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Henry Thornton - SMERSH: A discussion of economic, social and political issues Copenhagen - Beyond Climate Change, What Does its Failure Mean? Date 26/03/2010
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China's central purpose seems clear. Secure new sources of the raw material supplies it needs for future development. And to generate such oversupply as needed to ensure that user prices are driven down.

Australia's minerals exporters may well have to cope with a heavy downward pressure on both the price and volume sales to China. And that does not bode well for a country which has chosen to gamble the greater part of its export future on raw material exports.

By Colin Tease Email / Print

Following Copenhagen, I was able to connect its failure with the emergence of China as a world power. 

My wife helped me make the connection.  Knowing my interest in China, my wife recently gave me a book by Michael Jacques entitled ‘When China Rules the World’.

Jacques predicts the rise of the ‘middle kingdom’ and the end of the West.  His first point is incontestable; his second is less certain, although the book makes some telling points. 

Certainly, there was enough in it to encourage me look beyond mere climate change issues when considering the lessons to be drawn from the failure of Copenhagen Conference at he end of last year. 

150 or so countries went to Copenhagen with an agreed   purpose.  Global warming was problem; and reduced carbon emissions were what could help fix it.   

Yet they failed to agree on anything of substance except to meet again at some other time and place.

For all the imperfections of the earlier Kyoto agreement, Copenhagen seemed like a step backwards. 

Why?  With a longer perspective we might come to regard Copenhagen as the beginning of a new era in international cooperation; reflecting the rise of China and the diminishing power and influence of the US and the West. 

Copenhagen is the second major international conference in recent years where no agreement could be reached.   Thereby lies its real significance. 

The Doha Round of trade negotiations was the other.

The failure of Doha, though worrying for the same reasons as Copenhagen, is nevertheless more easily explained.  Unlike Copenhagen, Doha commenced with wide-ranging differences between the parties about what was needed.  That the interests of the various negotiating parties were beyond reconciliation was, therefore, not altogether surprising.  

And, we can point to any number of examples of failed attempts at international - or at least multi-lateral agreement - on less compelling issues; but this simply emphasises how much importance we should attach to the outcomes of Doha and Copenhagen.

Immediately after Copenhagen the blame mongers got to work.  Locked into old realities, they found ways to blame the Americans - a cooked up, West-serving solution, was foisted on hapless developing countries, without consultation or involvement.

In fact, what emerged didn’t suit the US, the West, or the poor countries.  

President Obama we know wanted, needed, something positive.   If only to persuade a sceptical US Congress to pass the necessary legislation he wanted for the US.  

True, developing countries weren’t brought into the final negotiating stage.   But that wasn’t President Obama’s fault.      Last minute negotiations are always, of necessity, confined to a small number of participating countries whose agreement is essential in getting some kind of positive accord. 

Sometimes developing countries’ wish lists are given weight, sometimes not.    With no real outcome at Copenhagen it wasn’t possible: nor did it matter in the end.  

The failure of the conference should properly be ascribed to China -with India as its silent partner.  China’s position has been revealed by a member of a delegation whose leader was part of the small group trying to stitch up a final positive outcome.

His account leaves no room for doubt.  The Chinese absolutely, would not sign up to a specific commitment to reduce carbon emissions.  Nor would they, under any circumstances, agree to surveillance by any kind of international group monitoring what China might or might not do.  It would tread its own path to carbon reductions and its word had to be enough.

We should not be surprised.   Conceding any kind of investigative and reporting role to an outside body would be regarded as an intolerable undermining of the Chinese Communist Party’s authority.  It would carry unthinkable implications for Chinese domestic politics.

Apparently the US and others understood.  The Chinese demand for no specific obligation to any target, or to international supervision of what it did was met in full - presumably, in the hope of drawing China into some kind of positive final outcome.

