AUSTRALIA

Chinese expansion is not just causing concern among politicians and local populations in Africa. China’s grab for commodities has been particularly felt in Canada and Australia, whose deep reserves of iron ore and other resources are highly sought after by China.

I met Miranda and Abby, two law school students from Perth, Australia, who were taking advantage of a strong Aussie dollar to vacation in Thailand. Perth is one of the cities affected most by China’s demand for iron ore because of the huge reserves in Western Australia, and the Australian dollar has appreciated because of the demand.

Tanned, with flowing blond hair and a friendly smile, Miranda told me Chinese investment was driving prices in Perth through the roof. “It’s now over seven Aussie dollars for a cup of coffee,” she said; that’s just more than $7 USD. “Housing prices are going up and up—they’re getting too high for most regular Australians.” Abby, a brunette with an athletic figure, told me a decent house now sells for $700,000 USD, which is more than most people can afford, and that rising prices were making life difficult for too many people. The Economist Intelligence Unit reported in 2011 that Perth has become the thirteenth most expensive city in the world to live in. Five of the world’s 25 most expensive cities are in Australia as a result of Chinese demand for its natural resources.

Miranda told me her family had benefited from China’s seemingly insatiable demand for iron ore. She welcomed the investment because the demand created high-paying jobs. Her father was an executive in the mining industry, and her dream job after graduation was to work at a white-shoe law firm for a few years before eventually shifting to an in-house legal position at a mining firm like Rio Tinto. The mining companies are where the money is, she said, and jobs there are more stable.

Although Miranda and her family were benefiting from the mining boom, Abby was quick to point out the negative effects it was having on many of their fellow Australians. The mining wealth was not trickling down to the rest of the community, she said; the money brought in was concentrated among those in mining, while everyone else was being left behind.

Miranda agreed, saying local retailers were getting hit especially hard because the soaring Australian dollar was pushing consumers to shop online. Her friends were now taking advantage of a weak U.S. dollar to buy clothes from America. Even with shipping and handling, it was cheaper to go that route than to buy at a brick-and-mortar shop in Perth.

China’s investments are creating friction between the haves and have-nots in Perth and in similar regions around the world and are leading the government and its citizens to wonder whether Chinese money is a blessing or a curse.

This story is not unique to Australia. In 2010 I was eating lunch with one of Canada’s most powerful members of Parliament. He turned to me and asked point-blank, “Should Canada welcome Chinese money? Is it a threat or an opportunity?”

He said that, although he personally welcomed Chinese money to help create jobs, many of his constituents and the members of his party were worried about the security risks posed by Chinese firms’ control of too many of Canada’s natural resources. I heard this common theme from many leading Canadian politicians of different parties whenever I met them.

As China has outcompeted the West over the past few years and doled out billions to buy up sovereign bonds in countries like Greece and Spain, countries around the world are beginning to wonder whether to put up barriers against Chinese money or to welcome it. By preventing too much Chinese investment, they hope to avoid security risks and the internal tensions created between those who benefit from Chinese money and those who do not. But they also worry about losing out on China’s money and newfound power. The world’s stock markets in the waning days of summer 2011 seemed to hinge on whether or not China would bail out Italy by buying its bonds, yet during the week when fears of an Italian collapse were highest, Italy was also trying to erect barriers to imports of Chinese ceramic tiles, which are cheaper and often of better quality than Italian ones.

“Canada is in a good position,” the politician told me. “We can continue to explore more business opportunities with China, but our proximity to America lets us remain close. Other countries that aren’t as close to America have harder decisions because they can’t play that relationship off against China.”

As China’s might grows, nations around the world are going to have to decide how close to China they will get. Italy is a perfect example: It wants Chinese help, yet at the same it is afraid that Chinese companies will take market share away from its biggest and most traditional industries.

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One of the few things that can halt China’s continuing explosive growth is the depletion of natural resources, which would cause steady, long-term inflation. For example, food prices soared throughout 2011, with year-over-year pork prices rising 50 percent, apples 30 percent, and yogurt 25 percent.

To try to keep a lid on raw-material inflation, China has adopted a forward-looking mind-set to build relationships with any country that will do business with it, regardless of ideology or human-rights issues. This has included working closely with countries like Sudan (both the southern and northern parts) and Iran, whose governments many Americans view as unsavory at best and outright sponsors of terror at worst.

Many Western critics cite these ties as evidence of China’s support of terrorism and genocidal regimes, which increases mistrust in Chinese leadership and its intentions. Western nations also fear these investments because they force the balance of international power away from America and disrupt the status quo. By investing abroad and helping countries hit hard by the financial crisis by buying more of their bonds or products, China has won their support and gains more concessions in world affairs—but at the same time, this increases other countries’ suspicion.

