Can anything hold back China’s economy?

December 5th, 2018

Presidents Trump and Xi Jinping reached an agreement over the weekend at the Group of 20 meeting in Argentina on a framework for trade dialogue that will delay the imposition of new American tariffs. While surely better than the alternative, this step does not address any of the fundamental tensions in the economic relationship between the United States and China.

Few observers doubt that China needs to make significant changes in areas such as intellectual property, the rights of foreign investors and subsidies to state-owned companies if it is to meet international norms. Antipathy toward Chinese economic practices is hardly confined to Trump. Recent months have witnessed attacks on the existing economic relationship from members of previous U.S. administrations, noted China experts and the American business community. Indeed, it can be fairly said there are no China accommodationists left in Washington. When foreign governments get past their frustrations with the Trump administration, they acknowledge that they, too, are frustrated with Chinese commercial practices.

Yet it is also easy to sympathize with Chinese leaders who insist that China’s political system is for it to choose, and that economic negotiations should focus on the pragmatic identification of win-win opportunities, rather than on questions of ideology. At the same time, it is hard to see how anyone with a modicum of historical knowledge could fail to be concerned by a combination of increased domestic repression, centralization of power in one man, rapidly increased military spending and rhetoric about enlarging China’s role in the world.

The United States requires a viable strategy for addressing its legitimate grievances. Unfortunately, neither rage nor proclamation constitutes such a strategy. A viable approach would involve feasible objectives clearly conveyed and supported by carrots and sticks, along with a willingness to define and accept success.

At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.

Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year.

This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world’s largest economy. If, as is plausible though far from certain, the United States loses its lead over the next decade in information technology, artificial intelligence and biotech, the trauma will be magnified.

Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict?

These are hard questions without obvious answers. But that is no excuse for ignoring them and focusing only on short-run frustrations. China appears to be willing to accommodate the United States on specific trade issues as long as the United States accepts its right to flourish and grow, knowing that sheer weight of numbers will make it the clear world’s largest economy before long.

That is a deal the United States should take while it can. It can bluster but it cannot, in an open world, suppress the Chinese economy. Trying to do so risks strengthening the most anti-American elements in Beijing.

Trump, for all his failings, has China’s attention on economic issues in a way that eluded his predecessors. The question is whether he will be able to use his leverage to accomplish something important. That will depend on his ability to convince the Chinese that the United States is capable of taking yes for an answer, and on his willingness to go beyond small-bore commercialism. We can hope, but we should not hold our breath.

December 5, 2018