A Determined Rival
“There cannot be two suns in the sky, nor two emperors on earth”
Confucius
By Carl T. Delfeld
(All Rights Reserved)
The rivalry between the United States and China is a global contest of great consequence.
It will determine whether America’s leading role on the world stage will be confirmed or upended.
And the next decade of this rivalry - 2020 to 2030 - will be decisive.
China sees America as divided, distracted, and in decline.
America sees China as deceitful, determined, and disruptive.
Will America muster the determination to remain the world’s pre-eminent power?
Or will a China that has grown three times faster than America every year in the last two decades, leverage its scale and speed to topple America into the backseat of world wealth and influence.
Will China’s closed, state capitalist, authoritarian model become the norm in the emerging world?
Or will America’s open, private enterprise, rules-based led order regain its footing and momentum?
No matter what you now think about America and China, I hope to shake your convictions and reshape your views with facts that will surprise you time and time again.
Now cynics may claim that it makes no difference whether China’s “moneybags communism” or America’s “moneybags democracy” is the leading power in Asia or the world.
I beg to differ.
How this power rivalry plays out will not only affect your pocketbook and stock portfolio – it will significantly impact the economic and national security of America and the financial security of your children and grandchildren.
It matters a great deal whether America or China in the next decade dominates our technology economy - especially when almost all companies are now technology companies - closely linked to the Internet and big data.
Technology advances in manufacturing allow a ton of American steel to be produced with 1/10 the manpower required in the 1980s. Panasonic has a plant in Japan that churns out two million plasma screens each month with only 25 workers.
Technology competition in space, 5G and 6G infrastructure, financial technology, robotics, drones, advanced manufacturing, semiconductors and all the future-oriented industries will be critical to each country’s wealth, power and national security.
If China calls the shots in these key industries, America’s S&P 500 stock index will be lower in 2030 than it is now and China’s economy will be larger than America’s by a sizable margin.
America would then need to double its defense budget and the U.S. dollar’s reign as the world’s reserve currency would then be in jeopardy.
America would then not be able to guarantee freedom of navigation through the South China Sea at the strategic gateway between the Indian Ocean and the Pacific Ocean.
And though a struggling Boeing is still the king of aerospace, and an estimated one billion Chinese people have yet to even board an airplane, by 2030 the world’s dominant aerospace company could be the Commercial Aircraft Company of China (COMAC).
These high stakes make America’s epochal contest with China, fueled by its vaunting ambition and determination, much more challenging than was its Cold War rivalry with the Soviet Union or its economic rivalry with Japan.
But for most Americans, China is still a country making cheap stuff for Walmart rather than a peer rival going for America’s jugular in supercomputers.
So let’s first take a step back and look at the big picture before drilling down to the rivalry’s chessboard, players and battlegrounds.
What is a Rivalry?
A rivalry is a keen competition between traditional opponents or near peer competitors.
When most Americans think of rivalry, what first comes to mind is sports competition - the Green Bay Packers vs. the Chicago Bears or the Boston Red Sox vs. the New York Yankees.
Or in geopolitics, it’s been America vs. the Soviet Union in the Cold War or the protracted trade conflict with Japan in the 1970s and 1980s.
The US-China rivalry is much more than just a geopolitical chess game.
Now most pundits stake out positions on US-China competition at the extremes.
Either the Chinese dragon will overwhelm America - or China is overrated and no match for America.
The truth is that America and China are already, like two champion sumo wrestlers, locked in an intense, enduring, knockdown near peer rivalry.
Now, our rivalry with Japan, a key ally, was limited to trade.
We forget that between 1953 and 1970, Japan’s GDP expanded by about 9% per year, manufacturing by 13%, construction by 11%, and infrastructure by 12%. In 1965 these sectors employed more than 41% of the Japanese labor force, whereas only 26% remained in agriculture.
America’s trade deficit with Japan soared a multiple of 25 times in one decade and US-Japan trade tension still simmers on the back burner today.
In contrast, America’s four-decade struggle with the Soviet Union was only ideological and military as Russia was a weak economic power.
China challenges America on all fronts, militarily, ideologically and in economics and business. According to CIA statistics, China’s economy has grown three times faster than America’s every year during the last four decades. Credit Suisse estimates that China now accounts for about 30% of value added in manufacturing.
U.S.- Russian trade in the 1980s averaged around $2 billion per year while U.S.- China trade is $2 billion per day.
And as China has moved up the food chain and is threatening America’s lead in advanced technology, Washington is proposing tougher measures, as China is a rising economic and security threat.
China is gaining ground in a range of technologies that experts say could give the country an economic and military edge, including artificial intelligence, facial recognition, microchips and quantum computing.
