Today I often quote and paraphrase the excellent must read, Asia’s Reckoning by Richard McGregor.

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In this blog post we examined how modern world governance, particularly the WTO, is ill-equipped to manage China’s rise. In short, the WTO is unable to identify the providers of subsidies to Chinese firms; a situation that, I contend, the Chinese government has recognized and worked to further obfuscate. The post finally contends that any disagreement to Chinese trade practices must be settled unilaterally.

In this post I’d like to provide some fundamental historical context to the friction we now face regarding trade. 

Illegal Chines Oil Shipments to North Korea

China in a New Era

First, China sincerely believes it is ready to be a global leader. The Sputnik moment came this time last year at Davos. Supreme leader Xi Jinping headlined Davos , giving a speech at The World Economic Forum in defense of the current world order, including the balance of payments distortions that benefits China.

 

From Reuters, my emphasis added:

Chinese President Xi Jinping offered a vigorous defense of free trade at the World Economic Forum in Davos on Tuesday in a speech that underscored Beijing’s desire to play a greater global role as the United States turns inward.

From an opinion piece in Newsweek, my emphasis added:

What a difference a decade can make. China went from being lambasted for being an irresponsible stakeholder in the mid-2000s, to now being seen as the linchpin of global economic stability.

Current account imbalances in surplus countries generate high growth at the cost of asset inflation in developed deficit countries.

The West’s realization of China’s new leadership role in the world has only continued since January 2017. Chinese global leadership in a new era isn’t something just mentioned abroad; it is an explicit goal. Chinese influence abroad was a key point of the pivotal 19th Party Congress which was held in October last year. Supreme Leader Xi Jinping, a man whose resemblance to Winnie the Pooh has resulted in the full censorship of Winnie the Pooh in China, signaled that China is entering a New Era, the 3rd Era of Communist China.

An example of forbidden content

An example of a meme that transformed from light humor to a great offense to the Chinese people

Chinese Communist Party Thought now believes in three distinct eras of leadership, each defined by changing leadership through death or imprisonment, ideology, and policy. The eras are known respectively for the paramount leaders of their time: the Mao era, Deng era, and Xi era. Xi’s third era has explicitly stated new goals, a major shift in domestic and foreign policy. For today’s topic we will focus on one, “pioneering global influence.”

“This year I shook hands with Xi Jinping”

The third era under the reigning handshake champion has a great departure from the second era’s foreign policy. Deng Xiaoping’s goal setting ideology was 韬光养晦 (“keep a low profile”). These simple words were era defining for foreign policy, eventually morphing to become ‘Hide your strength, bide your time.’ It is under these words that China and Japan normalized relations in the 1970s. Using Communist jargon, Deng’s early economic planners hailed Japan’s use of “US-Soviet hegemonic contradictions” to spur economic development. Put another way, Japan was credited for exploiting cold war tensions to save money by sheltering under the US security umbrella, which enabled the country to focus solely on economic growth. Kong Fanjing, a Chinese economist with the Chinese State Planning Commission, wrote, “Japan had foreign policy subordinate to domestic policy, and domestic policy subordinate to economics.” The second era under Deng largely copied this Japanese development model (Deng reduced military expenditures in the 80s), and Deng did everything he could to avoid major conflicts.

1978: Deng’s visit to Japan was the first time in more than two thousand years of contact that a Chinese leader entered Japan

Deng Xiaoping’s visit to Japan was perhaps more shaping than his trip to America. Deng met with emperor Hirohito, one of the classic WWII villains responsible for the deaths of millions of Chinese people. On his trip, Deng never asked for reparations, an apology for the war, and insisted on completely forgetting recent history. A 1968 UN agency report of potentially huge reserves of oil under the Senkaku/Diaoyu islands was electrifying. Japan, Taiwan, and China discovered a passion for islands that only the US military seemed to know existed, because the US rented the islands from Japan for Naval firing drills.

During his 1978 tour, Deng held a real press conference, something no Chinese leader has done since Jiang Zemin’s infamous press conference freak out.  When a Japanese journalist asked about the conflict regarding the Senkaku/Diaoyu islands, Deng  demurred, saying that generations, “who would be wiser,” will solve the issue. It wasn’t until massive student protests across China against friendly Japanese ties from late 1986 to early 1987 that China officially toughened its stance against Japan. The student protests eventually led to the sacking of Hu Yaobang, who was party secretary and  favored large economic reform. It was Hu’s death and mourning that set the stage for the Tiananmen Square massacre.

Hu Yaobang’s death and mourning was the start of the infamous Tiananmen Square Massacre

Even after Tiananmen Square and a toughened stance on Japan, Deng’s era retained the idea laying low to build a functioning economy. Witness to the disaster of Mao era economics and the boom of Japan, Deng believed and implemented an introspective system built upon high investment rates.

