Xi Jinping has rejected the concept of comparative advantage, the very notion underpinning the system of international commerce. Why should America sign a trade agreement with a country that does not believe in trade?
SOME MISTAKES are repeated over the course of generations. For more than four decades, American presidents sought a closer relationship with China, working to “engage” that country so as to “enmesh” it into the international system. Richard Nixon, in his landmark Foreign Affairs article in 1967, provided the rationale for engagement, arguing the Chinese state could not be isolated. “Taking the long view,” he famously wrote then, “we simply cannot afford to leave China forever outside the family of nations, there to nurture its fantasies, cherish its hates and threaten its neighbors.”
Since the early 1970s, American policymakers believed they could avoid such nurturing, cherishing and threatening by making the success of the Communist Party of China a goal of U.S. foreign policy. With interests defined this way, American presidents helped China’s communists at crucial moments.
The first of those moments came in 1972, during the latter stages of Mao Zedong’s Cultural Revolution. Years of internal fighting and chaos—essentially civil war—had weakened China’s ruling organization, but Nixon’s visit that year signaled support for Mao’s tottering regime. “We’re damned,” said Shanghai banker Wu Yaonan at the time, as recounted by democracy activist Chin Jin. “The United States is coming to the rescue of the Communist Party.”
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Another rescue was secretly mounted by President George H.W. Bush in the wake of protests in 371 Chinese cities in the spring of 1989 and the slaughter in Beijing in early June. Bush sent emissary Brent Scowcroft on an unannounced trip to the Chinese capital in July to assure paramount leader Deng Xiaoping that Washington would stand with the Party and help it outlast withering criticism from abroad. Bush then made sure that America’s Tiananmen sanctions, which he was forced to accept, were ineffective and lifted quickly.
Perhaps the most far-reaching attempt to save the communist system came a decade later when the Chinese economy appeared to be contracting and foreign businesses were reconsidering their commitment to China. Then, in 1999, the Clinton administration inked an agreement with Beijing containing what were to become China’s terms of entry into the World Trade Organization (WTO).
“Economically, this agreement is the equivalent of a one-way street,” President Bill Clinton said in a speech in March 2000. By that, he meant China was the one making all the concessions, and, reflecting the Western optimism of the times, he predicted the country would inevitably be transformed by trade. “China,” he said, “is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom.” Daniel Patrick Moynihan was more appropriately cautious: “The world,” the senator said, “will be a safer place—or so we hope.”
IN MANY ways, America’s hopeful policy became a grand wager. Americans bet that hostile communists would eventually return goodwill and support postwar liberal values that were bolstered by an American-designed architecture of treaties, conventions, rules and norms.
Nixon understood the nature of the gamble and eventually realized it might be a loser for America and the international community. As he said of China shortly before he died, “We may have created a Frankenstein.”
Unfortunately, that is exactly what America did—and is still doing. Today, Chinese leaders are using the proceeds of trade with the United States to, among other things, expand their military while its officer corps openly talks about killing Americans. Twice in December, a senior Chinese officer publicly urged unprovoked attacks on the U.S. Navy in the global commons. In the second of the outbursts, on the twentieth of that month, Rear Admiral Luo Yuan proposed the use of two types of ballistic missiles to sink two aircraft carriers and kill 10,000 Americans.
The Chinese have even gone beyond bluster. In May 2018, the Wall Street Journal reported that the Chinese military, from its base in Djibouti, lasered an American C-130 cargo plane, causing eye injuries to two pilots. An attempt to blind pilots, of course, is tantamount to an attempt to bring down their craft and kill them. American planes are continually lasered in the East China Sea by Chinese forces. Moreover, last year sonic waves caused brain injuries to American diplomats at the consulate in Guangzhou. Because the Chinese Communist Party runs a surveillance state, Beijing either was the perpetrator of this crime or complicit in it.
Injuring American pilots and diplomats is not Beijing’s only sin. China is trying to dismember three American treaty allies in its peripheral seas. In the South China Sea, inside its expansive “nine-dashed line,” China has now positioned about 275 vessels around Thitu Island, which has long been under control of the Philippines. This pressure tactic, dubbed the “cabbage” maneuver, was employed to seize Scarborough Shoal from Manila in early 2012 and has since been used in various other Philippine locations in the South China Sea, such as Second Thomas Shoal.