The battle over tighter regulation over technology exports and investments related to China is heating up in Washington.
This is the root of the matter regarding commerce with China from the beginning.
“Their incentive is shareholder value and making money,” Jim McGregor, the chairman of greater China for APCO Worldwide, said of America’s biggest technology companies. “It’s not defending what is good for America. You can say that’s terrible, but that’s the way our system works.”
In addition, unlike Russia, China is both a land and sea power with a 9,000-mile coastline alongside key shipping lanes.
China and America are roughly the same size but China has a population more than four times bigger.
China is the workshop of the world becoming the top manufacturer in 2010 and top exporter in 2009.
America is the most powerful military in the world but China is gaining fast and is the major military power in Asia already.
There are 1.1 billion English speakers in the world while 1.1 billion speak Mandarin.
How will this rivalry play out in the next decade and beyond?
I agree with Winston Churchill that: “The longer you can look back, the farther you can look forward…”
So let’s begin at the dawn of this rivalry.
A Rivalry From the Beginning
The rivalry between America and China goes way back - to the very beginning of the American story.
Remember that one of the key grievances of the colonists was the British ban on trading directly with overseas markets. So just months after the Treaty of Paris was inked in 1783, formally ending the Revolutionary War, America was on the move.
On George Washington’s birthday in 1784, a ship that served as a privateer during the war, the Empress of China, set sail from New York for Canton, China bearing a cargo of 20,000 Spanish silver dollars, 2,000 beaver skins and 250 casks of ginseng.
This daring expedition was financed by a syndicate of investors led by Robert Morris, a wealthy and influential trader, shipper and politico from Philadelphia.
Morris was known as the “financier of the American revolution and continental Army” and also served as de facto Secretary of the Treasury and commander of the continental navy.
Fourteen months later, the Empress of China triumphantly returned richly laden with silk, tea, cinnamon, and porcelain tableware, and all was sold for a queenly profit. None other than George Washington purchased a 302-piece set of tableware that you can see today at Mount Vernon.
At that time, China was the largest economy in the world.
Indeed, from 1644 to about 1830, China was the strongest, wealthiest and most sophisticated empire in the world reaching its zenith in about 1750.
No doubt Imperial China had a clear sense of superiority and looked down upon America aloofly as a country of little significance.
After all, America was at that time at best a fledgling frontier country deeply in debt and in financial chaos with multiple currencies, no functional central government and surrounded by hostile powers eager to encroach on its territory.
But as America, led by dynamic partnership of President George Washington and Treasury Secretary Alexander Hamilton, took command of the new federal government - America found its financial footing, setting the country on a growth trajectory that soon astonished the world.
China’s Turbulent Decline & Turnaround
Meanwhile, circa 1830, China, handicapped by a blend of hubris, isolationism and political instability, fell into steady decline and then chaos.
Failed institutions and internal rebellion led to China falling well behind the West in terms of technology. This downward spiral of economic and military weakness continued into the 20thcentury.
In sharp contrast, in the four decades from 1870 to 1910, America’s economy shifted into a higher gear producing annual 10% growth rates that allowed it to pass China and then England and Germany to become the world’s largest economy as well as leading exporter and manufacturer.
China struggled to achieve stability and was divided by warlord conflict and then the military invasion from Japan.
After the Communist victory in 1949, China unfortunately followed political and economic models that led to poverty, famine, cruelty and little economic growth. Then came the Great Leap Forward resulting in 30 to 40 million dying from starvation. Then came the cruel and destructive Cultural Revolution in the 1960s.
America began its diplomatic outreach to China when President Nixon visited in 1972.
By the 1970s, about 80% of Chinese lived in rural areas in subsistence farming, China’s foreign trade was minimal, the poverty rate was 88% and the size of its economy was less than 10% of the America’s economy.
Then in late 1978, under the leadership of Deng Xiaoping, China embarked on a limited market-oriented economic reform spearheaded by special economic zones.
On January 24, 1980, one year before President Reagan was inaugurated, Congress granted most-favored-nation (MFN) trading status to the Communist regime, reducing tariffs on Chinese goods to the same rate offered to America’s friends and allies.
MFN status had previously been reserved for countries with free-market economies and with political and civil rights, including the right to emigrate.
In 1980, China met none of these criteria.
Why America Slept While China Soared
Why did America sleep while China soared?
A great deal of this was due to hubris, complacency and greed.
With the end of the Cold War, America was alone on top and the high tech stock boom during the Clinton years gave us a false sense of confidence.
