President Trump seems resigned to the expectation that China will be of no help in resolving the North Korea challenge. That he (and his predecessors) ever believed otherwise is the most salient evidence of the consensus by successive U.S. administrations that a soft touch toward the People’s Republic of China is in order because it is a growing, influential power. Soon, so the argument goes, the PRC will be the largest economy in the world and an able military power, capable of altering outcomes in ways detrimental to the United States. The U.S. must avoid confrontation lest this burgeoning power react in kind.
Wrong. It’s the same thinking — yes, in a quite different context and time — that led earlier presidents to accept accommodation with the USSR during the Cold War. Ronald Reagan recognized that the policy benefited the Soviet Union and that Moscow was in no position to dictate terms once pressure was applied. President Trump should take this approach toward the PRC. Doing so would lead to a more cooperative China.
The Trump administration has sent mixed signals on China policy so far. The president-elect’s call to Taiwan’s President Tsai Ing-wen and near-mocking of the PRC when it stole a U.S. Navy drone during the post-election transition have been supplanted by the president’s apparent desperation to be liked by China’s president and by his declaration in a media interview that his very presence in office caused China to end the currency manipulation of which Candidate Trump had accused Beijing. In the aftermath of Pyongyang’s abuse and murder of U.S. college student Otto Warmbier, the president tweeted plaintively that he appreciates that President Xi tried to help with North Korea — with no apparent indication that Xi did any such thing — but that the assistance isn’t working.
The administration’s most persistent point of contention with Beijing is the U.S. trade deficit with China. Otherwise, it appears that the only consistency in the administration’s China policy is inconsistency.
To understand why, a review of Reagan’s approach toward the USSR can help. Campaigning in 1980, Reagan promised a new approach to the Soviet Union. From the completion of the U.S.–Soviet Anti-Ballistic Missile treaty in 1972 until the 1980 election, U.S. policy traveled the arc from détente to confrontation. In hindsight, what happened seems pretty straightforward.
By the early 1970s, the consensus of the foreign-policy and intelligence elite was that as a military power the Soviet Union had become a peer to the U.S. Richard Nixon and Henry Kissinger conceived of détente to minimize the potential for confrontation with a rising power, a policy much like U.S. accommodation toward China today.
The belief in Soviet parity extended to the economic realm. Well into the 1980s, Western intelligence services continued to analyze such limited data as were available in retrospect and assessed that the growth of the Soviet Union’s gross national product had exceeded that of the United States through the 1960s and 1970s and that the USSR was economically self-sufficient. (GNP was the more common national-income metric used in economic analysis in the U.S. Gross domestic product was adopted as the common metric in 1991.) The view was that the Soviet economy, while not strong, was sufficiently stable for Communism to endure.
Reagan believed that détente was buying time for Soviet leaders.
Reagan, though, believed much earlier than 1980 that it wasn’t Soviet strengths but Soviet weaknesses, primarily economic, on which U.S. policy should be based. He did not accept that GNP growth — impossible to know in the case of the Soviet Union, in any case — was even a relevant measure for the Soviet economic condition. In his speeches and anecdotes, Reagan focused instead on the structural shortcomings of central economic planning: waste and inefficiency, the lack of innovation, and the inability to create the conditions for an adequate standard of living.
Reagan believed that détente was buying time for Soviet leaders, who knew they had to address these challenges. He put the U.S. on a more confrontational footing to put pressure on Soviet structural weaknesses. Reagan left office with the job just about finished; the Soviet Union outlasted him by less than three years.
U.S. policy toward Beijing since the 1990s has followed an arc much like the one that characterized U.S. policy toward Moscow during the period prior to Reagan’s ascendance. Of course, the comparison of today’s China with the Soviet Union of the 1970s is not wholly apt, but ponder it anyway. No, the PRC today is not the globally capable military power the USSR was. Still, Beijing is developing power-projection capabilities and seeks to undermine U.S. military influence in Asia and the Pacific at the very least. In addition, the PRC is using money to counter U.S. leadership (see the Asia Infrastructure Investment Bank and the Silk Road Fund) much as the Soviet Union adopted client states in Asia, Africa, and the Middle East through military partnership.
No, the Chinese economy and society are not as brittle as the Soviet economy was; the PRC is more dynamic and open than the USSR was. Still, central planning remains the core identifying characteristic of China, as it was of the Soviet Union. Indeed, centralization forces are strengthening under President Xi, through control of state-owned enterprises, decisions about provincial leaders, and other means.
There are other similarities, starting with the consensus of the Western elite that China is in the ascendancy, as the Soviet Union was thought to be in the 1970s. While enthusiasm in that consensus has paled in the light of challenges that cannot be ignored, there are still those who believe that China soon will boast the world’s largest economy, given its GDP growth rate, which allegedly exceeds 6 percent. But just as true Soviet GNP was unknowable, there is not much reason to trust China’s published national economic statistics. Derek Scissors of the American Enterprise Institute offers further analysis suggesting that GDP, even if accurate, is not the right measure to use to evaluate China’s relative strength. Relying on Credit Suisse analysis of private wealth since 2000, Scissors wrote at Real Clear World last November that China is well behind the United States in this key measure. Scissors describes this datum as “the single best measure of a country’s economic size and of the pool of resources available to its public sector for military or social spending.” And the gap between China and the U.S. with respect to that measure is growing.