Beijing is also trying to take apart another island nation, Japan, by pressuring East China Sea islands that Tokyo administers and calls the Senkakus. At the same time, Chinese state institutions, backed by state media, are making the almost-absurd claim that the Ryukyu Islands, including Okinawa, are part of China and not Japan.
In addition, Beijing disputes South Korea’s possession of the Ieodo Ocean Research Station, built on what is known as Socotra Rock in the Yellow Sea.
To support these and other outlandish territorial claims, the Chinese are continually interfering with American vessels and aircraft in the global commons, putting crews in danger with close intercepts. In September, for instance, a Chinese destroyer, the Lanzhou, attempted to cross the bow of an American one, the Decatur, in the South China Sea, coming within a few yards.
Beijing indulges in bad conduct galore. It is giving safe haven to North Koreans cyber-attacking the United States; is proliferating materials, equipment and technologies for nuclear weapons and ballistic materials to avowed enemies of the United States such as Tehran and Pyongyang; is imprisoning American legal residents, and possibly U.S. citizens, in concentration camps in Xinjiang; is attacking both the concept of democracy in general and American democracy in particular in unrelenting propaganda campaigns; and is violating American sovereignty by operating its agents and diplomats in improper and sometimes open attempts to influence and coerce Americans. Challenges don’t come more comprehensive and existential than China’s.
This aggressive, belligerent, dangerous and sometimes criminal conduct resembles, of course, similar activities against other states, and all such bad acts are the evidence of the failure of America’s engagement policies. For decades, Americans thought the remedy for the failure of engagement was more engagement.
A China seeking to be a long-term flouter would be bad enough, but there is evidence that the Chinese leadership has broader horizons and more malign intentions. Xi Jinping, the current ruler, is clearly far more ambitious than Deng Xiaoping, Jiang Zemin or Hu Jintao, his three immediate predecessors. Like Mao Zedong, Deng’s predecessor and founder of the People’s Republic, Xi has a global vision. While Mao fervently talked about communist revolution sweeping the planet in the distant future, Xi nostalgically looks to China’s imperial past, where the emperor maintained that he or she—one woman sat on the throne—ruled tianxia, or “All Under Heaven.”
Xi uses tianxia language in his pronouncements, Beijing’s house scholars study how to apply tianxia to the world and Chinese officials hint that a tianxia revolution is coming to the international system. For instance, in September 2017, Foreign Minister Wang Yi wrote in Study Times, the Central Party School’s influential official newspaper, that Xi Jinping’s “thought on diplomacy” has “made innovations on and transcended the traditional Western theories of international relations for the past 300 years.”
Wang, with his time reference, was pointing to the current system of sovereign states, derived from the Treaty of Westphalia of 1648. The foreign minister’s use of “transcended,” therefore, is an indication Xi does not merely want the world to leave China alone. On the contrary, he contemplates a world where only China has sovereignty.
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Xi does not want to “export” the China model of governance, as is often said, but eliminate competing models. When China’s ruler tells us that “the Chinese have always held that the world is united and all under heaven are one family,” as he declared in his 2017 New Year’s Message, he is not issuing holiday puff. He is really ordering us to accept Chinese rule. “In the People’s Republic, there is now a visible and increasingly strong revival of traditional, imperial political values and ideals,” Fei-Ling Wang, author of The China Order: Centralia, World Empire, and the Nature of Chinese Power, recently told me. These “values and ideals” include a totalitarian “China Order,” a world empire encompassing tianxia.
The tianxia ambitions do not carry appeal outside China and have no followers elsewhere, says Charles Horner of the Hudson Institute. But the fact that Xi continues to talk about them is a warning that China’s leader does not care and is determined to impose them. Xi’s views are ludicrous of course, but they nonetheless put Washington on notice that China is not, as virtually all observers assume, competing with the United States inside the existing Westphalian system. It is, in reality, acting in ways unacceptable to the United States and other stakeholders in that current order.
In view of Beijing’s growing horizons and hostility, one wonders how Washington can successfully engage a hideous and hostile China, but a more fundamental issue is whether Washington should even attempt to do so. Engagement, in all its various forms, looks downright dangerous as it will help Frankenstein’s monster, if we can borrow Nixon’s imagery, to become more powerful. So what do we do? Arthur Waldron, an expert on Chinese history, says “Only one thing: exit completely as from any place full of plague, disease and contagion.” Fox News Channel’s Laura Ingraham went one step further in her primetime show in April, calling for a “boycott” of China.