While America viewed the end of the Cold War as a clear triumph for democracy and capitalism over communism, the Chinese saw it as a warning to greatly strengthen the centrality of the state and its military deterrence.
From the get go, China had no intention of letting its stock market or financial markets allocate resources based on the open, transparent flow of information and capital.
Rather, it would guide them based on the supreme goals of creating jobs, acquiring technology, and driving forward its economic growth to protect the monopoly of the Chinese Communist Party.
Slowly but surely, the Chinese economy began to engage with the world and attracted foreign investment in manufacturing to take advantage of its cheap labor and spurred on by Western companies fascinated by the potential of selling into China’s consumer market.
According to World Bank data, foreign investment in fixed assets in China increased 4,700% between 1981 and 2000 and then tripled between 2000 and 2010.
China was accepted into the World Trade Organization (WTO) prematurely before opening up their markets and privatizing their state-owned companies.
American firms led the charge into China to take advantage of its sharply lower manufacturing costs and to have a shot at, potentially, the biggest consumer market in the world.
This attitude continued into the presidency of George W. Bush who while campaigning in 2000 said, ”Trade freely with China and time is on our side”.
This “hope for the best” attitude is captured well by the Strategic Economic Dialogue (SED) between America and China launched in 2006. Thomas Christensen, then a State Department official, sums up this approach in his book, The China Challenge.
He writes that the basic message from Washington to Beijing was: “we wish China well and want to help extend your fantastic run of double-digit growth rates. Chinese growth is good for everyone”.
Well, maybe for Wall Street and Fortune 500 CEOs.
Christensen added that, “since the Chinese reform era began in 1978, no global actor has done more to assist China’s rise than the United States.”
This highlights another reason American statecraft was on automatic pilot, American officials operate in a bureaucratic system that rewards authority, penalizes contrary thinking and encourages following the status quo.
In some ways this attitude of complacency reminds me of how the British, and Winston Churchill in particular, viewed the rise of Japan in the 1920s and 1930s.
Japan and Britain were allies, until the terms the 1922 Washington Naval Agreement signed by America, Britain and Japan, alienated Japan.
Usually so far-sighted, Churchill missed Japan’s intentions by a mile.
He wrote the following passage in a letter dated December 15, 1924 to Prime Minister Baldwin:
I do not believe there is the slightest chance of it in our lifetime. The Japanese are our allies. The Pacific is dominated by the Washington Agreement….Japan is at the other end of the world. She cannot menace our vital security in any way.
Less then two decades later, Britain was humiliated as Japan’s war machine ran roughshod over Hong Kong, Singapore, Burma, and Malaya, coming to the very doorstep of Australia. Britain was finished as a player in Asia and as a world power.
Similarly, in economic terms, America also took its eye off the ball due to the war on terrorism reflecting its stubborn, single-minded focus on the Middle East.
This is ironic since George W. Bush referred to China as a "strategic competitor" during the 2000 presidential campaign. But whatever momentum in Washington regarding the challenge from China, it wavered and then evaporated after the 9/11 attacks.
To further distract America, came the 2009 global financial crisis, which bled, into the Obama presidency.
The Obama Administration made some tentative moves to counter a stronger China but was risk averse and non-confrontational as China increased its economic growth rate and lengthened its domination of key industries.
America and its allies allowed China to build artificial islands in the South China Sea and were unsuccessful at opening new markets for American companies. Then it committed the cardinal sin of politics by letting the Trans-Pacific Partnership (TTP) trade pact run into the 2016 campaign cycle.
The so-called China “experts” have been consistently wrong about China’s capabilities and intentions - always hedging their opinions on China’s intentions.
Imagine if Paul Revere would have galloped through the night yelling “the British may or may not be coming.”
However, the founder of modern Singapore and former prime minister Lee Kuan Yew, clearly grasped China’s ambitions clearly in a 2011 Forbes column:
“It is China’s intention to be the greatest power in the world. The policies of all governments toward China, especially neighboring countries, have already taken this into account.
These governments are repositioning themselves because they know that there will be consequences if they thwart China when its core interests are at stake. China can impose economic sanctions simply by denying access to its market of 1.3 billion people, whose incomes and purchasing power are increasing.”
Then came President Trump who deserves some credit for confronting China’s economic policies. But for all his rhetoric, the Trump Administration has lacked consistency and discipline, and never had nor executed a coherent strategy.
So, to put it mildly, America has over the years not executed a well-thought out plan.
Instead of building a coalition to take on China’s closed, mercantilist system, it wasted precious time and diplomatic capital criticizing Canada, Mexico, Europe, Australia and Japan.