According to the Credit Suisse analysis, net private wealth in the United States in 2016 stood at nearly $85 trillion, compared with about $24 trillion in China. The analysis also shows that China’s share of global net private wealth is declining, to 9.1 percent from 9.5 percent the year prior.
Of course, other data show that China’s economy is in big trouble. Among the most prominent are the data for capital flight. Money is a coward, and Chinese citizens have sent well more than $1 trillion to offshore save havens in the past couple of years. The government has dispensed upwards of that amount in foreign-exchange reserves to keep the value of the yuan relatively stable. Money also is unsentimental; capital flight is a pretty good sign of the lack of internal confidence in the Chinese economy.
Perhaps the most dire matter is that China is addicted to debt. Evidence abounds, starting with the declining asset quality on the balance sheets of the state-controlled banks, now among the world’s largest. The figures are almost certainly worse than these nominally public companies are disclosing. Driving the weakening bank balance sheets are property-value bubbles across the cities, inflated by local municipal finance vehicles (think dozens or more Fannie Maes and Freddie Macs — debt issuers that have the implied backing of the central government).
There are two likely ways out of the debt trap. One is a massive revaluation along the lines of what happened in many of the advanced economies in 2008. The other is years of low or no economic growth along the lines of Japan since the 1990s. To avoid having to contemplate these dire possibilities, some analysts argue that Beijing has tools that the U.S., Japan, and other free-market capitalist economies don’t have. At the stroke of a pen, the central government can, these analysts contend, cover bad bank debt, inject liquidity into the economy, and maintain stability.
Concentration of wealth in the hands of a few faux capitalists and conspicuous middle-class consumption in the cities obscure the fact that hundreds of millions of Chinese live in poverty.
Here’s the bad news: That’s not the solution; it’s the problem. Those very actions are creating unsustainable growth in public debt, which now is nearly three times the GDP. Much of the activity is taking place off the balance sheets of the banks. By some estimates, shadow banking activity accounts for more than 40 percent of China’s GDP.
Another challenge is the growing disparity between China’s rich and poor. The concentration of wealth in the hands of a few Croesus-like faux capitalists and the conspicuous middle-class consumption in the cities obscure the fact that there are hundreds of millions of Chinese citizens living in poverty and many tens of millions in extreme poverty, living on $1.25 (or less) per day. This is causing significant pressure on the central government, in the form of rising demands for services and jobs, resulting from the urban migration.
Beijing knows it’s in bad shape, more than the U.S. seems willing to acknowledge. As far back as 2007, Chinese premier Wen Jiaobao articulated what became known as “the four Un’s”: The Chinese economy, he said, was “unbalanced, unstable, uncoordinated, and unsustainable.” Guess what? It’s gotten worse, and more obviously so, in the decade since.
What should the U.S. do? First, acknowledge that modern détente, like its Cold War predecessor, is contributing to belligerence, not cooperation, this time from Beijing. President Trump should adopt Reagan’s stance toward Moscow and discredit Beijing’s system as weak and unsustainable. A frostier, less accommodating U.S. policy toward the PRC, one that draws attention to its weaknesses and inconsistencies, would lead to better outcomes. Particularly in the areas of foreign-policy obstructionism (North Korea) and adventurism (bogus claims to sovereignty in international waters), Beijing cannot long withstand U.S. resolve and confrontation.
That means more than just taking a hard line on China’s interventionist trade policy. Washington should also demonstrate its intent not to let Beijing become a peer naval power in the western Pacific, through increased defense spending and a steady naval presence of our own, and by confronting Beijing’s disregard for maritime laws in its claims to sovereignty over international waters. The U.S. and its allies also should isolate China in its continued support of North Korea, proceeding with an aggressive missile-defense build-up for Japan and South Korea and imposing sanctions, unilateral if necessary, on North Korea and possibly even China.
Reagan’s long-term objective with the Soviet Union was to see the system collapse on itself, which it did. But the USSR was unquestionably more vulnerable and unsustainable than the PRC’s hybrid, centrally controlled market economy. U.S. policy toward the PRC should be geared not toward the collapse of the Chinese system but toward moderating Beijing’s behavior outside its borders. Doing so could make the PRC a more willing partner in managing the North Korea challenge and compel it to stand down from maritime expansionism, which is creating instability in the Pacific.
By stealing a page from the Gipper’s playbook, President Trump could significantly alter the path of this important bilateral relationship, from accommodation to cooperation. Confrontation is a necessary stop along the journey.
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— Therese Shaheen is a businesswoman and CEO of USAsia International. She was the chairman of the State Department’s American Institute in Taiwan from 2002 to 2004.