Whether one stumps for a full-on boycott or mere disengagement over time, the only safe course for America is to deny Beijing resources by, among other things, no longer supporting its economy. Without sufficient resources, the multi-decade Soviet challenge failed, and without sufficient resources, China’s would as well.
A PAINLESS disengagement is impossible. As Waldron pointed out, “we unhesitatingly built a vast web of interdependence with China.” Unwinding decades of misguided policy—and this interdependence—inevitably carries costs. For instance, there will be burdens on the American economy, at least at first. Moving supply chains out of China, a major element of a disengagement strategy, will be enormously disruptive.
Some companies, such as Apple with its dependence on contract manufacturer Foxconn, will be at risk for years. There could be interruptions in the flow of pharmaceuticals, as that particular industry has concentrated much of its production in China. Moreover, disengagement will put at risk the stock of American investment in that country, valued at as much as $256 billion. Beijing holds American companies hostage in normal circumstances, so it will surely do so when it is clear Washington is looking for a full divorce.
Yet there are crucial mitigating factors. First, most companies can adjust quickly, shifting production in some cases in a matter of months. When I practiced law in Hong Kong, I helped businesses move production out of China in the immediate wake of the Tiananmen massacre. They did so without stoppages, and I watched them smoothly reenter China months later when it became clear that political upheaval was having little effect on the country’s manufacturing sector.
Even China-dependent Apple can adapt. Foxconn, which already has facilities in other countries, is eyeing a Wisconsin plant, and the Cupertino-headquartered company is also building significant facilities in India to meet demand there. Prime Minister Narendra Modi would be happy to have his country become the world’s new “factory floor” as that would further his signature “Make in India” program.
Second, companies, for business reasons, are already reducing vulnerability to China—largely because of its deteriorating economy, Beijing’s prejudicial actions against them, reduced manufacturing costs elsewhere and growing perceptions of Chinese geopolitical risk. GoPro, for instance, announced in December that it is moving some sourcing out of China. At the same time, manufacturing in America is flourishing due to a confluence of factors, including the growing popularity of basing production close to the point of consumption. Stanley Black & Decker’s announcement in May that it would build a $90 million factory in Texas for Craftsman tools—which are now made in locations such as China and Mexico—is a sign the United States can competitively produce even low-margin items. Disengagement from China is becoming fashionable as “onshoring” gains momentum.
Third, engagement over the course of decades has facilitated China’s taking of American intellectual property (IP), and disengagement will reduce grievous losses. Each year, Beijing steals hundreds of billions of dollars of U.S. IP, perhaps as much as $600 billion, as the February update to the findings of the Commission on the Theft of American Intellectual Property and the U.S. Trade Representative’s report of the same month show. China accounts for 87 percent of the pirated goods confiscated at America’s borders, so it is no wonder that many call China’s theft “the greatest heist in the world.”
There are, in addition to outright theft, the losses of IP due to forced taking by statute or practice—some of it in apparent violation of Beijing’s WTO obligations. This campaign to grab tech has continued for decades and therefore is obviously directed from the top of the Chinese political system. Incredibly, theft, perpetrated for four decades, has this century become even more integral to China’s economy. Hu Jintao, Xi Jinping’s immediate predecessor, sponsored the WTO-noncompliant “indigenous innovation product accreditation” rules. Xi took Hu’s tech-taking one step further with his audacious “Made in China 2025” initiative, which contemplates China dominating eleven tech sectors by the middle of next decade. China, it is clear, cannot meet Xi’s ambitious timetable set by CM2025, as the plan is known in China, unless Beijing continues to take foreign intellectual property. In fact, Chinese cyber-attacks for commercial purposes appear to be related to Xi’s grand initiative.
Put all this together, and it’s clear why the updated Blair-Huntsman report—the common name for the report of the Commission on the Theft of American Intellectual Property—calls China “the world’s principal IP infringer.” Disengagement means less American contact with China, which means, ultimately, fewer opportunities for Chinese thievery and almost no opportunities for forced taking.