Rather than targeting China, America should have framed the issue around state-owned and directed companies, which is the root of the problem in China as well as in other emerging markets.
Using tariffs to get China to the table and gain concessions did not work well because of his on and off again tactics and constant backing down due to pressure from Wall Street and corporate America.
Here is how I put it a decade ago in my book, Red, White & Bold:
“It is not protectionist to use the leverage of our huge consumer market to open markets on a reciprocal basis. No one wants to go back to the 1929 – 1934 period, when world trade plunged by more than 60% but America’s most important asset in negotiating trade and economic agreements is our huge consumer market."
In 2001, China was ushered into the World Trade Organization (WTO) by the United States. This was a decisive diplomatic coup - for China - as its legitimacy was greatly strengthened.
Robert Rubin, Treasury secretary under President Bill Clinton, told Congress that China’s accession to the WTO would “sow the seeds of freedom for China’s 1.2 billion citizens.”
Growth and foreign direct investment in China accelerated due to wage levels that were an incredible twenty times lower than average American wages.
After joining the WTO, not content with the huge competitive advantage of rock bottom wages, China kept its currency pegged to the dollar at artificially low levels, had strict capital controls, increased export subsidies and maintained the central government’s hold on state-owned enterprises.
As a result, China’s exports doubled in three years and almost tripled in four years.
Analysis from the Lowy Institute based on the International Monetary Fund (IMF) database shows the sharp change in trade flows from 1980 to 2018.
Before 2000, over 80 countries more traded with the U.S. than they did with China. By 2020, that number had dropped sharply and now 128 of the world’s 190 countries (67%) have China as their largest trading partner.
The researchers pinpoint China’s 2001 entry into the World Trade Organization as a dramatic turning point in China’s international trade relationships.
Thousand of factories closed in Mexico as well as in America as companies shifted manufacturing to China. Unfortunately, Mexico’s real average wage rates in U.S. dollar terms are now where they were a decade ago - spurring an influx of illegal immigrants into America.
Some argue that China’s premature membership in the WTO in 2001 without tough conditions was more damaging to America’s national interest than the 9/11 terrorist attacks.
From 1980 to 2020, roughly 400 million Chinese moved from the countryside to work in urban area factories. Average Chinese wages increase 1,200% between 2000 and 2015.
China also gained access to priceless technology and know how as General Electric and Honeywell helped launch China’s aviation industry, Maersk established China as a leader in shipbuilding and Samsung set up advanced production chains and cutting edge research centers.
This investment and technology sharing fueled an economic boom and infrastructure-building program unprecedented in world history.
Since 1995, the size of China’s economy has grown 25 times. China’s per capita income is now thirty times larger than it was in 1980 and its extreme poverty rate has gone from 80% to virtually zero.
In short, I think it is fair to say that during the last four decades, China has delivered an economic achievement that far surpasses America’s 1870-1910 run.
Sizing Up the Rivals
Every corner of our interconnected world will be impacted as this epic struggle unfolds with extraordinary fluidity and pace.
Can America’s foreign policy avoid the extremes of isolation and confrontation and its penchant to careen from crisis to crisis?
Can we muster the discipline, deterrence, leadership and diplomatic skill and finesse to make sure that this global rivalry plays out peacefully?
Or is it inevitable that America and China will clash militarily?
What could trigger a confrontation?
The list is a long one: a cyber attack hitting U.S. financial markets, a collision in the East China Sea, North Korean missiles headed to Japan, a crisis in Taiwan, out of control Hong Kong protests, continued harsh repression of minorities in China.
Another critical question as we head into the 2020s is whether America can rekindle a more dynamic economy that pulls the whole country forward?
A 2-3% growth rate is hardly dynamic.
With some significant exceptions, American entrepreneurship seems to be declining alongside productivity growth.
Early in the Jimmy Carter presidency, 17% of all United States businesses had been founded in the previous year; by 2012, that rate was about 10%.
In the late 1980s, almost half of United States companies were “young,” meaning less than five years old; by 2010, that share was down to only 39%, and the share of “old” firms (founded more than 15 years ago) rose from 22 percent to 34 percent over a similar period.
And those companies increasingly sit on cash or send it back to shareholders via dividends or stock buybacks rather than investing in new enterprises.
From World War II through the 1980s, according to a report from Senator Marco Rubio’s office, private domestic investment often approached 10% of GDP; in 2019, despite a sizable corporate tax cut, the investment-to-GDP ratio was less than half of that.
Clearly, America needs a strategy and a change of attitude to jumpstart its spirit of entrepreneurship to get its economy on a higher trajectory of growth.
Let’s next preview this rivalry’s chessboard, battlegrounds and players........................
