China is reportedly weighing a purchase of Italian debt, which would give it greater leverage in the global economy
Italian Prime Minister Silvio Berlusconi welcomes Wang Gang, the vice-chairman of China's main government advisory body, during a meeting at Chigi Palace in Rome / Reuters
It's not hard to understand why Americans might be nervous about news that China is considering buying up Italian debt, a potential first step toward bailing out the troubled European Union economies. There are immediate concerns, such as China's demand that Europe give up some the trade regulations that keep it protected from Chinese undercutting. And the story hits on a number of American anxieties, stated and unstated: that China's debt holdings give it a tool to use against us; the decline of the U.S. as the world's leader; the rise of China to displace us; Western financial weakness; the glimmer of doubt that maybe we got it wrong with the Western system of free markets and liberal democracy, that China got it right and will soon be leading the way.
But China, by buying up debt from Italy or elsewhere in the EU, might actually be doing far more to promote the Western-style free market democracy than to subvert it. An investment in Italian debt is literally an investment in the Italian style of governance, after all. More than that, it's an investment within a larger international system of free markets, global cooperative institutions, and inter-governmental organizations. Despite all the talk of the decline of the West and Western-style system, that fact that China -- the world's largest authoritarian state economy -- is even weighing sovereignty fund investments and World Trade Organization regulations is a nice little victory for Adam Smith, Woodrow Wilson, and other architects of the liberal international system.
China, of course, will likely continue to free-ride on the international system in the short term, manipulating currency flows as it depends on consumers in developed, free market democracies to buy its goods. And why shouldn't it? Its incentives are to maximize its benefit from the ever-freer global trade regimes (essential to the success of its incredible manufacturing output) while minimizing its costs to that system, getting around foreign trade safeguards as best it can. But the more successful that China becomes within the liberal international system of trade and cooperation, the greater stake it has in the continued freedom and cooperation of that system. Holding European debt might give China more leverage to cheat within the international system, but also reduces China's incentive to do so.
Imagine your friend, an avowed communist who runs her worker's commune to the letter of Marxist teaching, decides to start investing in the Chicago Mercantile Exchange, explaining she needs the money to expand her commune and to buy more pamphlets to spread the Marxist gospel. Is her business plan doing more in the service of communism or capitalism? It's an imperfect and incomplete analogy -- did I mention your friend's commune has over 1.3 billion residents? and that her investments make up nine percent of the entire Merc exchange? -- but the point is that her participation in the free market economy reinforces and strengthens it, even if she turns around uses her profit to support a smaller communist system within the larger capitalist one.
The process of coming to understand global economic cooperation as within a country's self-interest doesn't happen overnight. The world's developed economies didn't introduce the General Agreement on Tariffs and Trade -- the first real step toward a liberal system of international trade that promoted cooperation over protectionism -- until 1947. Before then, the world viewed trade much the same way that China does today: competitive, with each state best served by protecting their own industries and seeking to undermine one another's. It took centuries for the leading governments to decide that everyone was better off if they dropped the inefficient protections. Even the GATT, as revolutionary as it was in shifting the global economic system to one of cooperation, was only a partial step; the World Trade Organization wouldn't come until 1995, and its latest round of tariff-cutting agreements has been stalled for a decade.
It's not a coincidence that the greatest proponents of the liberal international system are also its richest: the U.S., Japan, Germany, France, and the UK, all of which benefit tremendously from a world of free trade and cooperation. China's increased buy-in to this system, and perhaps even its partial leadership of it, is likely to more closely align its interests with the rest of the world's, which is precisely the point of such a system. That buy-in may make it more difficult for the European Union to challenge China's notorious and illiberal protectionism, but it may also bring China closer to accepting the idea that made the European Union (which China so loves) possible in the first place: that the global economy can be built on cooperation and mutually held rules, rather than on zero-sum competition. For example, it could lead China to the conclusion that, rather than simply bailing out Europe, what might really further Chinese interests would be increasing European imports and leveling out the trade imbalance that is so weakening Europe's economies.
Still, it's more difficult to imagine that this would liberalize China's domestic governance; for now at least, the country is likely to continue making dissidents vanish, tightly managing speech, and mistreating poor rural communities regardless of how much Italian debt it holds. The question of whether a country like China will naturally become more democratic as it embraces the free market is still largely one of theoretical debate. But, when it comes to the global economy at least, it might be time for the West to start looking at China as a natural ally rather than a competitor.