Clyde Prestowitz, The World Turned Upside Down: America, China, and the Struggle for Global Leadership. Yale University Press, January 26, 2021, $31.20
The story should be familiar to most readers by now: Contrary to the naïve expectations of Western (and particularly American) economists, business leaders and politicians, China has become an economic superpower without liberalizing its political system or abandoning mercantilism.
And it has become a formidable strategic and military rival as well.
In his new book, Clyde Prestowitz deploys his 50 years of experience as a trade negotiator, advisor to presidents and CEOs, marketing executive, scholar and author to explain how this happened and what America and other countries must do to prevent China from overwhelming their democratic governments and free-market economies.
Prestowitz is one of America’s most experienced and thoughtful experts on trade policy and its economic impact, particularly with regard to the successful mercantilist development strategies that have made East Asia the largest and most dynamic component of the world economy.
His analysis centers on the most important and most obvious factor in China’s development and its relations with the rest of the world: the commanding role of the Chinese Communist Party and its vision of China’s future.
The alarming fact is that this role has been consistently downplayed or even ignored by politicians seeking campaign contributions and grand bargains, free-market economists living inside their mathematical models and CEOs putting shareholder value and their own compensation ahead of national security and even the long-term viability of their businesses.
China is a one-party, Leninist-Stalinist state in which the CCP’s top priority is to maximize its own power and the power and influence of China. Economic policy is key to that effort. The CCP and its leader Xi Jinping are not interested in opening up to free-market reforms that would undermine their control by handing levers of power to other domestic institutions and to foreign corporations, banks and governments.
The CCP-dominated Chinese system is incompatible with democratic government and free-market economics. It cannot be changed by “open agreements openly arrived at,” and while it will respond to pressure and practical necessities, it will always seek to maintain and expand its totalitarian system.
The assumption that China would inevitably move toward the democratic free market model of governance has proved to be totally wrong. In 1969, American scholar Jonathan Spence wrote about China’s resistance to foreign influence in his highly regarded historical work To Change China: Western Advisers in China, 1620–1960. Fifty years later, Clyde Prestowitz had to do it again:
It is critical for US leaders to understand that they cannot change China. They cannot persuade or entice it to develop a market-oriented economy without central guidance and coordination. They cannot stop it from expanding its military capacity or from attempting to create a global authoritarian order. They must recognize that wishing for China to become like us or thinking we can somehow force it to do so is fatuous.
As articulated by Xi, the Chinese dream is not to become a “responsible stakeholder” in the “global, rules-based system” created and sustained by the United States in the wake of World War II and the Cold War. It is instead to return to the grandeur of China’s past.
This includes becoming the leading scientific and industrial power on earth. The goal of Made in China 2025 might have an unrealistically ambitious time frame, but it’s the thought that counts: independence and leadership in all advanced technologies, from farming to outer space.
In this endeavor, China is following in the footsteps of Germany and Japan, South Korea, Taiwan and Singapore. Learning from all of them, but especially from Japan and Singapore, China has developed its own mercantilist, investment-driven, export-led growth strategy, which it has grafted onto five-year plans adopted from the Soviet Union.
Think of recent examples such as South Korea, Taiwan, Japan, and China. None of them had many natural resources. None of them “did what the Americans said.” None of them adopted the “Washington consensus.” All of them succeeded by using mercantilist strategies.
Prestowitz devotes an entire section of the book to explaining that America, too, got rich through mercantilism, not free trade, and that the theory of free trade suffers from omissions that severely limit its usefulness in the real world – to the point of becoming a “false god,” the worship of which undermined American prosperity and competitiveness.
China carefully studied the examples of other countries that had achieved a high level of economic development … It realized that all had adopted protectionist and mercantilist policies to jump-start industrialization and become workshops of the world. Party members grasped the importance of manufacturing, economies of scale, technological advance and the development of retainable industries. They … paid attention when Singapore’s Lee Kuan Yew advised them to study Japan and the “East Asian tigers.”
