How the West got China wrong

It bet that China would head towards democracy and the market economy. The gamble has failed.

The Economist

LAST weekend China stepped from autocracy into dictatorship. 

That was when Xi Jinping, already the world’s most powerful man, let it be known that he will change China’s constitution so that he can rule as president for as long as he chooses—and conceivably for life. 

Not since Mao Zedong has a Chinese leader wielded so much power so openly. 

This is not just a big change for China (see article), but also strong evidence that the West’s 25-year bet on China has failed.
After the collapse of the Soviet Union, the West welcomed the next big communist country into the global economic order. 

Western leaders believed that giving China a stake in institutions such as the World Trade Organisation (WTO) would bind it into the rules-based system set up after the second world war (see Briefing). 

They hoped that economic integration would encourage China to evolve into a market economy and that, as they grew wealthier, its people would come to yearn for democratic freedoms, rights and the rule of law.
It was a worthy vision, which this newspaper shared, and better than shutting China out. 

China has grown rich beyond anybody’s imagining. 

Under the leadership of Hu Jintao, you could still picture the bet paying off. 

When Xi took power five years ago China was rife with speculation that he would move towards constitutional rule. 

Today the illusion has been shattered. 

In reality, Xi has steered politics and economics towards repression, state control and confrontation.

All hail, Xi Dada
Start with politics. 

Xi has used his power to reassert the dominance of the Communist Party and of his own position within it. 

As part of a campaign against corruption, he has purged potential rivals. 

He has executed a sweeping reorganisation of the People’s Liberation Army (PLA) to ensure its loyalty to the party, and to him personally. 

He has imprisoned free-thinking lawyers and stamped out criticism of the party and the government in the media and online. 

He is creating a surveillance state to monitor discontent and deviance.
China used to profess no interest in how other countries run themselves, so long as it was left alone. Increasingly, however, it holds its authoritarian system up as a rival to liberal democracy. 

At the party’s 19th congress last autumn, Xi offered “a new option for other countries” that would involve “Chinese wisdom and a Chinese approach to solving the problems facing mankind.” 

Xi later said that China would not export its model, but you sense that America now has not just an economic rival, but an ideological one, too.
The bet to embed markets has been more successful. 

China has been integrated into the global economy. 

It is the world’s biggest exporter, with over 13% of the total. 

It is enterprising and resourceful, and home to 12 of the world’s 100 most valuable listed companies. It has created extraordinary prosperity, for itself and those who have done business with it.
Yet China is not a market economy and never will be. 

Instead, it increasingly controls business as an arm of state power. 

It sees a vast range of industries as strategic. 

Its “Made in China 2025” plan, for instance, sets out to use subsidies and protection to create world leaders in ten industries, including aviation, tech and energy, which together cover nearly 40% of its manufacturing. 

Although China has become less blatant about industrial espionage, Western companies still complain of state-sponsored raids on their intellectual property. 

Meanwhile, foreign businesses are profitable but miserable, because commerce always seems to be on China’s terms. 

American credit-card firms, for example, were let in only after payments had shifted to mobile phones.
China embraces some Western rules, but also seems to be drafting a parallel system of its own. 

Take the Belt and Road Initiative, which promises to invest over $1tn in markets abroad, ultimately dwarfing the Marshall plan. 

This is partly a scheme to develop China’s troubled west, but it also creates a Chinese-funded web of influence that includes pretty much any country willing to sign up. 

The initiative asks countries to accept Chinese-based dispute-resolution. 

Should today’s Western norms frustrate Chinese ambition, this mechanism could become an alternative.
And China uses business to confront its enemies. 

It seeks to punish firms directly, as when Mercedes-Benz, a German carmaker, was recently obliged to issue a grovelling apology after unthinkingly quoting the Dalai Lama online. 

It also punishes them for the behaviour of their governments. 

When the Philippines contested China’s claim to Scarborough Shoal in the South China Sea, China suddenly stopped buying its bananas, supposedly for health reasons. 

As China’s economic clout grows, so could this sort of pressure.
This “sharp power” in commerce is a complement to the hard power of armed force. 

Here, China behaves as a regional superpower bent on driving America out of East Asia. 

As with Scarborough Shoal, China has seized and built on a number of reefs and islets. 

The pace of Chinese military modernisation and investment is raising doubts about America’s long-run commitment to retain its dominance in the region. 

The PLA still could not defeat America in a fight, but power is about resolve as well as strength. Even as China’s challenge has become overt, America has been unable to stop it.

Take a deep breath
What to do? 

The West has lost its bet on China, just when its own democracies are suffering a crisis of confidence. President Donald Trump saw the Chinese threat early but he conceives of it chiefly in terms of the bilateral trade deficit, which is not in itself a threat. 

