21 August 2020

How should free-marketeers respond to the threat of China?

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There are many questions that will confront us once the pandemic finally ends, but near the top of the list will be the question of what to do about China. Whether it’s the inhumane way it treats its Uighur minority, its blatant disregard for Hong Kong’s autonomy, or its role in helping to kickstart the pandemic, the list of justifiable complaints against the Chinese government is long and growing.

Understandably, many wish to respond strongly to such actions and not only send a message to China that we disapprove, but exact some real price that China must pay if it chooses to pursue such policies. It’s not only Trump who appears ready to intervene economically to punish China, there are those in Britain who appear keen to stop ByteDance (the Chinese company which owns the video app TikTok) from relocating its HQ from Beijing to London.

This all leaves free-marketeers like me in a bit of a bind. On the one hand we are all for supporting democracy and the rights of individuals, and very much in favour of the downfall of totalitarian states. However, on the other hand the sort of strongman tactics that Trump is using will be economically harmful and it’s doubtful whether they will actually work.

While it might feel cathartic imposing tariffs or banning companies, economic sanctions don’t exactly have a good history of effecting policy change. Part of the problem is that they can entrench positions, leading to a siege mentality and strengthening support for the government among the population. It’s not just a matter of the stick, the carrot is also important. Moving further away from free trade, and trying to disconnect from China, is unlikely to offer the sought of incentives necessary for them to even think about changing policy.

After all, while the West may try to freeze China out, the rest of the world will go on trading with them. You only have to look at Napoleon’s failed attempt to choke Britain’s economy off via the continental system to see that any attempt to do the same to China would be bound to end in the same failure. Furthermore, the evidence is clear cut that imposing tariffs would substantially harm our own economic performance and productivity. When you are in the middle of a battle for supremacy the key is to innovate and grow your way to victory, not to harm yourself in the hope that your enemy will also be hurt in the process.

Many have said the once popular argument that economic growth in China will bring with it a democratic awakening has been disproven. But, as Tyler Cowen points out, China has gone from a largely rural to an urban society in the space of just thirty years, as masses of ‘conservative’ peasants migrate to the city. If these same peasants were suddenly given voting rights then they might overwhelm the ‘liberal’ middle class and elites on the Chinese east coast, so these established urbanites still support the CCP, which despite its flaws has delivered them growth and stability since 1990. There is still reason to hope that given more time the Chinese metropolitan class will eventually push for political reform, once it becomes in their own interest to do so. This is much less likely to occur if we back China into a corner which they feel they can’t get out of.

But while protectionism won’t win the new cold war, standing back and doing nothing isn’t much of an option either. Just as in the last cold war, the battle between the West and China is a battle for supremacy between systems. It’s not only the Belt and Road scheme in which China is attempting to push its vision of the future. It’s in its attempts to remold international institutions and standards to its own ends and in its own image: top down and controlled. Take for instance the recent Chinese attempts to convince other countries to let them remake the infrastructure undergirding the internet and the international standard by which it is run.

Furthermore, it should also be remembered that economics was not the only field of battle during the last cold war: Coca-Cola, Hollywood and Rock & Roll probably did as much to bring about the fall of the iron curtain as NATO or American diplomacy did. In Chinese imports like TikTok some see the heralding of the reverse: the tempting of the West by the products of the East. While claims the video app is a tech narcotic designed as part of a plan to dominate Western culture are overblown, we can’t ignore the fact that culture matters. The West should be instigating innovation-friendly policies so as to present products that can compete.

Unfortunately, just as with the last cold war, this new one is likely to last decades. The West must play the long game. That means building broad alliances to contain China and being pragmatic and patient and making sure our alliances are in charge of setting the international rules, not China. It means more free trade and globalization (at least with our allies if not with Beijing). And it means making deals with countries who may themselves be pursuing policies which we find objectionable.

Most of all, however, it means trusting in our system of openness and free markets. It was these which produced the innovations, prosperity, and culture that won the last cold war, and its these which will win the new one as well, if we let them. After all, we mustn’t be fatalistic. While China’s rise has been fast it should be remembered that consumption per capita is still no higher than a middle-income nation like Peru, and its rapidly ageing population means that the coming decade may well be a bumpy one. The West today can appear to be in a weak position with low growth and a loss of self-confidence, but China has its own problems and its triumph over the West is far from certain.

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Jethro Elsden is a Data Analyst at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.