Friday, December 21, 2018

China is not the economic superpower people think. That’s why it’s important to wait it out.

The relationship between the United States and China has deteriorated with startling speed. An uneasy truce holds while the two governments try to negotiate an end to escalating trade hostilities, but a slide toward a new Cold War is a real possibility.


President Trump rushed the United States down this path in haphazard fashion, but a change in American strategy was overdue. As U.S. leaders chart a new course with China, however, it is crucial that they understand an important truth: Time, contrary to popular belief, is on their side.

Twenty years ago, a strategy of economic engagement with China made sense. Despite steps toward economic reform, China’s enormous population, which represented roughly a fifth of humanity at the time, was poorer than those living in sub-Saharan Africa are today.

Cementing China’s place within the world economy promised to improve the lives of hundreds of millions of people. Economic development, it was also possible to hope, might nudge China toward political liberalization. Certainly that had been the case in Taiwan, which transitioned from a military dictatorship to a full-fledged multiparty democracy as it grew richer.

If China were willing to open itself to the world and accept exposure to the irresistible forces of liberalism, then the United States and its allies should play along.

China is now a middle-income country; its development has brought about the greatest reduction in global poverty in world history. But its rise also has brought disappointment. Growth did not lead to political change. On the contrary, it bolstered the legitimacy of an oppressive communist leadership.

China has been brazen in using access to its enormous domestic market as a means to bully other countries and firms. Its aggressive trade practices, from theft of intellectual property to its heavy use of industrial subsidies, undercut faith in a rules-based economic order. Meanwhile, it has become more assertive on the world stage, using a combination of hard and soft power to build an expanding sphere of influence.

China remains an authoritarian, one-party state. The communist leadership is opaque and repressive. It has little interest in expanding political freedoms or defending human rights, and its overarching goal is self-preservation.

Achieving that goal in a highly interconnected world requires a massive, increasingly sophisticated surveillance state at home and efforts to promote the legitimacy of illiberal economic and political models abroad. China meddles in the elections of nearby democracies and uses carrots and sticks to tie the fortunes of other countries ever closer to that of the Chinese state, thus raising the economic and political costs of defying China.

The challenge China poses to the democratic world looks insurmountable because its path to economic dominance seems certain. China has more than a billion people. At even the modest growth rates of recent years, its economic clout will eventually dwarf that of the United States. It will then be able to draw on far greater material resources than its rivals and dictate terms to trading partners that cannot afford to alienate the world’s most indispensable market.

But as impressive as China’s performance has been, its future is anything but assured. And time is very much on the side of the democratic world. Consider the evidence. The pace of Chinese economic growth has fallen by more than half since 2007 and has become increasingly dependent on unsustainable growth in debt. The demographic picture, too, looks forbidding. China’s working-age population is declining and expected to fall by roughly 25 million people by 2030. And although lots of countries have suffered from anemic growth in productivity over the past decade, productivity in China appears to be declining and shows few signs of reviving.

Falling productivity, in particular, reflects serious structural weaknesses in the Chinese economy. Economies can boost growth for a while by pushing more workers into the labor force or investing in factories and equipment. But long-run growth is possible only by coming up with new, better ways to use capital and labor.

As its economic boom has unfolded, China’s expansion has come to rely more on investment in capital and less on figuring out how to use resources more effectively. This partly reflects the fact that China is running out of room to borrow well-established technologies and techniques from countries that have already industrialized. But it also reflects the large role the state continues to play in the economy.

China is not the Soviet Union, but it is more like the U.S.S.R. than is often appreciated. Private Chinese firms account for just over half of industrial output — far more than the Soviets ever tolerated but hardly free-wheelingly capitalist. State firms are soaking up a growing share of new investment. Xi Jinping, who once held promise as a reformer, now preaches the virtues of state-driven development and stifles the voices of dissenting economists.

Thus, in a manner reminiscent of the late-stage Soviet economy, capital, driven by political imperatives, is piling up in wildly inefficient corners of the economy. With ever fewer workers entering the labor force, ever lower returns on new capital investments, and ever lower productivity, China must either change course in dramatic fashion or fall into a rut like that which doomed the Soviet Union. Either course will prove politically explosive.

The United States cannot force change in China and should be wary of policies that threaten to spark conflict or impoverish Chinese citizens. It should instead aim to limit malign elements of Chinese influence on the global economy while waiting patiently for the rot at the heart of the Chinese system to do its work. It should contain China, in other words, confident in the knowledge that its own economy, despite its many weaknesses, is more resilient.

A strategy of containment would ideally have three elements. First, the United States should indeed drive a harder bargain on trade. Though every country favors its own companies in various ways, Chinese state-support for its firms is egregious given its enormous role in the global economy. Chinese hacking and industrial espionage should not be tolerated. Governments of advanced economies are also right to worry about security risks associated with Chinese hardware. It is scary enough when U.S. firms hoover up massive amounts of user data, the better to manipulate our beliefs and decisions. It is appropriate to be skeptical of Chinese investments in the United States, to take a hard line with Chinese firms and citizens which engage in improper behavior, and to make aggressive use of the trade remedies available under the World Trade Organization.

Unilateral tariffs which skirt global trade rules, such as the Trump administration has used, harm American households and isolate America diplomatically.

The latter matters because containment must be multilateral to be effective. U.S. allies are also angered by Chinese abuses and wary of a China-dominated world. The Group of Seven alone accounts for nearly 50 percent of global gross domestic product.

China can throw its weight around in bilateral negotiations but not when confronted by the combined strength of the United States, Europe and Japan. In the same way, if the United States and its allies agree on global standards among themselves — on labor, environmental and fair-trade issues — China will have little choice but to meet them.

When each country goes its own way, on the other hand, standards favored by China are as likely to dominate as those preferred by the United States.

Americans are understandably wary of globalization and trade deals. Its leaders have been less than honest at times about the costs of openness and too eager to negotiate on behalf of big companies rather than working people. But China’s bargaining position is stronger if the United States acts alone.

What the United States understood during the Cold War, but Trump has never grasped, is that deals that bind like-minded countries make the United States stronger, not weaker.

Third, the United States can increase pressure on China by taking advantage of its greater economic and fiscal capacity. U.S. military spending during the Cold War forced the U.S.S.R. to devote an ever larger share of its budget to defense, hastening the demise of the Soviet economic system.

The United States could apply similar pressure today, albeit without the arms race. Budget hawks might fret that deficits are running dangerously out of control already. But the government’s borrowing costs remain low, and the United States — which collects far less in tax as a share of GDP than most other rich countries — has plenty of scope to raise revenue if bond markets get nervous. Investments in badly needed public goods should also boost growth, reducing the long-run budget costs of such spending.

The United States should embark on an ambitious program of investment in infrastructure, low-carbon energy, education and research in the name of national security. More than that, the United States and allied economies should take a page from China’s efforts to expand power through the Belt and Road Initiative, which funds infrastructure across Asia and Africa. A U.S.-led program to invest in infrastructure and low-carbon technology across the emerging world would pay economic, environmental and political dividends.

China could either sit the soft-power competition out or try to keep up despite its weaker economic circumstances. Either option would improve the United States’ strategic position.

It is hard to imagine a Trump administration having the foresight or discipline to carry out this sort of strategy, or the diplomatic nous needed to court allies’ support. But Trump will not be president forever.

It is in the world’s interest to see China become prosperous and free. The best way to get there is to be firm with China, generous with friends and patient.

Avent is the economics columnist at the Economist and author of “The Wealth of Humans.”

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