Why China can’t threaten America’s economic dominance

No amount of government investment can recreate the ingenuity and stability of a liberal order in Communist China.

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One of the lynchpins of Donald J. Trump’s presidential candidacy was his fiery critique of China, which he seems to view as one of the greatest threats to American jobs and economic prosperity. In the first presidential debate, Mr. Trump called out China for “using our country as a piggy bank” and crushing American manufacturing. He also took to Twitter in early December to lambast the Chinese for devaluing their currency and taxing imports from the United States. Prior to losing the election to Mr. Trump in November, Hillary Clinton too promised to crack down on Chinese currency manipulation and pledged to “impose targeted tariffs” should China continue “gam[ing] the system.”

China’s economic rise certainly has caused our nation a great many problems—from crushing U.S. manufacturing to stealing the intellectual property of innovative American companies. But these profound economic changes, as serious as they are, do not mean that China poses a threat to America’s economic supremacy.

Concerns about China are certainly warranted. Through cyberattacks and other means, China steals billions of dollars worth of American intellectual property (IP) each year, and it is the “world’s largest source of IP theft.”1 Companies based in China have little trouble accessing American markets, thanks to a relatively clear and stable regulatory structure, but “arbitrary, unpredictable” restrictions from the Chinese government effectively prevent U.S.-based businesses from selling there. According to The New York Times, “[t]he rules of engagement [in China] can change capriciously, especially for American and European companies, rendering major investments worthless.”2 And as China’s economic hot streak has stuttered, its renewed commitment to protectionist policies has made things even worse for U.S. businesses.

The rise of China as a source of cheap labor has not helped. One study from a group of economic researchers at M.I.T. estimated that “rising Chinese import competition” between 1999 and 2011—powered by the country’s low labor costs—eliminated between 2 to 2.4 million U.S. jobs. Domestic manufacturing alone accounted for nearly a million of these losses.3 Adding insult to injury, in local job markets most impacted by increased competition from China, wages have stagnated.4

These findings have convinced many—in academia and politics alike—that the United States is in danger of surrendering its economic supremacy to China. Kelvin Droegemeier, who helped draft the National Science Board’s 2016 report on Science and Engineering Indicators (SEI), is particularly worried about China’s rise. To him, the SEI report, which found that China’s financial commitment to scientific research and development has increased dramatically in recent years, is a “clarion call” for immediate action. “[W]e can’t sit still if we’re going to be the world leader,” he explained. “We have to continue investing by accelerating investments in basic research, our universities, STEM education, traditionally underrepresented groups, private companies, and products related to manufacturing and information services.” And, in this month’s edition of Foreign Affairs, British international affairs expert Robin Niblett warns that “the rise of China threatens to challenge U.S. military and economic hegemony.” Donald Trump, whose sound and fury about China dates back to the first day of his candidacy, would seem to agree. “When was the last time anybody saw us beating, let’s say, China in a trade deal?” he asked as he announced his presidential bid from a wide dais in Trump Tower on June 16, 2015. “We don’t have victories anymore. … [T]heir leaders are much smarter than our leaders, and we can’t sustain ourself with that.”

China’s impressive rise, however, obscures the underlying forces that have placed its continued economic advancement—and perhaps even its national integrity—in serious jeopardy. The Chinese economy is centrally managed to its core, with an authoritarian government making virtually all decisions of import. Though recent decades of moderate leadership have enabled China to enjoy some of the benefits of a market-based economy, this greater openness has undermined many of the authoritarian regime’s claims to legitimacy and established persistent economic progress as the primary justification for continued Communist Party rule. To avert economic collapse—and outright political collapse—Chinese leaders have frantically worked to prop up the economy, slashing interest rates and blowing billions on investment and infrastructure. But when economic forces finally catch up to the government’s antics, the illusion will shatter—leaving the regime at the mercy of an angry population demanding enfranchisement. “As the worsening economic, social, and environmental problems cause deep discontent across society and lead many people to take to the streets in protest, China has entered a period of deepening social tensions,” explains Suisheng Zhao, the director of the Center for China-U.S. Cooperation at the University of Denver. “The cracking up moment [for China’s regime] could come when economic growth has significantly slowed, and Beijing is unable to sustain the regime’s legitimacy with its economic performance.”

Furthermore, until and unless China replaces its authoritarian government with a truly liberal one, it will be forever disadvantaged relative to the United States and its peers. American ingenuity, exemplified in tech and research hubs like Silicon Valley and Boston, is simply not replicable by a country that spurns individual freedom and political empowerment—the necessary conditions for truly original thinking. No matter how much money China’s regime spends or how much of a priority it makes of innovation, it will never erase the long shadow of oppression it casts over its people.
American ingenuity is simply not replicable by a country that spurns individual freedom and political empowerment—the necessary conditions for truly original thinking.
In the Harvard Business Review, Abrami, Kirby, and McFarlan—professors of political science and business administration—detail the extent to which China’s political environment compromises innovation and competitiveness. “The Communist Party requires a representative to be present in every company with more than 50 employees,” they write. “Every firm with more than 100 employees must have a party cell, whose leader reports directly to the party in the municipality or province.” The government also exercises near-total control over the governance of universities, hamstringing creative progress and mandating adherence to its political agenda. In the face of all these obstacles, China’s innovators play it safe, making incremental improvements upon existing technology rather than taking enormous personal, political, and financial risks to try creating something new. As Abrami, Kirby, and McFarlan conclude, “[t]he problem … is not the innovative or intellectual capacity of the Chinese people, which is boundless, but the political world in which their schools, universities, and businesses need to operate, which is very much bounded.”

China’s rise is worth addressing, but America’s economic supremacy is hardly in danger. And until China is home to a stable liberal government whose people are enfranchised and free, it won’t be. “China’s market troubles are rooted in politics and not economics,” CNBC’s Jake Novak wrote back in September 2015, as the Chinese government arrested short sellers and censored the media in the midst of a stock market slowdown. “The bursting bubble [in China] is the misbegotten notion that China’s demographic numbers, economic potential, and work ethic could somehow overcome an inherently repressive regime and government-manipulated market. It can’t.”


Endnotes
  1. Commission on the Theft of American Intellectual Property, “The IP Commission Report,” The National Bureau of Asian Research, May 2013: 2.
  2. Irwin, Neil, “What Donald Trump Gets Pretty Much Right, and Completely Wrong, About China,” The New York Times, March 17, 2016.
  3. Acemoglu, Daron, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, “Import Competition and the Great US Employment Sag of the 2000s,” Journal of Labor Economics 34, no. S1 (2016): 141-198, 145.
  4. Porter, Eduardo, “On Trade, Angry Voters Have a Point,” The New York Times, March 15, 2016 (citing Autor, David H., et al., “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” National Bureau of Economic Research, January 2016.).

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