China’s commitment to become ‘carbon neutral’ by 2060 has excited environmentalists but it should be seen as part of China’s strategy to become the world’s economic and military hegemon. Carbon neutrality by a date as remote as 2060 will not constrain the ambitions of the Chinese Communist Party (CCP) in the slightest.
It is time to admit that the policy of economic engagement with China has failed. Optimists used to argue that embracing China in the world economy, especially by admitting it to WTO membership in 2001, would lead the Chinese people to demand democracy. The remarkable naivety of our leaders is captured in a speech given by President Clinton in 2000:
‘By joining the WTO, China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom. The more China liberalises its economy, the more fully it will liberate the potential of its people… And when individuals have the power, not just to dream but to realise their dreams, they will demand a greater say.’
No serious commentator would say that now. On the contrary, a growing literature shows that the exact opposite has happened. Participation in the world economy has entrenched the power of the CCP and made its brand of authoritarian dictatorship appear more attractive to the unwary.
China joined the WTO as a non-market economy and membership was not only expected to lead to pressure for democracy, it was also anticipated that China would become a market economy within 15 years by 2016. It has done no such thing and it turns out that the rules of the WTO are ill suited to coping with a major economy acting in a spirit of undiluted mercantilism.
A study by Daron Acemoglu of the Massachusetts Institute of Technology (MIT) and others concluded that trade with China caused significant job losses in the USA between 1999 and 2011. Counting direct and consequential job losses they estimated that about 985,000 jobs were lost in manufacturing and 1.98 million in the whole economy. They also tried to assess the overall impact on localities by studying ‘commuting zones’ and estimated that total job losses between 1999 and 2011 had been closer to 2.37 million. Three of the authors also examined local job losses more closely. David Autor (MIT), David Dorn (University of Zurich) and Gordon Hanson (University of California) found that a decade after the ‘China shock’ wages were depressed and employment was still reduced. Exposed workers experienced great job churning and reduced lifetime earnings.
More voices are starting to ask whether the time has come for liberal-democracies to disengage. Some focus on human rights abuse, notably of the Uighurs, and would like to see Magnitsky-style sanctions applied to CCP leaders; while others call for varying degrees of economic disengagement, including the discouragement of investment in China by American companies.
Partial disengagement is being advocated by researchers at the American Enterprise Institute (AEI), notably China expert, Derek Scissors. He urges policymakers to document subsidies provided by the People’s Republic of China (PRC) and take countervailing measures under WTO rules, rigorously regulate Chinese investment in America, and move or keep supply chains out of China.
He accepts that decoupling will have costs. Some prices will be higher, returns on investment in China will be lower, and there will be lost sales. But he contends that these losses are very small compared with what he calls the costs of Chinese economic predation. Subsidies and dumping provide lower prices in the short run but if rival suppliers are eliminated prices will soon go up.
Defenders of unfettered free trade are found to be naïve. There are 20 Chinese state-owned enterprises (SOEs) in the Fortune 100. Eleven benefit from regulations that prohibit competition. The other nine are effectively guaranteed never to fail. Competition from foreign and domestic rivals is also prohibited in many other sectors. In addition, SOEs receive land and capital subsidies and add to their debts readily. Only governments can increase the money supply, and overseas companies without such privileged access to government funds will find it impossible to compete.
Theft of technology continues despite longstanding criticism. Chinese SOEs have weak incentives to innovate and consequently there is an incentive to keep on stealing ideas to flourish. Many countries are concerned about the downright theft of intellectual property or the coercive extraction of it as a condition of operating in China. Even the pusillanimous EU has criticised China’s policy of requiring companies to surrender ownership of intellectual property.
Should the UK Government consider a policy of disengagement? Policies could include quotas combined with content limits to prevent goods largely made in China from entering via a different route and a policy of locating supply chains in the UK, where possible. Over-reliance on exports to China could be avoided. Sometimes exporters have become so reliant on sales to China that they can be manipulated by the CCP.
Chinese entities have been buying up British companies, most notably smaller high-tech, innovative companies. Should we prevent takeovers by foreign companies that are state-dominated? Have our universities become too dependent on fees from Chinese students and research funding from the CCP?
Can technology transfer be prevented? In America, an export licence is required if American technology is used in a product. If a foreign citizen based in the US transfers technology it is a considered a ‘deemed export’ and a licence is required. Chinese citizens based in the UK or the USA can be threatened and sometimes their families in China are intimidated. Even if they are not themselves hostile, scientists can be pressurised into revealing secrets. Tighter control of ‘deemed exports’ would discourage such intimidation.
In the hope of selling products to Chinese consumers, and in search of lower labour costs, many Western companies have invested heavily in China. A study by Professor Michael Enright of the University of Hong Kong for the Hinrich Foundation estimated that between 2009 and 2013 about one-third of China’s GDP was the result of investments by ‘foreign-invested enterprises’.
Despite the tariffs imposed by Trump, US investment in China has increased. Should FDI and portfolio investment in China be controlled? America already has a Committee on Foreign Investment in the US (CFIUS). One possibility would be to establish an outbound equivalent. Would such an approach work in the UK?
Partial disengagement is not primarily about defending our own interests, but upholding a civilised international order in which we each try to discover the best way to meet human needs within rules to discourage nations that are parasitic upon the restraint of others. In China, wealth creation bolsters the power of the Communist Party. It does not create strong independent organisations that can prevent governments from abusing the powers at their disposal. The aim of a free society is to prevent the concentration of power in a few hands. China aims for the exact opposite.
By failing to act, we entrench dictatorship in China: where opponents are purged, minorities are viciously subjugated, and the ‘surveillance state’ has attained unprecedented reach.
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