China - least imperialistic major power ever

China's approach stands in sharp contrast to that of the US and other Western powers (Source: here) 

Prior to Donald Trump’s first term as president, there was a broad consensus in the United States and Europe that the West’s interests were best served by working with China, not by fighting China.

Granted, there were large trade imbalances between China and Western economies to contend with, but China’s trade surpluses were conveniently recycled in Western financial markets, which drove down interest rates and provided a lot of funding for consumption and investment.

Besides, China produced increasingly attractive goods at very low prices, which was great for consumers. Lower-end manufacturing jobs were leaving the West for China and other Asian economies, but the West was still able to maintain full employment, because lower-end manufacturing jobs were steadily being replaced by higher-end jobs in other industries, such as tech, services, and entertainment. Both China and the West were able to live in accordance with their respective long-standing preferences of saving in China and consuming in the West. In short, the arrangement was a sweet deal for nearly everyone involved.

I say ‘nearly’, because a small section of workers at the very bottom of the income and education scale in the West – people who lacked the skills and training and means to transition to other industries – were being left behind during Globalisation.

This was not China’s fault nor was China in a position to remedy the problem. The problem with obsolete workers from redundant industries is intrinsic to the process of development itself and it is always up to governments in the countries in which this happens to make sure that unfortunate people in these segments of the labour market are able to re-skill for a transition to more sustainable jobs.

Unfortunately, this never happened. Instead of helping their most vulnerable, Western governments entered into a so-called Faustian Bargain with the middle class and businesses, offering tax cuts that were funded by scaling back essential public services, such as health and education.

The main victims of these cut-backs were precisely the same people, who were being left behind due to the ongoing structural changes in the world economy. In other words, these low-income, low-skilled, poorly educated, and largely white workers were hit by a double-whammy of job flight and government neglect.

It did not take long for populists and xenophobes to spot an opportunity to further their political careers by blaming the plight of the left-behind unfortunates on domestic and external scapegoats. Scapegoating manifested itself as growing resentment towards immigrants, who were blamed, without justification, for the plight of the white poor. It also manifested itself as Sinophobia based on the simplistic argument that China’s amazing success must somehow have been derived from the decline of the white poor in the West.

The happy co-existence between China and the West was shattered shortly after Donald Trump became president for the first time. Trump had been impressed by Peter Navarro, an also-ran second-rate academic economist, whose main claim to fame is a book with the catchy title “Death By China”. Trump never read the book, but he liked the title. When Navarro told him that tariffs can raise revenue (true) and fix trade imbalances (false) then Trump decided to pounce on China, whose trade surplus versus the US was larger than any other country. The idea of taxing Chinese imports to the US particularly pleased Trump, who wanted to cut taxes for the rich and needed a new source of revenue.

Trump soon launched a full-scale assault on China, attacking the country on many fronts. He blamed China for causing the Covid pandemic, insisted that China had committed mass-murder of the Uyghurs, and maintained that China was actively destroying the American economy.

It did not take long for others to adopt a similar tune. When the US changes course, the lap-dog British, the lumbering Europeans, and most of America’s other allies quickly follow suit. Soon anti-China policies were being adopted across the European Union, in Canada, in Australia and New Zealand, and in South Korea, Taiwan, and Japan. China was suddenly everyone’s worst enemy.

Let us examine the case against China a bit more closely. China clearly annexed Tibet, but curiously no one in the West appear too bothered by that. China also continues to maintain a right to re-annex Taiwan and a few minor reefs near the Philippines.

China also gets heavily criticised for its chief foreign policy principle of not interfering in the domestic affairs of other nations. The West finds it extremely distasteful, when, say, China invests in Zimbabwe, Myanmar, or Russia, although Westerners for some mysterious reason have no qualms about heavy Western investment in genocidal states like Israel or oil-rich murderous dictatorships in other parts of the Middle East.

Indeed, beyond these 'issues' there are practically no ‘live’ geopolitical conflicts involving China as a protagonist. The vilification of China is therefore completely out of synch with China’s alleged ‘crimes’. Objectively, China’s footprint around the world is small and, for the most part, benign. It is difficult to escape the rather obvious conclusion that China is being scapegoated. I would go so far as to say that China is possibly the least imperialistic major power EVER.