PAKISTAN

I met Tushna and Kaevan, a sister and brother from Karachi, Pakistan, in 2011. Kaevan had a bushy, jet-black mustache and short hair and wore a brown shirt when we met over breakfast; Tushna wore a light-red shirt.

As with many Pakistanis I have interviewed in the past decade, during which the United States used military bases in Pakistan to invade Afghanistan after September 11, there was frustration and sometimes anger in their voices about America’s involvement in their country. They believe America has been arrogant and hypocritical in how it has dealt with Pakistan, and they are bitter about the Pakistani lives that have been lost.

Tushna put her cup of coffee on the table and said angrily, “The Americans come and drop a bomb and kill civilians and act as if they are just casualties of war. Then when someone kills one of their soldiers, they act high and mighty, as if it is morally wrong to kill.” She continued, showing her annoyance, “When American leaders travel the city they shut entire roads for a day at a time, inconveniencing everyone. How can we live when we cannot go anywhere? How are they helping us?”

Tushna and Kaevan’s anger was palpable. I was a little worried they would start yelling at me, as a group of Pakistanis once did in 2010 at a conference I was speaking at in Vietnam when they found out I am American. I decided to change the subject to China.

Immediately, a smile emerged from under Kaevan’s mustache, and his whole body seemed to relax. “China has been an all-weather friend to us,” he said. “Whether to help with security issues with India or problems with the United States, China has been there to support us rather than order us around.” He rattled off the key areas of support China had provided to Pakistan since 1950, when Pakistan became one of the first nations to recognize China over Taiwan: key military aid, cooperation on building Pakistan’s civilian nuclear power initiatives, and economic assistance.

Tushna agreed. “All levels of Pakistani society right now like China. They are bringing money without American arrogance. They don’t tell us what to do as if we are children and don’t know any better.”

Many countries that have political systems other than American-style democracy, such as Pakistan, are naturally gravitating toward China, not only because of money, but also because they see China as being more hands-off about their internal affairs. For many Westerners, China’s deals with regimes that are opposed to or ambivalent about American power give them the impression that China lacks morality.

One of the issues China will have to deal with internally in the coming years is how to balance its need for natural resources and its newly found prominent position in world affairs. It is demanding more power in international organizations like the International Monetary Fund and the World Bank, where Chinese economists Zhu Min and Justin Lin have taken senior positions. Yet if it does this, it will also have to adhere to demands from the rest of the world for it to take a greater moral stand against injustice.

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The crux of the issues surrounding China on an international scale is that the world does not fully comprehend how to deal with a rising China. In many ways, the financial crisis has put China in a position of power so quickly that other nations do not know how to handle this new situation. China also likes to hide its true power and intentions in order to gain more power because other countries won’t know exactly what they are dealing with. As a result, they often overestimate China’s military capabilities.

One retired senior politician from America told me, “If China is increasing its trade volumes around the world, shouldn’t it be securing its own shipping lanes?” He was irritated because he felt China was freeloading on the U.S. Navy’s protection of maritime trade routes but was taking an increasingly muscular stand in the South China Sea, causing anger in Vietnam and the Philippines.

AMERICA

On a trip to the United States in early 2011 to give a speech at the Wharton School of Business, I took my three-year-old son, Tom, to New York to see Times Square. I had heard about a major advertising campaign the Chinese government had launched on electronic billboards there to improve its image with the millions of tourists who pass through each year. The campaign was launched to combat increasing anti-China rhetoric in America and the rising uneasiness that was accompanying China’s emergence in places like Canada and Australia.

My son wouldn’t stop jumping around until we tracked down the billboard. I had been telling him, during the incredibly slow Amtrak ride from Boston, about how cool the campaign would be. He was bubbling as if we were about to visit Disney World.

As soon as we arrived, we saw the famous Naked Cowboy playing his guitar, but we couldn’t find the ad anywhere. I asked police officers if they knew where the China ads were. All shrugged their shoulders and said they didn’t know.

After about an hour of walking around, eventually carrying Tom on my shoulders when he got tired, I finally found China’s attempt at soft power. It was underwhelming to say the least.

The screen showing the commercial was tucked away on a poorly visible section of the square. Even worse, it was filled with shots of Chinese scientists, businesspeople, athletes, and movie stars. With the exception of Yao Ming, there was nobody that anyone in Times Square that day would have recognized. I barely recognized most of them myself, and none really represented what China is to me. I stopped a woman walking by, whom I recognized as a mainlander, to ask if she knew the people in the ad. She said she recognized only a few.

The campaign was an utter failure. It failed to establish a connection with the American public and tourists from around the world because it didn’t understand at the most basic level who in China is known or unknown in America or how views of China are shaped. The producers simply had not analyzed their target audience and therefore used the wrong images. Implicit in the attempt itself was at least an acknowledgment that China needs to show a better face to the world, but it also proved that it doesn’t know how to do so yet.