A final outcome was then suggested which would specify what other participating countries were prepared to commit to, including international supervision, but the same obligations would not be asked of China. 
Still this was not enough.   The Chinese demand bag was not yet emptied.  China would not put its name to any final outcome- so its spokesman said- that recorded a specific commitment to a carbon emission reduction program by any participating country.   {Presumably because, in such a document, China would be identified to the world as the odd man out.}

This stand by China apparently prompted the Chancellor of Germany, Angela Merkel, to remark, “Are we not allowed to express even our own levels of commitment?”

The Chinese in effect, presented an ultimatum:  an agreed document empty of real content about carbon reductions by any country, or a document with specific commitments by certain countries, but with China standing aside.

The judgement was obviously made that an outcome without Chinese participation would be worse than no outcome at all.   China got what it wanted.

{At this stage India, along with Brazil, presumably breathed a sigh of relief since they too, silently supported the Chinese position, but had, cleverly, refrained from saying so.}

It seems that, in future international negotiations, the dominating weight of influence over outcomes will rest as much, if not more, with China as it will with the US.   Certainly, while ever the Chinese Communist party leadership remains, it will be difficult to get the Chinese to agree to any cooperative action it believes will compromise Chinese sovereignty.

Recent events in China have brought forth one mildly encouraging signal.  No doubt the Chinese strove for an end where blame for failure at Copenhagen could be pinned on the US.   That proved impossible.   In fact China has had to wear the blame for failure.  

It is also possible that China - unskilled in the ways of modern Western power practice - is only now beginning to understand the first law of multi-lateral diplomatic practice.   One’s raw power can, and sometimes must, be used to break up a conference in one’s own national interest.  The trick is to do it and yet attach blame to another country.  That skill China is still learning.  

The point of recounting all this detail is so that we may understand that the West-serving power structures which have governed international cooperation since the end of WW11 appear to be giving way to power structures predominately reflecting the interests of China and East Asia.

These new power centres certainly won’t want to play by our rules.   That’s why what happened at Copenhagen has serious implications going far beyond climate change. 

Ominously, it suggests that, in the shaping of important international events, the United States is not the force it once was.

A decade or so ago, it is hardly possible to imagine a conference of such importance not being dominated by US power and influence serving the West’s objectives.    With the Soviet Empire collapsing, the then widely held view was that the US - as the remaining superpower - would be the major source of world power and influence- not merely for the Western nations, but for the entire world- far into the future. 

The US was, after all, able to impose the so-called Washington Consensus on Western economies and beyond.  Not always in unalloyed form, but at least in major part.

It was able to dominate the Uruguay Round of trade negotiations which, in the late nineties of the last century, created the World Trade Organisation: thereby widening the reach of the former General Agreement on Tariffs and Trade to serve emerging US and Western interests.  

After almost a decade of negotiation, the US got pretty much what it wanted.  And that was a mere decade ago.   Some of the new rules were inconsistent with US domestic law, which the US had no intention of changing.  But even that the rest of the WTO membership seemed to accept. 

President George Bush was emboldened to say at the end of the 20th Century that the US would tolerate no rival political or economic system. 

Unfortunately for him, the Chinese systems- economic and political were taking shape even as he spoke and the US was powerless to resist them.

In the space of about a further decade, the US went from a position of pre-eminent strength, to where it had to meet China’s every demand to get a fairly indifferent outcome from a major international conference on climate change.

Of course, the US is no spent force.  It still is the foremost military power on earth; in any outright military confrontation it could overpower China.  And it continues to generate a larger national output and income than China. 

What all this means for the future we cannot know.  Robert Fogel, a Nobel prize winner from the University of Chicago has been bold enough to predict that by 2040 China will have output of US$ 123 trillion (three times world output in the year 2000) and a per capita income of US$ 85000- well in excess of the European Union. 

These estimates were calculated in 2007: being based on pre financial crisis calculations, they will need to be re-evaluated.     Other evidence, however, also suggests that the US’s time as the world’s economic powerhouse is under threat.

