China: Colossus or Paper Dragon?

Is China a colossus, and will the 21st century belong to the Chinese, as many think?  Or is China a paper dragon?  Let's see.

The impressive economic growth China has experienced in the last 40 years started in 1972 with President Nixon's rapprochement meeting with Chairman Mao.

From that point, China's growth went into warp drive when President Bill Clinton signed a China Trade Bill in 2001, which gave China a permanent most favored trade status.  Also under Bill Clinton, the U.S. approved China's entry as a member into the World Trade Organization (WTO) in 2001. 

The thought behind granting China these trade privileges – and they are privileges – was that the totalitarian communist regime would mellow and move toward a more open, liberal type of democracy.  That did not prove to be the case.  As Steven Mosher, Asian expert and author of Bully of Asia: Why China's Dream is a Threat to World Order, says, instead, the U.S. "created a monster" in building up China.  To quote him: "I think allowing China into the World Trade Organization must rank as one of the greatest strategic blunders by any great power in human history."  This may be an overstatement, but not by much.

Looking at these events in retrospect, the Wall Street Journal called them a "transformational moment in the global economy – the beginning of a new era in globalization."

And indeed it was, for no sooner was the ink dry on these moves than companies began relocating factories (i.e., jobs) and capital to China.  What Bill Clinton considered the last greatest legislative victory of his presidency was in fact the beginning of the hollowing out of much of America's industrial base and an explosion in U.S. trade deficits.

That's the history.  Today, China is the second largest economy in the world behind the U.S.  Some polls show that even Americans think China is already number one.  On top of that, China is building a modern military and seems anxious to replace the U.S. as the country that sets the norms for international trade. 

As formidable as China may appear, some see it as a paper dragon.  Each step in China's rise was aided and abetted, and in some cases actually engineered, by the United States.  This happened by several means.  First, China's trade with the U.S., which was key to its growth, has been asymmetric from the start.  China got far more from the agreements than it ever gave.  Not only were the formalities skewed to China's favor, but U.S. leadership steadfastly turned a blind eye to copyright and patent infringements and blatant theft by China of American technology and trade secrets.  Bully of Asia cites our own FBI's accounting of these thefts to be worth $600 billion per year. 

It is undeniable that for their own reasons, the U.S. financial, political, and foreign affairs elite each wanted China to succeed by means fair and foul, even if it was at America's expense. 

America also contributed to China's rise in other ways.  As Peter Zeihan points out in The Accidental Superpower, the China we see on maps today is an anomaly.  Geographically and historically, China is divided into three distinct regions – the north of the militaristic Han, the central part of the traders, and the southern area of secessionists.  These parts do not naturally hold together.  The different regions want different things and access to the world on different terms. 

In addition to the wealth that came with  trade, there were other American factors that have allowed these regions to coalesce into a coherent whole.  It was America's victory in the Pacific in WWII that eliminated the main threat to China, which was Japan.  Prior to the war, Japan took whatever in wanted in China and left the hinterland scraps to the Chinese.  China gained true sovereignty only with Japan's unconditional surrender in 1945.  And it was not only the Japanese navy that historically hamstrung China, but also European ones as well.  These too were eliminated from the Pacific, directly by the Japanese in the war and indirectly by U.S. actions in Europe afterward.

As Zeihan puts it, America "crafted the best of all worlds for the Chinese.  It eliminated the only significant military and economic rivals in East Asia.  It all but banned European influence east of India.  And it provided both the strategic freedom and economic means to attempt true Chinese unification." 

But that's all water under the bridge.  What about today?  The unvarnished fact is that China is still greatly dependent on America for its economic stability and even cohesion.  In the Brenton Woods world, which America implemented, the Chinese, like others, took advantage and designed their economy to be export-driven, basically aiming at the open U.S. markets.  The result: Ten to 15 percent of China's GDP depends on exports to the U.S.  And because much of this trade is unfair, China enjoyed a continual trade surplus with America – some $275 billion in 2017 alone.  Should the U.S. decide to play hardball on trade or just merely demand that cross country-trade be fair, China's internal stability would be shaken.  And the Chinese know it.

Also, to feed its massive export machine, China has become the world's largest importer of a wide variety of basic materials like high-tech components, plastics, wood, food, etc., with oil being the most prominent.  The problem here is that China is hemmed in.  Its maritime routes run beside countries like Japan, the Philippines, Indonesia, and Singapore.  If any one of these countries should become hostile, China's shipping could be disrupted.  What prevents this from happening is not the Chinese navy, not now or in the foreseeable future.  It's the U.S. Navy and the willingness of America to keep the sea lanes open for all.

The thing is this.  America does not have to do anything directly to harm China.  All that has to happen to shake China is for the U.S. not to become isolationist, but just to 1) adopt a diminished, a more traditional, interest in the world and 2) insist on fair trade. 

Some fear that if the U.S. demanded fair trade with China and an end to its technology theft, this would start a trade war.  But as President Trump recently said, when America is constantly running trade deficits of hundreds of billions of dollars each year, a trade war is "good and easy to win."  Although the globalists and Chinese apologists will dispute that point, the president's logic is hard to refute. 

And even if for some reason the U.S. continues to accommodate China indefinitely, the Chinese still face a combination of nearly insurmountable problems, ranging from China's enormous debt to its inherent corruption and polluted environment to its unsolvable upside-down demographics.  Given all this, it is disputable that China will still exist as a recognizable entity in 30 years.

China is much more fragile than commonly believed.  It may indeed be a paper dragon.

