"A candid discussion of China, however, cannot neglect to mention areas of concern to the region. . . . China's defense expenditures are much higher than Chinese officials have published. It is estimated that China's is the third-largest military budget in the world, and clearly the largest in Asia. . . . Since no nation threatens China, one must wonder: Why this growing investment?"

Cui Tiankai, the director general for Asian affairs at the Chinese Foreign Ministry, was in the audience and asked a question that resonated with many present: "Do you truly believe that China is under no threat whatsoever from any part of the world? And do you truly believe that the United States feel[s] threatened by the so-called emergence of China?" Rumsfeld reportedly responded by saying he knew of no country that threatened China, adding, "The answer is no, we don't feel threatened by the emergence of China."

Policy Implications

If we take the secretary of defense at his word, it means that there is no reason for Washington not to persevere with the even-handed policy pursued by seven administrations: promoting China's integration into the world system while preserving balance in the regional and world systems as benignly as possible. We should avoid drifting into a "one-ally strategy" with Japan in Asia and being so concerned about constraining China that we alienate our friends throughout the region who do not wish to choose between Beijing and Washington. A confrontationalist policy would be to dramatically increase the hedge against Chinese power and embark on stiffer policies, from technology transfer to market access to military posture. This would have the quadruple disabilities of antagonizing the successful part of China, slowing the progress of its poorer majority, denying us the many benefits of a more cooperative relationship and antagonizing most of Asia, including most of our traditional allies. To go down this confrontationalist road would be a strategic blunder of monumental proportions. As one well-placed Australian official put it to me, "We will go up a hill with you, but not march over the cliff."

Second, Washington should avoid overmilitarizing its response since, Taiwan aside, China's true medium- and long-term competitive challenges are in the realms of economics and ideas, not armed force. Overconcentration on defense will lead to a misallocation of resources that will weaken America.

Third, China and the United States both need to adopt a policy of reassurance. Beijing needs to continually reassure the region, the world and Washington that its growing power will be used constructively. And America needs to adopt policies that reassure China that China's rising influence and status will be accepted, even as both nations are competitors in significant ways. It is not well advised for a secretary of state to go to Japan and add fuel to Beijing's suspicion that Washington is pursuing an encirclement strategy by saying: "I really do believe that the U.S.-Japan relationship, the U.S.-South Korean relationship, the U.S.-Indian relationship, all are important in creating an environment in which China is more likely to play a positive role than a negative role." Carrying out a frequent and on-going dialogue between Washington and Beijing, as Deputy Secretary of State Robert Zoellick and his Chinese counterpart Dai Bingguo have started, is an important first step.

Indeed, the United States and China should be having regular consultations about regional security. One proposal is for annual "three-two" talks between Beijing, Washington and Tokyo, where cabinet or higher-level security and diplomatic officers of the three get together to exchange views. There were hopes that the Six-Party Talks on North Korea might evolve into a more formal security structure, but this evolution will not be possible if the six parties cannot effectively address the nuclear problem on the Korean Peninsula. The main points are that China must be brought more centrally into the regional security architecture, that ways must be found to stop deterioration of Chinese-Japanese relations, and that it is imperative that both Washington and Beijing cooperate to eliminate nuclear weapons and programs on the peninsula. Accomplishing this last would give an enormous boost to U.S.-Chinese relations and stability in Asia.

China's recent, more constructive policy toward Taiwan needs to be continued and enlarged. More emphasis on winning hearts and minds on Taiwan, and less on deterrence, would be reassuring to everyone. Indeed, we are seeing moves in this direction, with the provision of more employment opportunities for Taiwanese people on the mainland, the liberalization of Taiwan's agricultural exports to China and the prospect of cross-strait cargo charters. The use of force in the Taiwan Strait would be diametrically opposite to the needs for mutual reassurance. Recent rumblings in China have mentioned the need for restraint in missile deployments in the area of the strait; this is a good idea that needs to be reflected on the ground.

But U.S. domestic policy is just as relevant to the stability of Sino-American ties. The solutions to the U.S. trade and budget deficits do not principally rest in Beijing--they rest in Washington. China's recent modest revaluation of its currency and its delinking the yuan from the U.S. dollar are welcome developments, but these moves will not fundamentally affect America's trade deficit with China nor, as Alan Greenspan said, have any discernible effect on manufacturing employment in America.

China is also not responsible for improving the quality of American education. American schools are producing inadequate numbers of U.S. citizens proficient in the hard sciences, mathematics and engineering. Nor can China be blamed for spiraling U.S. healthcare costs. It is the United States that must arrest the steady increase of health expenditures as a percentage of GDP. The American auto industry, for example, cannot remain competitive when General Motors' overhead includes $1,525 of health costs for each car rolling off the assembly line.

But the ball is not entirely in America's court. China must clearly signal its willingness to cooperate constructively with the United States to manage the interdependent systems from which they both derive so much benefit. One such area would be protecting intellectual property rights. China simply is too big to be allowed to violate foreign intellectual property the way earlier, smaller modernizing economies did. Beijing has to assume responsibility for the local officials who have become addicted to the revenues and employment their localities generate through the theft of intellectual property.

Of course, the single biggest thing China could do to both help itself and bring more stability to the world economic system would be to put its banking system on a genuine commercial basis, durably reduce its non-performing loan problem and thereby end what amounts to a great capital subsidization to exporters. Thinking more broadly, the major economic powers should coordinate their respective policies: America must address its savings, fiscal and monetary policy problems, China must address its banking and financial system woes, and Europe and Japan must stimulate domestic consumption and growth.

A senior Australian business executive had this advice for how to manage the U.S.-Chinese relationship:

"Will China compete with America for world leadership? As far as I can imagine, it will never be a competitor for that global leadership and the reason being is that the Americans have unique abilities--[you Americans] are innovative and [have] the ability to make quick decisions. You have the power of politics, and you have a geographical platform from which to operate that is unique. Innovation and fast decision-making you have, but not China. If America focuses on your strength; they can focus on their strength."