Time to Wake Up and Start Decoupling from China
In recent months, articles in Foreign Affairs, Foreign Policy, and other leading journals have warned against decoupling from China and stumbling into a new cold war.
Some argue that China is merely a regional power seeking to reduce U.S. influence in its backyard and maintain its own territorial integrity and internal stability. That, while China’s indifference to World Trade Organization commitments and bullying of its South China Sea neighbors is frustrating, Beijing seeks no new global order or cold war. Moreover, they argue, trading with China has mostly been a win-win proposition, and Beijing’s stake in global economic stability is a guarantee against any serious conflict.
Others admit that China has lately been a “bad actor” but say any stiff response by Washington will only make matters worse. Calling for patience, they emphasize that China is not trying to export its ideology.
Still others claim that the U.S. would be the loser in a cold war, and measures like limiting semiconductor sales to Chinese tech champions will only result in lost U.S. income and R&D funds.
Finally, many analysts warn that forcing countries to choose between the United States and China as a main trading partner could result in unpleasant surprises for Washington.
The Great Fantasy
These cautions are the remnant of the great fantasy that swept the free world in the wake of President Nixon’s 1972 “opening of China” and Chinese leader Deng Xiaoping’s 1978 decision to experiment with market economics. We imagined China on a capitalist road that would inevitably lead to liberal politics and even democracy.
I was part of this fantasy as a leader of the first U.S. trade mission to China in 1982. In its wake, trade and investment took off, and China’s economy grew at light speed. Then came a huge disillusionment: In 1989, Deng ordered his tanks to shoot pro-democracy demonstrators in Tiananmen square. At least 700 were killed. Some put the number as high as 10,000.
A pall fell over China relations, but the incident was quickly overshadowed by the 1991 collapse of the Soviet Union, widely hailed as the end of the Cold War. China was not yet a major economy or power, and the Soviets had been perceived as the main enemy. President George H.W. Bush was so convinced China was on the road to liberalism that he downplayed the incident as an aberration.
However, Deng had a different view, rarely mentioned over the past 30 years. While Western leaders preached the gospel of democratization through baptism by free trade and market forces, Deng counseled his comrades to “bide your time and hide your light” and wrote of the beginning of “a new Cold War.”
The Cold War that Never Ended
The Economist implicitly acknowledged this cold war in a groundbreaking 2018 cover story. Said the long-time citadel of globalization, “the west had made the wrong bet on China.”
President Clinton, for example, had laughed at the notion of Beijing controlling the internet, saying it would be like “trying to nail Jello to the wall.” However, Beijing had placed a second bet on the table: that it could absorb free-world economic concepts and technology while preserving Communist doctrine and authoritarianism. Thereby, it could challenge the “rules based, liberal global order,” belying talk of a U.S.-China “coupling.” China’s cleavage of the Internet in 1997 with its “Great Fire Wall” and the barring of U.S. companies like Amazon, Google, and Facebook in favor of its own Alibaba, Tencent, and Baidu should have made this obvious.
The Economist’s tacit conclusion was that the United States was now losing this cold war. Former U.S. Assistant Secretary of State for East Asia Kurt Campbell wrote a few weeks later in Foreign Affairs that “positive engagement” with China was not working.
In retrospect, the overconfidence of free world leaders, economists, strategists, and pundits is culpable. They willfully ignored Beijing’s five-year development plans aimed at achieving Chinese leadership in key industries such as solar energy and telecommunications.
More astoundingly, they convinced themselves that China was disbanding its state-owned enterprises while, in fact, it was building them into globally dominant enterprises in industries like high-speed railroads, port management, and infrastructure development. These heavily subsidized companies have become the leading edge of the Chinese wedge into globalization. Free-world analysts and leaders saw them in purely economic terms, but for China they were strategic.
Only in 2015, when Beijing announced its “Made in China 2025” plans for dominance in high-tech industries and Xi Jinping began to emerge as a kind of new Mao Zedong, did the scales begin to fall from the eyes of the free world.
The Reality Framework
As former Undersecretary of Defense Michelle Flournoy noted in the Financial Times in June, the reality of the long West-vs.-China struggle demands a new, realistic approach.
Take the assumption that China is merely a regional power with regional objectives. Its “Belt and Road” project, skirmishes with India and in the South China Sea, acquisition of European ports, aid to Venezuela, naval forays into the Arctic, and convening of the “17 plus 1” (Central and Eastern European countries plus China) all suggest global ambitions.
Consider the issues of semiconductor chips. Conventional analysis argues that any U.S. restriction on sales to Huawei will only drive the company to make its own chips or shop elsewhere. Crucially, however, this argument assumes that Huawei and China do not already seek self-sufficiency. But they have been, as spelled out in five-year plans for many years. Restricting U.S. chip sales to Huawei cannot accelerate Chinese self-sufficiency if it is already barreling full-speed toward that point.
In that circumstance, restricting chip sales to China may very well extend U.S. lead time in one of the most important advanced technologies. Nor will it be easy for Huawei to acquire the chips from third-country suppliers, who are largely dependent on the U.S., and who have similar problems with Huawei and do not necessarily want to lose their own lead positions.
Now consider Kuka, a world leader in advanced robotics and formerly a German company. It was privately owned until the major Chinese producer Midea quietly bought a controlling interest in 2016. If Midea had been an ordinary global company, no one would have cast a second glance. But a major Chinese corporation inevitably has ties to the Chinese government and Communist Party. The German government was so upset over this buyout and the transfer of Kuka’s technology to China that it passed legislation to prevent a similar event in the future.
Why were the Germans upset? Because they knew the Chinese Communist Party and government seek global leadership in robotics. This is not a secret—it is part of the “Made in China 2025” plan. Moreover, the Germans do not believe China plans for a normal, market-driven robotics industry.
Nor does this apply only to robotics. It is true of virtually all major industries, especially those in the high-tech sector.
Most of the debate about globalization and coupling with China contains a fallacy: that it is purely a matter of economics. In fact, it is ultimately about national security and the long-term fate of democratic values.
A world in which authoritarian regimes dominate cutting-edge technologies and critical industries is not safe for democracy and free speech. It is therefore worse than silly to discuss how to deal with globalization of those industries solely in terms of production costs, comparative advantage, and consumer prices.
It is of existential importance that free-world countries remain among the leaders in high technology and fundamental industries. The costs of being uncompetitive in these areas would far outweigh any production cost savings garnered by producing in China. Indeed, one must ask if any price is too much to pay for freedom.
What Is to Be Done
We must first recognize that enticing or forcing China to “play by the rules” and to become “a responsible stakeholder in the rules-based, liberal order” is a hopeless task. The Communist Party does not live by rules or believe in an open-market economy. It believes its mercantilist strategy is a winner (which it has been so far) and will not abandon it.
Our only alternative is to change our own behavior and recognize an ongoing cold war. It does not necessarily mean complete economic decoupling from China, but it does mean a significant degree of decoupling. If Starbucks wants to establish coffee houses in China, fine.
On the other hand, it is essential that the United States assures that free-world players lead in the key industries China has targeted for its own leadership. This means adopting the right industrial policies, subsidizing research and investment, and managing global markets effectively.
In other words, we need to develop reciprocal globalization policies through the close cooperation of business and government, as we did during the 19th century, two world wars, the Space Race, and the first Cold War.
Clyde Prestowitz is the founder and president of the Economic Strategy Institute (ESI). He is also the author of several books, including The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era (2010).