If China is going to address the negative feelings bubbling up toward it throughout the world, it will need to do a better job than this, I thought. Most soft power needs to come from Chinese society itself, not necessarily through government-sponsored initiatives that are out of touch with everyday people in other nations.

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It is the year 2030 in Beijing. A sinister-looking Chinese professor is teaching a class about the rise and fall of global powers in a dark lecture hall lined with Mao posters. The professor attributes America’s downfall for his students, who are furiously taking notes, to overspending, tax hikes, and big government. He sneeringly lectures that China owned America’s debt and concludes, “Now they work for us.” The students cackle in response.

This was a TV ad titled “Chinese Professor,” commissioned by Citizens Against Government Waste in the run-up to the 2010 U.S. midterm elections. It made headlines in America by evoking the fear of a world overrun with Chinese. During the 2010 campaign, at least 29 candidates from both parties tapped into American fears of China in an attempt to scare people into voting for them. Nevada Senator Harry Reid’s campaign aired an ad accusing opponent Sharron Angle of being “a foreign worker’s best friend” for supporting tax breaks to encourage outsourcing to China and India. An ad commissioned by Ohio Congressman Zack Space featured a sarcastic voice thanking Republican opponent Bob Gibbs for supporting free-trade policies that sent Ohioans’ jobs to China. American anti-China ads are only growing more sensational and direct; a 2011 ad paid for by former Nevada Republican Party chair Mark Amodei featured images of Chinese soldiers marching on the Capitol Building in Washington, DC.

Sadly, the anti-China rhetoric in U.S. political advertisements reflects the larger pattern of anti-Chinese headlines in the media. As mentioned, Paul Krugman has increased the bad feelings toward the Chinese government by arguing that it is directly stealing American jobs by keeping its currency artificially low. President Obama has accused China of not “playing by the rules.”

Meanwhile, fears are rising in London about wireless hubs built by Chinese telecom maker Huawei. Many Londoners believe these systems allow the Chinese government to spy on them. Even the Committee of Foreign Investment in the United States advised Huawei to divest its acquisition of American server company 3Leaf Systems because of national security concerns. This recommendation came after Huawei had already paid $2 million for the intellectual property.

China has become an easy scapegoat as the United States suffers through a jobless economic recovery along with attempts to cut spending and adjust the debt ceiling. It is far easier to blame China than to take responsibility for profligate spending by everyday Americans, poor oversight by regulators, irresponsible risk-taking by Wall Street financial institutions, and a bickering political class.

Every generation of Americans seems to have its favorite bogeyman. In 1960s it was Vietnam and the scourge of the godless Communist. In the mid- to late 1980s, as relations with the Soviet Union warmed, Japan became the threat, especially after it bought iconic American landmarks like Rockefeller Center and Pebble Beach. Movies like the 1993 Sean Connery/Wesley Snipes thriller Rising Sun, based on the Michael Crichton novel, stoked U.S. fears of an America, Inc. already having been taken over by inscrutable Japanese.

Since then, with Japan’s economy stagnant for two decades and China overtaking it as the world’s second-largest economy, China has now replaced Japan as the threat. Many people like to draw parallels between Japan in the 1980s and China today, but these simple comparisons ignore a few clear and important differences. In fact, Americans should be far more welcoming of Chinese investment.

Japanese companies believed in the superiority of their management system. Made confident by books such as Ezra Vogel’s Japan as Number One: Lessons for America, Japanese executive teams believed they had developed a new management technique that ought to replace the outdated American model. They thought their low executive salaries and family-like corporate atmospheres emphasized the company over the individual and bred more loyal and driven employees. American businesspeople began reading works like A Book of Five Rings by Miyamoto Musashi and Chet Flippo’s New York magazine article “Samurai Businessman.”

Japanese companies were ruthless with the foreign companies they bought out. They quickly replaced senior management teams and instituted glass ceilings for top positions. Even today, few Japanese companies in the United States have non-Japanese senior executives. Often the gaijin they do have are mere tokens who do not have much power internally.

Soon after the explosion of the dot-com bubble, Ron, a 48-year-old Harvard Business School graduate who worked for a big Japanese bank in New York, told me, “The worst thing a high-achieving American can do is work at a Japanese firm. They put glass ceilings everywhere and you get treated like you’re inferior. Once the economy gets better, I’m out of here.”

Contrast this with Chinese companies. In interviews my firm conducted with senior executives of Chinese firms, we were informed that they buy foreign companies for their brand equity, technology know-how, and most important, their modern management systems. I don’t think I have ever heard a Chinese businessman say he thought Chinese management systems were superior to American ones. One of the main goals of Chinese firms is to buy Western companies to learn from them.

