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?

What will rescue a fragile China at this juncture is the United States continuing a trade relationship with the Chinese state. After all, China’s merchandise trade surplus with America last year ($419.53 billion) accounted for 119.3 percent of its overall merchandise surplus ($351.76 billion) in the same time period. So reaching a trade deal with the United States is critical for Xi Jinping. As is said in Chinese circles these days, “only Trump can save China.”

Yet even if Trump wanted to save China, Beijing cannot be saved. The Chinese state, for various reasons, cannot sustain a trade relationship with America.

The proponents of a U.S.-China trade agreement say a deal will end Beijing’s criminal and pernicious practices. Furthermore, they allege, a deal will open up China’s economy by, among other things, reducing tariffs, obtaining access for American businesses to sectors now off-limits to foreigners, abolishing subsidies to state-sector competitors, and eliminating discriminatory and onerous requirements on foreign entities.

The problem with such an approach, however, is that Washington has inked decades of deals with Beijing, and Beijing has violated all of them. Consider the plight of American electronic payment processors. As a condition for joining the WTO, China promised to allow these businesses to enter the Chinese market by 2006, five years after accession. Today, after Beijing lost a WTO case on the matter in 2012, no American company has entered the Chinese market. American Express at the end of last year received preparatory approval from China’s central bank to issue credit cards, but it is at best still a year away from doing so, and it had to take on a joint venture partner to get this far.

The final approval, when and if it ever comes, will not be worth much. By now, China’s UnionPay has had the time to obtain a near monopoly in China on credit cards. Moreover, Alipay, the Alibaba Group affiliate, along with Tencent’s WeChat Wallet have come to dominate electronic payments in the country. Beijing’s policies in this area were malicious and extraordinarily selfish, and they worked.

What won’t work is an agreement to end this unfavorable situation for U.S. companies. China today is less able to honor commitments it makes to Washington than it was in the pre-Xi era. Xi, since becoming Communist Party general secretary in late 2012, has moved China away from a mixed economy toward a state-dominated system. Xi, like Mao, has sought self-sufficiency. As a result, China’s leader is returning the country to the 1950s, recombining already large state enterprises back into formal monopolies; increasing state ownership of state enterprises, reversing the partial privatization of earlier years; arranging for state businesses to take stakes in private ones; and shoveling more state subsidies to favored market participants, most of them state enterprises. At the same time, he has exerted controls—many of them draconian—on the country’s financial and currency markets in order to keep share and currency prices within government-mandated ranges and cut down on currency outflow.

All this is backed up by increasingly frequent ideological and xenophobic campaigns. Xi’s centerpiece initiative, encapsulated by the phrase “Chinese Dream,” contemplates a strong state. Yet a state-dominated China does not sit easy with the notion of a market-oriented system. Moreover, more than his predecessors, Xi 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?

To compound problems, Xi’s political grip is far more tenuous than it first appears. The bold ruler has staked his precarious position atop the Communist Party on the success of his Maoist-inspired efforts, so it is unlikely he can accept market-opening demands and still retain his high position. He has, by centralizing power, also centralized accountability, and for him, that means there is no one he can blame. Xi’s Maoist-like vision either succeeds or he succumbs to the political enemies he has created with waves of political purges. Moreover, the price of failure in Xi’s China has increased. He has deinstitutionalized the Communist Party by doing away with the post-Mao rules and understandings that have constrained infighting and reduced the personal cost of losing political struggles. He is, therefore, all-in on Mao-type internal economic and political policies.

IN THESE circumstances, what troubles the trade relationship between China and the United States cannot be fixed by something as simple as an agreement. So why do Washington’s policymakers think the remedy for decades of failed trade deals with that country is signing up another one in an even less favorable environment?

“I hope you can make persistent efforts to push forward an agreement that can benefit both sides,” Xi Jinping said in February, referring to the prospective trade deal with the United States. “We all think that in terms of maintaining the prosperity and stability of the world, as well as promoting global economic prosperity and development, our two countries share broad mutual interest.”

Unfortunately, China and the United States, at far different stages of economic development and with vastly different political systems, don’t share interests. The conduct of China’s senior leaders betrays a belief that they calculate their interests in ways far different than their American counterparts.

That means disengagement, the only policy that has not failed over the past four decades, is the one that can promise acceptable outcomes for America. Disengagement, of course, does not fit easily with American generosity and optimism, but China, with its scorched-earth, winner-takes-all mentality, is not leaving Americans a choice. Many say the U.S. tie-up with China is “too big to fail.” Yet it is better to point out that China has become too inward-focused for relations to succeed.

Jonathan Bass, chief executive of PTM Images and a disengagement advocate, says the United States should trade with nations with “a commitment to democracy and the rule of law and a commitment to the belief of the primacy of the individual over the state.” And he continued: “to say the U.S.-China relationship cannot be undone is fundamentally wrong.”

In fact, undoing that relationship now looks fundamentally right.

Gordon G. Chang is the author of The Coming Collapse of China.

Image: Reuters