Fourth, Chinese industrial policy is injuring American companies and disengagement will reduce the harm by moving them as far as possible from Beijing’s reach. Xi Jinping has launched numerous Cultural Revolution-style efforts against successful foreign businesses, pursued highly discriminatory law enforcement actions against them, and sponsored national security legislation and regulatory rules unduly burdening foreign competitors. Disengagement, in short, saves companies from deteriorating conditions in China.
American and other policymakers have tried “constructive engagement,” “aggressive engagement” and everything in between as they attempted to entice, cajole, shame and inspire Chinese leaders. Robert Zoellick, while deputy secretary of state in 2005, urged China to become a “responsible stakeholder” in the international system. The following year, Secretary of State Condoleezza Rice pronounced it was, in fact, becoming one. American policy was built on self-delusion. Hopes became assumptions and assumptions hardened into ideology. Ideology, in turn, became faith.
Yet critics now recommend only incremental adjustments to the four-decade-old engagement policy. Take, for example, Kurt Campbell and Ely Ratner, Obama-era State Department officials. “Neither seeking to isolate and weaken it nor trying to transform it for the better should be the lodestar of U.S. strategy in Asia,” they write of China in Foreign Affairs. The gist of their proposed approach is “don’t do much.”
The proponents of unambitious—or as President Donald Trump might say, “low-energy”—views have a point: nuclear-armed states should be given wide berths, especially when they’re in danger of failing. George H. W. Bush presided over the largely peaceful collapse of the Soviet Union, but his infamous Chicken Kiev speech of August 1991 makes it clear the forty-first president was luckier than anything else. He had, as is now evident, completely failed to understand the power of nationalism in Ukraine, the site of the mistimed address, or the dynamics in the wider USSR, which collapsed just months after the speech.
SO WHAT are we missing in China now? American policymakers should at least try to understand internal Chinese dynamics because those dynamics are cited by engagement proponents as support for Washington’s overly generous approach. Moreover, those dynamics are responsible for behaviors now forcing policymakers to reassess that once-established policy.
American policy elites do not understand China’s dynamics because they not only cling to overoptimistic assessments of China’s trajectory, as Campbell and Ratner have told us, but also because they maintain fundamentally misconceived views of the nature of Chinese Communism. China, for various reasons, now cannot meet a basic expectation of others: it is unable to live within the current international system, even as adaptive as that framework has proven to be.
Xi owns the results of his stagnation-inducing programs: a slowing economy. The official National Bureau of Statistics (NBS) regularly reports economic growth in the high-six-percent range, but those reports are exaggerated, especially since the middle of this decade. Take the year 2016 as an example. The NBS reported that China’s gross domestic product grew 6.7 percent that year. In 2017, however, the World Bank issued a bar chart showing that China’s GDP increased only 1.1 percent, and this surprisingly low figure is in line with the single most reliable indicator of Chinese economic activity: total primary energy consumption. Official statistics report that in 2016 this metric increased 1.4 percent.
The situation has not improved much since then. In December, Renmin University’s Xiang Songzuo created a sensation across China when he said 2018 GDP growth would come in at about 1.67 percent and that the economy might even contract. Indicators for that month pointed to contraction, as did numbers for January and February.
In March, there was a slight rebound due to Beijing doing what it promised this year not to do: flood the economy with even more debt. Yet the economy is now heading down again as the stimulus wears off—more evidence that debt alone cannot create a sustained recovery. Even if one believes Beijing’s exaggerated growth numbers, the country is creating at least five-and-a-half times more debt than nominal GDP.
What will rescue a fragile China at this juncture is the United States continuing a trade relationship with the Chinese state. After all, China’s merchandise trade surplus with America last year ($419.53 billion) accounted for 119.3 percent of its overall merchandise surplus ($351.76 billion) in the same time period. So reaching a trade deal with the United States is critical for Xi Jinping. As is said in Chinese circles these days, “only Trump can save China.”
Yet even if Trump wanted to save China, Beijing cannot be saved. The Chinese state, for various reasons, cannot sustain a trade relationship with America.
The proponents of a U.S.-China trade agreement say a deal will end Beijing’s criminal and pernicious practices. Furthermore, they allege, a deal will open up China’s economy by, among other things, reducing tariffs, obtaining access for American businesses to sectors now off-limits to foreigners, abolishing subsidies to state-sector competitors, and eliminating discriminatory and onerous requirements on foreign entities.
