Saturday, April 25, 2020

There Is No China Crisis

By Daniel W. Drezner - April 25, 2020 at 06:00AM

The United States has a long and distinguished history of freaking out about powerful rival nations. When countries even begin to approach the United States in economic might, the political reaction often borders on the hysterical. At the height of the Cold War, high rates of Soviet gross domestic product (GDP) growth caused policy makers to fret that the USSR's centrally planned economy would outperform American capitalism. Members of Congress reacted with their usual aplomb, tolerating the rise of McCarthyism and the blacklisting of suspected communists in the arts. Sputnik triggered a similar panic about whether the United States was losing the space race to a communist foe.

A few decades later, the Japanese were the source of anxiety. After four decades of rapid growth, they seemed poised to overtake the United States economically. A pallet of books with titles like Japan as Number One, The Enigma of Japanese Power, and The Japan That Can Say No caused Americans to panic again. A Cold War treaty ally was suddenly viewed as something different: a rival with a novel variety of capitalism, one relying on greater state intervention than ours, that was threatening American hegemony. Members of Congress continued to react in a calm and professional manner—for example, by smashing a Toshiba boombox on the grounds of the U.S. Capitol.

As it turned out, American fears of both countries were wildly overhyped. Decades of Soviet demographic decline and economic stagnation proved that the Stalinist system was not, in fact, terribly viable. Likewise for Japan: Decades of demographic decline and economic stagnation proved—you get the idea.

The current freakout is about China, and the parallels to past freakouts are striking. After two generations of rapid growth, the Middle Kingdom now has the second-largest economy in the world. Its 1.4 billion people already make it the largest import market for everything from crude oil to hair dryers to automobiles. It has been the most important engine of global economic growth since the 2008 financial crisis, and the debate among most private-sector analysts is whether its economy will overtake the United States in this decade or the next one.

The corresponding reaction from American officials has been predictable. For decades, successive U.S. administrations paved the way for China to enter the liberal economic order. The Trump administration has thrown away that welcome mat and blasted the notion that engagement was ever a good idea.

Whenever a Trump official gives a talk at the Hudson Institute, a China hawk gets its wings. In 2018 it was Vice President Mike Pence saying mournfully, "America had hoped that economic liberalization would bring China into greater partnership with us and with the world. Instead, China has chosen economic aggression, which has in turn emboldened its growing military." In 2019 it was Secretary of State Mike Pompeo's turn. "Frankly," he said, "we did an awful lot that accommodated China's rise in the hope that communist China would become more free, more market-driven, and ultimately, hopefully, more democratic." Alas, he concluded, "we didn't realize how China was evolving."

The Trump administration's "phase one" truce with China on trade, signed on January 15, belies a panoply of aggressive steps this administration has pursued to contain the People's Republic. These range from arresting a Huawei executive for espionage to blocking Chinese takeovers of U.S. firms to restricting visas for Chinese students interested in studying certain scientific fields in America to contemplating limits on Chinese firms' ability to raise capital in U.S. stock markets.

For all the talk about the politics of Washington being more polarized than ever, the bipartisanship of the new consensus about China is striking. If Democrats have opposed the Trump administration's actions, it is mostly because they think the actions haven't gone far enough. When Trump escalated the trade war with China in spring 2019, Senate Minority Leader Chuck Schumer tweeted, "Don't back down. Strength is the only way to win with China."

China also generates strange bedfellows within Congress. A 2018 letter from 15 U.S. senators from both parties warned about the threat of the Belt and Road Initiative (BRI), China's massive global infrastructure development venture. "The goal for BRI is the creation of an economic world order ultimately dominated by China," they asserted. At the Munich Security Conference in February, I heard no distinctions between Republican and Democratic members of Congress on the threat posed by China. Outside of government, the new Washington consensus has prompted a cottage industry of essays, reports, think pieces, and long-form journalism opining on What To Do About China.