A trade war would undermine the very norms he should be protecting and harm America’s allies just when they need unity in the face of Chinese bullying. 

And, however much Mr Trump protests, his promise to “Make America Great Again” smacks of a retreat into unilateralism that can only strengthen China’s hand.
Instead Mr Trump needs to recast the range of China policy. 

Putting up with misbehaviour today in the hope that engagement will make China better tomorrow does not make sense. 

The longer the West accommodates China’s abuses, the more dangerous it will be to challenge them later. 

In every sphere, therefore, policy needs to be harder edged, even as the West cleaves to the values it claims are universal.
To counter China’s sharp power, Western societies should seek to shed light on links between independent foundations, even student groups, and the Chinese state. 

To counter China’s misuse of economic power, the West should scrutinise investments by state-owned companies and, with sensitive technologies, by Chinese companies of any kind. 

It should bolster institutions that defend the order it is trying to preserve. 

For months America has blocked the appointment of officials at the WTO. 

Mr Trump should demonstrate his commitment to America’s allies by reconsidering membership of the Trans-Pacific Partnership, as he has hinted. 

To counter China’s hard power, America needs to invest in new weapons systems and, most of all, ensure that it draws closer to its allies—who, witnessing China’s resolve, will naturally look to America.

Xi’s thirst for power has raised the chance of devastating instability. 

He may one day try to claim glory by retaking Taiwan. 

And recall that China first limited the term of its leaders so that it would never again have to live through the chaos and crimes of Mao’s one-man rule. 

A powerful, yet fragile, dictatorship is not where the West’s China bet was supposed to lead. 

But that is where it has ended up.

A Wolf In Sheep's Clothing

China WTO membership was a terrible mistake 
By Shawn Donnan in Washington

Robert Lighthizer: "The global trading system is threatened by major economies who do not intend to open their markets to trade and participate fairly".

The Trump administration has said that allowing China to join the World Trade Organization was a mistake and accused Beijing of moving further away from becoming a market economy.
 The statement in a report by the office of Robert Lighthizer, the US trade representative, is a sign of rising trade tensions between the world’s two largest economies. 
 It is also a reversal of more than two decades of policy in Washington towards China’s 2001 accession to the WTO.
Both Democratic and Republican policymakers have long argued that China’s membership of the organisation has been a way to bring Beijing into the global fold and avoid potential trade wars.
 Mr Lighthizer said China, together with Russia, was undermining the WTO, which had always been envisioned as a club for market economies eager to trade with others. 
 “The global trading system is threatened by major economies who do not intend to open their markets to trade and participate fairly,” he said, calling China’s actions “contrary to the fundamental principles of the WTO”. 
 His office’s first annual report to Congress on China’s behaviour as a WTO member described US backing for the Asian power’s accession as a mistake because of the terms that were agreed to and how Beijing had repeatedly failed to live up to promises to previous administrations.
 “Given these facts, it seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime,” the report said. 
 Mr Lighthizer vowed to use new unilateral tools outside the WTO to try to force a change in Beijing’s behaviour.
That foreshadows moves in the weeks to come that some analysts say could set up tit-for-tat trade actions by Beijing and Washington that could devolve into a big trade war. 
 A senior administration official said on Friday that while the US was prepared to continue using the WTO to fight its battles with China, it was also increasingly convinced that many of those actions were futile and that Washington was better served acting unilaterally in certain cases. 
 President Donald Trump’s administration is considering a number of actions aimed at China with much of the focus on an investigation launched last year into Beijing’s practice of forcing foreign firms to hand over important technologies in order to do business.  
Mr Trump has said he will discuss his trade plans and how to deal with China in his State of the Union address at the end of this month.
 A senior White House official said addressing “systemic” issues in China such as its industrial policy and intellectual property regime that were hurting the US economy was set to be one of the main themes of the administration’s work this year.
 The Trump administration, the White House official said, was also eager to force reform at a WTO that it sees as dysfunctional.  
 Edward Alden, a senior fellow at the Council on Foreign Relations, said the move to call US backing for China’s WTO accession a mistake amounted to an “extraordinary statement” that was “at odds with the convictions of senior US officials of both parties over at least two decades”. 

Rogue Nation, Rogue Market

China Is Not A Market Economy, And The WTO Won't Survive Recognizing It As Such
By Douglas Bulloch

Bob Lighthizer, U.S. trade representative, a noted China hawk recently added his support to the EU in insisting China not be recognised as a 'market economy'. 

China's status as a 'Market Economy' is once again under dispute. 

Not, of course, by anyone who knows anything about the Chinese economy, but within the councils of the WTO, where the issue is being argued between the EU and China. 

