How Deng Xiaoping Solved China’s Trade Problem—and What America Can Learn from Him

Wikimedia Commons
October 19, 2020 Topic: economy Region: Asia Tags: ChinaTradeEconomyXi JinpingPolicy

How Deng Xiaoping Solved China’s Trade Problem—and What America Can Learn from Him

More than at any point in contemporary history, China sees itself as a strong power. Now aware of China’s monumental presence on the world stage, Western elites can take a leaf from Deng Xiaoping and relearn how to exploit trade policy.

DENG STUDIED this history, and was determined to ensure that the new China would not suffer the same fate as its predecessor. The period from the beginning of the Opium Wars to the founding of the People’s Republic of China in 1949 has been dubbed the “Century of Humiliation” in China and forms a central part of the country’s historical narrative, in which the CCP is the restorer and guardian of Chinese independence. These degradations, according to the CCP, will only be redeemed by China’s return to hegemonic status and its previous territorial extent—including Taiwan.

It was not simply a desire for revanchism, however, that allowed Deng Xiaoping to reform China successfully. Rather, as a student of contemporary capitalism, Deng closely observed Singapore’s development, which showed that a culturally Chinese society had the prerequisite social technologies to productively use markets. Secondly, he knew that China could open up its markets to rapidly spur economic growth. Finally, and most importantly, he understood that with the right trade approach, informed by China’s history with the Mongols and European colonial powers, China could do so while maintaining sovereignty and keeping out American political influence. Deng’s gambit worked, even though it contradicted the conventional wisdom of Western economics.

Economists today would likely argue that the Ming policy towards Altan Khan was irrational because open trade would have been mutually beneficial. In fact, the Ming emperor’s refusal was a denial strategy, and it illustrates a political constraint on trade: a relative advantage is often more important than an absolute one. Keeping a relative advantage over your security rivals is necessary because security is a precondition for trade and economic growth. If the emperor had allowed the Mongols to outgrow China by trading with them, he would have done himself no favors.

China and Japan pursued isolation in the nineteenth century as a means of maintaining local political control against rising European colonial powers. Had modern economists been advising the Qing court, they might have argued that opening up trade with the European powers was a wise move: it would optimize for and create the greatest amount of economic growth. Instead, as soon as China succumbed to pressure for trade, the great powers of the era had an economic interest in subverting their sovereignty. The British, Dutch, or Americans did not want their sailors or merchants tried under Chinese law, which meant they would begin demanding extraterritorial jurisdiction. Over time, they sought control of more and more logistical and economic centers, such as Hong Kong, Tianjin, and Shanghai. Eventually, they occupied Beijing.

This illustrates a common pattern that free trade advocates don’t recognize—when states have an economic interest in organizations or resources in your country, then these states are incentivized to intervene in your economy. This eventually leads to an abrogation of sovereignty, if the economic interest is sufficiently large.

History shows that if a government has to choose between growth and sustaining itself, it is typically perfectly happy to forgo growth. In the present day, we can see that economic sanctions have denied growth and even impacted existing economic infrastructure in Russia, Iran, and—in the extreme—North Korea. Yet all three consistently prefer to sustain economic damage rather than give up geopolitical, security, or military advantages, such as Iran and North Korea’s nuclear programs, or Russia’s military interventions in its near abroad and the Middle East.

Modern scholars and decisionmakers in the West take the stability of political systems for granted and assign fundamental importance to the market rather than other social infrastructure, including the state itself. Markets do not precede states; rather, states create the conditions for markets to flourish by establishing and enforcing market norms. Those norms must be carefully set up both for internal markets and trade with external markets in order to prevent unpredictable consequences. With this in mind, Deng set out to fix China.

AFTER MAO’S death in 1976, his successor Hua Guofeng maintained a strictly Maoist line that was unpopular throughout China, but even more so within the CCP. Even before Mao’s death, people had begun to publicly denounce the Cultural Revolution. Fresh from his recently concluded exile, Deng gathered his allies, supported these criticisms, and soon pushed out Hua. With the Maoist approach self-discredited, Deng’s path forward was clear. Using the widespread disillusionment with Maoism, Deng carried out an institutional reform that enabled a tremendous drive for growth in China—a drive that has propelled it to its current position.

