All of our bets on China have been wrong

Is trade conflict with China beginning to broaden into something bigger and more long-lasting? It would appear so. Much of the current backlash is a product of the West’s long-standing, but misplaced, fawning and awe over Beijing’s historically unprecedented economic advancement over the past 30 years: the naïve assumption that its growing prosperity would inevitably lead to a more open, politically liberalized country whose interests would more closely align with those of the West.

As those expectations have been dashed, so too the backlash has arisen accordingly: Many now view China as both a trade cheat and a mounting global security threat, as it approaches economic parity and strategic rivalry with the West. And China’s leadership appears less well equipped both politically and economically than its Western counterparts to deal with this rising conflict, as it metastasizes into a fully fledged Cold War 2.0.

By any standard measure, it has not been a good few weeks for China. In November alone, retail sales slumped to a 15-year low; the country’s exports rose 5.4% from a year earlier, the weakest performance registered since a 3% contraction in March, and well short of the originally forecasted rise of 10%; car sales fell to levels not seen since the 1990s; the vast majority of companies directly impacted by US tariffs (around 86%) have reported a decline in orders, “according to a survey of 200 chief financial officers in manufacturing firms with significant export business”; and the default risk (a gauge of financial stress) for Chinese companies has climbed to the highest level in 13 years, according to the Moody’s rating agency.

Most ominous, a senior executive from China’s largest telecom-equipment manufacturer, Huawei (also the daughter of its president), was arrested in Canada, after a US extradition request on the grounds of suspected money-laundering designed to mask evading US trade sanctions imposed on Iran.

This arrest took place against a backdrop in which Beijing has increasingly been viewed as a security threat. In addition to the long-standing charges of intellectual-property theft, China is now being accused of conducting hacking attacks on the home-country servers of big Western companies, and using Huawei’s new 5G (fifth-generation wireless) network as a platform for this cyber-espionage.

This national-security angle is adding to the traditional complaints about Chinese trade practices. In echoes of the old Cold War, the so-called “Five Eyes” (an organization that was originally established among the US, the UK, Canada, Australia and New Zealand after World War II to counter Soviet influence) are now actively exchanging sensitive intelligence on China’s foreign activities. In aggregate, this is triggering concerns that we’re entering new and more dangerous terrain between the West and China.

Oddly, this rising hostility has sprung from exactly the opposite set of circumstances that created the foundations for the original Cold War. In contrast to diplomat and historian George Kennan’s famous telegram about the old Soviet Union (which correctly rebutted US president Franklin D Roosevelt’s naïve assumptions about Josef Stalin and provided the diplomatic underpinnings for a sustained policy of Western containment after World War II), today’s Cold War 2.0 is typified by what author James Mann calls the West’s “China fantasy,” a notion encapsulated by former US president George W Bush’s remark: “Trade freely with China, and time is on our side.”

The main idea was that Beijing would ultimately internalize Western norms and values as it integrated and prospered via an increasingly globalized world economy. It is worth recalling that similarly optimistic assessments about trade and globalization were made about the world on the threshold of World War I.

But much as the assassination of Archduke Franz Ferdinand quickly dispelled early-20th-century optimism, a similarly rapid, albeit less dramatic, reassessment of China is now under way, especially given the increasingly autocratic nature of the current regime under President Xi Jinping. Most striking is that even long-standing China doves are now echoing the language of old-guard hawks, who have long viewed trade with China as a zero-sum game.

The Huawei extradition request is also symptomatic of this reassessment, which is increasing the Western assault against Beijing, and taking it well beyond Donald Trump’s earlier tariff tantrums.

Certainly, the historic tendency to see China’s economic rise through rose-tinted glasses is not a charge one can make about the Trump administration, which came into power viewing Beijing as a major strategic threat. When President Trump first introduced his tariffs, the perception was that China’s wise policy mandarins would play the long game, and simply wait out the tariffs, which, it was argued, would affect the US more adversely than China. Beijing itself proclaimed that it would refuse to negotiate “with a gun pointed to its head,” and pointedly threatened countermeasures.

Since the trade war was launched, however, the US economy has not shown any significant signs of weakness, even allowing for the recent stock-market jitters. The official unemployment rate is at a near 50-year low, and labor-force participation is rising; wage rates are picking up, yet there are few signs that inflation is about to take off.

By contrast, China is slumping badly and appears eager to negotiate despite (or, perhaps, because of) mounting US pressure. If anything, by demanding the extradition of Meng Wanzhou, the daughter of Huawei’s president, Ren Zhengfei, the Trump administration has upped the ante further.

