Curbing China’s rise

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EUA e a China
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Donald Trump outlined his intentions for international trade on 26 June 2016, when he sharply criticised US ‘politicians [who] have aggressively pursued a policy of globalization [that moved] our jobs, our wealth and our factories overseas’, leading to deindustrialisation and the destruction of the US middle class. Denouncing a ‘leadership class that worships globalism over Americanism’, he accused Nafta, the World Trade Organisation, Chinese economic practice and the now defunct Trans-Pacific Partnership (TPP) of being the main causes of US manufacturing decline. He announced that he would withdraw from TPP, renegotiate Nafta, declare China a currency manipulator, take legal action against ‘unfair’ Chinese trade practices, apply tariffs on Chinese-sourced imports, and ‘use every lawful presidential power to remedy [bilateral] trade disputes’ with China.


Few observers took this assault on globalisation and the institutional architecture of international trade seriously, since Trump was unlikely to be elected. And if he were, he would be curbed by the US Treasury and US business actors with vested interests in global free markets. It was thought that international commitments undertaken as part of US economic and security institution-building after the 1944 Bretton Woods conference would weigh on decision-making, and the opinion and influence of the most internationalised segments of US capitalism would be even more important.


These structural conditions suggested that no president, even one as idiosyncratic as Donald Trump, would be able to veer too sharply from the main course of post-cold war policy, which aimed to preserve US hegemony. But this overestimated the autonomy of capital and its capacity to shape policy, and underestimated the political and strategic implications of China’s re-emergence. Based on the assumption that ‘China represents a fundamental long-term threat’ graver than the former Soviet Union, the current US containment effort is altering the character of international relations and globalisation.


The central US course after 1991 was the global spread of market capitalism. The US Treasury and the International Monetary Fund implemented an agenda, headed ‘the Washington Consensus’, of global liberalisation, deregulation and privatisation that was forcefully imposed on indebted, hence vulnerable, ‘developing countries’ in Sub-Saharan Africa and Latin America in the late 1980s and 1990s. After the 1997-98 Asian financial crisis, the economic systems of the newly industrialised countries of East Asia and developing countries in the region were questioned. Under severe pressure, statist industrial policies and domestic market protections gave way to a retreat of the state and opening up to international investment. The campaign, far more coercive than persuasive, was promoted by US and European finance and multinational/transnational firms determined to access previously closed markets.


A new golden age


The collapse of the Soviet Union removed the last historic barrier to the spread of capitalism, creating the conditions for a second golden age of international capitalism (the first had been British-led globalisation in the late 19th century). The US had become the sole Great Power, and in the 1990s the aims of the US state and of capital coincided to an exceptional degree, like the symbiosis of the British imperial state and capital at the height of British internationalisation; power and wealth maximisation purposes were entwined.


The coincidence of interests had led the British government to work on behalf of capital (using force or the threat of it, as in Latin America, China and Egypt), and led private investors to defer, when needed, to the strategic imperatives of the imperial state (investors in Russia were made to understand that balance of power politics trumped profit). The US state played a decisive role alongside internationalised business in spreading global liberalisation in the late 20th century. Harvard international relations professor Stephen Walt wrote that US leaders ‘saw the unchecked power at their disposal as an opportunity to mould the international environment to enhance the US position even more, and to reap even greater benefits in the future [by getting] as many countries as possible to embrace their particular vision of a liberal capitalist world order’.


The US political and economic elites saw China as an opportunity rather than a threat. The People’s Republic of China (PRC) had found a common cause with the US in the 1960s and 1970s — containing the Soviet Union. Diplomatic relations were established on 1 January 1979. On a celebratory tour of the US that month, Deng Xiaoping remarked that China and the US were ‘duty bound to work together [and unite] to place curbs on the polar bear’. Jonathan Steele wrote in the Guardian that during the White House ceremony, with China’s red flag flying and a 19-gun salute, ‘a bright red [Coca-Cola] delivery van passed by ... It was a fitting symbol of the multi-million dollar bonanza which American business men were looking forward to, thanks to China’s new appetite for American trade, technology and credits’.


In the 1980s, the PRC initiated gradual market liberalisation and opening to international investment. In 1986 it applied to join the General Agreement on Tariffs and Trade (Gatt), precursor of the WTO. After the collapse of the Soviet Union and a three-year pause in the aftermath of the Tiananmen Square upheaval, Deng amplified domestic ‘restructuring’, and accelerated the country’s internationalisation and integration into the world (rather than just the regional) capitalist economy. The geopolitical correlate of global economic integration was the need to accommodate the US to avoid confrontations that could have derailed the transition.