The U.S. Trade Representative – Robert Lighthizer – has notified the body that the U.S. also–in support of the EU's case–opposes China's recognition as a 'market economy'.
China has reacted with predictable hostility, restating its longstanding view that 'market economy' status would simply become a fact on the 15th anniversary of joining the WTO, almost exactly a year ago, when China first filed a complaint at the WTO about the refusal of the U.S. and the EU to grant this recognition. 

According to a strict reading of their accession treaty, they have at least an argument. 

In this agreement, a fifteen year period was assumed to be enough time for China to implement its many provisions and emerge, more or less, as a functioning market economy. 

Had China made faster progress, they could have made their case and been granted this status earlier, according to the agreement.
Many countries have, in fact, recognised China as a market economy; Singapore back in 2004, Australia in 2005, Brazil in 2004 (although Reuters reveals the picture is far more complex, with Brazil applying extensive anti-dumping measures but not wishing to harm relations by getting involved in the public dispute). 

But in each case, no effort was made to demonstrate that China was a market economy, as stipulated in the accession agreement. 

Instead it was usually appended to a Free Trade Agreement and made a condition of access to China's market for foreign exporters.

The 'Super Markets'
Nevertheless, success in strong-arming smaller economies and exporters to recognise China as a market economy, cuts no ice with the EU or the U.S. who remain implacably opposed, for the simple reason that this would restrict anti-dumping measures against China's vast export surplus. 

Equally, China has made no inroads in persuading either the U.S. or the EU that it is, in fact, a market economy, doing nothing to ensure EU or U.S. companies actually gain market access to China without endless conditions and habitual delays. 

Specifically, China continually promises to open market access for EU and U.S. exporters, but then frustrates them in practice, demands investment takes place through joint ventures, often with SOEs, and routinely insists upon technology transfer.
Ironically, all of these restrictive practises are forbidden in the same accession agreement upon which China relies in its case for market economy status in the first place, but because the WTO's enforcement procedures are simply not strong enough to enforce all the provisions in the accession agreement the issues are continually raised as future concessions, when they are simply 16 years overdue.
For many years the lure of market access to China has been enough for foreign exporters to soft-peddle their demands, and the recent U.S. action to 'self-initiate' an anti-dumping action over aluminium is an indicator that supply chains are complex enough for individual companies to fear retaliation. 

But there is no mistaking that the slow, cross sectoral and inter-departmental ratchet of U.S. pressure is rising on China trade. 

Even the new National Security Strategy is said to make much stronger linkages between political and economic questions than in the past, with a particular focus on China.

Is the WTO threatened?
Since Davos in January, where Xi Jinping was hailed as a new defender of free trade, much hyperbole has bypassed the reality of China's actual trade policy and practice and instead focussed on U.S. retreat. 

But Robert Lighthizer's recent remarks clearly indicate that U.S. patience is running thin with the WTO as a arbitrator of trade disputes, suggesting that the U.S. will start to draw upon an arsenal of dormant unilateral powers that may undermine the centrality of the WTO to world trade. 

This may or may not be understood as a retreat from free trade, but it is obviously inspired by a frustration with the inability of a rules based system to enforce the rules it is based on. 

In other words, while the WTO won't disappear, it does risk being sidelined.
Recognising China as a 'market based' economy then, has become a real dispute with an extra helping of symbolism. 

Not only is it about China's ability to resist anti-dumping measures, but also whether a serious international organisation, dedicated to the serious business of trade, can withstand its central provisions becoming mere polite fictions. 

So when Lighthizer says that a decision to recognise China as a market economy "would be cataclysmic for the WTO," it might be worth taking him seriously. 

Moreover, if joining the WTO was the spur to Chinese economic development that most economists claim it was, policy makers in Beijing might want to conduct an impact assessment on the risk of it all falling apart.

China, the Party-Corporate Complex

The Chinese Communist Party has systematically infiltrated China’s expanding private sector and now operates inside more than half of all nonstate firms; it can manipulate or even control these companies, and some foreign ones, too. 

By Yi-Zheng Lian 

A salt farm in Shouguang, China. Despite the dismantling of the more than 2,000-year-old state monopoly on salt, all Chinese salt producers are still state-owned. 

There, they said it: China is not a market economy.
In December, 15 years after China’s accession to the World Trade Organization, the European Union, the United States and Japan formally refused to grant Beijing the coveted label, denying it important concessions on tariffs and other trade restrictions.
This is partly a response to economic distortions caused by government intervention, including an excess supply of steel, which China exports and dumps in advanced industrialized countries, harming local producers and workers. 

China’s many high-profile moves to open up its markets in recent years turn out to have been half-hearted, if not intentional hoodwinking.
Despite the much-ballyhooed dismantling of the more than 2,000-year-old state monopoly on salt, all salt producers are still state-owned. 