Remember when I said that both the Soviet Union and Japan suffered from economic stagnation and demographic decline? There are good reasons to believe that China will be the next country in line. China's population crisis is already baked in: Sometime this year, the median age in the country will exceed that in the United States, and by 2040 senior citizens will comprise a greater portion of China's population than ours. To describe China as economically stagnant would be a gross exaggeration. Nonetheless, its growth rate has fallen by more than 50 percent in the last decade, and its productivity growth has fallen by far more than that over the past 25 years. It appears that China will get old before it gets rich. Yet the new Washington consensus is too panicked to observe these realities.

To be fair to the new conventional wisdom, it is not founded only on hysteria. A key premise of the old consensus was that engaging China would facilitate that country's transformation from a one-party dictatorship into a more open and liberal polity. The actual results have been…well, not that. The apparent failure of the previous narrative to play out as hoped has rattled many people's faith in the power of economic freedom to lead inexorably to political freedom.

Instead of classical liberal arguments about the pacifying effects of trade, the new consensus is replete with terms like predatory liberalism and weaponized interdependence. In the new narrative, China is an authoritarian state hell-bent on world domination; we must decouple the U.S. economy from China's in order to check Beijing's rise. The new consensus increasingly sounds like an update of the old containment doctrine, with China's brand of authoritarian capitalism replacing Soviet-style communism as the existential threat to the American way of life that must be confined to a limited sphere.

It's one thing to say that the old Washington consensus got China wrong. It's another thing entirely to conclude that the exact opposite approach is warranted—and let's be clear, that is what the Trump administration wants us to believe.

A proper U.S. strategy toward authoritarian capitalism in general and the Middle Kingdom in particular needs to appreciate the strengths and the weaknesses of the China model. Cold War hawks exaggerated Soviet capabilities, and today's China hawks do the same with the regime in Beijing. Even if one accepts that China poses a significant threat to the American way of life, the optimal response is far removed from the actual response we are witnessing today. Indeed, it seems as though much of the policy response to China is predicated on a loss of self-confidence by the United States. Debates about China are stalking horses for debates about what is wrong with America.

What We Got Wrong

The policy consensus that surrounded U.S. support for China's entry into the World Trade Organization (WTO) has not aged well. In a March 2000 speech, President Bill Clinton overpromised just a wee bit when he claimed that "the more China liberalizes its economy, the more fully it will liberate the potential of its people—their initiative, their imagination, their remarkable spirit of enterprise. And when individuals have the power not just to dream but to realize their dreams, they will demand a greater say." Support for China's entry into the WTO was bipartisan; the Senate approved it 83–15.

What did policy makers get wrong? Back in the day, liberal internationalists made two arguments about why China's participation in the global economy was in America's national interest. First, if China traded more with the rest of the world, it would alter that country's domestic political character. Economic freedom within the People's Republic would increase, leading to more economic affluence. These factors would nudge China into the same political evolution that its Northeast Asian neighbors experienced: greater demands for the rule of law, followed by political liberalization. No policy maker believed this would happen overnight; the Clinton speech quoted above is chock-full of caveats. The overarching belief, however, was that over time China would start to resemble, say, South Korea.

The second argument was not about changing the character of Chinese politics but about altering the existing regime's incentives to disrupt the liberal international order. This logic was simple: The more that China needed the rest of the global economy to fuel its economic growth, the less Beijing would act like a "revisionist" state and the more it would act like a status quo power.

This was at the root of a decadelong call by the United States for China to be a "responsible stakeholder" in the system. As Deputy Secretary of State Robert Zoellick suggested in the 2005 speech that coined that phrase, "China does not believe that its future depends on overturning the fundamental order of the international system. In fact, quite the reverse: Chinese leaders have decided that their success depends on being networked with the modern world." Indeed, the Chinese and American economies became so intertwined that in a 2007 paper, Harvard historian Niall Ferguson and University of Bonn economist Moritz Schularick dubbed them "Chimerica."

The new Washington consensus is predicated on the notion that the previous few paragraphs are so absurd that they should be laughed out of the discourse. It might be worth taking a moment, however, to consider exactly how the old Washington consensus got China wrong before concluding that the exact opposite approach is the way to go.

