China Is Cheating at a Rigged Game

The trade war is a sign of a global system gone badly wrong.

(Thomas Peter/Getty Images/Leon Neal/Getty Images/iStockphoto/Foreign

Policy illustration)

BY JAKE WERNER-
AUGUST 8, 2018, 9:29 AM
A new attitude toward China is rapidly taking shape across the U.S. political
spectrum. Sen. Bernie Sanders (I-Vt.) echoes President Donald Trump’s
talking points, decrying the transfer of “our” technology to China
and condemning investment there. Fellow progressive Sen. Elizabeth Warren
(D-Mass.) is lining up with former White House Chief Strategist Steve Bannon
calling for an “aggressive” policy. Establishment Democrats like Senate
Minority Leader Chuck Schumer are endorsingTrump’s trade war with
China. Free-trade stalwarts like the Wall Street Journal editorial board and
establishment bodies like the Council on Foreign Relations are finding
common ground with protectionist unions like the United Steelworkers and
trade critics like Global Trade Watch. While there are still significant
differences of policy and strategy, seemingly everyone agrees that the Chinese
are conducting trade in a predatory manner that hurts American business
and workers, and that the time for confrontation has arrived.

Curiously absent from these arguments is any analysis of what motivates

Chinese policy. In its place we find a crude image of duplicitous Chinese bent
on taking advantage of innocent Americans. As Oregon Sen. Ron Wyden, the
ranking Democrat on the Senate Finance Committee, put it at a hearing in
March: “China has stolen our intellectual property, held American companies
hostage until they disclose their trade secrets, and manipulated their markets
in a strategic manner to rip off American jobs and industries.” Or as
Republican Sen. John Cornyn of Texas said, “We simply can’t let China erode
our national security advantage by circumventing our laws and exploiting
investment opportunities for nefarious purposes.”

This is an image that resonates in disturbing ways with the long history
of anti-Chinese racism in the United States. And just as Chinese immigrants
in the 19th century were made a scapegoat for free-market capitalism’s
inability to create broadly shared prosperity, so too China is being blamed
today for the failure of free-market globalization to achieve inclusive growth.

The emerging confrontation with China is only the latest sign that something
has gone seriously wrong in the global economy. China critics are not wrong
that the United States and China are now trapped in a zero-sum competition
for economic growth. The problem, however, is not Beijing but the structure
of the global economy itself. As it becomes increasingly clear that the existing
form of globalization has exhausted its potential to advance development,
vilifying China has become a substitute for facing honestly the urgent need to
transform the nature of global growth.

If Americans simply accept the constraints imposed by the existing structure

and try to fight it out within them, then we’re heading into a cycle of steadily
accelerating conflict. That’s because, for China, the central question is not
trade but development. When understood from this perspective, it becomes
clear that the demands Republicans and Democrats are posing are
tantamount to cutting off China’s path toward a wealthier society. To the
Chinese leadership, this poses an existential threat.

It’s true that the Chinese economy has grown at the highest rate in its history
over the last three decades, dramatically improving the standard of living for
hundreds of millions of people. Yet most Chinese remain quite poor because
they started from such a low income level and because the wealth has been
distributed in a highly unequal manner. One recent report put the median
household income, adjusted for purchasing power, at $6,180. That figure in
the United States stands at $43,585—more than seven times higher.

While many of China’s coastal provinces have attained a high degree of

development, huge swathes of the interior remain mired in low-productivity
smallholder agriculture.

Even in Shanghai, China’s richest city, a large majority of workers are

employed in low-paying occupations, often working 12 or more hours a day
doing backbreaking work on construction sites, working in sweatshops under
dangerous conditions, running tiny shops on razor-thin margins, doing sex
work, sweeping the streets, or scavenging trash.

The struggle to make a decent life under conditions of intense competition and
general scarcity has made social unrest a chronic condition in China. The
government no longer releases statistics on the number of strikes and protests,
and the official media outlets rarely cover them, but there is little doubt that
discontent is both broad and deep. China Labour Bulletin’s unofficial tally of
labor disturbances stood at 1,257 for 2017 and rose to 1,063 in the first seven
months of 2018. Since these numbers reflect only the cases accessible online,
largely via social media, the monitoring group believes the real number might
be 10 to 20 times higher.

Chinese leaders have concluded that the only way to manage this dangerous
instability is to continue the current trajectory of development and maintain
China’s movement to higher-value production. What they fear above all else
is that China might fall into the “middle-income trap,” in which a country’s
developmental trajectory levels off and stagnates well short of advanced
status. Countries such as Egypt, Thailand, and Brazil are mired in such a
condition, frustrating the aspirations of their people and giving rise to
widespread political turmoil.

