Eric Vandenbroeck 4 Nov. 2019

China between trade war and imperial ambitions

As pointed out before China's sense of history among others is rooted in the concept of Han Chinese an idea that derived from the Song period when the first form of Chinese diplomatic cosmopolitanism was conceived. It was during the described Song period that Chinese colonists spread relentlessly southward, recurrently provoking armed opposition from tribal groups in their path.

But the new Chinese empire is different. At once more modest and more arrogant, it is an empire of theater and presumption. It is a construct both of domestic repression and of international aspiration. Its arsenal of weapons includes secrecy, deception, and a sense of history that enables it to take a long view of China's interests and ambitions. Thus adding to the long debate about China and the Thucydides Trap something that continues to be a subject today.

Then, last week again Chinese President Xi Jinping emerged from a Communist Party conclave with a resolute endorsement of his leadership, despite a slowing economy, a bruising trade war with the U.S. and unrest in Hong Kong.

Underreported during last week's Party conclave however was the unease among the country’s leaders about their earlier attempt to secure its vulnerable supply lines, expand its maritime presence and extend its international financial and political presence. Plus more important, in tandem with the current trade war, China now contends with its country’s first sustained economic slowdown in a generation.

The country’s growth rate has fallen by half and is likely to plunge further in the years ahead, as debt, foreign protectionism, resource depletion, and rapid aging take their toll.

The signs of unproductive growth are easy to spot. China has built more than 50 ghost cities, sprawling metropolises of empty offices, apartments, malls, and airports. Nationwide, more than 20 percent of homes are vacant. Excess capacity in major industries tops 30 percent: factories sit idle and goods rot in warehouses. Total losses from all this waste are difficult to calculate, but China’s government estimates that it blew at least $6 trillion on “ineffective investment” between 2009 and 2014 alone. China’s debt has quadrupled in absolute size over the last ten years and currently exceeds 300 percent of its GDP. No major country has ever racked up so much debt so fast in peacetime.

Worse still, assets that once propelled China’s economic ascent are fast turning into liabilities. In the 1990s and early 2000s, the country enjoyed expanding access to foreign markets and technology. China was nearly self-sufficient in food, water, and energy resources, and it had the greatest demographic dividend in history, with eight working-age adults for every citizen aged 65 or older. Now China is losing access to foreign markets and technology. Water has become scarce, and the country is importing more food and energy than any other nation, having decimated its own natural endowments. Thanks to the one-child policy as pointed out in my 2018 article, China is about to experience the worst aging crisis in history, because it will lose 200 million workers and young consumers and gain 300 million seniors in the course of three decades. Any country that has accumulated debt lost productivity, or aged at anything close to China’s current clip has lost at least one decade what will become near-zero economic growth.

 

How China will react going forward

The question, then, is not whether a struggling rising power will expand abroad but what form that expansion will take. The answer depends in part on the structure of the global economy. How open are foreign markets? How safe are international trade routes? If circumstances allow it, a slowing great power might be able to rejuvenate its economy through peaceful trade and investment, as Japan tried to do after its postwar economic miracle came to an end in the 1970s. If that path is closed, however, then the country in question may have to push its way into foreign markets or secure critical resources by force, as Japan did in the 1930s. The global economy is more open today than in previous eras, but a global rise in protectionism and the trade war with the United States increasingly threaten China’s access to foreign markets and resources. China’s leaders fear, with good reason, that the era of hyper globalization that enabled their country’s rise is over.

The structure of a country’s home economy will further shape its response to a slowdown. The Chinese government owns many of the country’s major firms, and those firms substantially influence the state. For this reason, the government will go to great lengths to shield companies from foreign competition and help them conquer overseas markets when profits dry up at home. A state-led economy like China’s is unlikely to liberalize during a slowdown. Doing so would require eliminating subsidies and protections for state-favored firms, reforms that risk instigating a surge in bankruptcies, unemployment, and popular resentment. Liberalization also could disrupt the crony capitalist networks that the regime depends on for survival. Instead, regimes like China’s usually resort to mercantilist expansion, using money and muscle to carve out exclusive economic zones abroad and divert popular anger toward foreign enemies. The most aggressive expanders of all tend to be authoritarian capitalist states, of which China is clearly a prime example.

 

China’s peaceful rise?

During his recent speech commemorating the 70^th anniversary of the Chinese Communist Party’s rule President Xi once more emphasized that China would pursue peaceful development. President Xi Jinping, however, has also given multiple internal speeches warning party members of the potential for a Soviet-style collapse. The government has doubled internal security spending over the past decade, creating the most advanced propaganda, censorship, and surveillance systems in history. It has detained one million Uighurs in internment camps and concentrated power in the hands of a dictator for life. State propaganda blames setbacks, such as the 2015 stock market collapse and the 2019 Hong Kong protests, on Western meddling. These are not the actions of a confident superpower.

China has projected its power abroad throughout this turbulent period, tripling foreign direct investment and quintupling overseas lending in an ambitious attempt to secure markets and resources for Chinese firms. Beijing also has gone out militarily, launching more warships over the past decade than the whole British navy holds and flooded major sea lanes in Asia with hundreds of government vessels and aircraft. It has built military outposts across the South China Sea and frequently resorts to sanctions, ship-ramming, and aerial intercepts in territorial disputes with its neighbors.

If China’s growth slows further in the coming years, as is possible, the Chinese government will double down on the repression of the past decade. When the country’s leaders cannot rely on rapid growth to bolster their domestic legitimacy and international clout, they might be all the more eager to squelch dissent, burnish their nationalist credentials, and boost the economy by any means necessary. Moreover, powerful interest groups, most notably, state-owned enterprises and the military and security services, have developed a vested interest in maintaining China’s current strategy, which funnels money into their coffers. As a result, the government would struggle to extricate itself from foreign entanglements even if it wanted to.

 

Possible solutions

Some initiatives could help strike the proper balance. Instead of deterring Chinese expansionism by sailing provocative but vulnerable naval armadas past China’s coastline, for instance, Washington could deploy mobile anti-ship and surface-to-air missile launchers on allied shores. And as for the current trade war if the United States joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and invited China to join, too, Beijing would have the motive and means to reduce its trade-distorting practices without fighting a 1930s-style trade war. China might spurn the offer, but then the treaty would at least strengthen the commitment of its signatories to the free flow of goods, money, and data. In so doing, it would limit the spread of China’s mercantilist and digital authoritarian policies. The United States could supplement this stance by investing more in scientific research and investigations into specific Chinese companies and investors so that it can maintain technological superiority without banning Chinese investment and immigration into the United States. These moves would not eliminate the root causes of U.S.-Chinese rivalry, but they would protect U.S. interests while avoiding a slide into a cold or hot war.

 

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