Is China a colossus, and will the 21st century belong to the Chinese, as many think?  Or is China a paper dragon?  Let's see.

The impressive economic growth China has experienced in the last 40 years started in 1972 with President Nixon's rapprochement meeting with Chairman Mao.

From that point, China's growth went into warp drive when President Bill Clinton signed a China Trade Bill in 2001, which gave China a permanent most favored trade status.  Also under Bill Clinton, the U.S. approved China's entry as a member into the World Trade Organization (WTO) in 2001. 

The thought behind granting China these trade privileges – and they are privileges – was that the totalitarian communist regime would mellow and move toward a more open, liberal type of democracy.  That did not prove to be the case.  As Steven Mosher, Asian expert and author of Bully of Asia: Why China's Dream is a Threat to World Order, says, instead, the U.S. "created a monster" in building up China.  To quote him: "I think allowing China into the World Trade Organization must rank as one of the greatest strategic blunders by any great power in human history."  This may be an overstatement, but not by much.

Looking at these events in retrospect, the Wall Street Journal called them a "transformational moment in the global economy – the beginning of a new era in globalization."

And indeed it was, for no sooner was the ink dry on these moves than companies began relocating factories (i.e., jobs) and capital to China.  What Bill Clinton considered the last greatest legislative victory of his presidency was in fact the beginning of the hollowing out of much of America's industrial base and an explosion in U.S. trade deficits.

That's the history.  Today, China is the second largest economy in the world behind the U.S.  Some polls show that even Americans think China is already number one.  On top of that, China is building a modern military and seems anxious to replace the U.S. as the country that sets the norms for international trade. 

As formidable as China may appear, some see it as a paper dragon.  Each step in China's rise was aided and abetted, and in some cases actually engineered, by the United States.  This happened by several means.  First, China's trade with the U.S., which was key to its growth, has been asymmetric from the start.  China got far more from the agreements than it ever gave.  Not only were the formalities skewed to China's favor, but U.S. leadership steadfastly turned a blind eye to copyright and patent infringements and blatant theft by China of American technology and trade secrets.  Bully of Asia cites our own FBI's accounting of these thefts to be worth $600 billion per year. 

It is undeniable that for their own reasons, the U.S. financial, political, and foreign affairs elite each wanted China to succeed by means fair and foul, even if it was at America's expense. 

America also contributed to China's rise in other ways.  As Peter Zeihan points out in The Accidental Superpower, the China we see on maps today is an anomaly.  Geographically and historically, China is divided into three distinct regions – the north of the militaristic Han, the central part of the traders, and the southern area of secessionists.  These parts do not naturally hold together.  The different regions want different things and access to the world on different terms. 

In addition to the wealth that came with  trade, there were other American factors that have allowed these regions to coalesce into a coherent whole.  It was America's victory in the Pacific in WWII that eliminated the main threat to China, which was Japan.  Prior to the war, Japan took whatever in wanted in China and left the hinterland scraps to the Chinese.  China gained true sovereignty only with Japan's unconditional surrender in 1945.  And it was not only the Japanese navy that historically hamstrung China, but also European ones as well.  These too were eliminated from the Pacific, directly by the Japanese in the war and indirectly by U.S. actions in Europe afterward.

As Zeihan puts it, America "crafted the best of all worlds for the Chinese.  It eliminated the only significant military and economic rivals in East Asia.  It all but banned European influence east of India.  And it provided both the strategic freedom and economic means to attempt true Chinese unification." 

But that's all water under the bridge.  What about today?  The unvarnished fact is that China is still greatly dependent on America for its economic stability and even cohesion.  In the Brenton Woods world, which America implemented, the Chinese, like others, took advantage and designed their economy to be export-driven, basically aiming at the open U.S. markets.  The result: Ten to 15 percent of China's GDP depends on exports to the U.S.  And because much of this trade is unfair, China enjoyed a continual trade surplus with America – some $275 billion in 2017 alone.  Should the U.S. decide to play hardball on trade or just merely demand that cross country-trade be fair, China's internal stability would be shaken.  And the Chinese know it.

Also, to feed its massive export machine, China has become the world's largest importer of a wide variety of basic materials like high-tech components, plastics, wood, food, etc., with oil being the most prominent.  The problem here is that China is hemmed in.  Its maritime routes run beside countries like Japan, the Philippines, Indonesia, and Singapore.  If any one of these countries should become hostile, China's shipping could be disrupted.  What prevents this from happening is not the Chinese navy, not now or in the foreseeable future.  It's the U.S. Navy and the willingness of America to keep the sea lanes open for all.

The thing is this.  America does not have to do anything directly to harm China.  All that has to happen to shake China is for the U.S. not to become isolationist, but just to 1) adopt a diminished, a more traditional, interest in the world and 2) insist on fair trade. 

Some fear that if the U.S. demanded fair trade with China and an end to its technology theft, this would start a trade war.  But as President Trump recently said, when America is constantly running trade deficits of hundreds of billions of dollars each year, a trade war is "good and easy to win."  Although the globalists and Chinese apologists will dispute that point, the president's logic is hard to refute. 

And even if for some reason the U.S. continues to accommodate China indefinitely, the Chinese still face a combination of nearly insurmountable problems, ranging from China's enormous debt to its inherent corruption and polluted environment to its unsolvable upside-down demographics.  Given all this, it is disputable that China will still exist as a recognizable entity in 30 years.

China is much more fragile than commonly believed.  It may indeed be a paper dragon.