Acton Institute Powerblog

What to do about China?

Crises are not only opportunities which should, to paraphrase Rahm Emmanuel, never be allowed go to waste. They also serve as clarifying moments. Unexpected events can shatter even the strongest consensus on a given topic. The coronavirus pandemic is such a moment when it comes to America’s relationship with China.

Until relatively recently, most Western policymakers calculated that a steady integration of China into the global economy would be of mutual economic benefit for China and Western nations. Trade with other countries and an associated growth of commercial freedoms inside China, it was further held, would soften the regime’s authoritarian character, gently create space for other domestic liberties, and help tame China’s more aggressive external impulses.

That consensus has, however, been collapsing for some time. This was signaled by the 2017 National Security Strategy issued by the Trump Administration. Many policies, it stated, had been “based on the assumption that engagement with rivals and their inclusion in international institutions and global commerce would turn them into benign actors and trustworthy partners.” But, the document then added, “For the most part, this premise turned out to be false.”

A major effect of the coronavirus pandemic has been to confirm that economic integration has not substantially changed the Chinese regime’s nature. The question thus becomes: where does America go from here vis-à-vis China? Even more particularly, what should America do about its trade relationship with China?

China is Not Our Friend

The evidence that China’s gradual entry into global markets has not produced the results anticipated by many Westerners is overwhelming. By no measure of political, religious, or civil freedom can China be described as liberalizing.

The Chinese regime’s long-standing authoritarian character was enhanced when Xi Jinping replaced Hu Jintao as Communist Party general secretary and chairman of the Central Military Commission in November 2012 and then as China’s president in March 2013. Xi then gave several speeches on the topic of China’s “rejuvenation.” Rejuvenation’s practical meaning was made manifest in a further centralizing of political authority, a crack-down on internal dissent, radical curtailments of already-limited religious freedoms, the mass imprisonment of “suspect” groups like the Uyghur Muslims, and an increase in the Party’s control over the Chinese military and security forces.

That pattern generally holds true for the Chinese economy. When China acceded to the World Trade Organization in December 2001, the hope was that it would move in the market-liberalizing directions that WTO members are supposed to go. But China has not been walking down that path of late, a fact recently confirmed by the Heritage Foundation’s 2020 Index of Economic Freedom which classified China’s economy as “Mostly Unfree.” Indeed, China increasingly behaves in a manner akin to an 18th-century mercantilist-state: the Chinese Communist Party not only integrates economic and military power on a scale which dwarfs that of Louis XIV’s France, but it also pursues policies which have been called “colonialism with Chinese characteristics.”

China’s ongoing buildup of its armed forces and steady augmentation of its military presence in the South China Sea has been accompanied by a growing integration of military, strategic, and economic policy. While Chinese investment and construction activities have declined around the world overall since 2016, overseas infrastructure investments by Chinese companies continue to be partly driven by strategic and military concerns.

The coronavirus pandemic has heightened worries that America’s supply chains are too interwoven into the Chinese economy.

Such investment remains concentrated in areas where Beijing wants more influence: Africa, Central Asia, the Middle East, and Southeast Asia. The same dynamic manifests itself in China’s Belt and Road Initiative (BRI). Despite Xi’s internationalist rhetoric of “community with a common destiny,” BRI involves the Chinese regime making foreign investment decisions driven primarily by geopolitical needs rather than good economics. Those “needs” include control of strategic corridors in Central and Southeast Asia. The means for achieving this are infrastructure development and investment made by enterprises partly or fully owned by the Chinese state.

There is also greater recognition that, as one recent analysis illustrated, Chinese technology companies “not wholly owned by the state” but with “deep ties to the Chinese state security apparatus” operate in ways that blur “commercial imperatives” with “the strategic imperatives of the party-state.” The widespread and well-documented intellectual property theft engaged in by such companies exemplifies this pattern of behavior.

Not to Be Trusted

Taken together, these facts illustrate that China’s entry into global markets has not made Beijing “more like us” in some very important ways. Growing evidence that the regime has misled and continues to lie to the world about the coronavirus’s impact upon its own population and economy underscores the fact that Chinese officials cannot be trusted. A government that lies about something as destructive as a pandemic can be safely assumed to be willing to lie about anything else.

This has implications for what has been the most significant flashpoint in U.S.-China relations over the past four years—trade. In 1980, U.S.-China trade was worth only $5 billion. Forty years of growing commerce between the two countries, however, have resulted in China being consistently ranked as one of America’s top-three trading partners since 2004.

For some time, however, many Americans have insisted that the trade relationship lopsidedly favors China and has negatively affected particular industries and regions of America. I and others have disputed the economics of that argument and the particular cause-and-effect logic which it implies. But the coronavirus pandemic has heightened worries that America’s supply chains are too interwoven into the Chinese economy. Thus when China’s economy gets into trouble—as it did when the coronavirus forced Beijing to lockdown various Chinese cities—American businesses found themselves scrambling for alternatives.

It is precisely at such moments, however, that you need access to open and competitive markets. They make it easier and more cost-effective for American companies to switch supply chains in emergencies. Protectionism makes such adaptation slower, harder and more costly.

A very different problem is the growing tendency of Chinese businesses to invoke the prospect of direct retaliation by the Chinese government whenever they think they are not getting their way. This was recently on full display when the Chairman of Huawei Technologies Inc.—a company credibly deemed to be effectively owned by the Chinese regime—warned America in March to “expect countermeasures from the Chinese government if it further restricts the technology giant’s access to suppliers.”