Beijing’s response to the pressure has been to offer up one concession after another: substantially cutting tariffs on US auto imports into China, upping purchases of US soybeans and other crops, and even offering substantial amendments to the country’s “China 2025” industrial policy (hitherto savaged by US trade negotiator Robert Lighthizer, among others, as protectionist), by promising greater access for foreign companies.

That was once considered a red line by China’s negotiating team. Retaliation for the extradition of Meng has been directed at Canada, rather than the US itself.

Why did so many get this calculation about China so wrong? Part of it, of course, is a product of an intense, albeit understandable, animus toward Donald Trump himself. Another aspect reflects a visceral attachment to free trade

By any objective standard, these are not the signs of a country negotiating from a position of strength.

Why did so many get this calculation about China so wrong? Part of it, of course, is a product of an intense, albeit understandable, animus toward Donald Trump himself. Another aspect reflects a visceral attachment to free trade.

China’s president, Xi Jinping, has exploited this sentiment, positioning his country as the new champion of globalization and free trade, even though recent trade pacts have had far less to do with a free exchange of traded goods, more an entrenchment of existing multinational corporate privileges designed to subvert domestic regulation. And China itself hardly qualifies as a paragon of free trade.

But in a broader sense, China has not conformed to the expected Western script. In spite of integrating itself into the global economy under the auspices of the World Trade Organization, World Bank and International Monetary Fund, Beijing has not internalized liberal rule-based norms implicit in these organizations.

In fact, under President Xi, the Communist Party’s political strength and “purity” have become an end in itself, to which economic reforms have become subordinate (“purity” being a term with strong Leninist connotations).

Not only is this adversely affecting China’s economic performance, but it is contributing to changing Western perceptions of Xi’s government and provoking countermeasures: restricting Chinese investment in sensitive high tech industries, limiting academic exchanges at Western universities, and more closely scrutinizing Beijing’s diplomatic overtures around the globe.

The latter is occurring (in the words of The Economist) because of concerns that “China is co-opting institutions such as the UN and the WTO to make them safe for authoritarianism, state-backed capitalism and other threats to a rules-based order.” As the magazine notes, the Western figures leading this charge are not just anti-China trade hawks, but “ex-doves [who] agree that 20 years of patiently cajoling China to change has not worked.”

In other words, the relationship is unlikely to revert to the status quo ante. Globalization is dead; the world will likely fragment into regional trading blocs as a result. The “Chimerica nexus,” which married China’s massive labor force and savings surplus to the US consumer and housing market, has been shattered. Global supply chains are likely to be re-domiciled closer to home (the newly concluded United States-Mexico-Canada Agreement being the first illustration of that phenomenon).

“Reciprocity,” once a code word associated with trade protectionism, is now seen as a vital national-security quid pro quo, a safeguard that will govern future negotiations with Beijing.

This is already posing grave economic difficulties for China. Likewise politically, as the country is poorly equipped to deal with these mounting challenges. Unlike the US (where constitutional safeguards can mitigate the capriciousness of a volatile leader like Trump), the increasing concentration of power and control around President Xi means that there are fewer checks or constraints to balance his government in the event that it makes errors and miscalculates in its dealings with the rest of the world.

Modern China has never been a liberal democracy, but the earlier introduction of term limits for Communist Party political posts (now scrapped) provided a check or, at the very least, introduced a degree of limited accountability, had Xi been forced to hand over the presidency to some new leader in 2022. On the other hand, as economist George Magnus argues in Red Flags:

“Unbridled power, the disincentives to argue with or reason against the leader, the heavy hand of state censorship and limitations on learning … are not ideal, hand-maidens of dynamic reform and high economic aspiration.”

This is especially true given the mounting challenges for China’s leadership as it faces new, potentially hostile economic and political terrain vis a vis the West. The fundamental tension among modernity, markets and a rules-based order on the one hand, and the maintenance of an arbitrary one-party state on the other, is for now being resolved in favor of increased authoritarianism, occurring in the context of deteriorating economic growth.

The problem is that the whole basis of the Communist Party of China’s national legitimacy has been predicated on its continuing ability to deliver growth and prosperity to its people. Minus the prosperity, the party’s political position becomes more tenuous, especially as it is increasingly identified as a proximate source for Cold War 2.0.

Historically, the reflexive response of the CPC has been more repression (often under the guise of anti-corruption probes), more politically driven economic projects (which actually detract from growth in the long term), fabricated targets, more debt-fueled “white elephants” via the state-owned enterprises, less transparency, and more overall financial fragility.

But if the West continues to perceive China as a security threat to be managed, rather than a friend in need, it is hard not to imagine yet more tension (trade and otherwise) or, indeed, outright conflict, breaking out in the years ahead from the resultant fallout.

This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.