US elite’s hopes


China’s voting record at the UN Security Council is evidence of this. The US consistently sought to incorporate China into the institutional and market disciplines of the western-centred world economy, with rules and frameworks set in Washington. (The US set stringent conditions for China’s WTO entry, and it only became effective on 11 December 2001.) Assuming that economic and political freedoms were intertwined, and acting from a position of strength, US elites thought that they could shape China’s economic and political paths.


With market opening, China received ever-larger inflows of foreign direct investment (FDI). Net inflows averaged $2.2bn a year (in current international dollars) between 1984 and 1989; $30.8bn between 1992 and 2000; and $170bn from 2000 to 2013. During the first wave, most capital came from Chinese regional overseas investors and Japan, then European and US flows became important. Transnational firms seeking cheap and disciplined labour, and unconcerned about authoritarian politics, made China the last link in the production and value chains that structure the world economy.


While the PRC sought to use these flows to acquire technology and know-how, most investment initially went into low value-added sectors such as textiles, or into processing industries such as the assembly of electric and electronic equipment with components manufactured outside China for global firms that had no factories but owned product intellectual property rights. Critical observers noted there was ‘little evidence that FDI inflows into China embody much hard or soft technology ... the “technology” gap between investing countries and China was commonly perceived to be 20 years’. China’s gains in the value chain were small; the gains of transnational firms were enormous. China appeared caught in webs of dependence.


Halting globalisation


This changed in the late 2000s, due to state-led developmental efforts, and is now quite different. Technology and know-how appropriation through mandated technology transfers, joint ventures, and cross-sector state-led industrial upgrading have moved China steadily up the value chain. These advances caused serious concern in Washington and other western capitals late in the 2000s, when President Barack Obama announced his ‘pivot’ to Asia. In his 2015 State of the Union address, he declared, ‘China wants to write the rules for the world’s fastest-growing region ... Why would we let that happen? We should write those rules.’


The current administration wants to slow China’s ascent by getting rid of the rules, and with Congress and broad sectors of the national security apparatus, has framed China as a major if not yet existential threat: an enormous country that has become too rich too quickly (GDP per capita has risen from $194 in 1980 to over $9,000). A country that has nurtured domestic industrial conglomerates in the telecoms, maritime and rapid rail sectors and devotes a large share of a growing GDP to research and development (over 2% in 2016 against 0.6% in 1996; US 2.74%, France 2.25%). A country that is modernising its navy and engaged in international economic and political expansion through its Belt and Road Initiative, and so far has purchased, constructed or is operating 42 ports in 34 countries. In key areas China still lags far behind the US in qualitative terms but, like Japan in the 1970s, it is rapidly catching up.


The US is now actively ‘seeking to constrain China’s rise’, according to the Financial Times, before its modernisation efforts mature. John Mearsheimer, a realist international relations scholar, argues that the US should hinder Chinese growth, and work for the economy’s ‘collapse’ to avoid the PRC becoming a giant Hong Kong. The US is doing this by reducing US market access for Chinese-sourced imports (the trade war), shutting Chinese firms out of high-tech sectors where the US has a qualitative lead, challenging territorial claims in the South China Sea on the grounds that ‘Chinese access to the islands’ would be a ‘danger to the global economy’, and by restricting foreign student visas and imposing background security checks on all Chinese graduate students.


The US’s aggressive legal and regulatory actions against the telecoms conglomerate Huawei, the world’s larger supplier of the equipment behind wireless networks, are the first critical moves. The administration has had variable results in seeking a worldwide ban on security grounds on Huawei involvement in building 5G infrastructures. On 1 December 2019, Canada arrested Meng Hangzhou, the chief financial officer of the company, at the US’s request; she has been charged with bank and wire fraud to violate US sanctions against Iran, and stealing trade secrets; she is now in a legal battle over extradition.


As the FT noted, ‘The US move to put the Chinese telecoms flagship on its so-called Entity list — requiring American companies to obtain a government license to sell to it — is a pivotal moment for the global technology industry. It represents the opening salvo in an emerging US-China cold war ... The latest US moves seem designed to cripple or crush one of the first Chinese tech companies to become globally competitive ... They amount to an effort to decouple the US and Chinese tech sectors, leading to a bifurcation of the global industry’.


