U.S. Woes Open Door for China

--US face the risk of be overtaken by China as the role model in economy and politics. --the meltdown in financial markets damanaged its economy and also tarnished it reputation and threatens its ability to extert infuluence around the global. --To the extent Chain suffer less overall, its relative strength will increase compared to US --more devloping countries will look to China's controled capitalism instead of US's unfettered capitalism. --The implication is more manapulation of tade and currency, prolonging US and global recession --The solution is to convince China to inlcude China into the international economic system used to be dominated by developed countries. Give China a large share in IMF. The new edition of Foreign Affairs magazine has a pair of articles about the global financial mess that carry these disturbing headlines: "A Weakening of the West," reads one, and "The Rise of the Chinese Model" the other. Those two pieces frame a serious but little-discussed strategic problem for President-elect Barack Obama. The meltdown in financial markets hasn't simply damaged the American economy. It also has tarnished the U.S. economic model, and threatens to reduce Washington's ability to exert influence around the globe. The "Anglo-Saxon brand of market-based capitalism" is under a cloud, Roger Altman, former U.S. deputy Treasury secretary and now chairman of Evercore Partners, writes in one of the Foreign Affairs pieces. "The U.S. financial system is seen as having failed." That can't be good for America's moral authority. Conversely, China stands to benefit from the mess in a couple of ways. In practical terms, because its financial system is far less exposed to the debt problems now ravaging the West, China simply will suffer less real economic damage. Sure, China will endure short-term hits from the decline in consumer demand for the goods its factories churn out. But to the extent it suffers less damage overall, its relative strength will grow. Having accumulated massive piles of foreign-exchange reserves, for example, China now can use that cash to make strategic investments that an economically flattened West simply can't. It will be better able to give aid to struggling nations, thereby winning friends there, and can keep up its pattern of investing directly in commodities and natural resources around the globe. At the same time it reaps practical benefits, China has an opening to expand its political sway. As developing nations watch the convulsions in world financial markets, they may well decide that China's model of a kind of centrally controlled capitalism is more attractive than the American model of unfettered capitalism. The danger is that the developing world starts to look to China for economic lessons, rather than to the West. Put it all together, and "I think it will mean greater influence for China," says Harold James, professor of history and international affairs at Princeton University and the author of the second Foreign Affairs article. These strategic risks will land directly in the lap of the new Obama team as it takes over next month. There are ways to minimize the damage to America's interests, but they will require avoiding the temptation to turn inward -- and, ironically, will require working more closely with China even while competing with it for global influence. The hardest part of the problem may be the intangible part -- the tarnish on the American economic model. Starting with Ronald Reagan's promotion of America as the "shining city on the hill," to the collapse of the Berlin Wall and communism, through America's rescue of Latin America in the 1990s debt crisis and on to the stock-market boom of recent years, the U.S. was leading a world-wide movement toward free markets, open trade and light government regulation of the economy. The spread of that model expanded American influence -- political as well as economic -- in places such as Central Europe and East Asia. More than that, it benefited the American economy by allowing for free movement of goods and capital. The danger now is that developing nations could turn instead to the Chinese model of government, with managed mercantilism as the favored approach. While that approach has worked for China, it also has produced global trade and currency imbalances that have made matters worse. Moreover, to the extent that developing countries might try to mimic China's manipulation of trade rules and currency values to protect their own markets, that would only prolong today's global slump and delay America's recovery. Faced with these risks, the Obama team has some advantages, of course. It should find it easier to execute a sustained policy of economic stimulus than will leaders in Western Europe, who are hobbled by the continent's fractured political system. And the mere arrival of a new president is an opportunity to re-establish American influence. Yet that alone can't eliminate strategic risks. Precisely because China is the main potential beneficiary of any American decline, limiting the damage likely will require convincing China that it will benefit more from a broad global recovery than from taking advantage of the West's short-term problems. Mr. James suggests that may mean trying to bring China more directly into an international economic system long dominated by the West. The Group of Seven industrialized nations would make a lot more sense as the place to discuss the world's economic woes if the group were expanded to include China, for instance. China also could be made a bigger participant in the International Monetary Fund, which would be a way to use Chinese surpluses to advance economic recovery in a way that benefits all, not just the Chinese. The biggest trick for the Obama team, though, will be to resist Americans' natural urge on the home front to turn inward at a time like this, becoming more protectionist and isolationist. That course likely would only worsen the consequences of the global problem -- and leave the field more open for China.