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“There cannot be two suns in the sky, nor two emperors on earth”
Confucius
By Carl T. Delfeld
(All Rights Reserved)
The rivalry between the United States and China is a global contest of great consequence.
It will determine whether America’s leading role on the world stage will be confirmed or upended.
And the next decade of this rivalry - 2020 to 2030 - will be decisive.
China sees America as divided, distracted, and in decline.
America sees China as deceitful, determined, and disruptive.
Will America muster the determination to remain the world’s pre-eminent power?
Or will a China that has grown three times faster than America every year in the last two decades, leverage its scale and speed to topple America into the backseat of world wealth and influence.
Will China’s closed, state capitalist, authoritarian model become the norm in the emerging world?
Or will America’s open, private enterprise, rules-based led order regain its footing and momentum?
No matter what you now think about America and China, I hope to shake your convictions and reshape your views with facts that will surprise you time and time again.
Now cynics may claim that it makes no difference whether China’s “moneybags communism” or America’s “moneybags democracy” is the leading power in Asia or the world.
I beg to differ.
How this power rivalry plays out will not only affect your pocketbook and stock portfolio – it will significantly impact the economic and national security of America and the financial security of your children and grandchildren.
It matters a great deal whether America or China in the next decade dominates our technology economy - especially when almost all companies are now technology companies - closely linked to the Internet and big data.
Technology advances in manufacturing allow a ton of American steel to be produced with 1/10 the manpower required in the 1980s. Panasonic has a plant in Japan that churns out two million plasma screens each month with only 25 workers.
Technology competition in space, 5G and 6G infrastructure, financial technology, robotics, drones, advanced manufacturing, semiconductors and all the future-oriented industries will be critical to each country’s wealth, power and national security.
If China calls the shots in these key industries, America’s S&P 500 stock index will be lower in 2030 than it is now and China’s economy will be larger than America’s by a sizable margin.
America would then need to double its defense budget and the U.S. dollar’s reign as the world’s reserve currency would then be in jeopardy.
America would then not be able to guarantee freedom of navigation through the South China Sea at the strategic gateway between the Indian Ocean and the Pacific Ocean.
And though a struggling Boeing is still the king of aerospace, and an estimated one billion Chinese people have yet to even board an airplane, by 2030 the world’s dominant aerospace company could be the Commercial Aircraft Company of China (COMAC).
These high stakes make America’s epochal contest with China, fueled by its vaunting ambition and determination, much more challenging than was its Cold War rivalry with the Soviet Union or its economic rivalry with Japan.
But for most Americans, China is still a country making cheap stuff for Walmart rather than a peer rival going for America’s jugular in supercomputers.
So let’s first take a step back and look at the big picture before drilling down to the rivalry’s chessboard, players and battlegrounds.
What is a Rivalry?
A rivalry is a keen competition between traditional opponents or near peer competitors.
When most Americans think of rivalry, what first comes to mind is sports competition - the Green Bay Packers vs. the Chicago Bears or the Boston Red Sox vs. the New York Yankees.
Or in geopolitics, it’s been America vs. the Soviet Union in the Cold War or the protracted trade conflict with Japan in the 1970s and 1980s.
The US-China rivalry is much more than just a geopolitical chess game.
Now most pundits stake out positions on US-China competition at the extremes.
Either the Chinese dragon will overwhelm America - or China is overrated and no match for America.
The truth is that America and China are already, like two champion sumo wrestlers, locked in an intense, enduring, knockdown near peer rivalry.
Now, our rivalry with Japan, a key ally, was limited to trade.
We forget that between 1953 and 1970, Japan’s GDP expanded by about 9% per year, manufacturing by 13%, construction by 11%, and infrastructure by 12%. In 1965 these sectors employed more than 41% of the Japanese labor force, whereas only 26% remained in agriculture.
America’s trade deficit with Japan soared a multiple of 25 times in one decade and US-Japan trade tension still simmers on the back burner today.
In contrast, America’s four-decade struggle with the Soviet Union was only ideological and military as Russia was a weak economic power.
China challenges America on all fronts, militarily, ideologically and in economics and business. According to CIA statistics, China’s economy has grown three times faster than America’s every year during the last four decades. Credit Suisse estimates that China now accounts for about 30% of value added in manufacturing.
U.S.- Russian trade in the 1980s averaged around $2 billion per year while U.S.- China trade is $2 billion per day.
And as China has moved up the food chain and is threatening America’s lead in advanced technology, Washington is proposing tougher measures, as China is a rising economic and security threat.
China is gaining ground in a range of technologies that experts say could give the country an economic and military edge, including artificial intelligence, facial recognition, microchips and quantum computing.
