It's Time for America to Break with Beijing

June 19, 2019 Topic: Security Region: Asia Tags: ChinaXi JinpingEconomyTradeDemocracy

It's Time for America to Break with Beijing

Xi Jinping has rejected the concept of comparative advantage, the very notion underpinning the system of international commerce. Why should America sign a trade agreement with a country that does not believe in trade?

Xi uses tianxia language in his pronouncements, Beijing’s house scholars study how to apply tianxia to the world and Chinese officials hint that a tianxia revolution is coming to the international system. For instance, in September 2017, Foreign Minister Wang Yi wrote in Study Times, the Central Party School’s influential official newspaper, that Xi Jinping’s “thought on diplomacy” has “made innovations on and transcended the traditional Western theories of international relations for the past 300 years.”

Wang, with his time reference, was pointing to the current system of sovereign states, derived from the Treaty of Westphalia of 1648. The foreign minister’s use of “transcended,” therefore, is an indication Xi does not merely want the world to leave China alone. On the contrary, he contemplates a world where only China has sovereignty.

Xi does not want to “export” the China model of governance, as is often said, but eliminate competing models. When China’s ruler tells us that “the Chinese have always held that the world is united and all under heaven are one family,” as he declared in his 2017 New Year’s Message, he is not issuing holiday puff. He is really ordering us to accept Chinese rule. “In the People’s Republic, there is now a visible and increasingly strong revival of traditional, imperial political values and ideals,” Fei-Ling Wang, author of The China Order: Centralia, World Empire, and the Nature of Chinese Power, recently told me. These “values and ideals” include a totalitarian “China Order,” a world empire encompassing tianxia.

The tianxia ambitions do not carry appeal outside China and have no followers elsewhere, says Charles Horner of the Hudson Institute. But the fact that Xi continues to talk about them is a warning that China’s leader does not care and is determined to impose them. Xi’s views are ludicrous of course, but they nonetheless put Washington on notice that China is not, as virtually all observers assume, competing with the United States inside the existing Westphalian system. It is, in reality, acting in ways unacceptable to the United States and other stakeholders in that current order.

In view of Beijing’s growing horizons and hostility, one wonders how Washington can successfully engage a hideous and hostile China, but a more fundamental issue is whether Washington should even attempt to do so. Engagement, in all its various forms, looks downright dangerous as it will help Frankenstein’s monster, if we can borrow Nixon’s imagery, to become more powerful. So what do we do? Arthur Waldron, an expert on Chinese history, says “Only one thing: exit completely as from any place full of plague, disease and contagion.” Fox News Channel’s Laura Ingraham went one step further in her primetime show in April, calling for a “boycott” of China.

Whether one stumps for a full-on boycott or mere disengagement over time, the only safe course for America is to deny Beijing resources by, among other things, no longer supporting its economy. Without sufficient resources, the multi-decade Soviet challenge failed, and without sufficient resources, China’s would as well.

A PAINLESS disengagement is impossible. As Waldron pointed out, “we unhesitatingly built a vast web of interdependence with China.” Unwinding decades of misguided policy—and this interdependence—inevitably carries costs. For instance, there will be burdens on the American economy, at least at first. Moving supply chains out of China, a major element of a disengagement strategy, will be enormously disruptive.

Some companies, such as Apple with its dependence on contract manufacturer Foxconn, will be at risk for years. There could be interruptions in the flow of pharmaceuticals, as that particular industry has concentrated much of its production in China. Moreover, disengagement will put at risk the stock of American investment in that country, valued at as much as $256 billion. Beijing holds American companies hostage in normal circumstances, so it will surely do so when it is clear Washington is looking for a full divorce.

Yet there are crucial mitigating factors. First, most companies can adjust quickly, shifting production in some cases in a matter of months. When I practiced law in Hong Kong, I helped businesses move production out of China in the immediate wake of the Tiananmen massacre. They did so without stoppages, and I watched them smoothly reenter China months later when it became clear that political upheaval was having little effect on the country’s manufacturing sector.

