Why China Wants a G-3 World

International Herald Tribune | September 8, 2011

By Parag Khanna and Mark Leonard

LONDON — Of all the formulations deployed in recent years to describe the emerging world order, G-2 is probably the worst and most dangerous.

Americans don’t like the idea of another rival so quickly achieving strategic parity and influence, and the Chinese are uncomfortable with such a high-level responsibility commensurate with their weight.

The U.S.-China relationship can hardly be described as agreeable, progressive, or even productive. And yet people keep coming back to the idea of a G-2 because the alternatives can seem so inefficient.

The G-20 — with its unwieldy membership of irrelevant countries like Argentina and Italy — can barely tackle financial regulation, let alone climate change, failed states and nuclear proliferation. This explains the latest vogue phrasing from the commentator Ian Bremmer: the “G-Zero” world, in which there is no clear leader and no functioning system of global governance.

Yet even our seemingly chaotic world does have fundamental power realities, patterns of interaction, and rules and institutions that can be used to harness collective resources. Particularly since the end of the Cold War, a range of mechanisms has arisen to address gaps in the governance of issues ranging from intervention to climate change.

The driving force behind these global policy innovations has been neither America nor China, but a third power which is increasingly overlooked: Europe.

Europe has been neglected from recent literature on the emerging global order in favor of sexy but nonfunctional categories such as BRICS — the club of emerging powers including Brazil, Russia, India, China and South Africa.

The reason Europe is discounted is because it often fails to speak with one voice; its decision-making is slow. But despite this handicap E.U. countries together still represent the world’s largest trade block, exporter of capital, and source of funds and leadership for multilateral organizations. And in spite of the difficulties of collective decision-making, European resources not only drive peacekeeping operations and development initiatives across the planet, it is Europeans who have done more than anyone else to establish a global legal order and the multilateral economic rules that have allowed globalization to take place since the end of the Cold War.

In fact, we live in a “G-3” world — one that combines U.S. military power and consumption, Chinese capital and labor, and European rules and technology. The United States, the European Union and China are the three largest actors in the world, together representing approximately 60 percent of the world economy — with the E.U. being the largest of the three.

The E.U.’s population of more than 500 million is one-and-a-half times that of the U.S., while only one-third that of China, which has more than four times as many people as America. In terms of military budgets and power, the United States is second to none, but the European Union is still far ahead of China. Equally important to these material factors is the observation that only the United States, the European Union and China actually represent strong governance models that are being exported and emulated around the world. Only these three, therefore — and not yet Brazil or India, and no longer Russia — are so systemically relevant that their individual actions and decisions impact the whole world. They are producers of global governance, while most other states are still receivers.

What is more, the triangular relationship between these three countries is crucial to the world. Everyone knows about the density of economic, security and human links across the Atlantic and the growing importance of the “Chimerican economy.” However, most American analysts have missed the simple fact that the E.U.-China relationship is in many ways as dense as the U.S.-China relationship.

Europe is a major source of high technology to China. It is a larger foreign investor in China, and has a larger trade deficit with China than America. Leverage over Chinese behavior to modify its currency and trade practices will need to come as much from Brussels as from Washington. Despite notable transAtlantic differences on issues such as Iraq, Afghanistan and climate change, the United States is much better off having Europe in a smaller club as a partner than being ganged up on by BRICS in the G-20.

Recent Chinese behavior clearly demonstrates just how strongly China wants a European hedge against the United States, and thus a G-3 world. In an effort to diversify its massive currency reserves away from dollars, China had already stepped up its purchases of euro zone sovereign bonds prior to the financial crisis. And in just the past two months it has vocally sought to display confidence in Europe through the acquisition of new Eurobonds.

As George Soros recently stated: “I certainly would not short the euro because China has an interest in having an alternative to the dollar. You can count on China to back the efforts of the European authorities to maintain the euro.” Additionally, China has stepped up retail foreign investment across Europe from England to Greece, infusing capital into property markets and other sectors, providing a much-needed lifeline.

While China has expressed concern about the euro zone crisis, it has been scathing of America’s need to get its fiscal house in order in the wake of its debt downgrade. Observers know very well that Europe, not America, is China’s role model for its state welfare systems, social democracy, low inequality, infrastructure, and commitment to sustainability. There are far more Chinese students in Europe than in America, and far more delegations of Chinese technocrats visiting European capitals.

This hints at the importance of shifting toward a G-3 discourse and framework. Europe is perhaps the only power that consistently embraces and advances global norms — and devotes considerable resources to them and demonstrates policy innovation. Without European contributions, there will be little global progress on intelligence sharing, counterterrorism and proliferation, promoting democracy and human rights, reducing greenhouse gas emissions, or rebuilding failed states.

A G-2 world all but guarantees a repeat of history rather than a break from it. It is a comfortable fiction that is steering us toward a century as unstable as the last. If we seek a 21st century of progressive governance rather than another Cold War, more regularly convening a G-3 would be a good place to start.

Parag Khanna is a senior research fellow at the New America Foundation and non-resident senior fellow at the European Council on Foreign Relations.Mark Leonard is director of the European Council on Foreign Relations.

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