The battle over tighter regulation over technology exports and investments related to China is heating up in Washington.
This is the root of the matter regarding commerce with China from the beginning.
“Their incentive is shareholder value and making money,” Jim McGregor, the chairman of greater China for APCO Worldwide, said of America’s biggest technology companies. “It’s not defending what is good for America. You can say that’s terrible, but that’s the way our system works.”
In addition, unlike Russia, China is both a land and sea power with a 9,000-mile coastline alongside key shipping lanes.
China and America are roughly the same size but China has a population more than four times bigger.
China is the workshop of the world becoming the top manufacturer in 2010 and top exporter in 2009.
America is the most powerful military in the world but China is gaining fast and is the major military power in Asia already.
There are 1.1 billion English speakers in the world while 1.1 billion speak Mandarin.
How will this rivalry play out in the next decade and beyond?
I agree with Winston Churchill that: “The longer you can look back, the farther you can look forward…”
So let’s begin at the dawn of this rivalry.
A Rivalry From the Beginning
The rivalry between America and China goes way back - to the very beginning of the American story.
Remember that one of the key grievances of the colonists was the British ban on trading directly with overseas markets. So just months after the Treaty of Paris was inked in 1783, formally ending the Revolutionary War, America was on the move.
On George Washington’s birthday in 1784, a ship that served as a privateer during the war, the Empress of China, set sail from New York for Canton, China bearing a cargo of 20,000 Spanish silver dollars, 2,000 beaver skins and 250 casks of ginseng.
This daring expedition was financed by a syndicate of investors led by Robert Morris, a wealthy and influential trader, shipper and politico from Philadelphia.
Morris was known as the “financier of the American revolution and continental Army” and also served as de facto Secretary of the Treasury and commander of the continental navy.
Fourteen months later, the Empress of China triumphantly returned richly laden with silk, tea, cinnamon, and porcelain tableware, and all was sold for a queenly profit. None other than George Washington purchased a 302-piece set of tableware that you can see today at Mount Vernon.
At that time, China was the largest economy in the world.
Indeed, from 1644 to about 1830, China was the strongest, wealthiest and most sophisticated empire in the world reaching its zenith in about 1750.
No doubt Imperial China had a clear sense of superiority and looked down upon America aloofly as a country of little significance.
After all, America was at that time at best a fledgling frontier country deeply in debt and in financial chaos with multiple currencies, no functional central government and surrounded by hostile powers eager to encroach on its territory.
But as America, led by dynamic partnership of President George Washington and Treasury Secretary Alexander Hamilton, took command of the new federal government - America found its financial footing, setting the country on a growth trajectory that soon astonished the world.
China’s Turbulent Decline & Turnaround
Meanwhile, circa 1830, China, handicapped by a blend of hubris, isolationism and political instability, fell into steady decline and then chaos.
Failed institutions and internal rebellion led to China falling well behind the West in terms of technology. This downward spiral of economic and military weakness continued into the 20thcentury.
In sharp contrast, in the four decades from 1870 to 1910, America’s economy shifted into a higher gear producing annual 10% growth rates that allowed it to pass China and then England and Germany to become the world’s largest economy as well as leading exporter and manufacturer.
China struggled to achieve stability and was divided by warlord conflict and then the military invasion from Japan.
After the Communist victory in 1949, China unfortunately followed political and economic models that led to poverty, famine, cruelty and little economic growth. Then came the Great Leap Forward resulting in 30 to 40 million dying from starvation. Then came the cruel and destructive Cultural Revolution in the 1960s.
America began its diplomatic outreach to China when President Nixon visited in 1972.
By the 1970s, about 80% of Chinese lived in rural areas in subsistence farming, China’s foreign trade was minimal, the poverty rate was 88% and the size of its economy was less than 10% of the America’s economy.
Then in late 1978, under the leadership of Deng Xiaoping, China embarked on a limited market-oriented economic reform spearheaded by special economic zones.
On January 24, 1980, one year before President Reagan was inaugurated, Congress granted most-favored-nation (MFN) trading status to the Communist regime, reducing tariffs on Chinese goods to the same rate offered to America’s friends and allies.
MFN status had previously been reserved for countries with free-market economies and with political and civil rights, including the right to emigrate.
In 1980, China met none of these criteria.
Why America Slept While China Soared
Why did America sleep while China soared?
A great deal of this was due to hubris, complacency and greed.
With the end of the Cold War, America was alone on top and the high tech stock boom during the Clinton years gave us a false sense of confidence.