Was the financial meltdown responsible?  Not by itself.  That particular virus had its origins in the US, and was at its most virulent there.  No doubt it did not help; but well before that other forces were at work undermining US power and influence.

Perhaps they were inevitable.  If one looks at the history of empires (and, in a certain way the West is an empire led by the US) they tend to collapse under their own weight.

British historian Niall Ferguson reminds us that, as history marches on, empires rise and fall.  His researches suggest that, from one to the next, they tend to have ever-shortening life spans.  The Romans lasted several hundred years.   The British not much more than two hundred.  If the US is now in decline it will have spanned less than one hundred.

Imperial powers, Ferguson believes, decline because in one way or another they overreach; and in trying to recover they make mistakes, political, economic, military, either singly or in combination.  And, in the modern world mistakes tend to be more financially and politically costly than they were in simpler times.

In the middle to late 19th Century British could demand of China not merely that it import and consume British opium from India, but that it concede Hong Kong on long lease as a free port into China.  50 years later Britain was in terminal decline.

According to some, pouring money into the development of its colonial possessions caused the British to starve their own economy of the technology investment it needed to keep up.  Britain, as an industrial power, so the argument goes, paid the price.

Whatever the cause, we know for certain that Britain could no longer manage the world economy after 1918.  After two 20th Century wars- both of which it won- Britain emerged virtually powerless and terminal decline. 

After 1945 the British watched helplessly as their Empire disintegrated and world leadership passed definitively into US hands.  

The US rise to power began at the end of WW1.  By the end of WW11 until about 1970’s US power was at its zenith.  Its military strength was enough to contain the Cold War with the Soviets and yet power on as the world’s richest economy. 

Even more important, it engineered a new post war economic system covering the West’s currency, trade and investment.  Within the UN framework, it set up the IMF to manage financial flows, the GATT to manage international trade and the World Bank to look after post war development. 

In a Cold war world, this entire economic edifice flourished under the umbrella of US military security.    Under US leadership, the system ushered in 25 years of Western prosperity.

The strength of the US economy enabled the US dollar to underwrite the world trading and payments system.  For countries holding reserves in US dollars it was able to guarantee to exchange them, on demand, for gold at a fixed price.   Moreover, it was possible for countries inside the system (and that meant all of the West) to maintain their national currencies in more or less stable relationships with each other and with the dollar.

Thus, commercial exchanges between western countries could take place with the enormous advantage of price stability for both buyers and sellers. 

The system held until 1970.

At that time the US was embroiled in the Vietnam War which was costing ever more to finance.  Such was the unpopularity of this war domestically,  funding  by increasing domestic tax became impossible.   Money had to be printed.

From that moment the US was unable to any longer guarantee to cover international dollar reserves with gold or underwrite the West’s trading system.  The value of its own currency was under attack.

With all of that went the security blanket of the West’s trade and payments system.    Future trade between Western nations would have to take place without the stabilising influence of dollar based fixed exchange rates.    

Henceforth, currency values between trading nations would be subject to constant movement according to the market’s judgement of the value of each currency hour by hour.  Floating currencies also encouraged speculators to buy and sell currencies.  A whole new world of financial uncertainty was created.  Ultimately it led to disaster a couple of years ago. 

Under the old system, relatively fixed exchange rates kept trade flows roughly in balance.  Increased exports tended to push up currency values:  falling exports tended to push down the exchange rates.  No country could run permanently bloated trade surpluses.

With no fixed rate relationship countries cold hold down the value of their currencies and thereby maintain an artificial export advantages and accumulate foreign exchange income.  

Germany and Japan were the most notable early practitioners of this policy.   The US was unwilling to stop them at the time.   For geo-political reasons it gave them generous access into the US market.  The US was rich enough to bear the cost of this to its own economy.  Sustaining powerful economies in its allies Germany and Japan was part of a necessary policy of containing Soviet Communism.

Germany and Japan take full credit for economic miracles, which could never have happened without the US watching benignly as the Germans and the Japanese kept their currencies undervalued and their export surpluses increasing.

