During his recent trip to the U.S., President Hu Jintao of China spent more--and, indeed, better--time talking to business leaders than to political leaders. This fact is yet another reminder of one of the great paradoxes of contemporary China: A country under the rule of a Communist party has relied on the most advanced form of capitalism, globalization, to undertake one of the most dramatic economic transformations in modern history. Since Deng Xiaoping launched his Four Modernizations strategy in December 1978, China has shifted not only from central planning to a market economy but also from being practically a closed economy to a globally integrated one.
China is now the most open to trade among the world's large developing countries and is almost as open as the developed countries are. It is the world's third-largest trading nation. It's a huge exporter but also a huge importer of goods. China's ratio of imports to GDP is 30%, which is twice that of the U.S. and three times that of Japan. China has also become the second-largest recipient of foreign direct investment (FDI), with a total accumulated of more than $600 billion. Its ratio of FDI to GDP, around 33%, is three times higher than the U.S.' and 18 times higher than Japan's. By virtue of its massive accumulation of official foreign exchange reserves--which could soon exceed $1 trillion--China is also a major international investor, though heavily concentrated in American bonds.
China's increasing openness since 1978 has handsomely benefited its economy, which is now nine times larger, and has lifted 400 million Chinese out of extreme poverty. China's economy has become the world's fourth-largest if measured at current exchange rates or second-largest if measured in terms of purchasing power. In all likelihood, and by any measure, China's economy will be the world's largest 25 years from now.
Powerful But Still Poor
Globalization has driven China and, increasingly, China is driving globalization. But China exhibits another paradox that the West often overlooks: It is simultaneously a great economic power and a poor country. In 2005 its annual per capita GDP was $1,400, one-thirtieth that of the U.S. Even if adjusted by purchasing power, China's per capita GDP ranks 118th in the world. In fact, China is poorer, relative to the U.S., than was Japan in 1950, before Japan's recovery and amazing growth in the second half of the 20th century.
In addition to being a low-income country, China also has severe imbalances in its areas of development: between, for instance, its drive for prosperity and the impact of this on the environment; its explosive demand for natural resources and its relatively poor resource base; its accelerated unleashing of market forces and its lack of social safety nets; its private sector and its state-owned enterprises; the incomes of its rich and those of its poor; the hyperdevelopment of some of its coastal areas and the underdevelopment of its inland regions; and, most risky of all, its vibrant economic freedom and its lack of political freedom.
Cooperation Is Best
China is under pressure to address these serious developmental imbalances while grappling with the consequences of having become a major global power. This unique circumstance is a big challenge not only for China but also for the rest of the world, particularly the U.S. For the U.S., the drive to maintain its global primacy undisputed, mixed with pressures from groups lobbying for trade and investment protection, leads, from time to time, to an overstatement of the risks and an understatement of the opportunities for its own prosperity and security that China's growth offers.
For good reasons the American government is urging China to be a responsible stakeholder in the international system. The problem, however, is that there is no precise standard for what that is, and no country--certainly not China--is ready to accept a unilateral imposition of an arbitrary standard. Consequently there must be dialogue, negotiation and mutual accommodation between the two countries to solve contentious issues and to realize the enormous potential of their partnership. Furthermore, the U.S. and China must also recognize that solving some of their current differences could be done with less strain and more justice to both were they to rely more on multilateral mechanisms and less on bilateral or, even worse, unilateral means to tackle these grievances.
Admittedly, the available multilateral institutions are ill-equipped to manage the kinds of issues that currently overshadow the U.S.-China relationship, such as China's trade surplus with the U.S. and its exchange-rate regime, not to mention its human-rights record and its ambiguous stance in dealing with nuclear proliferation in other Asian countries.
Ultimately, the way to go--not only for the U.S. and China but also for the other powers--is not to ignore multilateral institutions but to cooperate in reforming them. A promising start to this approach was provided last month when the world's leading countries decided to empower the IMF to pursue agreements among countries with the largest trade disparities in order to correct global financial imbalances. It's a pity these same countries have yet to act to save the WTO Doha trade round talks from imminent failure.
Ernesto Zedillo, director, Yale Center for the Study of Globalization, and former president of Mexico; Lee Kuan Yew, minister mentor of Singapore; and Paul Johnson, eminent British historian and author, rotate in writing this column. To see past Current Events columns, visit our Web site at www.forbes.com/currentevents.Forbes
