Facing up to China

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Facing up to China


Stephan Haggard
The author is the Krause Distinguished Professor at the Graduate School of Global Policy and Strategy at the University of California in San Diego. He is the author with Marcus Noland of the Witness to Transformation blog at https://piie.com/blogs/north-korea-witness-transformation.

Discussion about China has taken a rapid turn in the United States. Those favoring constructive engagement have been placed on the defensive by military, political and economic changes under Xi Jinping. Serious discussion is now afoot about whether the United States needs to “decouple” from China. These discussions will naturally put Korea in an awkward position as it seeks to navigate between Beijing and Washington. But the risks are real and demand more open debate.

The shift in mood in the United States can be traced to around 2010, and motivated the Obama administration’s “pivot” to Asia. Before that time, the Chinese leadership had continued to pursue a grand strategy for China — outlined by Deng Xiaoping himself — that sought to assure the United States and its neighbors. Dubbed the “peaceful rise” approach, Deng argued China needed a peaceful environment in order to develop. It should thus avoid challenging the United States or asserting leadership, and should hide its capabilities.

2008’s global financial crisis damaged U.S. credibility, and Chinese analysts started to talk openly about U.S. decline. As China continued to grow three times faster than the United States or Korea, the peaceful rise approach became implausible.

Xi’s more expansive alternative rang a number of alarm bells: from the conflict over the U.S.-led Terminal High Altitude Area Defense (Thaad) antimissile system to the Senkaku Islands, the South China Sea and the Belt and Road Initiative. Yet economic issues ultimately crystalized the debate.

Trump’s approach to trade policy has been scattershot, attacking allies and adversaries. As a result, it was hard to know what parts of the president’s trade agenda would endure. Yet Democrats have also been hawkish on China trade, and Trump’s approach enjoys more support, at least among elites, than might be thought. As other issues, such as the Korus, were resolved, the administration came to increasingly focus on the China problem.

The issues at stake are fundamental. The decision to bring China into the World Trade Organization (WTO) was a momentous one. It was based on the strategic presumption that China would evolve into a “responsible stakeholder,” with a vested interest in the global trading system. No one expected China would become a capitalist democracy. Yet its own leadership had openly talked about evolving in a more market-oriented direction with a more pronounced role for the rule of law.

No longer. Under Xi, political power has been concentrated to an unprecedented degree and economic management is moving back in a more statist and politicized direction. Rather than converging toward a more market-oriented model, ambitious industrial policy efforts such as Made in China 2025 put vast sums of state money behind initiatives in important high-tech sectors, from artificial intelligence (AI) to electric vehicles and semiconductors.

At the same time, Chinese firms, in some cases apparently backed by the government, were exploiting the very openness of advanced industrial democracies. Weak intellectual property laws became a focal point. Firms such as Huawei grew in part because of successful management, with a relentless focus on expansion and driving costs down. Yet the history of the firm was also strewn with a succession of conflicts over industrial espionage, cases that were settled quietly as firms risked access to the Chinese market for bringing their complaints to court.

China’s rise was creating a new set of policy dilemmas for the United States and its advanced industrial state allies, including Korea. Governments could not confront Chinese industrial policy practices or intellectual property theft because firms from their own countries were effectively held hostage. Complain and they could face discretionary treatment at the hands of Chinese regulators. Stay silent, and competitive advantage would be stripped away one trade secret at a time.

The growing conclusion: Rather than the world economy constraining China, leverage was operating in exactly the opposite direction. The solution: Not only must the United States and its allies unite around a new set of rules of the road for engagement with China, the “big deal” that Trump has promised. The advanced industrial states must also do more to limit their exposure to Chinese pressure by diversifying risk and decoupling.

Trump has repeatedly said that China should not be blamed for its success; it is the United States and its allies that have to adjust. Unfortunately, Trump has done surprisingly little to advance a more forward-looking agenda. As the Korean economy slows, the country faces the same debate.

But a roadmap for China’s relationship with the world is also crucial. I continue to support negotiations that will update China’s WTO commitments. And everyone should agree that a tariff war is an ineffective way to get there, harming firms and consumers on both sides and reducing welfare.

Korea needs to have this debate as well: At what point does deepening engagement with China pose risks to the very technological capabilities that have undergirded Korean prosperity?
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