCP) has close supervision over the military. This is almost definitely still the case, but the lack of communication and coordination with the military is something that should concern the United States. Second, given both sides inability to talk to the other about space and how we might cooperate, I do think there is a real chance for an arms race.

4. The 2006 trade deficit was announced this week—a record $763.6 billion. And China is now America 's second biggest trading partner after Canada . What is the significance of the trade deficit—both for our economy and China's?

Economists like to argue that the bilateral trade deficit does not mean much by itself. You have to look at the position of each country and its overall balance of trade with the world. So the issue is not only that the United States runs a $232 billion dollar deficit with China but also that it runs a deficit of $763 billion with the world. We have to realize that Americans, both as individuals and as a country, spend way more than we save. And the truth is, if we did not buy cheap toys and clothes from China we would probably buy them from Vietnam, Cambodia or some other country with lower costs than the United States. So even if our deficit with China goes down—and US exports to China have increased by double digits the last five years—our overall trade deficit would probably remain the same.

For a long time, China used to run a deficit with the rest of the world, even if it was running a huge surplus with the United States. But for the last couple of years, China has run a surplus with the rest of the world, which suggests that the currency is undervalued or that the Chinese are subsidizing exports in some other way. And no matter what economists say, there is the widespread perception that the bilateral trade deficit means lost American jobs. The political reality is, if you are a congressman or senator from Ohio or North Carolina, you feel pressure to do something about China.

5. There have been numerous complaints about China allegedly manipulating its currency. What are they actually doing, and how is it affecting the global economy?

Manipulation in this context refers to the Chinese maintenance of a very narrow band for the movement of the yuan against the dollar. The yuan is limited to 0.3 percent a day movement against the dollar. Since China announced this policy (which replaced a fixed rate) in July 2005, the yuan has appreciated 6.6 percent against the dollar. The Bush Administration and this Congress do not think this is nearly enough. Academic and private sector estimates of how undervalued the yuan is range from 15 to more than 40 percent.

The overall effect is to lower the prices of Chinese exports (and to raise the price for imports into China). It plays some part in the bilateral trade deficit and in China's surplus with the rest of the world. It is probably most damaging to countries like Cambodia, Vietnam, Mexico, and South Africa that are trying to compete with China in textiles, apparel, and low cost manufactured goods.

6. Senators Byron Dorgen and Sherrod Brown introduced legislation this week to make Congress approve China's normal trade status every year. Do you think—as they do—that publicly reviewing China's record every year is a good idea?

Clearly the United States has every right to make sure that China upholds its end of trade agreements. But the threat of rescinding China's normal trade status is essentially empty. Rescinding would probably mean a violation of US commitments to the WTO, and the Chinese would certainly move to end the benefits US firms receive in China under the WTO. We can already pursue unfair trade practices through the WTO, and this is the mechanism we should use.

An annual review is unlikely to be helpful. The annual debate on China and PNTR in the 1990s provided the United States little leverage and often made Washington look weak to Beijing. The United States would set conditions to be met over the year to ensure renewal, China would fail to meet them, and the United States would renew anyway.

There seems to be a real desire among Democrats in Congress to address what many see as the costs of globalization and trade with China: stagnant wages and rising inequality. The Dorgen and Brown legislation is probably not going to be where the main action is. Senators Baucus and Grassley are working on legislation that is supposed to be WTO compliant. The details of the bill are not known yet, but it may be a step to forging a compromise between the administration's desire to keep the trade relationship stable and some key concerns of the Democratic Party such as labor and environmental standards in future bilateral trade deals and increased pressure on the Chinese over currency.

7. For years, American music and film executives have criticized China's efforts to combat piracy. One Chinese official told me the reason his government isn't cracking down is that cheap, illegal DVD's have become a new opium for the masses—distracting them from criticizing the government. Is that a fair statement?

