Despite the belief of corporate America, Capitol Hill thinks otherwise. Unlike the major wars of the past century, which were fought over territory, natural resources and political ideology, the 21st century’s first major conflict could be a prolonged struggle for economic advantage, say analysts. It will not be a war fought with bombs or bullets. Instead, the weapons in this war will consist of temporary tariffs, tax incentives, migrant labour and the strategic awarding of university scholarships, say the analysts.

The emotions surrounding US-China relations reflect the challenges of balancing economic and military interests in a world where the free flow of capital, goods and people has blurred the lines between friend and foe.

Proponents of closer bilateral links say the US$ 121 billion in two-way trade will lead to ever-closer political ties and help create a prosperous country capable of buying larger amounts of American luxury products. However sceptics believe Washington is tacitly allowing US corporations to sacrifice manufacturing jobs, technology and military security in pursuit of quick profits.

Consider the foreign direct investment (FDI) capital flowing into China. Over the past three years, China has received US$ 112 billion from overseas capital markets. This year, it will receive an estimated US$ 50 billion in FDI — more than South Korea, Malaysia, Singapore, Thailand, Vietnam and Indonesia combined.

Certainly these increases in foreign investment have given foreign corporations a more visible presence in China. In 1990, for example, American FDI amounted to only $400 million, much of it concentrated in 45 foreign affiliates that employed a mere 13,600 workers. Today, the US alone has more than $33 billion invested in China. Over 450 China-based US affiliates with annual sales of $23 billion employ more than a quarter of a million workers. Ironically, some political and labour leaders in the US view these outposts of American capitalism with suspicion. They view these multinational affiliates as conduits for technology used by the Chinese to manufacture products exported to the US thereby adding to the trade imbalance.

“The greatest danger on the US-China trade front is that while many in Washington view China as a ‘strategic competitor,’ American businesses have increasingly embraced the mainland as a ‘strategic partner,’” writes Morgan Stanley senior economist Joseph P. Quinlan in the July issue of Foreign Affairs magazine. “This divergence represents a dangerous disconnect that must be reconciled in short order.”

Since the French defeat in Vietnam at Dienbienphu and the demise of the British Empire, the economic development of East and South-East Asia has been largely linked to the strength of the US dollar and an American business presence throughout the region. Today, however, Asian nations from South Korea to Indonesia are starting to regard China as the economic engine that will pull Asean and its neighbours through the 21st century. Talks are currently underway for China to become a full member of Asean, the regional free trade bloc.

“For all the countries in Asia, China is such a large force that the only rational response is to figure out how to work with it,” says Nicholas R. Lardy, a diplomatic and trade analyst with the Washington-based Brookings Institution. “They know well that China can’t be stopped.”
Andy Xie, a managing director and economist at Morgan Stanley in Hong Kong, believes China’s US$ 1.2 trillion economy will surpass that of sluggish Japan’s US$ 4 trillion economy in the not-too-distant future.

“The tables have begun to turn,” says Xie in a recent report. “Last year, Japan’s economy was merely 3.4 times as big as China’s. If the current trend continues, the Chinese economy could become bigger than Japan’s sometime in this decade. Even so, China’s living standards will remain far lower than Japan’s due to its much larger population. It will take another three decades for China to catch up with Japan in living standards.”

Although the US remains a powerful force and essential trading partner for many nations, Washington’s ability to lead is crippled by its deepening recession and serious questions about the honesty of its capital markets. As Beijing consolidates the benefits of its World Trade Organization membership, the flow of goods, capital and executive talent to China will intensify.

Already trading relationships are changing. Malaysia’s exports to China have increased 30 per cent over the past three months due to increased demand for electrical components. Singapore’s exports to China are more than 69 per cent above the levels recorded in 2001 due to booming petrochemical biotechnology sales.

US ally Taiwan, which once dominated the manufacturing of computer components in the world, has seen its lead slip as its companies shift production to the mainland. In fact, according to the Taipei government, Taiwanese-owned factories on the mainland make more than 40 per cent of China’s electronic exports.