Hypocrisy and hyperbole characterise the West’s portrayal of China. When we strip away the bullshit, we are left with the rather simple truth that China mainly exerts influence overseas through capital flows, not wars or coup-mongering.

China also recycles its large trade surpluses, not just in the West, but also prominently in poor countries, where Chinese money finances the construction of railways, ports, roads, and other infrastructure. For the most part, these investments are gratefully received, because poor countries have few or no other means of accessing foreign capital apart from getting it from China.

As those of you who follow these things closely will know, President Joe Biden did not unwind Trump’s 50% China tariff from his first term. Trump is now adding to those tariffs. What is remarkable, though, is how ineffective the tariff hikes have been in terms of ‘fixing’ US-China trade imbalance or even improving US economic fortunes versus China.

Consider first the US trade deficit with China, which has hovered in a steady range between USD 450bn and USD 550bn per year since 2011, despite tariffs. In reality, however, China’s trade surplus has actually increased since Trump and Biden’s tariffs, because many of China’s erstwhile direct exports to the United States have been re-routed through third countries to avoid tariffs. In other words, after nearly ten years of tariffs there has been no reduction in the US trade deficit with China.

The reason why tariffs do not reduce the trade deficit is very simple. US demand for imports is determined by US aggregate demand, not by the relative prices of imports from China versus other regions. As long as the US maintains a stable level of aggregate demand - which it has done due to Trump and Biden’s massive fiscal stimulus packages – China will continue find willing buyers of its goods in US markets and the only difference will be that China’s exports now reach the US via third country intermediaries.

There is also no evidence that tariffs have had major impacts on China’s longer-term competitiveness. China occasionally over-invests in specific sectors, such as housing or electric vehicles. This happens because some sectors become politically important and then it becomes difficult to change tack. However, the politically sensitive sectors are not representative of the China economy as a whole. China’s elevated saving rates and high rates of investment as well as the country’s relentless focus on long-term productivity growth and innovation continue to preserve China’s lead in sectors ranging from battery technology to renewable energy and digital technologies as well as a raft of other industries.

A word on Chinese R&D. China has largely left behind the old model of innovation in which Chinese companies acquired Western companies to access technologies complementary to China’s own capacities and requirements. That model gave way to a genuinely indigenous and unique type of Chinese R&D some twenty years ago, which is characterised by a very short distance between innovator and customer.

Let me illustrate the point with reference to Chinese mobile phones. Chinese mobile phone providers update their software and services packages in response to suggestions from users via an app that connects directly to the engineering department. The close line of communication between users and engineering allows Chinese mobile phone companies to innovate with far less risk (no guessing what customers want) and far greater customer satisfaction (quicker response times).

By now, of course, China has graduated to become world leader in a number of fields, not least renewable technologies. For some time now, China has produced genuine 'world first' innovations. China was recently able to launch a AI engine at a mere fraction of the price of Western competitors. This year a Chinese company launched the Betavolt Battery, which is the size of a coin, runs on miniature nuclear power (Nickel-63), and does not need re-charging for between 50 and 100 years (see here). More generally, China's commitment to long-term investment means it will not face steep costs that place limits on investment and growth. A good example is Chinese energy production, shown below in comparison with the United States

 China is investing, the US not so much (Source: here)

These examples illustrate a very simple but important point: Fighting China with tariffs does not achieve anything. The Chinese and Western macroeconomic realities are such that tariffs and other misguided adversarial strategies against China will never succeed. The rate of innovation and levels of investment are simply too high and China will continue to outpace Western economies regardless of what they do. Fighting China only serves to exclude the West from the opportunity to participate in China’s rise.

The West would be better served by working with China. The West should jump on China’s coat-tails and, working with China, gain influence in the role as important investment and trading partners to China.

Many Western policy-makers undoubtedly know this, but who among them will be the first to grow a pair and say it out loud, shattering the Trumpian anti-China consensus?

The End