The Chinese leadership can now count on, if not the political support, then the acquiescence of the growing middle class. People in Shanghai, Beijing, and other large cities can clearly see that their standard of living is much better than it was 20 years ago. They have their mobile phones, flat screen TVs, and illegal DVDs. As long as people think their lives, and the lives of their children, are improving, they have few reasons to actively oppose the CCP.

But if China's leaders think cheap DVDs will be an effective distraction, I think they are kidding themselves. Many, if not most, of the movies are from the West, and they probably promote cultural and political views that the Communist Party would not see as "healthy." Besides, if I have lung disease because of the terrible air pollution that afflicts most major cities or if my child is refused treatment at a hospital because I cannot afford the fees, I doubt being able to see a movie the day before it is released in the United States will make me feel any better about the government.

8. Many Americans see China defending North Korea —and China defending Sudan (in the face of genocide in Darfur )—and think, this is a country whose values are very different from ours. How would you describe their foreign policy philosophy?

In some ways, the Chinese foreign policy is an artifact of the last century. China was occupied by Japan and by the Western colonial powers, and as a result Beijing has been a staunch defender of sovereignty. Especially in Africa, Chinese leaders make a point of saying that they do not mix politics and business; they unlike, the United States, will do business without constant lectures about democracy and human rights. The truth is not that simple, and China's engagement with the developing world is bringing other conflicts over the migration of Chinese workers, the support for corrupt regimes, the behavior of Chinese firms, and other issues.

China's foreign policy can in large part be explained by its fragility at home. China's leaders are confronted by growing social unrest, environmental degradation, rising inequality, and an aging population. They need continued economic growth and so what they want most is a peaceful international environment. This means good, or at least stable, relations with the United States are critically important to Beijing. So while our values will differ, the Chinese, for the most part, need to work with us.

9. The new Treasury Secretary, Hank Paulson—who is known to be very focused on China —named a new deputy for China policy this week. What changes do you think Paulson wants to make to America 's relationship with China ?

I think Secretary Paulson's objective is to deepen the relationship and to get some movement from the Chinese on economic issues at a time when there is a great deal of underlying tension over trade, the ASAT test, Darfur, Chinese military modernization, and other issues. Specifically, Paulson has called on the Chinese to increase domestic consumption and to speed the move toward an exchange rate set by market pressures.

Former Deputy Secretary of State Robert Zoellick really seemed to be guiding the relationship from Washington's end, and his departure for Goldman Sachs left the a little bit of a vacuum at the top. Paulson seems to have stepped into that space, and is driving the strategic economic dialogue, which is meant to revitalize exchanges between the two sides. The main topic is currency, but the talks also include discussions on the environment, innovation, and investment. Paulson has to convince the Chinese that they are better off dealing with him than Congress on the currency issue, and Congress that he is making some progress on getting movement from Beijing. His repeated calls for patience suggest that it is going to be slow going.

10. In your view, is China going to eclipse the United States and become the next superpower? Will we be rivals or partners in the meantime?

China is a big economy and getting bigger. Its $2.69 trillion GDP makes it the world's fourth-largest economy behind the US, Japan, and Germany. But it is important to remember that average per capita income is about $1700; using this measure, China ranks 100th in the world. China faces huge social and environmental challenges. Corruption tears at the CCP, and the party appears unwilling, or unable, to address political reform. In fact, the last two years have seen serious backsliding on human rights, press freedom, and the rule of law. It will take China several decades to become a modern economy. The United States, though it faces problems at home and abroad, remains the world's most innovative and entrepreneurial economy, and the only country able to project power globally.

We are going to be both partners and rivals. Our engagement with China is already deep and broad. We cooperate on North Korea, energy, and environmental issues. The Department of Energy, for example, has cooperative arrangements with China in well over a dozen areas of research and development. Still, cooperation is not likely to be easy; it will take hard work from both sides. At the same time, we will continue to differ over Taiwan, human rights, and Sudan. Even if China's rise is several decades away, it is in America's best interests to try and shape China's international activities now, when we are so clearly the world's only superpower. The task will only be that much harder once China narrows the gap.