Increasingly Oppressive

Even Trump's biggest cheerleaders allow that the opening to China worked for a while. In his Hudson Institute speech, Vice President Pence acknowledged that "for a time, Beijing inched toward greater liberty and respect for human rights."

In terms of economic openness, China did more than inch. Whether you look at the Heritage Foundation's Index of Economic Freedom, the Fraser Institute's Economic Freedom Rankings, or one of various metrics from the Organisation for Economic Co-operation and Development, the result is the same. In the late '90s and the early part of this century, China's economy was indeed liberalizing. Beginning around 2006, there was a decade of stagnation and reversal of reforms. But in the last few years, the country's economic freedom scores have again increased across the board.

The quality of China's free trade agreements with other countries has consistently improved in recent years. Even in the area of intellectual property rights, the U.S. Chamber of Commerce's Global Innovation Policy Center ranks China ahead of Chile and India and on par with Mexico. At the China Development Forum's fall meeting last year, I heard Chinese officials repeatedly brag about a new law permitting 100 percent foreign ownership of Chinese entities. It is possible that Beijing is simply gaming the system by making cosmetic policy changes to placate a business sector that desperately wants access to China's market.  Still, these metrics contrast sharply with Trump's depiction of China as a unique rogue actor in the global economy.

This part of the consensus was nonetheless wrong in two fundamental ways. The first was that the increase in economic liberty would spill over into an increase in political liberty. If anything, in China the two have been inversely correlated in recent years. The leadership in Beijing, it turns out, never wanted to follow the path of South Korea; they wanted to follow the path of Singapore, a city-state with copious amounts of economic freedom and very circumscribed politics.

The nonprofit Freedom House observed in 2019 that "China's authoritarian regime has become increasingly repressive in recent years"—and that sentence, if anything, undersells the depth of repression. During the last 10 years, the country shifted from a routinized form of authoritarian power transfer in which new leaders were appointed every decade to the lifetime leadership of Xi Jinping. The repression of ethnic Uighurs and Kazakhs in the western part of the country has been increasingly brutal and systematic. The erection of a massive network of internment facilities, prisons, and forced labor camps speaks to the regime's ruthlessness and deep illiberalism. According to The New York Times, President Xi explicitly urged his subordinates to use the "organs of dictatorship" to demonstrate "absolutely no mercy" to the Uighurs.

When Clinton advocated for China's entry into the WTO, he said, "We know how much the internet has changed America, and we are already an open society. Imagine how much it could change China." Unfortunately, it appears that the People's Republic has changed the internet rather than vice versa. There are a hundred different ways to prove China's digital authoritarianism: the country's online freedom plunging to a decade-low level, according to Freedom House; official efforts to create an Orwellian-sounding "social credit" system in which Chinese citizens would receive rewards and benefits for their public conduct; the massive expansion of the surveillance state; or the simple fact that far more Western news sites are blocked by China's censors in 2019 than were a decade earlier. Reports that China is exporting its surveillance regime to sympathetic allies have been somewhat exaggerated. To paraphrase John Quincy Adams, however, Xi's regime has become a fortress city on a hill, demonstrating to other aspiring autocrats its recipe for success.

The second mistake was in thinking that as Chinese citizens became more affluent and globally connected, they would become more classically liberal in their attitudes. Recent survey work conducted by Renmin University's National Survey Research Center suggests a more complex evolution of views. While China's young people are more tolerant of concepts like same-sex marriage than are their older neighbors, they hold more illiberal views on questions of race, religion, and human rights. Younger mainland Chinese are more supportive of authoritarianism than are older generations. And more affluent Chinese, those who can travel and access information beyond China's censors, express attitudes similar to their less affluent peers'. Journalist accounts suggest that they are hostile toward Hong Kong protesters as well, believing them to be suffering from "post-prosperity arrogance." Yet mainland reactions to Hong Kong are more varied than a lot of Western press coverage suggests.

The 1990s assumption that greater affluence and economic liberty would produce more political liberalization rested on a simple empirical regularity: That was the way things had worked in the past. And it might still work that way: The residents of Hong Kong have visibly demonstrated that even a taste of civil liberties makes people fight to preserve them. Still, it should be clear that waiting for the Chinese Communist Party to evolve is not a fast-acting recipe for good American foreign policy.