While America viewed the end of the Cold War as a clear triumph for democracy and capitalism over communism, the Chinese saw it as a warning to greatly strengthen the centrality of the state and its military deterrence.
From the get go, China had no intention of letting its stock market or financial markets allocate resources based on the open, transparent flow of information and capital.
Rather, it would guide them based on the supreme goals of creating jobs, acquiring technology, and driving forward its economic growth to protect the monopoly of the Chinese Communist Party.
Slowly but surely, the Chinese economy began to engage with the world and attracted foreign investment in manufacturing to take advantage of its cheap labor and spurred on by Western companies fascinated by the potential of selling into China’s consumer market.
According to World Bank data, foreign investment in fixed assets in China increased 4,700% between 1981 and 2000 and then tripled between 2000 and 2010.
China was accepted into the World Trade Organization (WTO) prematurely before opening up their markets and privatizing their state-owned companies.
American firms led the charge into China to take advantage of its sharply lower manufacturing costs and to have a shot at, potentially, the biggest consumer market in the world.
This attitude continued into the presidency of George W. Bush who while campaigning in 2000 said, ”Trade freely with China and time is on our side”.
This “hope for the best” attitude is captured well by the Strategic Economic Dialogue (SED) between America and China launched in 2006. Thomas Christensen, then a State Department official, sums up this approach in his book, The China Challenge.
He writes that the basic message from Washington to Beijing was: “we wish China well and want to help extend your fantastic run of double-digit growth rates. Chinese growth is good for everyone”.
Well, maybe for Wall Street and Fortune 500 CEOs.
Christensen added that, “since the Chinese reform era began in 1978, no global actor has done more to assist China’s rise than the United States.”
This highlights another reason American statecraft was on automatic pilot, American officials operate in a bureaucratic system that rewards authority, penalizes contrary thinking and encourages following the status quo.
In some ways this attitude of complacency reminds me of how the British, and Winston Churchill in particular, viewed the rise of Japan in the 1920s and 1930s.
Japan and Britain were allies, until the terms the 1922 Washington Naval Agreement signed by America, Britain and Japan, alienated Japan.
Usually so far-sighted, Churchill missed Japan’s intentions by a mile.
He wrote the following passage in a letter dated December 15, 1924 to Prime Minister Baldwin:
I do not believe there is the slightest chance of it in our lifetime. The Japanese are our allies. The Pacific is dominated by the Washington Agreement….Japan is at the other end of the world. She cannot menace our vital security in any way.
Less then two decades later, Britain was humiliated as Japan’s war machine ran roughshod over Hong Kong, Singapore, Burma, and Malaya, coming to the very doorstep of Australia. Britain was finished as a player in Asia and as a world power.
Similarly, in economic terms, America also took its eye off the ball due to the war on terrorism reflecting its stubborn, single-minded focus on the Middle East.
This is ironic since George W. Bush referred to China as a "strategic competitor" during the 2000 presidential campaign. But whatever momentum in Washington regarding the challenge from China, it wavered and then evaporated after the 9/11 attacks.
To further distract America, came the 2009 global financial crisis, which bled, into the Obama presidency.
The Obama Administration made some tentative moves to counter a stronger China but was risk averse and non-confrontational as China increased its economic growth rate and lengthened its domination of key industries.
America and its allies allowed China to build artificial islands in the South China Sea and were unsuccessful at opening new markets for American companies. Then it committed the cardinal sin of politics by letting the Trans-Pacific Partnership (TTP) trade pact run into the 2016 campaign cycle.
The so-called China “experts” have been consistently wrong about China’s capabilities and intentions - always hedging their opinions on China’s intentions.
Imagine if Paul Revere would have galloped through the night yelling “the British may or may not be coming.”
However, the founder of modern Singapore and former prime minister Lee Kuan Yew, clearly grasped China’s ambitions clearly in a 2011 Forbes column:
“It is China’s intention to be the greatest power in the world. The policies of all governments toward China, especially neighboring countries, have already taken this into account.
These governments are repositioning themselves because they know that there will be consequences if they thwart China when its core interests are at stake. China can impose economic sanctions simply by denying access to its market of 1.3 billion people, whose incomes and purchasing power are increasing.”
Then came President Trump who deserves some credit for confronting China’s economic policies. But for all his rhetoric, the Trump Administration has lacked consistency and discipline, and never had nor executed a coherent strategy.
So, to put it mildly, America has over the years not executed a well-thought out plan.
Instead of building a coalition to take on China’s closed, mercantilist system, it wasted precious time and diplomatic capital criticizing Canada, Mexico, Europe, Australia and Japan.
Rather than targeting China, America should have framed the issue around state-owned and directed companies, which is the root of the problem in China as well as in other emerging markets.
