At War with China

China is our number 1 enemy in the world. We cannot allow Chinese authoritarianism to prevail over Western democracy, especially in Ukraine. In truth, some people are so completely ginned up over the conflict with China that they will have you drawn and quartered if you dare say anything good about the Middle Kingdom.

One suspects that some China-haters are terrified that we will not be able to compete effectively against a nation that does a significantly better job of educating its children. Thus, they prattle on about how China is imploding, how its economy is crashing, how its young people are unemployed and worthless. 

The conclusion: we do not need to compete to win. We need merely to await China’s implosion. When Tiananmen Square became a killing field in 1989, the New York Times correspondent, a grape farmer from Oregon, declared portentously that the regime would never survive.

And Gordon Chang, always wrong but never in doubt, has been saying that China will fall apart imminently. He has been saying it for more than two decades, and has never suggested that he might be wrong.

One might mention that China, beginning with the Deng Xiaoping reforms, instituted in the late 1970s, produced a world beating increase in wealth and prosperity, not to mention a massive reduction of poverty. 

And they did not abolish the Communist Party. Strange thing that.

Now, of course, China has been facing an implacable and intractable enemy. That is, us. We have fought China with sanctions and tariffs. We have trash talked China every day. We have demeaned and diminished Chinese achievements, making them out to be liars, cheats and thieves.

Naturally, our politicians, in particular, thrill to the chance to talk tough about China. It makes them feel strong and empowered, and, after all, that is the bottom line, isn’t it?

Of course, no one sees that China might retaliate for this attack, by forming an alliance with Russia and by producing fentanyl. 

To imagine that we can set out to wreck the Chinese economy, not to mention the Chinese international reputation, with impunity, beggars belief. You cannot be that naive.

In the meantime, while you are getting lathered up over how bad the Chinese are, an Irish economist named Philip Pilkington has offered a contrary take on the Chinese economy. And former Member of the European Parliament, Daniel Hannan, declares that the mercantilist tendencies proposed by one Sen. Marco Rubio as a solution to the China problem are seriously off the mark.

Consider them to be instances of contrary opinion. Surely, both men know that the more we dismiss China, the more we are pessimistic about its future, the more likely it is that China will recover from its current funk.

But, is it really in a funk?

Pilkington opens thusly:

Open a Western business newspaper and one would probably come away thinking that the Chinese economy is doing poorly, or perhaps even on the verge of collapse. While it is true that the country’s economy continues to suffer from structural problems, this perception is not just wrong but risks undermining the credibility of Anglophone publications and the capacity for our policymakers to make rational decisions. 

True, he says, there is some evidence of mild deflation, but still, other segments of the Chinese economy are growing well:

Two other data points were released last week which show the Chinese economy growing robustly. The first came from the private sector Caixin Services Purchasing Managers Index survey, which showed stronger than expected growth in the very sector about which bearish commentators have raised concerns. 

Interestingly, the private sector surveys of the Chinese services sector show it expanding quicker than the official Chinese government studies which showed a mild contraction in November. Those who accuse the Chinese of inventing economic statistics would do well to explain why government surveys are more conservative than their private sector equivalents. Whatever way one looks at it, the Chinese services sector is now expanding.

Then there is Chinese export data, which showed exports expanding for the first time in seven months. Combined with the service sector data, this shows a broad-based expansion of the Chinese economy. Not a veritable economic boom, it must be stressed, but continuous growth that is consistent with the IMF’s own projections. These show that Beijing will comfortably meet its 5% growth target this year — a projection China bears seem to ignore when they pass judgement on the economy.

And then there is the matter of semiconductor production. As you recall, we placed sanctions on the export of certain semiconductor manufacturing technologies. Evidently, we were trying to cripple certain Chinese companies, in particular, Huawei.

So, how did that work out? Well, it seems that Huawei circumvented the sanctions and produced its own technology:

There are rumours that China may have advanced in its capacity to produce semiconductors. A specialist hardware website notes how a recent Huawei laptop listing suggests that the Chinese have broken the 5 nanometer chip barrier. If the listing is correct, it suggests that China has advanced even further than the 7 nanometer processor found in the new Huawei Mate 60 smartphone. The phone shocked Western analysts who thought that such technology was beyond the production capacity of the Chinese. It increasingly looks like the American-led chip sanctions are just pressuring China to produce the needed technology domestically, and thereby undermining the competitiveness of incumbent Western players.

Obviously, this is not good news. Just as obviously, it makes our sanctions regime seem to be an exercise in futility. Many people will be shocked to discovered that while we were onshoring manufacturing-- with limited success-- China was doing the same on its end.

Now, Daniel Hannan has explained in the Washington Examiner that Marco Rubio’s call for a new mercantilism is wrong and wrong headed. Surely, it defies basic Adam Smith and it rejects the virtue of free trade.

First, the proposition that Chinese competition has destroyed jobs is false. The U.S. has seen a steady expansion in both jobs and pay packets. Working-class men earn a third more than their fathers did at the same age. We sometimes imagine that 1950s workers lived in a blue-collar golden age, but the hourly wage in a Detroit car factory in 1953 was $1.30, equivalent to $14.50 today, below the starting salary of an Amazon warehouse worker.

Sure, some jobs are lost to Chinese competition — critics say 130,000 a year. But that is a rounding error when we consider that 60 million jobs are lost each year (and more are created) through technology. Automation affects every country, including China, where manufacturing jobs have been in decline since 2013 because of robotics. Indeed, according to a 2017 study, the sectors exposed to Chinese competition have been creating jobs faster than others. Not factory jobs — better-paid jobs in design, research, and marketing.

When former President Donald Trump complains that “China is the biggest beneficiary of Apple, not us,” he is wrong. Most of the “Chinese” components in your iPhone were imported to China from elsewhere, not least the U.S. Chinese parts and labor account for less than 2% of the total price. Most of the profits come to the U.S.

As for the argument that China excelled because it practiced state planning, that is obviously untrue. After the death of Mao, Chinese peasants, with the belated blessing of the government, privatized agriculture. Considering how many people had starved to death under Mao’s communism, it was the least they could do. 

We ought to notice that Deng Xiaoping and another senior member of the Politburo, Liu Shaoqi, had tried to introduce capitalist reforms in the early 1960s. Chairman Mao called for a cultural revolution in order to save Communism. We know how that worked out.

Hannan concludes by noting that Chinese president Xi Jinping has of late returned to state planning. For now, it does not look like a very good bet. It looks like something of a mistake. And yet, are we that confident that he will never change course. 

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