China’s leaders are intensely aware of this experience as well as earlier

Chinese precedents, including the Tiananmen Square protests of 1989 that
were fueled by high inflation and economic dislocation. Several years ago,
Wang Qishan—often considered the second-most powerful man in China—
made Alexis de Tocqueville’s The Old Regime and the Revolution required
reading for top cadres, warning explicitly that China’s current situation
resembled that of France on the eve of revolution.
Feeling their backs against the wall, no amount of pressure from the United
States will convince Chinese leaders to give up their development strategy.
But why should they? Raising a country from poverty and increasing
opportunities for everyone should not be controversial goals. Why, then, are
so many in the United States jumping at the chance to condemn China for it?
The answer is that, under the existing form of globalization, the only way to
achieve development is to “cheat”—where cheating is defined as significant
state intervention in the market economy. The only major countries that have
achieved a developmental breakthrough are precisely those that have
manipulated the terms on offer by the global economy.

The record of growth over the last three decades of globalization

demonstrates this. The chart below shows one measure of development for the
poor and middle-income countries with the largest populations. Of these, only
China has seen dramatic and sustained growth in per capita GDP. In contrast,
other countries have shown modest increases in incomes, but no
developmental breakthrough. The general structure of their economies
remains stagnant—either subsisting in abject poverty or stuck far short of
wealthy countries.
The post-World War II era of global growth, more accommodating of state-
led investment regimes, saw countries such as Brazil and Mexico achieve
rapid development. But in the age of free-market globalization, poor
countries’ only chance at development has been attracting foreign investment
into manufacturing industries for export to the rich world. The other
significant alternative, export of primary goods from oil to copper to
soybeans, has enriched certain people in poor countries but has generally
failed to translate into broad-based growth because of the rapid boom-bust
cycles and limited employment gains of these markets.

Export of manufactures as a development strategy was pioneered

by Japan, South Korea, and Taiwan in the 1960s and 1970s. As Cold War
allies of the United States prior to the re-imposition of free-market ideology,
these governments were given wide latitude in directing resources toward
strategic industries. Equally significant, they faced very limited competition in
the field of low-cost exports.

As more and more countries were integrated into the free-market

globalization regime beginning in the early 1980s, competition for investment
and export markets grew ever fiercer. The more countries that employed the
strategy, the harder it was for any single country to accumulate the capital it
needed to fundamentally remake its economy and achieve a sustained increase
in wealth. And unlike the consciously coordinated development planning of
the postwar era, the free market tends to channel resources to those who are
already well-off because they promise the highest returns. As a result, three-
fifths of foreign investment in the globalization era has gone to one-eighth of
the world’s population residing in the rich countries.

Since global consumer markets remained stubbornly limited, poor countries

were forced into intense competition against each other. Pursuing
development through sweatshops meant that only those countries that
maintained cheap labor would successfully draw foreign investment. Should
the price of labor begin to rise—which is to say, if economic growth started to
translate into a better life for the people doing the work—then foreign
investment would move elsewhere.

As a result, many countries saw an influx of investment that left no enduring

legacy because capital quickly departedwhen workers started making
demands or when cheaper options opened up. Mexico, for example, has seen
several waves of large-scale foreign investment. Yet wages have been flat for
over a decade, the poverty rate is stuck at over half the population, and the
share of employment in manufacturing is the same today as it was in 1960.

China escaped this trap precisely because it had the wherewithal to cheat
while playing this rigged game.
China escaped this trap precisely because it had the wherewithal to cheat
while playing this rigged game.
When China entered the developmental competition in the 1980s, it boasted
an exceptionally disciplined and literate workforce, unusually advanced
infrastructure, and a highly diversified industrial landscape compared to
others at the same level of development. These legacies of the Communist
revolution and the planned economy provided an ideal setting for sweatshop
production when they were made available to foreign capital. From 1989 to
2016, China drew one-fifth of all foreign direct investment into developing
countries.

But investment alone does not produce development. Latin America, over the
same period, drew an even larger share of FDI to developing countries—one-
fourth—without achieving the explosive growth seen in China.

Like the leadership of most poor countries, the Chinese Communist Party
endorsed development as a central goal of its rule. But in other countries,
power is most often organized through fragmented patron-client networks,
which are connected only parasitically to productive enterprise. In contrast,
the Chinese state is unusually centralized and possesses an unusual degree of
control over the economy.

China is certainly not innocent of patronage and corruption, but in the top-
down party-state system, officials rise in the ranks by achieving good
macroeconomic statistics and contributing to centrally determined industrial
policy. Because of the close connection between officials and business,
patronage can be pursued through productive investment rather than merely
through extraction of resources.

The Communist Party has cultivated market forces to discipline the labor
force and individual firms yet has maintained its own ability to supervise
broad investment patterns. By coercing capital to build up strategic industries
and expertise, the leadership has steadily moved the economy, sector by
sector, toward increasingly advanced production. From toys and textiles, on to
steel and chemicals, then to autos and aviation, and now to information
technology and advanced robotics, the state has steadily driven production
upward.