Deng had two key objectives in pursuing this growth: to ensure the survival of the CCP regime and to improve China’s geopolitical position. He succeeded with honors on both counts. The regime not only survived, but outlasted the USSR and is still going strong. Geopolitically, China reversed positions with the Soviet Union as the primary competitor to the United States. Now Russia serves as the junior partner to China in countering the West, rather than China serving as the junior partner to the Soviet Union.

Deng’s CCP was not overly concerned with whether the details of policy were following precise communist theory or not. Deng’s famous saying, “it doesn’t matter whether the cat is black or white, as long as it catches mice,” invites comparison to Kemal Atatürk’s argument that, since Islam is the true religion, anything that conforms to reason and the advancement of Turkey must be compatible with Islam. Another Deng era saying, “To get rich is glorious,” would seem to clash with conventional communist derision of bourgeois values. A charitable interpretation of this position is that as long as China remains under a communist government, whatever produces growth is ultimately communist, since this growth is deployed towards building communism.

In contrast to his ambivalence about adhering to communist theory, Deng was very concerned with whether the details of policy would weaken or strengthen Chinese sovereignty and power. Deng personally set out to make sure they would not. While President Richard Nixon’s 1972 visit to China is well-known, it is perhaps less important than Deng’s 1979 visit to America. This was the first major event of Deng’s rule: the visit concluded with the re-establishment of official diplomatic relations between the People’s Republic of China and the United States, and was the first visit of a Chinese head of state to America in nearly forty years.

Aside from meeting with President Jimmy Carter, Deng traveled across America. Over the course of his nine-day trip, Deng visited the headquarters of Coca-Cola, toured the factory floors of Ford, Boeing, and Baker Hughes, and visited NASA’s Manned Spaceflight Center in Texas, where he sat on top of the Lunar Rover. Attending a nearby rodeo, he donned a classic ten-gallon cowboy hat in a moment famously captured on camera. These were not merely routine photo-ops, but strategic technological and public relations moves that were vital to his developing strategy to revitalize China with American trade and industry.

Deng visited America to see with his own two eyes the manufacturing technology that would soon be offshored and rebuilt in China. Moreover, the trip allowed him to present an image of China as non-threatening, friendly, and peaceful which would be key to opening up a country still viewed as a communist threat during the Cold War. Standing less than five feet tall and wearing an oversized cowboy hat, Deng was not quite the image of a communist tyrant that Americans might have feared.

In a 2018 lecture at Emory University, former President Carter credited Deng’s visit with having a “beneficial impact on the American public.” To quote Carter, “Very quickly, surprising to me, the American people began to look with favor on the treaty I had worked out with the People’s Republic of China.” The result of that treaty is history. The mayor of Seattle at the time of Deng’s visit summarized it thus: “In 1971 there was almost no trade between China and the United States. Instantly, almost with Deng’s visit, everything opened.”

Deng had persuaded the American people and president that China posed no threat to the United States, thus securing a broad and unprecedented level of free trade over the next few decades. But Deng suffered no illusions of sentimentality, which he knew that the practice of statesmanship did not rely on. He took special care to make sure that only American money and technology would enter China, not any Americans or American ideas. For example, when Carter asked Deng to allow the return of American missionaries to China as a favor in return for diplomatic recognition, Deng refused because “they acted superior to the Chinese and tried to change our culture.” Nevertheless, Carter made the deal. A decade later in 1989, Deng put down the pro-democracy Tiananmen Square protests with force.

Deng’s mindset remained unchanged and was visible in the contemporary 1992 negotiations with British prime minister Margaret Thatcher over the status of Hong Kong, then still under British sovereignty. Leading the talks, Deng insisted upon Chinese sovereignty of Hong Kong, arguing that otherwise “he would be no better than the traitors of the Qing dynasty who had first yielded Chinese soil to Britain under treaties which were illegal and invalid.” Thatcher rebuffed Deng and reasserted the legitimacy of the treaties resulting from the Opium Wars. In response, Deng spent the next round of talks toasting to “militant friendship” at a banquet hosted by North Korean Kim Il-Sung, snubbing the British delegation who remained in the same building. In 1997, Hong Kong returned to Chinese rule.