Using tariffs to get China to the table and gain concessions did not work well because of his on and off again tactics and constant backing down due to pressure from Wall Street and corporate America.
Here is how I put it a decade ago in my book, Red, White & Bold:
“It is not protectionist to use the leverage of our huge consumer market to open markets on a reciprocal basis. No one wants to go back to the 1929 – 1934 period, when world trade plunged by more than 60% but America’s most important asset in negotiating trade and economic agreements is our huge consumer market."
In 2001, China was ushered into the World Trade Organization (WTO) by the United States. This was a decisive diplomatic coup - for China - as its legitimacy was greatly strengthened.
Robert Rubin, Treasury secretary under President Bill Clinton, told Congress that China’s accession to the WTO would “sow the seeds of freedom for China’s 1.2 billion citizens.”
Growth and foreign direct investment in China accelerated due to wage levels that were an incredible twenty times lower than average American wages.
After joining the WTO, not content with the huge competitive advantage of rock bottom wages, China kept its currency pegged to the dollar at artificially low levels, had strict capital controls, increased export subsidies and maintained the central government’s hold on state-owned enterprises.
As a result, China’s exports doubled in three years and almost tripled in four years.
Analysis from the Lowy Institute based on the International Monetary Fund (IMF) database shows the sharp change in trade flows from 1980 to 2018.
Before 2000, over 80 countries more traded with the U.S. than they did with China. By 2020, that number had dropped sharply and now 128 of the world’s 190 countries (67%) have China as their largest trading partner.
The researchers pinpoint China’s 2001 entry into the World Trade Organization as a dramatic turning point in China’s international trade relationships.
Thousand of factories closed in Mexico as well as in America as companies shifted manufacturing to China. Unfortunately, Mexico’s real average wage rates in U.S. dollar terms are now where they were a decade ago - spurring an influx of illegal immigrants into America.
Some argue that China’s premature membership in the WTO in 2001 without tough conditions was more damaging to America’s national interest than the 9/11 terrorist attacks.
From 1980 to 2020, roughly 400 million Chinese moved from the countryside to work in urban area factories. Average Chinese wages increase 1,200% between 2000 and 2015.
China also gained access to priceless technology and know how as General Electric and Honeywell helped launch China’s aviation industry, Maersk established China as a leader in shipbuilding and Samsung set up advanced production chains and cutting edge research centers.
This investment and technology sharing fueled an economic boom and infrastructure-building program unprecedented in world history.
Since 1995, the size of China’s economy has grown 25 times. China’s per capita income is now thirty times larger than it was in 1980 and its extreme poverty rate has gone from 80% to virtually zero.
In short, I think it is fair to say that during the last four decades, China has delivered an economic achievement that far surpasses America’s 1870-1910 run.
Sizing Up the Rivals
Every corner of our interconnected world will be impacted as this epic struggle unfolds with extraordinary fluidity and pace.
Can America’s foreign policy avoid the extremes of isolation and confrontation and its penchant to careen from crisis to crisis?
Can we muster the discipline, deterrence, leadership and diplomatic skill and finesse to make sure that this global rivalry plays out peacefully?
Or is it inevitable that America and China will clash militarily?
What could trigger a confrontation?
The list is a long one: a cyber attack hitting U.S. financial markets, a collision in the East China Sea, North Korean missiles headed to Japan, a crisis in Taiwan, out of control Hong Kong protests, continued harsh repression of minorities in China.
Another critical question as we head into the 2020s is whether America can rekindle a more dynamic economy that pulls the whole country forward?
A 2-3% growth rate is hardly dynamic.
With some significant exceptions, American entrepreneurship seems to be declining alongside productivity growth.
Early in the Jimmy Carter presidency, 17% of all United States businesses had been founded in the previous year; by 2012, that rate was about 10%.
In the late 1980s, almost half of United States companies were “young,” meaning less than five years old; by 2010, that share was down to only 39%, and the share of “old” firms (founded more than 15 years ago) rose from 22 percent to 34 percent over a similar period.
And those companies increasingly sit on cash or send it back to shareholders via dividends or stock buybacks rather than investing in new enterprises.
From World War II through the 1980s, according to a report from Senator Marco Rubio’s office, private domestic investment often approached 10% of GDP; in 2019, despite a sizable corporate tax cut, the investment-to-GDP ratio was less than half of that.
Clearly, America needs a strategy and a change of attitude to jumpstart its spirit of entrepreneurship to get its economy on a higher trajectory of growth.
Let’s next preview this rivalry’s chessboard, battlegrounds and players........................
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