Power versus profit


The US is seeking to break apart the global and regional production and value chains that have been a core feature of globalisation. The Washington trade war is directed as much against the transnational firms that have made China into an assembly and production platform as it is against Beijing. US officials consider that ‘too much of the supply chain has moved to China’ and that the firms that have done the moving, either directly or through the construction of multi-layered subcontracting, are part of the problem.


They interpret the cosmopolitan activities of transnational firms as unpatriotic, an argument that has a long history in nationalist thought. Samuel Huntington in 1999 denounced ‘liberal [politicians] and academics’ as well as some business elites who harbour ‘anti-national sentiments’ and support a ‘cosmopolitanism [that is eroding] national unity’, and called for a ‘robust nationalism’ founded on God, the nation and the armed forces.


The hope and expectation of the Trump administration, as well as of high ranking Democrats, is that a sustained trade conflict and stringent security regulations will generate prohibitive costs for transnational firms, pushing them to disinvest in China, ending technology transfers and other commercial interaction such as microchips sales by Intel or Micron to Huawei. Non-US firms are being pressured to comply: US laws and regulations have global reach, applying to any products or processes that include US-made components or intellectual property rights. In the future, this could affect all firms using the US dollar, as in the case of the current global blockade of Iran.


Foxconn (Hon Hai Precision Industry), the huge Taiwanese company that assembles Apple and other electronic products in China, announced in April plans to diversify its supply chain to India and Vietnam, China’s rivals, to protect itself against future disruptions in Asian supply chains. Since February, 66 Taiwanese firms have begun to repatriate their production from mainland China, supported by an incentive programme from the Taipei government. Dozens of US and Japanese firms are disinvesting from China to Mexico, India and Vietnam; according to a recent study, 60% of the 200 major US firms operating in China are reviewing or will review their supply chains. This will be accelerated if the administration extends the trade war. According to Morgan Stanley Bank, quoted in the Nikkei Asian Review, the cost of the iPhone XS would increase by $160 if the US applied dissuasive tariffs on all ‘Chinese’ exports.


American economic nationalists envision bringing parts of the manufacturing chains home, something the administration has loudly called for, as yet without results. Transnational firms, notably but not only firms without factories such as Apple or Nike, would need very strong incentives. It would be costly and hard to dismantle their Chinese platforms, but relocation in the US would cut deeply into their profit margins.


This June, Trump attacked the US Chamber of Commerce for supporting trade with China and suggested that he would impose 25% tariffs on all Chinese-sourced imports if China does not comply with US demands; this would force US firms ‘to move into other locations ... they [will] go to Vietnam ... or they make the product in the United States which is my favorite’. He can count on the support of the leaders of the Democratic Party, whose leader in the Senate, Chuck Schumer, has demanded a firm trade stance towards the PRC.


Tensions within China


Tension is rising between the most internationalised parts of capital and the state. Unlike the Soviet Union, which stood outside the world capitalist economy, China has become an essential part of it. Capitalism, redefined by Fernand Braudel as the ‘upper floor’ of economic activities, in which long-distance trade generates the highest profits, flourishes in global space, not in markets nationally segmented. That upper floor, as distinguished from local ‘ground floor’ markets, requires an open world economy. With important exceptions such as the defence sector and fossil fuel industry, tightly bound to the state, the key components of capital today have global interests and reach. The current situation challenges the liberal hypothesis that the density of interdependence in the late 20th century caused an irreversible change in world social relations. It also undermines neo-Marxist perspectives that envisioned a ‘transnational ruling class’, transcending politics and the state.


It would be naïve to assume China will bend under pressure. On 30 May the Chinese Global Times, which expresses official opinion, wrote, ‘China is ready for a long-term trade battle with the US. Compared to last year when the US started the trade war, the Chinese public is more supportive of the government taking tough countermeasures. More and more Chinese people now believe that the real purpose of some Washington elites is to ruin China’s development capabilities, and these people have hijacked the US’ China policy.’ On both sides, power seems to be gaining precedence over profit. The interactions of US and Chinese nationalism may well tear apart interdependence and end globalisation as we have known it.



- Philip S Golub is professor of international relations at the American University of Paris. He is the author of East Asia’s Reemergence, Polity Press, Cambridge, 2016.


Copyright ©2019 Le Monde diplomatique — used by permission of Agence Global.

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