The diplomat who opened relations with the People's Republic assesses the "inconceivable" changes since his first visit to the country in 1971.
FORTUNE -- Henry Kissinger, who played a dominant role in U.S. foreign policy during the Nixon and Ford administrations, is the author of a new book, On China. He spoke with Fortune managing editor Andy Serwer.
Q: Dr. Kissinger, can you talk about the nature of the relationship between the United States and China today?
A: We are the two major economic engines in the world that interact with each other all over the world. So economic progress and peace of the world depend on the nature of that relationship. At this particular moment, both governments understand the importance of the relationship but have not succeeded yet in translating it into a common project for the future. They have been better in writing communiqués for the meetings of heads of government than in filling in this gap. Both countries are moving into a new and somewhat undefined future and need to work on whether they can define it in a parallel way. It doesn't have to be identical, but it has, at a minimum, to avoid strategies of confrontation.
Let's talk about the changeover in leadership in China and what that would mean, going from Hu Jintao to Xi Jinping in 2012 and 2013. How does that process work? How should American business people view the changeover in leadership in China?
American business leaders tend to think of their activities as a series of episodes to be managed by legal processes and predictable norms. The Chinese manage their internal affairs by relationships, not by legal processes. So when one operates in China, one has to understand how the social and cultural network operates. The governmental process that is now starting will take more than two years. It's not like an American election, where new presidents emphasize the novelty of what they're doing. It's the opposite. The new group that will come into power in China may emphasize the continuity of what they are doing in general. Their innovations will not be presented as a dramatic break, and one will see it only evolve gradually. The Chinese for centuries have managed to keep their internal decision-making process untransparent. You know the inner group that makes the decisions, but how they make it, how it is decided, and how they then bring about acceptance of the decision remain obscure. I know the players, and I've met with many of them, but they do not share with one how they make their decisions. But I believe that the process will become more transparent as it evolves, not because of democratic theory, but because of the nature of relationships and structures that have evolved.
That's fascinating that you think they'll become more transparent, so are things really changing in China politically?
It is part of a continuum. The current leaders, the Hu Jintao generation, is obviously different from the preceding -- from the revolutionary generation that I first met. The next generation -- that of Deng -- was the one that brought about the reform whose fruits we now see. For them, the Cultural Revolution was an abomination. The generation that is coming in includes the children of the victims of the Cultural Revolution. They are building -- at least some of them -- the Cultural Revolution into the continuum of Chinese history. It isn't that they approve it, but they consider it an experience that shaped them, through which they learned something. Part of them believe they were strengthened by the experience.
Can you anticipate or discern any possible directional shifts with Xi Jinping and his group of associates perhaps going forward?
I think that China will try to build itself more fully into the international system and insist on sharing its design and not only its execution. There will be an effort to evolve, or explore at least, the concept of partnership -- or parallel evolution -- with the United States. But coupled with this is that Hu Jintao came out of the bureaucratic system that evolved under Deng, and that concluded China needed a period of calm. This new group will move in the same general direction. But it will probably be more muscular in its conduct. So you will get both tendencies. There'll be an overall tendency to explore how a partnership with America would work. And that would be reflected also in economic policies. Of course, all of this assumes that America pulls itself together. We cannot expect the Chinese to solve for us troubles for which we are largely responsible. If America looks as if it is coming apart, if an economic crisis continues, then this will be reflected in Chinese conduct.
Particularly if the economic crisis stems from a lack of leadership.
Let's talk about our financial crisis. Has this lowered our credibility in their eyes?
It has lowered our credibility in two ways. One, because some of our lectures and predictions have turned out to be inaccurate. And second, it has lowered the prestige of those within the Chinese decision-making system who argued for the American approach and who believed that they could learn from America. Their influence was probably weakened, at least for a period after the crisis.
When you talk about the development of China going forward you speak about co-evolution, a Pacific community. Was that an idea that you had organically or did that reflect what you think already is occurring? Or both?