Even China-dependent Apple can adapt. Foxconn, which already has facilities in other countries, is eyeing a Wisconsin plant, and the Cupertino-headquartered company is also building significant facilities in India to meet demand there. Prime Minister Narendra Modi would be happy to have his country become the world’s new “factory floor” as that would further his signature “Make in India” program.

Second, companies, for business reasons, are already reducing vulnerability to China—largely because of its deteriorating economy, Beijing’s prejudicial actions against them, reduced manufacturing costs elsewhere and growing perceptions of Chinese geopolitical risk. GoPro, for instance, announced in December that it is moving some sourcing out of China. At the same time, manufacturing in America is flourishing due to a confluence of factors, including the growing popularity of basing production close to the point of consumption. Stanley Black & Decker’s announcement in May that it would build a $90 million factory in Texas for Craftsman tools—which are now made in locations such as China and Mexico—is a sign the United States can competitively produce even low-margin items. Disengagement from China is becoming fashionable as “onshoring” gains momentum.

Third, engagement over the course of decades has facilitated China’s taking of American intellectual property (IP), and disengagement will reduce grievous losses. Each year, Beijing steals hundreds of billions of dollars of U.S. IP, perhaps as much as $600 billion, as the February update to the findings of the Commission on the Theft of American Intellectual Property and the U.S. Trade Representative’s report of the same month show. China accounts for 87 percent of the pirated goods confiscated at America’s borders, so it is no wonder that many call China’s theft “the greatest heist in the world.”

There are, in addition to outright theft, the losses of IP due to forced taking by statute or practice—some of it in apparent violation of Beijing’s WTO obligations. This campaign to grab tech has continued for decades and therefore is obviously directed from the top of the Chinese political system. Incredibly, theft, perpetrated for four decades, has this century become even more integral to China’s economy. Hu Jintao, Xi Jinping’s immediate predecessor, sponsored the WTO-noncompliant “indigenous innovation product accreditation” rules. Xi took Hu’s tech-taking one step further with his audacious “Made in China 2025” initiative, which contemplates China dominating eleven tech sectors by the middle of next decade. China, it is clear, cannot meet Xi’s ambitious timetable set by CM2025, as the plan is known in China, unless Beijing continues to take foreign intellectual property. In fact, Chinese cyber-attacks for commercial purposes appear to be related to Xi’s grand initiative.

Put all this together, and it’s clear why the updated Blair-Huntsman report—the common name for the report of the Commission on the Theft of American Intellectual Property—calls China “the world’s principal IP infringer.” Disengagement means less American contact with China, which means, ultimately, fewer opportunities for Chinese thievery and almost no opportunities for forced taking.

Fourth, Chinese industrial policy is injuring American companies and disengagement will reduce the harm by moving them as far as possible from Beijing’s reach. Xi Jinping has launched numerous Cultural Revolution-style efforts against successful foreign businesses, pursued highly discriminatory law enforcement actions against them, and sponsored national security legislation and regulatory rules unduly burdening foreign competitors. Disengagement, in short, saves companies from deteriorating conditions in China.

CHINA AT the moment is a “hot mess” and in desperate need of another American rescue.

Xi owns the results of his stagnation-inducing programs: a slowing economy. The official National Bureau of Statistics (NBS) regularly reports economic growth in the high-six-percent range, but those reports are exaggerated, especially since the middle of this decade. Take the year 2016 as an example. The NBS reported that China’s gross domestic product grew 6.7 percent that year. In 2017, however, the World Bank issued a bar chart showing that China’s GDP increased only 1.1 percent, and this surprisingly low figure is in line with the single most reliable indicator of Chinese economic activity: total primary energy consumption. Official statistics report that in 2016 this metric increased 1.4 percent.

The situation has not improved much since then. In December, Renmin University’s Xiang Songzuo created a sensation across China when he said 2018 GDP growth would come in at about 1.67 percent and that the economy might even contract. Indicators for that month pointed to contraction, as did numbers for January and February.

In March, there was a slight rebound due to Beijing doing what it promised this year not to do: flood the economy with even more debt. Yet the economy is now heading down again as the stimulus wears off—more evidence that debt alone cannot create a sustained recovery. Even if one believes Beijing’s exaggerated growth numbers, the country is creating at least five-and-a-half times more debt than nominal GDP.