Foreign asset-management companies are now allowed to operate wholly foreign-owned businesses in China, but only in deals with institutional investors and private-equity funds, not retail investors, a much bigger piece of meat. 

Partly to steady the renminbi, Beijing no longer allows Chinese citizens to take up to $50,000 a year out of the country, and it has recently restricted the repatriation of capital by foreign firms like Deutsche Bank.
Hyper control, interventionism, currency manipulation — no, China is not a market economy. 

But it’s worse than that: The Chinese Communist Party (C.C.P.) has systematically infiltrated China’s expanding private sector and now operates inside more than half of all nonstate firms; it can manipulate or even control these companies, especially bigger ones, and some foreign ones, too. 

The modern Chinese economy is a party-corporate conglomerate.

It all began in 1927. 

After the communists’ fledging armed forces suffered serious losses against the Kuomintang government, Mao Zedong and his associates decided to create a hierarchy within the military that would mirror the structure of the party. 

The idea was to instill a fighting spirit throughout the ranks by ensuring the party’s top commands would be relayed all the way down. 

Party branches 黨委 were set up at the company level, party cells 黨小組 at the platoon and squad levels, and together they recruited foot soldiers who were solid party material. 

In just a few years, an unruly peasant army was whipped into a formidable fighting force. 

The rest is history.

Fast-forward to 2002 and the C.C.P.’s 16th national congress, convened under Jiang Zemin. 

In the interval, China underwent two revolutions. 

The first, in 1949, established a communist state; the second, in 1978, jettisoned a stagnant socialist planned economy in favor of pro-market reforms. 

By 2002, China was competing with France to be the world’s fifth-largest economy, and the Chinese people’s entrepreneurial spirit had been reawakened. 

Much of the political elite, including relatives of party and government officials, had become the owners and managers of private businesses.
To legitimize the growing importance of these so-called new social strata 新興社會階層, the party congress inducted many of their influential members into the C.C.P. 

The move would have been heresy under canonical Marxism, but it was made acceptable by the convenient adoption of a new ideology: socialism with Chinese characteristics. 

It was also an astute bargain. 

In return for becoming politically acceptable, capitalists and top business managers at private firms would come under the party’s chain of command.
The year before the party started controlling the managerial classes, it had already begun to manipulate how private companies ran their businesses. 

Starting in 2001, every private-sector firm with at least three C.C.P. members among its employees was required to have a party unit. 

Much like the party cells in the Red Army decades earlier, party units in companies were expected to “firmly implement the Party’s line, principles and policies,” as the Constitution of the C.C.P. stipulates.
This control mechanism had been a fixture of state-owned enterprises since the first days of the communist republic. 

It was brought into the private sector in earnest in 2001 — just on the heels of China’s accession to the W.T.O. — and extended after the 2002 party congress. 

Around 2006, it was introduced to private firms set up with foreign capital, like Walmart.
Official figures for 2015 show that nearly 52 percent of all nonstate firms had party cells in-house. 

Such cells are now also common in foreign companies, and even foreign NGOs, at least among bigger, more established ones.
This should greatly worry foreign businesses and foreign governments because the Constitution of the C.C.P. requires all members to “adhere to the principle that the interests of the Party and the people stand above everything else, subordinating their personal interests to the interests of the Party and the people.” 

Or, as the head of the Chinese Supreme Court put it last year, when those sets of interests conflict, the “party nature” of C.C.P. members should always trump their human nature 黨性高於人性.
Consider the implications. 

For example: 

A foreign firm employs a Chinese senior manager, giving him access to its proprietary technology; he is also a member of the C.C.P. and the firm’s party unit. 

One day his party superior orders him to transfer a trade secret from the firm to a local rival. 

In the name of party and country, he can only comply.
In other words, the problem isn’t just that the Chinese economy isn’t a market economy in that the government won’t let it operate freely enough. 

Its very structure, including in the private sector, has been designed — and is redesigned, again and again — to serve the C.C.P.’s will and its interests, economic and political. 

This party-corporate complex is only going to expand as most state-owned enterprises, inefficient holdovers from the old economy, are being supplanted by the fast-growing private sector.
Chongcao 蟲草, literally worm-grass, is an expensive Chinese herbal medicine said to treat lung and kidney conditions, and erectile dysfunction. 

It comes from a curious creature. 

At the beginning of winter the larvae of a certain moth are attacked and impregnated by a kind of micro-fungus. 

Come summer, they still look like animal larvae, but have become plant colonies. 

In the last 15 years or so, the C.C.P. has colonized China’s private-sector companies in much the same way: They may still seem like conventional firms, but really they are the party’s potent spawn.