If this exceptional vision and state capacity provided the impetus for Chinese
development, it was China’s uniquely strong bargaining position that allowed
the state to make good on its plans. The huge and rapidly growing China
market convinced major foreign corporations to invest on terms negotiated
with the state rather than unilaterally imposing their own conditions, as they
did with manufacturing in Latin America or extractive industries in Africa.
Most prominently, China required foreign corporations entering the domestic
market to participate in joint ventures with Chinese companies, which
allowed domestic firms to learn the managerial and technological practices of
the developed world. China also established regulations that secure favorable
terms for Chinese enterprises licensing the technologies of foreign firms.

The Chinese government and some individual Chinese companies have also
gained access to advanced technology through industrial espionage. In this,
they were following a path trod by every other economically successful
country—not least the United States. In the late 18th and early 19th centuries,
the young and technologically backward United States engaged
enthusiastically in smuggling and theft of cutting-edge production techniques
from Great Britain.

Yet outright theft plays a minor role in China’s strategy. Not even U.S. Trade
Representative Robert Lighthizer, a hard-line China hawk, pretends that
industrial espionage is the primary component in China’s successful
acquisition of advanced technology. The USTR’s report on its Section 301
investigation of China’s “unfair technology transfer regime” concentrates
overwhelmingly on transfers achieved through joint ventures, licensing
regulations, and Chinese firms’ purchase of foreign companies—none of
which would have occurred if the foreign companies involved were unwilling
to make the deals. Each is simply another case of the general market principle
that actors with greater bargaining power will always strike better deals for
themselves. In the final analysis, China gained access to advanced technologies
not by “cheating” but because it was not as fatally weak as others similarly
hoping to break the monopoly of the rich countries on high-productivity
techniques.
***
Yet China’s development strategy has come at a terrible cost. Beijing’s need
for foreign investment coincided with a long-term campaign by corporations
in the United States, Europe, and Japan to drive down wages and break the
power of unions. The availability of cheap Chinese labor allowed those
corporations to force workers to accept stagnant pay and deteriorating
working conditions under threat of moving production abroad, materially
contributing to the collapse of the social contract in the developed countries.

China’s strategy has also foreclosed the possibility of development for other
poor countries.
China’s strategy has also foreclosed the possibility of development for other
poor countries.
Here again, the power of the Chinese state secured an important advantage
over competitors, not just in providing to foreign capital a cheap and
disciplined labor force and unusually high-quality infrastructure, but also by
maintaining a low exchange rate for the yuan. This preserved a price
advantage for Chinese exports that sidelined other countries.

Not least, the Chinese people have also suffered greatly. Because export-led
growth required intense exploitation of the workforce, China has
systematically dismantled the power of labor. As a result, Chinese workers
have endured decades of dangerous conditions, poor pay, routine wage theft,
and constant indignities at work. In 2017, a horrifying 38,000Chinese workers
died in workplace accidents.

Though development has expanded economic opportunities for most Chinese,

the top-down, centralized system that was necessary to achieve development
under free-market globalization has harshly circumscribed other realms of
freedom in China. With rising wealth has come endemic corruption,
deteriorating public services, and a sharp upward distribution of wealth. As
ordinary people have been increasingly exposed to market forces, they have
faced intensifying competition, rising insecurity, and the breakdown of trust
and community that accompanies such a condition. Development has
undermined rather than advanced its prospects of democratization.

These problems are not unique to China. Free-market globalization has pitted
the workers of all countries against each other in a race-to-the-bottom
dynamic. Blame for the consequences should fall neither on the winners nor
the losers of this struggle. The problem is the structure of the global economy
itself.

Overcapacity is a real issue, as is the tough competition that China’s planned

development of high-tech production may pose for the most dynamic sectors
of the U.S. economy. But rather than blocking development in China, a new
form of globalization could attack these problems by raising wages and
productivity around the world. The nationalist approach tries to limit
competition by restricting supply, while the alternative would address
overcapacity and limited markets by expanding demand.

But such a solution requires a far deeper rethinking of global growth than
politicians on either left or right have contemplated. It requires an end to the
race to the bottom: a global regime of labor rights that would distribute the
gains from growth more broadly and, at the same time, force corporations to
compete by investing in their workers rather than by degrading the conditions
of employment. It also requires significant investments in the billions of
people currently starved of capital—investments that the free market has
refused to make—that would transform those trapped in the slums, the
ghettos, and impoverished rural areas into the workers and consumers of
tomorrow.

Scapegoating China threatens to strangle free-market globalization without

establishing anything to take its place—an approach that can only lead to a
vicious cycle of rising economic dysfunction and nationalist conflict feeding on
each other and pushing the world in a very dangerous direction. A different
path will require confronting powerful interests, in the United States and
China alike, that have suppressed the political voice of labor for decades.
Against zero-sum nationalist thinking, the alternative is a genuinely global
vision of development.

Jake Werner is a historian of modern China with interests in the twentieth-

century global history of capitalism, labor, urban space, and everyday life

Posted by Thavam