11 December 2019

Why a new British strategy for China is crucial

By

In London last week, NATO leaders discussed for the first time “the challenges and opportunities posed by China”. There is every reason China discussions are moving from narrow trade forums to hard power organisations that are not even traditionally focused on the Pacific.

What James Mann of Johns Hopkins University has called the “soothing scenario” of peaceful rise then liberal democratic transition, long part of respectable opinion, is suddenly being called “anachronistic” even by the European Council on Foreign Relations. According to scholars like Michael Pillsbury, “authoritarian resilience” has set in.

The question for a post-Brexit UK is how to use its capabilities for the century’s defining trade and strategic challenge. With the full suite of diplomatic and trade tools soon at our disposal once more, strategic nous may indeed be returning to Downing Street. But to understand how to deploy them, we might recall that the China scenario we face was not meant to happen.

What was success supposed to look like? In his recent book China, Trade and Power, Stewart Paterson suggests that, in trade, success would have included substantially increased incomes in the West as well as China, and Western companies frequently owning Chinese counterparts. In China itself it would have meant a freer press, separation of Party from judiciary and state, perhaps some democratic choice.

The belief that this was inevitable saw China admitted to the WTO without commitments like capital account convertibility and a floating exchange rate to limit the supply-side shock of exported deflation. Letting almost a billion low-wage workers into the global economy in the largest labour market arbitrage in history without these commitments left the West carrying the can, its central bank inflation-targeting cutting many real incomes, with asset bubbles benefiting the already well-off.

It is not hard to see who lost and who gained. And if low interest rates are suddenly less effective in correcting slowdown, China’s renminbi intervention has hindered exchange rate adjustment. Our low nominal rates drive house price-rises that discredit free markets, especially in an Anglosphere where property ownership is closely connected to participatory democracy and adult dignity itself. As Paterson has asked, what good is a cheap washing machine if you can’t afford a home to put it in? Globalisation never had to be this divisive.

This was all meant to push China towards a liberal end of history: instead support for authoritarianism in the West is demonstrably increasing. The liberal political order, such as it is, risks being up-ended.

Hundreds of millions of Chinese have been raised from poverty, a market triumph that can hardly be overstated. But the mercantilist economic nationalism we permitted has been a jackpot for the Party-state, whose control has gone from shaky to almost total, the precise opposite of the aim of Western engagement.

Productivity growth is on hold and global investment prefers cheap labour to the innovation on which developed economies depend. Industrial regions have increasingly been gutted, and the immunity of financial and civil service jobs (so far) has helped drive a culture war between the West’s metropoles and provinces. That China’s export boom has not seen any concurrent rise in global productivity suggests it is using not the comparative advantage that would mean more efficient resource-allocation, but a strategy deleterious to others’ growth. The results of our engagement so far are increasingly hard to explain to the Western public.

The evidence also points to growing expansionism abroad and authoritarianism at home. The rise of Xi Jinping, and with him more centralised decision-making, abolished term-limits and an Orwellian “Social Credit” system using algorithms to assess every Chinese citizen’s behaviour, means a steadily more autocratic polity is projected into the world. Recent activities in Hong Kong are a wake-up call.

As Pillsbury describes in his book The Hundred-Year Marathon, Xi Jinping’s first speech as leader in 2013 contained three words – “strong nation dream” – that as a PLA veteran and former secretary to the defence minister, Xi knew his allies would understand immediately. The concept is linked to The China Dream by Colonel Liu Mingfu of Beijing’s National Defence University, a 2009 bestseller which is recommended reading in state bookstores . Including the first public discussion of the “Hundred-Year Marathon” – China surpassing the US as hegemon by 2049, a century after the founding of the People’s Republic – it describes this new order as “just” because “beating the United States will be China’s greatest contribution to humanity”. In his speech, Xi also stated that the “dream” will be realised in 2049.