And now China is the third-largest economy in the world in US dollar terms, the largest in purchasing power parity terms, the world’s largest trading nation and the source of more than 40% of America’s large structural trade deficit.
China’s Belt and Road investment program spans the globe and China’s Asian Infrastructure Investment Bank now has more than 100 members and prospective members – all the nations that matter with the notable exceptions of the United States and Japan.
Not to mention China’s de facto control of the South China Sea, the threat the country poses to Taiwan and Japan’s southern islands, its expansion in both the Pacific and Indian Oceans and its military modernization program.
What can be done about this?
Like Germany and China with their Industry 4.0 and Made in China 2025 programs, America should launch a comprehensive American Rejuvenation Program dedicated to world leadership in all key technological, infrastructure, and high-value-added fields. The program must be introduced as fundamental to long-term national security and as a response to the greatest challenge the United States has ever faced short of the Civil War. It must be designed and organized to be comprehensive and strongly coordinated within the US government and between government, business, academic, labor, and state and local government organizations.
Note that Prestowitz believes China to be a greater threat than either the Axis Powers in World War II or the Soviet Union during the Cold War.
The book provides a very long list of policy recommendations to strengthen America and its allies. These include standard measures such as reciprocity, moving supply chains out of China and limiting Chinese access to American finance; more radical changes such as the introduction of a Market Access Charge (MAC) and Value Added Tax (VAT) to drive down the value of the dollar and reduce America’s trade deficit; and innovative proposals to undermine China’s international influence.
The latter include attempting to expel China from the World Trade Organization; establishing a separate democratic globalization organization to manage and enforce the rules of international trade and investment; and the creation of “a consortium of the US, EU, Japanese, South Korean and Australian development and infrastructure banks along with the Asian Development Bank for the purpose of modernizing the Philippines by 2040.”
Prestowitz proposes that America learn from Germany, Japan and China, rebuild itself and beat them at their own game, while countering China whenever and wherever possible. Given America’s strengths in software, data processing, semiconductors, precision manufacturing and venture capital, a degree of success could be expected.
But China is a moving target. Due to its quick and effective response to Covid-19, its economy has recovered more quickly than others and its share of global trade has risen during the pandemic. It has signed the Regional Comprehensive Economic Partnership (RCEP) trade agreement with all the democracies of Asia-Pacific. It is lowering tariffs rapidly, now that it’s in its interest to do so.
On the other side of the ledger, an America that devalued its currency and otherwise made itself a less attractive market for trade and investment would give China a chance to pick up the slack.
There is also a problem of perception. While other Asian countries are happy – desperate, even – for America to provide a counterweight to China, they also trade more with China than with America, and that China trade is growing. They are not likely to commit economic suicide to keep America’s grand strategists happy.
As for Europe, the Brussels-based publication Science/Business reports that “Research ministers have agreed to more aggressively police foreign participation in the EU’s research program, adding a new provision to Horizon Europe that is aimed primarily at preventing China and the US from getting access to sensitive European research.”
Horizon Europe is a European Union scientific research initiative aimed at increasing European competitiveness and growth by raising EU science spending levels by 50% over the next 7 years.
The Science/Business report goes on to quote Robert-Jan Smits, former director-general of the European Commission’s research directorate: “It’s clear that the main driver of this change in Europe’s research policy is the fight between the US and China for global technology leadership. This is increasingly becoming an ugly fight in which the global rules of respect and engagement are thrown out of the window and Europe threatens to be squeezed between these world powers …”
And while Prestowitz thinks incoming President Biden’s first priority should be warning America and the world about the threat from China, domestic issues seem likely to take precedence.
Nevertheless, an advocate must advocate. To better understand both the challenge posed by China and the thoughts of an influential participant in the debate in Washington, DC, read this book.
Scott Foster is an analyst with Lightstream Research, Tokyo.