Weaponized Interdependence?

China's interdependence with the rest of the world has not been the pacific balm that liberals expected. Here, again, the old consensus did not get everything wrong. Traditionally, the rapid rise of a new "great power" triggered a hegemonic war. But as China has caught up to the United States, there has been no major hot conflict. Economic interdependence likely played a role in that.

The Chinese leadership is still rhetorically committed to an open global economy. Xi Jinping sounds more liberal than Donald Trump when he addresses the World Economic Forum. Even as Beijing has reciprocated U.S. protectionism during the bilateral trade war of the last two years, it has simultaneously lowered barriers with the rest of the world. Claims that the Belt and Road Initiative is entrapping countries into fealty to China have been dramatically overblown, to the point where even Xi Jinping acknowledged a need to rethink its branding. My own research suggests that if China is intending to upend the global economic order, it is doing so in a radically suboptimal manner. Harvard professor Iain Johnston knows more about China than I ever will, and he arrives at the same conclusion: When it comes to the global economy, China is not a revisionist state.

China's stakeholder status, however, has not prevented the country from gaming the system. Reports of forced technology transfer—the practice of requiring Western-owned factories in China to use advanced technology, which is then copied and/or stolen—are legion, representing a serious cost to U.S. firms. The country's cyberespionage, which was muted after a 2015 bilateral agreement with the United States, has flared up again during the Trump years. Beyond the economic realm, Beijing has adopted a more bellicose posture in its backyard. Even the most stalwart defenders of China's foreign policy acknowledge that it has been testing its limits in the South China and East China seas, making territorial claims on islands and waters and backing them up with a vigorous naval presence.

China has also taken a more active role in global governance, but not in the way U.S. policy makers anticipated. Name an important international organization, and the pattern has been the same during the Trump years: U.S. retreat matched by more active Chinese involvement. This is particularly true at the United Nations, where Chinese candidates have bested American candidates to head agencies such as the Food and Agriculture Organization. Chinese officials now run four of the 15 specialized U.N. agencies; the United States runs one. One former senior U.N. official described multiple agencies to me as "lost" to China. Beijing is aiming to control the World Intellectual Property Organization next. Each of these small victories permits Beijing to exert greater influence over agencies neglected by Washington. Instead of passively assimilating into the global community, the Chinese are looking to change it.

Beyond existing institutions, China has also created a panoply of new structures ranging from the Asian Infrastructure Investment Bank to the BRI. These are designed to put Beijing at the center of new economic networks and to keep the United States on the outside looking in. Yes, China is acting like a stakeholder, but it wants greater say over the system as well.

The old consensus failed to recognize that as Chinese power increased, the country would be able to exploit that interdependence. As China's market size has grown, it has become less reliant on exports. Beijing is now more willing to throw its economic weight around, forcing multinational corporations to comply with official requests or face a cutoff in access to the Chinese market. Its recent flexing of market power has been so aggressive that Victor Cha and Andy Lim of the Center for Strategic and International Studies dubbed it "predatory liberalism."

If there was a crystallizing moment for the new Washington consensus on China, it was the National Basketball Association (NBA) fracas that played out last October. As the protests in Hong Kong heated up, Houston Rockets General Manager Daryl Morey tweeted a message supporting the residents taking to the streets. The backlash from the Chinese government was predictable: All of the team's exhibition games were removed from Chinese television.

The backlash from the rest of the NBA was more disturbing. The initial response—from the league's commissioner, Adam Silver, to Brooklyn Nets owner Joseph Tsai to All-Star LeBron James—was to disown Morey for speaking up. As Cha and Lim explained in The Washington Quarterly, "the NBA cannot afford to lose the Chinese market with its emerging middle consumer class larger than the population of the United States." Seeing a U.S.-dominated sports league kowtow to an authoritarian government was a shock to basketball fans and the foreign policy community alike.