If the “China dream” is a strategy, ‘One Belt, One Road’ is a core tactic, increasingly internationalising China’s currency, denominating investment in renminbi. The infrastructure will rely on the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund, with $100bn and $40bn authorised capital respectively to invest along these corridors. Both are emerging as potential rivals to the IMF, World Bank and International Finance Corporation.

Until recently, mainstream Western scholarship dismissed more hawkish statements as a fringe view, but this has changed since Xi took over. He has made clear that China “merely” wants to “command” a third of the world economy, its position four hundred years ago. To note a relative lack of military power would also miss the point. China prefers to invest in asymmetric systems (anti-satellite technology, cyber-intrusion), for bang-for-the-buck and to avoid premature provocation.

The fate of the USSR, bankrupted by trying to outspend the US on its forces, informs the “no-provocation” approach. But as Paterson has stated, “Johnnie Worker Red Labial “Scotch” Whisky is amusing, “Crust” toothpaste is probably not as good as Crest… [but] the remarkable similarity between NATO’s F35 Stealth Jet Fighter and the Chinese J-31 is more sobering”. A Defense Science Board study found that cyber-intruders had hacked the “Patriot missile system, Aegis missile defence system, the F/A-18 fighter, the V-22 Osprey multirole combat aircraft, the Littoral combat ship”. The US Intellectual Property Commission found infringement costs the US economy $225bn to $600bn annually.

Again, these tactics are widely discussed in books that became mainstream in China at latest when Xi took charge. When the New York Times Beijing bureau chief Patrick Taylor stated in 1999 that “China [has] little expertise and few resources to build the industrial base necessary to become a modern military power”, he missed the point. We had the resources, China the capacity to learn.

In the 1970s, Deng Xiaoping asked President Carter to agree the first 7,000 visiting science students, which Carter understood as an act of goodwill, backing Chinese entry to international associations for astronautics and nuclear physics (his Presidential Directive 43 began tech-transfer programmes in geosciences, energy, space). In 1985, President Reagan arranged the sale of six major weapons systems to China, helping Beijing build research centres for robotics, supercomputers and lasers.

Once the Soviets had allowed massive tech transfer to China as an ally against the West, believing China wished only to be remade in their image. Then China became an ally against the Soviets. After all, given the right terms of trade at the WTO, political liberalisation would soon be underway. Instead, China’s tech strategy is more developed than any UK equivalent. One part, the 863 Programme (named for its March 1986 founding) is intended to end China’s foreign technological dependence. It has already seeded Tianhe supercomputers and Shenzhou spacecraft.

For my part, I spent two years in Beijing researching a PhD on this strategy’s impacts in an industry meant to be the next big thing for the West, solar photovoltaics. As I began, start-ups were appearing across Western Europe and North America; four years later, eight of the top ten producers were Chinese, our industry pulverised by a sector UK aid helped launch. Western governments had subsidised their own countries’ installation, driving down prices early and before natural consolidation around technological leaders. China took advantage, subsidising the low-quality product that flooded in. Some Chinese firms – those with dominant private and foreign shareholdings – were beginning to innovate, but state-backed competitors clearly received free land, water and other resources (this also serves to disincentivise Chinese entrepreneurs, who investment in innovation is essential if China is to escape the middle-income trap).

Will China’s strategy work? It is not easy for the Chinese entrepreneur to generate economically disruptive ideas in a state increasingly typified by fear, or defend IP from a state-owned enterprise (SOE) in a Chinese courtroom. The risk is not that this will “work” – China becoming a prosperous, liberal state would be a triumph. It is that it will fail over the course of a century, dragging down and possibly ending the fragile and highly unusual age of growth that began with the Industrial Revolution.

This “age of dynamism” has depended on a very specific environment. In The Wealth Explosion, Stephen Davies compares China (historically unified as one polity), with Europe, whose islands, peninsulas and mountain ranges led to the competing polities vital to success.

