This piece is a little broader in scope that our past posts about China.  That seems useful, since war-mongering in press coverage of China has put us all in blinders.  We’re not claiming here that the Chinese are angels, but there is a lot more to the story that needs to be discussed.

We start with a couple of basic points, of interest regardless of whether we consider China friend or foe:

1. China is now the world’s biggest economy and is continuing to grow rapidly. Further its population is more than four times the US.  That has many consequences worth thinking about.
2. China has built itself up from nothing to a world class challenger in many areas. This is not just—or even primarily—a case of “stealing from us”. It is imperative that we understand their example and what we can learn from it.

On the first point, it should be noted to begin with that while the Chinese economy is the biggest in the world, the country is so big that its per capita income is well-below Mexico.  A rising standard of living in China could drive growth in the rest of the world for quite some time.

That is a dramatic turnaround in what China means to the rest of the world.  It is also the reason why virtually everyone expects China’s trade relations to be renegotiated.  Opening China has moved from a largely theoretical matter (because there just wasn’t that much to be sold) to become the primary issue.

This is the time for negotiation, but it’s also a window of opportunity we can easily miss.  In this, as we’ve noted before, a unilateral trade war is actually counter-productive. We’re defending protectionism, when the primary issue is open access to the Chinese market!  Further by insisting on a bilateral deal, we’re substantially reducing the leverage needed to make the deal a success.  The Business Roundtable of corporate CEO’s said as much prior to the start of current negotiations.  This isn’t about trade deficits; it’s about worldwide rules of fair trade going forward.

Trade negotiation, however, is not the only issue here.  US businesses have long had the luxury of focusing on the domestic market.   Economies of scale will now demand a less parochial view.  An obvious example is loosening of fuel economy standards.  That’s a concession to our automobile industry for the domestic market that will hurt international competitiveness.  Another example is 5G mobile equipment.  US vendors are behind the curve, because the domestic market has been fractured and slow-moving.

We are not doing our economy a favor by granting special favors (including tariffs) to domestic businesses.  That’s just perpetuating the idea that winning here is all it takes.  (Tariffs are also an unreliable and inefficient way of producing jobs.)

As for what we can learn from China, we give a few examples

– Government-sponsored R&D pays big benefits.  That is the single biggest contributor to the Chinese success.   They have created a world-class technological empire out of almost nothing.  Even the much-lamented Chinese technology theft is a non-trivial (if nefarious) accomplishment.  How many companies do a good job managing transitions of responsibility even for their own software?

We used to care about the government role in research too.  It was assumed in the good old days of the 50’s and 60’s. Now we have not only cut back on government R&D (Trump’s latest budget is a recent example), but with the current anti-science nostalgia we’re not even sure we want much to do with scientific progress.

– Education is an imperative.  It’s people who make for national success and we need them to be prepared for the jobs that will defend our national standard of living.  China has been ready to spend the money to make it happen.

– We should want to drive up the value chain.  Despite past history, the Chinese understand perfectly that price-competitive businesses are not the way to go.   Real wealth comes from dominant industries with the power to sell on content instead of price.  That’s what technology can deliver.  It’s simply not in the cards to believe past successes will just revive.

– All businesses need to embrace technology for success.  Even in the cost-sensitive outsourcing business, ease of interworking was an important factor in Chinese success.

– Finally (and paradoxically) a dynamic, decentralized economy is a real plus.  This may seem surprising in a list of lessons from China, but it’s strangely true.  The major impetus that kicked off the Chinese economic miracle was an accidental liberalization.  As a small opening, Chinese municipalities were allowed to run independent businesses once they reached their nationally-set production goals.  As it happened, these independent businesses took off and eventually marginalized the state-run enterprises.  Many morphed into successful private companies.  (Xi is now attempting to put that genie back in the bottle, with reemphasized state enterprises.)

We should never underestimate the value of the dynamism of the US economy.  But we had better be careful to understand what has really worked for us.  There has always been an important government role, and diversity mattered too.  In the Chinese example, success was only possible because government provided the environment, particularly education and infrastructure, for the businesses to grow.  That’s precisely what worked for us establish US dominance in the post-war years.   In general, prosperity requires both the environment and the opportunity to achieve success.

 

All that being said, what can we say about dealing with China?  A few guidelines:

We are misled if we think “enemy” is all we need to know.  China is an important factor for both good and bad in the world economy.  They were an important help in the efforts that prevented a depression in 2008.  They can be a major locomotive in the world economy going forward.  They contribute to the worldwide development of science and technology—which makes us all richer.  They recognize the importance of climate change.  It is our task to make that all work for us.

To get there we need to treat the Chinese like any other adversary—we should deal with them from strength and look for mutual advantages.

It is not productive simply to dictate, with the idea that we can shut them down by denying them access to our market.  We represent 18% of their export market and much less of their total economy.  That’s plenty to cause trouble, but not enough to dictate, and in any case real pain would hurt us as well.  Further, if we want success in their market, there has to be ongoing mutual self-interest—no signed document will do it.   And there’s a historical side of this as well:  China endured some of the worst of western imperialism in the nineteenth and early twentieth centuries.  That memory lingers, and we are not served by recalling it with our behavior.  Mutual advantage is much better than antagonistic isolation.

We need to extend the rules for fairness in international commerce through the WTO.  As noted earlier all parties recognize this has to happen, and we have historically led such initiatives.  We have twice the leverage in cooperating with the EU (also 18% of Chinese exports), and we avoid the hypocrisy of endorsing protectionism in the argument for opening of their markets.

Matters such as intellectual property protection and theft should be solvable problems, in part because the Chinese now have much to defend as well.  It’s not for nothing that Huawei is well ahead of the curve in 5G development.   Chinese universities are now high on the list of international institutions (even though Western ones still have cachet in China!), and the Chinese are acquiring patents like everyone else.  It’s also true, if seldom noted, that Chinese computer hacking decreased significantly by the end of the Obama years and went way up when Trump declared economic war.

The military installations in the South China Sea are a serious problem, but the fact is that the great majority of Chinese imports and exports pass that way—so it’s not surprising they’re worried about it.  We make that worry all the greater by declaring that it is legitimate to use all resources at our disposal to get the Chinese to do what we want.  The only real solution is some kind of freedom of the seas regional agreement that all parties can have confidence in.

Human rights violations are also important, and we have to keep those issues alive.  It’s hard to know how far we’ll be able to get.  The one thing you can say is that we shouldn’t be too quick to use Xi a stand-in for China as a whole.  We’ve already noted Xi is a throw-back (a “princeling” heir to the Maoist past), so perhaps there is hope for better later.  There are many conclusions to be drawn about us if you take Trump as a stand-in for everything American.

In the end the point is to treat China like any other independent nation.  China as “enemy” has real roots, but also large doses of domestic politics (China has been a convenient excuse for our own misdeeds) and “yellow peril” racism.  China needs to work properly in the international system of trade and ideally also in international security agreements.  Any efforts to avoid a new set of arms races will have to involve them.

Vigilance is fine, but there is at least the potential of much to build on.