When Chinese firms complete acquisitions, not only are most foreign management structures left untouched, but also their best practices are often exported to China. China is constantly seeking to improve existing operations in the home market. Take, for instance, when Chinese computer maker Lenovo acquired IBM’s ThinkPad laptop line. There were few layoffs, and Lenovo actually poached senior executives from Dell to run their operations. They did not install senior Chinese officials until the business lost market share in the domestic Chinese market and the founder of Lenovo took back the helm, much as Michael Dell did when Dell’s business faced headwinds.

In other words, America should welcome investment from Chinese companies instead of fearing it. China is not looking to steal U.S. white-collar jobs and create a realm with limited opportunities for Americans. New economic connections between America and China can also hedge against security risks in the future. After World War II, America was able to rebuild its relations with Germany and Japan by integrating their economies with its own. This strategy worked well in the past and has the potential to work again in the present.

CHINESE SOFT POWER

The Chinese government’s most impressive attempt at soft power to date has been the Confucius Institute program. It is a network of learning centers at Western universities supported with funding from the Chinese government and aimed at promoting the Mandarin language and Chinese culture. Such a strategy works much better than the advertisement in Times Square; it caters directly to students and teaches them to appreciate Chinese culture.

This strategy has some shortcomings, however. Although this program gets young people excited about the prospects of living and working in China, the government has recently clamped down on issuing visas to young foreigners. By being so strict, it frustrates and potentially alienates students who are genuinely passionate about China and want to work there. I personally offered a job to a young Penn State graduate who was excited about working in China. His father owned a restaurant business there, and he was thrilled at the prospect of starting his career there, too. Unfortunately, we were unable to secure a visa for him, which left him frustrated.

Although it has lost the struggle for diplomatic recognition, Taiwan has been much more successful than the People’s Republic at using soft power. Taiwan’s government has paid for Mandarin language training and research stipends for many of America’s leading professors and graduate students through the Chiang Ching-kuo Foundation, which in turn often takes the Taiwanese view in its struggle with the mainland. As China rises in the world, it must become more adept at using its soft power—and it will.

When I was the assistant director of the Centre for East Asian Research at McGill University during the late 1990s, I spent a lot of time raising funds for the university’s programs and traveling to counterpart universities around the world. The South Korean government supports film festivals in universities around North America through the Korea Foundation. They also pay for academic conferences, events, and faculty support. A large part of the funding for McGill’s robust Korean studies program came from the Korea Foundation. This was a great way to build support for South Korea, be it political support or a continued military presence to combat volatility in the North.

The Taiwanese also were very generous, mostly through private foundations and often with direct or tacit support of the government. The Chiang Ching-kuo Foundation, named after Chiang Kai-shek’s son, who became supreme leader of Taiwan after his father died, supported professors’ active academic research. Nearly all of my professors who were older than age 45 years had spent their formative years studying China and Mandarin either in Taiwan or backed by Taiwanese money.

Private foundations also financially supported such people as my Harvard classmate Wang Dan, who was one of the student leaders during the Tiananmen protests in 1989. Wang Dan has continued to be one of China’s foremost critics. Backed by Taiwanese money with specific agendas, he will be unlikely to voice anything but opposition to China.

This cooptation of the academic class and its students, which has a trickle-down effect that affects policies governing military exchanges and weapons sales, helps Taiwan advance its agenda. China, however, is poor at this and does not have a strong lobbying effort within the Western world.

China needs to start funding more academic research and exchange. They should also promote the establishment of foundations using private Chinese money. Too much of China’s soft power has been government controlled and led. As Chinese become wealthier, many of them want to help promote China’s image to the world through their own funding and initiatives.

The government needs to make it easier to set up nongovernmental organizations (NGOs). It is far too afraid of them, which stems from worries that they cannot be controlled and might be fronts through which foreign government will create subversion. The process to establish them should be made easier. Besides, the government has admitted that 90 percent of NGOs operating in China don’t have legal licenses; many simply register as businesses.

Many debates in China focus on how it should build its image abroad. This is extremely important, as we have seen in Africa, where people’s perception of China can potentially determine the future of its relations there. Historically, Chinese leaders have strived to maintain issues of national sovereignty as the paramount focus of their foreign diplomacy. The idea is that the Chinese government won’t intervene in other nations’ affairs, with the expectation that, in turn, no one will inquire into theirs. The Chinese government is good at rattling cages to gain more influence during international discussions, but it shies away from taking too large an international role in actual decision making. In the mind of the Chinese government, it is better to spend money on its internal needs and to let America waste its money acting as the world’s policeman.

Harnessing and asserting its soft power is China’s best bet; however, it must do a better job. The government recognizes this and has been spending serious money to promote China’s good name worldwide. Unfortunately, many of their attempts so far have failed to improve China’s brand position.

As the end of cheap China increases consumption and the demand for better-quality housing and jobs, China’s need for natural resources will only get bigger. Further investment abroad will naturally cause more tension.