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A 'hedge' strategy toward China

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By Fareed Zakaria
Monday, November 15, 2010

SINGAPORE

Two years ago Barack Obama was superman. Now he can't do anything right. His trip to Asia has been reported as a failure because he didn't get a trade deal with South Korea or a currency devaluation from China. But the visit had broader purposes and was largely successful at those, though this is just the start of a complex set of foreign policies that should constitute the core of a new American grand strategy.

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For the negative reporting, Obama has only himself to blame. Doubtless egged on by his political advisers, Obama cast his trip to Asia as about jobs, jobs, jobs. If the president was truly crafting a trade trip, someone sent him to the wrong places. Only one of the countries he visited (Japan) is among the top six destinations for U.S. exports. He could have saved a lot of fuel and traveled to Canada and Mexico, which together buy 20 times as many American goods and services as does India and 10 times as many as does South Korea. (Indonesia is not even in the top 20 countries that buy U.S. exports.)

In fact, by undertaking this trip to India, Japan, South Korea and Indonesia, Obama was making America's opening move in a new great power game unfolding in Asia. Until now, China's rise had been talked about more as an abstraction. But events over the past few months have made the rise of China tangible in the eyes of many Asians. They are watching how the United States will react.

The right reaction is not containment. A too-easy analogy is being made between the American response to the Soviet Union and Washington's policy toward China. The Soviet Union was an aggressive global adversary. It actively threatened Western countries and allies, supported wars and guerrilla movements, and funded adversaries and terrorist groups, all aimed at destabilizing Western interests. It offered itself as an alternative model to countries all over the world. Though it had an economy that was a fraction the size of America's, the Kremlin built a vast military establishment with tens of thousands of nuclear weapons.

China, by contrast, has chosen to enter into the Western-sponsored global order, participating in the trading system and by and large maintaining cooperative relations with the West. The U.S. and Chinese economies are closely intertwined. Whatever the differences between Beijing and Washington, it's important to put them in perspective. Their disagreements over currency and trade - less heated than those between the United States and Japan in the late 1980s and early '90s - do not a Cold War make.

Asian countries are not looking to the United States to create a Cold War-style set of anti-Chinese military pacts. For most, China is their largest economic partner. They accept aid and loans from Beijing, and they have few major political disagreements with the Chinese. For all the nervousness over China's tough attitude toward Japan over the recent incident in the East China Sea, no Asian official I have spoken to thinks there is any comparison to be made with containment. In fact, everyone hopes that America's close relationship with China can be used to moderate Beijing's behavior. Tom Donilon, the new national security adviser, got it just right when he said last week, "The region looks to the United States with respect to China, to engage in a positive constructive relationship with China."

I would propose thinking of American policy toward China more in terms of a "hedge" strategy. Many investment funds buy stocks hoping that they will rise in value, but they also bet against some companies (or other financial instruments) to ensure that if the market turns downward, they will be protected. (Hence the name hedge funds.) Similarly, the United States should maintain a close and productive relationship with China, hoping that this will ensure a peaceful and prosperous Asia. If, however, China's rise becomes threatening and destabilizing, America should also have in place strong alliances with other Asian powers such as India and Japan - which Obama's trip sought to accomplish - as building blocks to balance Chinese expansionism.

Like many hedge funds, the U.S. strategy should have a "long bias," meaning it should place greater emphasis on efforts to engage China, since that is by far the preferable (and much less costly) strategy compared with entering into a new, long Cold War with what is soon likely to be the world's largest economy.

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