Eyes Off the Prize
As Iraq dominates U.S. attention,
China, India and Iran are emerging as the next world powers
by Jehangir Pocha
February 16, 2007
About 30 years ago, U.S. diplomats famously
dismissed the civil war raging in the jungles of Cambodia as a
"sideshow" to the Cold War. Callous as that was, the
uncomfortable fact remains that the diplomats were probably right.
As bloody and heartrending as the situation in Cambodia got by
1977, in the end it appears to have had only a limited bearing
on the wider historical forces at work in the world, adding a
further dimension of sheer meaninglessness to the tragedy and
trauma that still haunts millions of Cambodians.
Today, headlines are fixated on the gore
and chaos unfolding in Iraq. The conflict there has been shaping
the outcome of the elections in many Western nations, and is certain
to be the most contentious foreign policy issue in the 2008 U.S.
presidential election. Yet this unrelenting focus on Iraq obscures
the reality that in another 30 years the Bush administration's
adventure there will probably look like the Cold War-era face-off
in Cambodia does now-a tragic mistake fuelled by hubris that cost
countless innocent lives and billions of dollars, but which ultimately
had only a limited effect.
Instead, the principal dynamic shaping
life in the year 2037 will be the re-emergence of three ancient
nations: China, India and Iran. Their powerful economies, muscular
militaries, ambitious politicians, nationalistic populaces and
resurgent cultures will irrevocably alter the lives of the 2.9
billion people who will then be living within their borders. But
beyond that, these three countries will radically alter the balance
of power in the world and give people and nations everywhere a
new impetus to recreate their own societies.
That this will happen is certain. What's
up for grabs is what it will mean for the United States and the
world. Yet the United States and most other countries seem to
be only marginally prepared to deal with this nascent new world
China is the nation whose resurgence is
best understood in the West. But despite the media hype around
China, the country is only of marginal interest to the average
American citizen and policymaker, as illustrated by the fact that
when Chinese President Hu Jintao visited Washington earlier this
year President Bush didn't even offer him a state dinner, dismissing
him with just a hurried lunch. India, for all the ferment and
change it is experiencing, receives hardly any diplomatic or media
attention. Both official and general perceptions of this complex
and contradictory country generally revolve around banal sound
bites of it being a "software superpower." And, because
official and public views of Iran are so dogged by miscomprehension
and prejudice, the entire country is seen almost exclusively through
a political lens, even though Western diplomats themselves tell
us the Islamists ruling Tehran are almost totally out of step
with the rest of the country.
The relatively few editors, businessmen,
academics and officials committed to studying China, India and
Iran provide us with invaluable insights into these countries.
But they still generally label what we are seeing in these three
ancient civilizations as "amazing change." In reality,
it is much more: not just change or evolution, but a paradigmatic
shift that will challenge the basic framework of the post-WWII
As with any new idea, the world is trying
to cope with the changing dynamics in China, India and Iran by
squeezing them into existing structures and processes. But the
national ambitions of the rising East and the sheer scale of their
change will force a major, if not complete, re-thinking of the
Just as the turn of the last century saw
Germany, Japan and Italy demand (but so misguidedly pursue) their
own place in the sun, China, India and Iran will soon demand that
the global system that currently protects the United State's interests
adapt to accommodate their own economic and strategy ambitions.
The most immediate impact will be on the three pillars of U.S.
dominance: the global financial system that has the U.S. dollar
at its center, the global oil and gas trade which the United States
currently controls, and America's "soft power," or its
ability to win friends and arguments based on the popularity of
its culture and values.
Today's global financial system is based
around an informal but effective agreement labeled Bretton Woods
II, which revolves around the idea that, de facto, the world is
following a regime of fixed global exchange rates just like the
original Bretton Woods regime maintained de jure from 1945 to
1973. While the original Bretton-Woods was a formal system that
fixed nations' currency rates to their gold reserves, Bretton
Woods II is an informal arrangement that pegs exchange rates to
the U.S. dollar.
Currently, more than 30 nations, including
China and Saudi Arabia, have their exchange rates pegged to the
dollar in one form or another, allowing them to export their goods
into the United States and maintain huge trade and current account
surpluses. This arrangement works as long as this surplus is used
to purchase U.S. dollar-denominated debt, including the U.S. national
debt. With this money coming from China, Saudi Arabia and other
countries, the United States can then finance its $8 trillion
budget deficit. This allows the U.S. Federal Reserve to produce
enough money to stimulate spending by U.S. consumers, who will
then buy Chinese-made clothes and home theatre systems (or Saudi
oil) via the "fixed" exchange rate. The Asian countries
then invest their profits into U.S. T-bills-in other words, lending
it back to the United States so the cycle can repeat itself over
and over again.
This system has worked well until now.
China is an exporting juggernaut and has about $1 trillion in
foreign reserves, most of which is used to buy U.S. debt, including
$350 billion in U.S. T-bills. This has allowed Americans to live
beyond their means on someone else's money, while also allowing
the United States to raise its huge debt in its own currency,
thereby neutralizing any currency risk.