The NBA incident is only the most visible example. The Chinese government has successfully applied similar pressure to U.S. airlines and Hollywood producers. On human rights, Chinese diplomats also have become much more outspoken in recent years, threatening "countermeasures" in response to any criticism from foreign governments. China has grown much more comfortable with using sticks as well as carrots as part of its economic diplomacy.

The other flaw in the old consensus was a failure to appreciate that China might exploit its economic position to engage in further surveillance and coercion of other countries, a phenomenon that political scientists Henry Farrell and Abraham Newman have labeled "weaponized interdependence." This is what has triggered bipartisan anxiety about the role that the Chinese tech giant Huawei is playing in the development of 5G mobile networks across the globe.

As Secretary of State Mike Pompeo explained in December 2019, "Thanks to the way 5G networks are built, it's impossible to separate any one part of the network from another." Therefore, he declared, "it's critical that [allies] not give control of their critical infrastructure to Chinese tech giants like Huawei or ZTE." Similarly, in fall 2019, Sens. Chuck Schumer (D–N.Y.) and Tom Cotton (R–Ark.) jointly requested that U.S. intelligence officials investigate whether a Chinese smartphone app popular among teenagers poses a national security risk. "With over 110 million downloads in the U.S. alone," they wrote in a letter, "TikTok is a potential counterintelligence threat we cannot ignore."

A Counterproductive Response

The old consensus on China was flawed because it rested on a Whiggish narrative in which the arc of history bends toward free markets and liberal democracy. Such overconfidence was bolstered by America's unparalleled standing in the world a generation ago. The United States was the global hegemon, and it seemed like the rest of the world was copacetic with this fact. But free markets and civil liberties are the exceptions and not the rule in world history.

A little introspection and humility are good things for a policy making community. Unfortunately, the debate has lurched all the way into full-blown panic mode. The new Washington consensus is less about the souring of elite attitudes toward China and more about the souring of elite attitudes toward the United States. American intellectuals have gone from believing in the end of history to believing that history will bury us. Columnists opine that the U.S. needs to copy China's top-down tech strategies. Last summer, Foreign Affairs devoted 50 pages to what had happened to the American Century (hint: nothing good); in January, the same magazine ran a special section debating whether capitalism was doomed.

As one State Department official explained to me last spring, "The U.S. electorate lost faith in the global economic system." In November, Nils Gilman wrote at The American Interest that "if the proof of the economic pudding is in the eating, China seems to have been using a better cookbook over the last decade." The thought that dare not speak its name, the one underlying all of this anxiety, is that China's model of political economy might be superior to America's.

This anxiety has arguably led the Trump administration to respond to China in ways that are counterproductive. There clearly are areas of concern in dealing with the People's Republic—on human rights, on economic networks where China might achieve dominance, and on true challenges to our national security. These contentious issues require targeted measures and cooperation with allies to give the United States a strong bargaining position. The Trump administration has done the exact opposite.

In dealing with China, the president has linked issues that should be kept separate. He casually suggested trading the prosecution of a Huawei executive for trade concessions and told Xi Jinping he would stay quiet on Hong Kong so as not to disrupt trade negotiations. And the U.S. trade war has not been limited to China; Trump has hiked tariffs on every major economy. The result has been that China has expanded its global market share even as trade with the United States has declined, and even as China's human rights violations have continued apace. The success of U.S. efforts to block Huawei from participating in the construction of 5G networks has been limited at best. This is partly because Huawei has embedded itself so deeply in these networks, but it is also because the Trump administration's diplomacy has been so ham-fisted. Even many of our close allies trust Xi Jinping more than Donald Trump.

The actual trade negotiations with China proved nothing short of a fiasco. The Tax Foundation estimates that the Trump administration's aggregate tariff increases amount to "one of the largest tax increases in decades" and says that the costs of the trade war have already exceeded whatever benefits the 2017 tax bill was projected to produce for long-term growth. Moody's Analytics estimates just one year of the trade war shaved U.S. real GDP growth by three-tenths of a percent and cost almost 300,000 jobs. The "phase one" trade deal does nothing to challenge the elements of China's behavior that the new Washington consensus finds so objectionable. If anything, it does the opposite, creating a "managed trade" arrangement that flouts WTO rules and makes the Chinese government the guarantor of agricultural and energy purchases.