The problem with such an approach, however, is that Washington has inked decades of deals with Beijing, and Beijing has violated all of them. Consider the plight of American electronic payment processors. As a condition for joining the WTO, China promised to allow these businesses to enter the Chinese market by 2006, five years after accession. Today, after Beijing lost a WTO case on the matter in 2012, no American company has entered the Chinese market. American Express at the end of last year received preparatory approval from China’s central bank to issue credit cards, but it is at best still a year away from doing so, and it had to take on a joint venture partner to get this far.
The final approval, when and if it ever comes, will not be worth much. By now, China’s UnionPay has had the time to obtain a near monopoly in China on credit cards. Moreover, Alipay, the Alibaba Group affiliate, along with Tencent’s WeChat Wallet have come to dominate electronic payments in the country. Beijing’s policies in this area were malicious and extraordinarily selfish, and they worked.
What won’t work is an agreement to end this unfavorable situation for U.S. companies. China today is less able to honor commitments it makes to Washington than it was in the pre-Xi era. Xi, since becoming Communist Party general secretary in late 2012, has moved China away from a mixed economy toward a state-dominated system. Xi, like Mao, has sought self-sufficiency. As a result, China’s leader is returning the country to the 1950s, recombining already large state enterprises back into formal monopolies; increasing state ownership of state enterprises, reversing the partial privatization of earlier years; arranging for state businesses to take stakes in private ones; and shoveling more state subsidies to favored market participants, most of them state enterprises. At the same time, he has exerted controls—many of them draconian—on the country’s financial and currency markets in order to keep share and currency prices within government-mandated ranges and cut down on currency outflow.
All this is backed up by increasingly frequent ideological and xenophobic campaigns. Xi’s centerpiece initiative, encapsulated by the phrase “Chinese Dream,” contemplates a strong state. Yet a state-dominated China does not sit easy with the notion of a market-oriented system. Moreover, more than his predecessors, Xi has rejected the concept of comparative advantage, the very notion underpinning the system of international commerce. Why should America sign a trade agreement with a country that does not believe in trade?
To compound problems, Xi’s political grip is far more tenuous than it first appears. The bold ruler has staked his precarious position atop the Communist Party on the success of his Maoist-inspired efforts, so it is unlikely he can accept market-opening demands and still retain his high position. He has, by centralizing power, also centralized accountability, and for him, that means there is no one he can blame. Xi’s Maoist-like vision either succeeds or he succumbs to the political enemies he has created with waves of political purges. Moreover, the price of failure in Xi’s China has increased. He has deinstitutionalized the Communist Party by doing away with the post-Mao rules and understandings that have constrained infighting and reduced the personal cost of losing political struggles. He is, therefore, all-in on Mao-type internal economic and political policies.
IN THESE circumstances, what troubles the trade relationship between China and the United States cannot be fixed by something as simple as an agreement. So why do Washington’s policymakers think the remedy for decades of failed trade deals with that country is signing up another one in an even less favorable environment?
“I hope you can make persistent efforts to push forward an agreement that can benefit both sides,” Xi Jinping said in February, referring to the prospective trade deal with the United States. “We all think that in terms of maintaining the prosperity and stability of the world, as well as promoting global economic prosperity and development, our two countries share broad mutual interest.”
Unfortunately, China and the United States, at far different stages of economic development and with vastly different political systems, don’t share interests. The conduct of China’s senior leaders betrays a belief that they calculate their interests in ways far different than their American counterparts.
That means disengagement, the only policy that has not failed over the past four decades, is the one that can promise acceptable outcomes for America. Disengagement, of course, does not fit easily with American generosity and optimism, but China, with its scorched-earth, winner-takes-all mentality, is not leaving Americans a choice. Many say the U.S. tie-up with China is “too big to fail.” Yet it is better to point out that China has become too inward-focused for relations to succeed.
Jonathan Bass, chief executive of PTM Images and a disengagement advocate, says the United States should trade with nations with “a commitment to democracy and the rule of law and a commitment to the belief of the primacy of the individual over the state.” And he continued: “to say the U.S.-China relationship cannot be undone is fundamentally wrong.”
In fact, undoing that relationship now looks fundamentally right.