Really both. There is also a gap of cultural understanding. The American governmental process operates through a series of discrete individual decisions. So for example, in 2009, there occurred three events we considered disparate: We had an arms deal with
Taiwan. The President saw the Dalai Lama. And the Treasury pressed the currency issue. The Chinese looked at that, said, "Aha,this is now clear. They're trying to keep us down." Anyone familiar with the American political process was aware that this happened as a series of discrete, individual decisions that sort of accidentally came together. So this is how we look at things. The Chinese look at issues in an overall conceptual way. They have the concept of "shi", S-H-I, which expresses the confluence of all factors bearing on a problem. This is an inherent difficulty in our relationship. It is my impression that within the Administration and on the Chinese side, there is at this moment a serious effort to come to some definition of cooperation. We've become pretty good, both sides, at solving immediate issues as they arise. But we have not yet developed a good program of how to fill the gap between the very short-term tactical and the very abstract general. There's a second obstacle, which is that American public opinion is at this moment growing hostile to cooperation with China. When I promoted my book, I was on scores of radio shows with call-ins. I don't remember a single question from a caller friendly to China.
The U.S. and China aren't necessarily antagonists, or we don't want to be. As you suggest, we're able to solve quick crises or prevent things from escalating. Are we rivals though?
On a business level, it's a substantial element of competition. In this sense, we are rivals. On the other hand, there have now been eight American administrations that have dealt with China since Nixon, and they all have come out at more or less the same conclusion. Clinton and Reagan started somewhat differently. But within two years, both came back not to exactly the same point, but to the importance of a cooperative relationship.
Given the leadership changes in both countries in 2012, and beyond in China, there probably won't be a whole lot of movement in either direction over the next 24 months, or 12 to 24 months?
Dai Bingguo, who's the highest ranking [Chinese] official dealing with foreign policy, wrote a long article about why China has a national interest in a cooperative relationship and why some of the beliefs that they are trying to dominate the world are not accurate. But there's no question that the people against whom he was writing that article are influential, and so there's always a possibility that after the change of leadership, if things don't develop well, they might become more assertive again. And when you look at our upcoming Presidential campaign, you can be sure that the extreme left and the extreme right will raise the China issue in a confrontational way. So we have a difficult period to go through.
Did you ever anticipate, Dr. Kissinger, how much China would change from your first visit in 1971?
When I first came to China, there were practically no automobiles, very limited consumer goods, and no high-rise buildings. The technology was fairly backward. When President Nixon came to China, we had to bring a ground station with us in order to communicate effectively and for our media to communicate. It was typical of Chinese pride that they bought the ground station from us so that they were not operating an American ground station. As late as 1976, five years after the opening, trade with China was less than the trade with Honduras. This whole process we are talking about now didn't get conceived until 1979 and didn't really get momentum until the late '80s. So this is a 20-year phenomenon.
Are you concerned that the Chinese economy could overheat, and are you confident that the Chinese government leaders are able to handle a market-driven economy?
They already are running a kind of market economy. Now, what they are trying to do and what I think will happen is the emergence of a system that is somewhat in between. They will have the challenge of developing an economy where the coastal regions are at the level of advanced economies, and the interior is at the level of some of the least developed countries in the world. That's a huge challenge. And whether that can all be done by market principles remains to be seen, but I don't think that is the major problem. There is a danger of overheating. There is a danger of a housing bubble in matching all the structures and even cities being built with demand that could get difficult.
But the key problem will be how to relate these emerging economic structures to political structures that are being adapted. Internationally, China will undoubtedly attempt to translate its economic performance into political influence. In that sense, there will always be a kind of competition. But it does not have to take the form of a zero sum game.
It seems inevitable that China will become the largest economy in the world soon. Is that something that should concern the United States?
It's going to happen, but one has to see it in the right perspective. Per capita, it still will be about only a fifth of the United States because it has to be distributed over a much larger population. There exists a huge demographic problem. A shrinking percentage of the population has to take place to take care of a rapidly growing older generation after 2025 or 2030. Finally, we should act not because we want to outdo China, but because of what we think is essential for our society and for the peace of the world. But it is an unprecedented situation. For cooperation to work, both sides have to have the view that I described. It's not something America can do unilaterally. And -- but I think it is necessary for peace and progress ...
Let me ask you about China internally. How widespread is unrest in China, and what does it mean?
I have no first-hand knowledge of that unrest, but the Chinese media report many demonstrations. There is no question that when you move hundreds of millions of people from the countryside into the cities, when you create artificial cities where people are moved into, then based on the experience of other industrializing countries in previous centuries, traditional ties get weakened, and dissatisfaction with conditions rises. So there must be some uncertainty and, to some degree, unrest. My understanding is that most of these demonstrations have a local origin and deal with specific grievances and are not on principles, like what the form of government should be. But it must be a concern of the government in China whether at some point these demonstrations merge and become a political event.
This article is an extended version an interview that originally appeared in the September 26, 2011 issue of Fortune.
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