The reason those restrictions were imposed in the first place is that Huawei was indicted for racketeering and stealing trade secrets earlier this year. But that, in turn, is symptomatic of a wider issue: the expectation that Huawei will always do Beijing’s bidding whenever the regime believes this will advance China’s broader strategic and military agendas. Huawei and other Chinese technology companies have been accused of aiding the regime’s security forces in carrying out repression inside China. Why, it’s reasonable to wonder, would Huawei’s subservience to the regime not continue beyond China’s borders?

Disentanglement Is Costly

Given these manifold problems, we shouldn’t be surprised that some now believe that America’s economy must be radically disentangled from China. That, it is suggested, would cut the Gordian knot in which they think much of America’s economy and national security now finds itself bound. An eye to America’s long-term well-being, however, suggests a different approach.

Is it really in America’s long-term economic interest to disengage, holus-bolus, from a market of 1.4 billion people, and an economy that is and will continue to be—whether we like it or not—one of the world’s largest? Does anyone believe that the subsequent gap will not be filled by businesses from other countries?

America should not respond to Chinese mercantilism by adopting policies similar to those pursued by Beijing.

In 2018, China was America’s third-largest export market overall and its fourth-largest agricultural export market. The bulk of American goods exported to China consisted of high-tech manufacturing such as aircraft, electrical machinery, and medical and optical instruments. This is good for American exporters and those Americans who work for these businesses. Put another way, the costs and lost opportunities for American businesses of mass disengagement from an economy that accounts for “16 percent of global [economic] activity,” “40-50 percent of global marginal growth,” “the world’s largest middle class,” “four of the world’s top 10 banks,” and “the largest e-commerce market” should be neither ignored nor trivialized.

Nor should we make light of what would likely be significant price-increases for many consumer goods for Americans if various supply chains were repatriated to America. Let’s not forget that one reason for such supply chains being in China in the first place is that it is less expensive to make or source various goods there than in America. Wealthy Americans can absorb the costs associated with supply-chain repatriation with relative ease. The same cannot be said for less-well-off Americans. They would end up paying much more for some necessities of life and find access to many other goods increasingly beyond their financial means. At a minimum, this indicates that obstacles should not be put in the way of American companies who disengage from China from shifting their operations and investments to other, friendlier countries where production or sourcing costs for certain goods are lower than in America.

An Inevitable Reset

More generally, it should be possible for American businesses to continue to trade extensively with China while the U.S. government simultaneously addresses the associated national security challenges. Under any circumstances, this would be a delicate exercise. Three things should be kept in mind.

First, America should not respond to 21st-century, Chinese-style mercantilism by adopting policies similar to those pursued by Beijing. In a 2018 Foreign Policy article, Tanner Green laid out the manifold ways in which pursuing BRI has seriously backfired on China. Among other things, this includes 1) little return on the huge investments made by state-directed Chinese companies involved in this project; 2) significant political backlashes against China’s presence in countries such as Burma, Pakistan, Malaysia, Bangladesh, Sri Lanka, and the Maldives; and 3) perhaps most tellingly, the acceleration of corruption in Chinese political and business circles in a nation already awash in corruption. America has no reason to draw similar problems down upon itself.

Second, legitimate economic activities must be distinguished from those which are not. Competition, for example, is one thing. Stealing is an entirely different matter. Chinese businesses and nationals are engaged in aggressive theft of intellectual property in the service and knowledge sectors of the U.S. economy. It’s not just that such theft is wrong in itself or that it directly undermines America’s high-value-added manufacturing companies. Much of the purloined technology will be used to enhance the Chinese military and security forces.

Addressing this problem requires the U.S. government to continue confronting China’s leadership about this topic, and aggressively prosecute Chinese nationals and businesses engaged in these practices. Many Americans, I suspect, would be surprised to learn that, until 2018, there were relatively few such prosecutions. Now they have accelerated and, as Huawei’s reaction shows, China does not like it.

The third aspect of resetting the trade relationship has less to do with China and more to do with America. We need a serious discussion of what products and services genuinely have a national security dimension and which do not.

Free traders from Adam Smith onwards have acknowledged national security as a legitimate political exception to trade liberalization. But making such determinations is more easily said than done. On the one hand, very simple products—such as, we’re recently discovered, surgical masks—can suddenly become necessities. No country should want to be at the mercy of a regime like the Chinese government for the supply of these and other medical products in times of crisis.

At the same time, elastic conceptions of national security are invariably stretched to rationalize all sorts of unwarranted government interventions into the economy. They also provide opportunities for widespread cronyism as various businesses insist on flimsy grounds that they make an indispensable contribution to national security and therefore merit tariff protection, subsidies, or other such government support.

However difficult making such assessments may be, they are nevertheless essential for any rethinking of the U.S.-China trade relationship—a reset only made more urgent by China’s behavior during the coronavirus pandemic. America cannot pretend that China will inevitably become “just like us.” The economic determinism underlying such claims should be repudiated. America also cannot pretend that systematic disengagement from a market of 1.4 billion people would not represent forfeiture of enormous economic opportunities for American businesses, the cost of which would be borne by many American workers and all consumers.

Squaring these realities will require subtlety of mind and a clear grasp of distinctions. But if there was ever a time for true economic and political statesmanship vis-à-vis China, it is surely now.

This article first appeared on April 17, 2020, in Law & Liberty, a project of Liberty Fund, Inc., and was republished with permission.  

Samuel Gregg

is director of research at the Acton Institute. He has written and spoken extensively on questions of political economy, economic history, ethics in finance, and natural law theory. He has an MA in political philosophy from the University of Melbourne, and a Doctor of Philosophy degree in moral philosophy and political economy from the University of Oxford.