I can’t emphasize enough how this has changed. Xi Jinping’s thought is written into the Chinese Communist Party constitution and he expressly states that the period of ‘biding time’ is over. The time has come to have influence across the globe.  If one reads headlines such as “Xi Signals New Era” or “Study for New Era — Xi Thought inspires China,” one must understand that this is the communist party, to include party organizations in private and foreign companies,  deciding how to change course, a course in which foreign influence is part of the ideology.

On January 16th of this year a manifesto was published on page one of the people’s daily. As an aside, it is fitting to see manifestos published in the people’s daily again; it hearkens to a tradition of the cold war. Commentary from Xinhua is illuminating:

Noting the problems facing the world, such as a “democratic deficit,” “governance deficit,” “development trap,” wealth gap, terrorism and climate change, the article said “the drawbacks of capitalism-led political and economic systems are emerging; the global governance system is experiencing profound changes and a new international order is taking shape.”

“The world needs China, as all humans are living in a community with a shared future,” the article said. “That creates broad strategic room for our efforts to uphold peace and development and gain an advantage.”

The article said China was at a historic period for the cause of socialism with Chinese characteristics to leap forward, for the system of socialism with Chinese characteristics to mature and for the world pattern to reshape.

I can’t stress enough how much people in China believe this. We are witness to a fundamental policy shift from the Xi administration, one that focuses on reshaping the the world.

American Retreat or American Renaissance?

Enter, Donald Trump, his slogan, “Make America Great Again,” and the notion that America is becoming isolationist, retreating from world leadership. Is China and its new authoritarian regime poised to lead the world?

Although I am sure this is click-bait and an inflammatory article just to be inflammatory, I’m going to quote the earlier quoted opinion piece from Newsweek to make a point:

Trump’s America seems more like the irresponsible and bystander state and China appears more like the guarantor and bulwark of global economic stability through a shared vision of increased economic cooperation and commitment to inclusive growth. Perhaps next year the annual World Economic Forum ought to be held at China’s Yabuli Ski Resort instead, confirming that the world is truly upside-down.

Although the opinion piece quoted above is often confused, muddled, and outright silly; I find the underlying ideology, seeking the leadership akin to 20th century powers in 21st century context, quite similar to the ideology that Donald Trump propagates.

When was America greater than it is now? Pundits would look to a wide, rage inducing swath of issues in which America has improved: equality being the obvious choice. The answer is, and this certainly fits well with people who would like Donald Trump, MAGA hearkens to a time when the US, due to the realities of two world wars and the threat of communism, was able to play a unique role in the world. In 1960 the United States comprised 40% of the World’s GDP. Today it comprises roughly 25%.

Of course, MAGA is nonsensical. That ‘greatness’ was only attainable due to a unique set of circumstances directly after World War Two: two devastating world wars, the evils of communism, scarcity of savings, and  great need for investment. However, since 1960 to the present, there has been a period of abundant, and even of excess, capital, driven by high savings and weak demand, and the end of the Cold War. During this period, the United States has accommodated the excess savings of the rest of the world by running large capital account surpluses (that is importing capital), which has meant  that it also has run the corresponding trade deficits. Because economic growth among its trading partners benefited from trade surpluses to grow, it is not surprising that the large American trade deficits of this period have allowed the country to continue as the indispensable center of global trade.

America is just as indispensable now as it was before the 60s. Before the 60s the United States ran large trade surpluses and capital account deficits as it exported its excess savings to fund its net exports while the growth of its trading partners was constrained by their urgent investment needs, new technology and wars playing a crucial role in this need. MAGA hearkens to a dead time; it lacks economic clout due to unique circumstances (war) and old trading regimes.

Envisioning a Chinese rise that is the “bulwark of global economic stability” is comical (any adjective akin to silly is acceptable here). China is a developing, authoritarian government with a huge debt burden that is best described as fragile and easily offended (see: outrage at South Korean missile defenses). To assume that it could rise to fill the gap of America’s role is indefensible. No country can, because the 20th century institutions and rules were made and cared for in unique circumstances that no longer apply today; they weren’t made for the non-free world.

The articles about China’s rise will only get more ridiculous. This article by the New Yorker is absurd:

As Donald Trump surrenders America’s global commitments, Xi Jinping is learning to pick up the pieces.