The huge dollar savings of Germany and Japan enabled them to advance their own economic interests.
Eventually, the US, unable to stand the pressure on its domestic economy, compelled both Germany and Japan to lift their exchange rates.

About this time the Soviets were collapsing and China was emerging in ways which led some to believe, mistakenly, that it was embracing western style capitalism: this, the US was keen to encourage.  And it happened at the time when there was a renewed ideological push for free trade and lower tariffs.

Thus, for different reasons, China was given the same advantageous access to the US market as had earlier been afforded Germany and Japan.

Before long the US was being flooded with cheap Chinese goods, which kept increasing while China held down the value of its currency relative to the US dollar.  China is still doing it.

US consumers borrowed, as did most of the English-speaking world’s consumers in the stampede to buy cheap Chinese imports.  Australia was among them.

In the process the world came to be  divided into consuming and saving nations; with East Asia, dominated by China, being the savers and providers of goods: and the West’s developed countries, notably the English speaking ones being the borrowers, consumers and importers.

Trade flows became hopelessly imbalanced to East Asia’s favour.

The US, being the biggest consumer, got into the most trouble.  It watched, apparently unconcerned, while the Chinese accumulated huge dollar surpluses that were used to buy US Treasury bonds.

From the period of the Reagan Presidency, as US government outlays continued to rise-especially for defence- its President held steadfastly to tax cutting policies.  The era of embedded US budget deficits began.

This policy was re-enforced by some US academics.  They maintained that lower taxes would increase overall economic activity and accordingly tax collections would actually rise. 

They didn’t.  And by the mid 1980’s the US became a debtor nation for the first time in the 20th Century.  It has been sliding deeper into debt ever since.

Since China became a major supplier to the US market, the US has been borrowing the Chinese surpluses of dollars to balance its budget. But that is only one side of the debt equation.  The other is consumer debt which has been fed to US consumers to buy cheap Chinese goods.

It is this total debt accumulation hanging over the US economy which is undermining its world wide economic and political reach.  That, and the burden of its military expenditure.

It cannot be said that China is consciously moving to fill the space vacated by the US.   More, that is a consequence of China self-interestedly moving to develop in its own way.  

Those who believed that China would ultimately embrace Western politics and economics misread history and underestimate the enduring importance of cultural difference. 

In fact, China is doing no more than picking the eyes out of western capitalism and adapting them to its own purposes.

Its central purpose seems clear.  Secure new sources of the raw material supplies it needs for future development.   And to generate such oversupply as needed to ensure that user prices are driven down.    No doubt China would like a significant financial interests in our big mining companies: but even more, it wants new resource development under its direct control.  This ambition explains much of its focus on Africa. 

China’s longer term aim built on the back of this policy, could be to create its own African empire.  Many Africans certainly think so.  African prosperity, so enhanced by a Chinese presence,  will be dominated by political and economic structures built around Chinese rather than the Western models.

In that event, China will increase its power, influence and security in much the same way as the US did 60 years ago, 

An emerging China is certainly a worrying prospect.  Thus far much of the West appears to have believed that as China’s prosperity increased so it would it more closely embrace the Western ideas of capitalist democracy.

That, in my view is dangerously misguided.

More likely, the future will require that we find a way to live in a  world where perhaps the dominant economic and political force is based on a philosophy radically different from that of the West.  The challenge will be for us to make the necessary adjustments.

As to Australia’s future prospects in this kind of world, for the short term at least we can probably look forward to exploiting a lucrative minerals market in China.   Beyond that, if China’s African strategy pays off, we face the prospect of price competition for the Chinese market from new sources of supply over which China exercises far greater influence.  

Our minerals exporters may well have to cope with a heavy downward pressure on both the price and volume sales to China.   And that does not bode well for a country which has chosen to gamble the greater part of its export future on raw material exports.

 Paper delivered by Mr. Colin Teese at a dinner of the Melbourne Beefsteak Club, 26 March 2010

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