Many have tried to unify Europe. The Habsburgs came close in the 1500s, but a series of “gunpowder revolutions” saw nation states assert themselves, as local elites realised that their survival required flourishing innovation. This was unusual: innovation means new money, new threats to an elite’s power. China experienced a promising period in the 1200s, but the Ming inward turn stifled innovation and outside contact. So the persecuted European innovator of ideas and machines could flee to a nearby competitor. In China then and now, no such escape is available.

Getting and staying rich means nurturing innovators, not entrenching incumbents, whether Chinese SOEs or sluggish European corporates. Only one of the world’s ten most innovative firms is EU-based (even that listed in New York), as a unified elite destroys innovative challengers with hyper-regulation. In China, crony-capitalist SOEs promote their standards abroad through emerging authoritarian institutions. Into this system, of which WTO Director General Azevedo has said “we are heading in the wrong direction, and we seem to be speeding up”, enters the newly-independent UK, where growth began.

If we do nothing, organisations like the Shanghai Cooperation Organisation, a club for autocracies whose members are China, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Russia, hint at the risks. India is now an observer, and dangers for hearts and minds were captured in a grimly obsequious recent article in Hong Kong’s South China Morning Post by Indian anti-democrat Deep K. Datta Ray: “India proves democracy is no longer fit for purpose… odious tactics are democracy’s leitmotif globally”, and “China is moral for delivering freedom… it is now time for Indians to reassess their inheritance and for the Chinese to disseminate the truth about democracy… Xi Jinping’s… political system [has had] unparalleled success at bettering not just Chinese citizens, but also, mankind”.

What is to be done? Instead of demanding things that won’t happen on currency policy, we might break down our response into three areas: first, trade and the Commonwealth; second, hard security and defence; third, the concept of national competitiveness strategy.

The Trump administration has begun confronting China with cross-category tariffs, but this is relatively crude and self-harming. The UK should use the WTO dispute-settlement system to push compliance, working with allies to develop new rules for SOEs, where the Office of the US Trade Representative (USTR) has been gathering troves of information (and it is important to grasp that a deeper trade deal with China is a longer-term project within this strategy).

Elsewhere, the UK and US should make it harder to sell back to us products based on infringed IP, using the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) to address attempts to force our companies to turn it over. The pivot back to our neglected Commonwealth allows us to promote the rule of law, entrepreneurship and private property rights through Asia and the Pacific, alongside membership of the vital Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

In hard security, the upcoming decision on Huawei is a test, but a broader strategic revamp is needed. NASA is now prohibited from joint Chinese scientific activities: we should ask questions of the UK universities that have let in five hundred Chinese military personnel in the last decade. There is also a strong case for preventing firms such as Huawei employing Parliamentarians.

Meanwhile, we only need consider Huawei for 5G because we maintain innovation-reducing quasi-monopolists like BT Openreach. China annually analyses its competitiveness versus other countries. We don’t, even as our productivity stagnates.

In 1982, Andrew Marshall, Director of the Pentagon’s Office of Net Assessment, noted of the USSR: “A major component of any assessment of the adequacy of the strategic balance should be our best approximation of a Soviet-style assessment… this must not be the standard US calculations done with slightly different assumptions… [R]ather… structured as the Soviet would structure it”.

As Michael Pillsbury has suggested, our time could be compared to the launch of Sputnik, which allowed a re-organisation of innovation that led ultimately to the digital revolution itself. Pushing China towards more liberalism with targeted penalties for both autocratic expansionism and the gaming of world trade will be useful. But a new trade strategy is merely an offshoot of renewed national strategy for growth itself. And that could hardly be more urgent for our security, for the Chinese people themselves, and for growth everywhere.

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Dr Radomir Tylecote is co-author of 'Plan A+: creating a prosperous post-Brexit UK' and 'Freedom to Flourish: UK regulatory autonomy, recognition, and a productive economy'.