This can happen because international
loans are mostly denominated in dollars and when a country borrows
too much its own currency depreciates, thus making it more expensive
for the borrowing country to pay back its dollar-denominated debts.
So, for example, if India borrowed $1 billion from the World Bank
in January 2006 when the exchange rate was 10 rupees to the dollar,
that means in rupee terms India borrowed 10 billion rupees. If
India borrows another $1 billion in 2007 and investors deem that
excessive, the value of the rupee will fall to, say, 12 rupees
to a dollar, which means it will now cost India 12 billion rupees
to pay back the original $1 billion it borrowed.
Because the United States borrows in its
own currency, it is immune from this currency exchange trap. The
$1 billion the United States borrows remains $1 billion even if
the dollar devalues globally. In fact, it is the lenders who bear
the cost of the devaluation, as the $1 billion they get back will
be worth less vis-à-vis their own and other currencies.
What policy makers should now begin to
grapple with, according to former U.S. Treasury Secretary Lawrence
Summers, is that the rationale for China to buy U.S. debt is slowly
fading. Beijing's huge stock of dollars is threatening its own
economy with inflation and the United States' mammoth debt is
making China and other countries wonder if U.S. dollars are truly
a wise investment. In the last year alone, China, the United Arab
Emirates, Russia, Italy, Switzerland, Qatar and New Zealand have
all said they will reduce their U.S. dollar holdings and buy more
gold and Euros.
China also realizes its dollars are subsidizing
U.S. growth when they could be used on domestic development projects
and/or lent to other Asian nations with whom it wants to buy influence
at the expense of the United States. Though Chinese officials
are generally deferential to the United States in their public
comments, many say privately that they realize that China is lending
money to the United States, which in turn is lending dollars to
global institutions such as the International Monetary Fund (IMF)
and thereby acquiring greater clout over the global financial
system, particularly over the countries dependent on the IMF for
Increasingly Beijing, New Delhi and other
Asian nations, including Thailand, are talking about using their
surplus dollars to create their own financial institutions, such
as an Asian Monetary Fund, that would lend Asian surpluses to
Asian borrowers. Not only would this diminish the United States'
ability to dictate economic policy to borrowers, it would cement
regional ties by giving Asian nations a vested interest in each
other's development and stability.
Meanwhile, Iran poses its own threat to
the dollar. Currently, the global oil and natural gas trade is
conducted mainly in U.S. dollars. Since countries need to pay
for their oil in dollars, they strive to acquire them, and this
further strengthens both demand for the dollar and its central
role in the world economy. But Iranian President Mahmoud Ahmadinejad
has begun talking about selling Iranian oil and gas for Euros
and other internationally traded currencies. If Iraq does indeed
fall into the Iranian orbit, as many fear it will, and if Iran
can get Iraq to follow suit, along with Iran's ally Venezuela,
about a third of the world's energy would no longer be traded
in the dollar, but in Euros or other currencies.
Another worry for Washington is that Tehran
and Beijing have close military ties and are deepening their efforts
to keep the United States out of energy-rich Central Asia, an
area that has always been seen by Beijing, Moscow, Tehran and
New Delhi as their backyard. In the months following the 9/11
attacks, Washington surprised these regional powers by using the
international alarm over global terrorism to establish new military
bases in Tajikistan, Uzbekistan and Kyrgyzstan. Washington also
used its clout to buy major oil fields in the area and created
the strategically important Baku-Tbilisi-Ceyhan pipeline, which
allows Western countries to directly access the Caspian Sea's
energy reserves without needing to go through Russia or Iran.
Shi Yinhong, director of the American
Studies program at the People's University in Beijing, is concerned
that tensions in the region heightened last year when the United
States supported the "color" revolutions that toppled
pro-Russian and pro-Chinese allies in Ukraine, Georgia and Kyrgyzstan,
and replaced them with pro-Western democrats. In response, the
region's rising powers and disgruntled dictators are pooling their
umbrage against the United States' geopolitical dominance under
the diplomatic shell of the six-nation Shanghai Cooperation Organization
(SCO), says Madhav Nalapat, professor of geo-politics at the Manipal
University in southern India. "The SCO is well on track to
becoming an organization that directly challenges the geopolitical
reach of the United States," he says. "China is in the
driver's seat because it sees itself as the next United States."
Initially, the Chinese-founded SCO had
only five other members: Russia, Kazakhstan, Uzbekistan, Tajikistan
and Kyrgyzstan. But in July 2006, Iran and India (as well as Pakistan
and Mongolia) were inducted as observers and are expected to become
full members soon. This would formally unite China, Russia, India,
and Iran in a quasi-military alliance for the first time, fueling
talk of an emerging axis between these four powers that could
balance, and maybe even threaten, U.S. influence in the region.