The lesson China has drawn is that it cannot and should not fully liberalize, lest it increase its vulnerability to reprises of the Trump administration's economic pressure. Little wonder that Chinese firms have ordered their foreign suppliers to reduce their reliance on U.S. components, enraging American firms that deal in microchips and biotech. The new Beijing consensus about the United States includes talk of "financial war." The Quincy Institute's Chas Freeman has concluded that "both countries are in the process of reconciling themselves to protracted confrontation based on real and imagined differences."

In U.S. history, only two historical examples parallel the decoupling scenario that the Trump administration envisages with China. The first is the Embargo Act of 1807, in which the United States sanctioned both Great Britain and France during the Napoleonic wars. It crippled the U.S. economy at the time, causing GDP to shrink by an estimated 5 percent. The second example is the imposition of the Smoot-Hawley Tariff of 1930, a choice that contributed to a two-thirds decline in global trade. (Oh, and to the Great Depression.)

The existing trade war has been damaging enough. A true decoupling from China, one that extended to capital markets and higher education, would produce a similar shock to our economy. A reverse migration of foreign-born scientists and technicians would reduce innovation in the United States while bolstering it in China.

What Makes America Great

U.S. fears have led to an overhyping of the communist regime's competence. One reason Beijing acceded to the phase one trade deal was to remedy a pork shortage of its own making.

Not only has China's economic growth slowed down; there is strong evidence that its officials have overstated its growth rate by more than two percentage points annually for the last 12 years. The country's total debt-to-GDP ratio now exceeds 300 percent, as continued fiscal stimulus has not yielded faster growth.

China's bungled reaction to the new coronavirus highlights how the regime's authoritarianism could sabotage its future. COVID-19 got out of control because local authorities in Wuhan ignored warnings from doctors. The city's mayor did not tell citizens what was happening in late December—when doing so could have halted the virus's spread—for fear of upsetting superiors in Beijing. Chinese authorities are now aggressively quarantining affected regions, but much of the damage has been done. Official data from February showed the sharpest monthly contraction in the country's economic activity on record.

For all the talk of China catching up to us technologically, a recent survey from Berkeley's Institute of East Asian Studies concluded that "the gap between the United States and China remains substantial." By China's own rankings, the country is still lagging in areas such as artificial intelligence research. Indeed, China's own illiberalism hampers its ability to catch up; U.S. researchers are better at international collaboration than their Chinese counterparts.

My Tufts colleague Michael Beckley says that Beijing's recent military assertiveness is coming not from strength but from weakness—from a "profound unease among the country's leaders, as they contend with their country's first sustained economic slowdown in a generation and can discern no end in sight." A surefire way to exacerbate Chinese bellicosity, Beckley notes, would be to close off the U.S. market to China.

Continuing to pursue a true break would harm both economies and worsen the security situation. U.S. policy makers need to restore their faith in the free enterprise system that made us the world's richest country in the first place and worry less about the Middle Kingdom.

There are areas in which the prospect of weaponized interdependence means that some negotiated decoupling will be necessary. In those arenas, however, the United States will need the cooperation of its allies—because otherwise, China is likely to be the one setting global standards in 5G and other technical areas. The U.S.-China Trade Policy Working Group, a collection of economists and lawyers from both sides of the Pacific, has put forward a framework for managing the relationship. As for coping with predatory liberalism, Adam Silver's change of tune in the face of a media firestorm shows that negative press attention is the best way to get U.S. firms to stop kowtowing to Chinese authorities.

As long as China's government acts in a repressive manner, there can and should be limits to the economic relationship. In winner-take-all sectors, prohibiting Chinese predatory practices makes sense. Yet the United States trades with allies that have similarly abysmal human rights records, from Honduras to Saudi Arabia. During the Cold War, we cooperated with the Soviet Union on arms control, space research, and other areas.

The Chinese state is brutal, but the answer is not to repudiate our commitment to openness. The United States can negotiate from strength with China—so long as policy makers in Washington remember what makes America great.


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