Donald Trump, of whom I am the staunchest critic, is not surrendering global commitments. The commitments them-self and the institutions they were made in are often symbolic and nothing else. On climate change:

China is still the largest emitter of CO2 on the planet by a substantial margin, contributing 29 percent of the world’s total CO2 emissions in 2015. The United States comes in a distant second at 14 percent. In addition, while Beijing is cutting back on coal-fired power plants—particularly in its wealthy and pollution-conscious coastal provinces—it is upping its count of CO2 emitting coal-to-chemical (including coal-to-gas) plants. There are 46 coal-to-chemical plants in operation and another 22 under construction that will add another 193 million tons of carbon emissions annually. A conservative estimate suggests that by 2020, such plants will contribute as much CO2 as all of Poland’s contribution to global carbon emissions, while the extreme scenario—if China builds all the coal-to-chemical plants outlined in its 13th Five Year Plan—will lead to a contribution of almost 800 million tons per year, more than German’s total carbon emissions in 2015, and equal to roughly 10 percent of China’s current CO2 contribution…

…Whatever positive steps China is taking at home are not being replicated in its behavior abroad. China is the world’s largest exporter of coal-fired power plant finance and technology. Even as Xi is calling for an “international coalition for green development on the Belt and Road” (his comprehensive new trade and development initiative involving 65 countries), Beijing is backing more than 100 new coal-fired power projects in the Belt and Road countries. China’s much-touted Belt and Road deals in Pakistan, for example, include plans for as many as 12 coal-fired power plants—even in areas recognized for their superior solar energy potential. In addition, China is actively pushing coal-to-chemical plants abroad. The Paris accords don’t account for countries’ actions outside their own borders, so China is not breaking the letter of its Paris commitments, but these Belt and Road investments are certainly not in keeping with the spirit of the agreement.

The madness heralding China’s rise extends not just to military affairs and climate change. Professional financial analyst now regularly talk about an internationalized RMB and the rise of the RMB as the new global currency. While use of the RMB as a reserve currency or as a trading currency will probably rise in the next decades, this is mainly because of its still very low base. The quoted China Daily quotes the RMB, an international currency, as being part of 1.94% of international transactions, a lower amount than 2016, and far behind the dollar’s 45%. The highest possible percentage is 50% due to needing two currencies to exchange.

Laudations of the Chinese miracle reached fevor pitch when “in a milestone for the yuan’s internationalization, the currency joined the IMF Special Drawing Right basket.” Christine Lagarde, wearing a blazer in the form a traditional Chinese Qipao, smiled happily to include China in a symbolic and completely empty gesture, the IMF SDR.

Christine Lagarde, leader of the IMF. Her appearance here in no way is meant to be qualitative value judgement.

One could always compare the RMB to any currency. You could arbitrarily change the currencies in the IMF’s measure with no consequence, but alas, this was another sign of a changing time: an America in retreat, a China on the rise.

The Illusion of Great Power

America has protected Asia’s flourishing economies fighting against Japanese, Chinese, Korean, and Soviet aggression. Most begrudgingly, America has opened domestic markets to exports in ways those aggressors would never reciprocate.

When negotiating the return of Okinawa to Japan in 1972, America had two wishes: a commitment to keep American troops in Japan and a promise to limit textile imports to the United States. Presidents Eisenhower, Kennedy, and Nixon had to fight against Japanese textile imports. Presidents Ford and Carter restrained specialty steels and color TV sets respectively. America has often been used by allies to structure high investment growth models in East Asia. Donald Trump, however obtuse, is not the first president to be unhappy with the economic commitment America has made and their accompanying bilateral trade deficits. If anything, every American president since the end of the war has expressed grief at East Asian ally development models.

China continues to build military outposts in the South China Sea

Japan, China, and the United States were aligned strategically, agreeing on the primacy of the Soviet threat soon after world war two, but there was never agreement regarding economics or best business practices. America continued the economic bargain it guaranteed which is to absorb abundant, and even of excess, capital, driven by high savings and weak demand, however that bargain made sense when trying to keep East Asian allies stable, building necessary capabilities after the war. Why should America extend this agreement to a country that is unhelpful of North Korea, a country that threatens America with nuclear destruction. Why should America extend this agreement to a country that has an abhorrent human rights record, recently arresting A Swedish Citizen in China because of human rights agitations, arresting and beating human rights lawyers, and being the first country since Nazi Germany to kill a noble peace prize winner, Liu Xiaobo. China has shown itself not to be a leader. China has shown itself to be an authoritarian bully. China is only suitable to lead in symbolic situations.

I loathe Donald Trump, however it is intuitive to re-examine Cold War commitments that were made to the free world now that the Cold War is over. It is more intuitive to not make those commitments to the world that isn’t free. Furthermore, rejecting the Trans-Pacific Partnership (which I am vehemently against), Paris Climate Accord, or UNESCO should not mean the rejection altogether by Washington of the very idea of a stable, rules-based trading system, because America is the only country able to absorb East Asian imbalances. America is the only country that can be the linchpin to these surpluses, however I cannot see how East Asian allies that also run surpluses will be willing to raise domestic demand by reducing savings in an effort to pressure China.

The consequence of a U.S. withdrawal from global governance, in other words, is unlikely to be an orderly, rules-based global trading system in which leadership has shifted from Washington to Beijing. Far more likely is a return to the pre–Bretton Woods days of trade conflict and beggar-thy-neighbor policies, and beggar-thy-neighbor policies have been a staple among East Asian countries since the war’s end.