Indications of this crested this past
year when Moscow, Beijing and New Delhi defended Tehran against
the United States' attempts to curb its nuclear activities by
imposing sanctions. In fact, New Delhi, often seen as the most
pro-United States of the four countries, even threatened to walk
away from a much sought-after civilian nuclear deal of its own
with the United States if Washington pushed it too hard to support
the sanctions against Iran. The SCO has also asked the United
States to withdraw all of its troops from the K-2 air base it
set up in Kazakhstan just after the 9/11 attacks. Meanwhile, both
Russia and India have established new military bases in Tajikistan,
not far from the U.S. base there.
The economic endgame in all this is to
dilute Washington's hold over the Caspian Sea's energy reserves,
says Robert Karniol, Asia-Pacific editor for Jane's Defense Weekly.
China and India, the world's fastest-growing energy consumers,
want to divert Central Asia's energy resources toward their own
economies, and Iran and Russia, the region's largest energy suppliers,
are keen to reduce their dependence on sales to the West.
Both Russia and India have begun to talk
of a Central Asian "energy club" that would create a
regional gas grid, pipeline network and oil market, and China
is already constructing a pipeline through Kazakhstan that would
give it direct access to Russian and Caspian Sea oil. New Delhi
and Beijing have raised Washington's ire by backing a more audacious
proposal to convert the prized Baku-Tbilisi-Ceyhan pipeline, which
has been designed to bring gas to Europe, into a supply route
for Asia. New Delhi wants to extend the pipeline to Syria, where
oil could be loaded onto tankers and shipped to Asia through the
Perhaps most significantly, however, the
rise of China, India and Iran is increasingly weighing down what
Joseph Nye, a former chairman of the National Intelligence Council,
which provides the president and intelligence agencies with National
Intelligence Estimates, calls the United States' "soft power"-the
attractiveness of American ideas, culture and values.
After the end of the Cold War, a U.S.-defined
system of secular democracy and free markets was widely hailed
as the universal governance model. Now, the increasing diffusion
of Chinese, Indian and Iranian ideas, culture and values is increasing
the soft power of these countries. This is most evident in the
increasing global appetite for their cultural exports, including
movies, books, fashion and art. As more and more people-including
Westerners-consume Chinese, Indian and Persian culture, they are
developing a greater appreciation and regard for these countries,
making it easier for Beijing, New Delhi and Tehran to put their
points of view out to the world.
For example, the success of the Chinese
Communist Party in bringing more people out of poverty than any
other country in history and in rebuilding China's global clout
is making China, not the United States, the model for many nations,
particularly in Africa and Asia. This sentiment was loudly mouthed
by some African leaders during the recent Africa summit in Beijing.
Even in democratic India, ministers, businessmen and laypeople
often talk admiringly of China's one-party system, wishing its
effectiveness for themselves.
For its part, Iran is directly challenging
the United States' democratization push in the Middle East with
its own unique notion of Islamic democracy. Given the way things
are shaping up in Iraq, Palestine and Lebanon, it's likely that
Iranian ideas and values and not American ones will shortly become
the dominant force in the region.
U.S. attempts to defend democracy after
the recent military coup in Thailand have also been undermined
by China, and, more disturbingly, Beijing and New Delhi have been
the main opponents of a U.S. plan to take military and economic
action against the government in Sudan, which is committing genocide
in the Darfur region. As a U.S. diplomat in Beijing puts it, "We
just cannot exert our will anymore. We have to consider what China
and India think before we do anything."
If the trajectory of China, India and
Iran's resurgence is not derailed by the substantial problems
facing these countries-poverty, corruption, religious turmoil
and widening imbalances in income-the world of 2037 will look
substantially different from today, with Americans carrying much
of the negative burden of the change. Yet, as Nye points out in
his book, The Paradox of American Power, any U.S. attempt to undermine
or contain the emergence of these new powers could backfire just
like Britain, France and Russia's attempts to contain Germany,
Japan and Italy backfired a century ago. There is already a growing
sense in China, India and Iran that the neo-conservatives are
likely to push the United States into repeating the mistakes of
colonial Europe. The much-touted Project for the American Century
developed by Paul Wolfowitz and company is seen by many analysts
in China, India, and Iran as a direct challenge to their vision
of an Asian Century. The ensuing resentments are already igniting
new waves of anti-Americanism in these countries and elsewhere.
A stable and balanced world order will
only emerge if the United States can arrive at negotiated understandings
with China, India and Iran over how their new and growing financial,
energy and military interests can be achieved within a globally
acceptable framework. Even if this approach is pursued with the
best of intentions, it could short-circuit under the burdens of
the complexities and contradictions that plague relations and
interests between the West and the rising East, as well as between
China, India and Iran themselves.
Yet neither the United States nor Europe
is investing the time and resources required to engage astutely
with a resurgent China, India and Iran. Unlike the men, materials
and money invested in understanding and dealing with the Soviet
Union during the Cold War, the tidal wave of change coming from
the East remains on the periphery of Western mindsets.
Thirty years from now, the greatest cost
of the war in Iraq might well be that it proved to be the siren
song that lured the United States away from its natural if challenging
course, onto the rocks.