China Is Cheating at a Rigged Game

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 endorsing Trump’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 departed when 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. 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.

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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. 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 38,000 Chinese 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.