Henry Kissinger released a book recently and correctly stated that the U.S. can’t seem to do strategy anymore. He was speaking in geopolitical terms.
China understands strategy. And they understand leveraging what they have to get a very big result.
In this long piece below, Patrick Mulloy writes about China’s economic rise in terms of leveraging and strategy. Mulloy served five two-year terms on the U.S.-China Economic and Security Review Commission. He is also a CPA Advisory Board member. This piece is a chapter in a book by David M. Anderson called “Leveraging: A Political, Economic and Societal Framework.”
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China Leveraged the West to Grow Its Economy
And Its’ Comprehensive National Power
By Patrick A. Mulloy, Former Commissioner
U.S.-China Economic and Security Review Commission
Introduction
China, once the dominant power in Asia and the wealthiest society on earth, fell rapidly from that perch to suffer partial dismemberment and what its leaders refer to as the “century of humiliation”, lasting from the end of the first Opium War in1843 to 1949 when the Communist Party united China under one government. Even a united China, however, failed to arrest its economic decline and rebuild itself through a centrally planned economy based on the principle of autarky. It ultimately put itself on a path to success when in 1978 it adopted a strategy combining bargaining, resource, and economic investment leverage to get the more dominant Western nations and their corporations and investment banks to help rebuild China. Now 35 years after first employing such leverage China is re-emerging as the dominant power in Asia and a major force in the global economy. China’s national grand strategy to recover its wealth and power placed the primary importance on rebuilding its economy, as its leaders understood that a nation’s strength is primarily based on its productive capacity.
To illuminate this complex matter, it is necessary to examine historical events of the past two centuries. As the former Supreme Court Justice Oliver Wendell Holmes remarked in the 1921 case New York Trust v. Eisner, “a page of history is often worth a volume of logic”. That quotation certainly applies to China’s drive over the past 35 years to rebuild its economy in order to shore up its “comprehensive national power.” The Chinese use this term to describe “the sum of the total coercive, economic and ideational power of a nation” (Lampton, p. 21). It is, however, difficult to fully comprehend the energy and vision that has driven China’s rise since 1978 without understanding a key part of China’s long history.
China’s Decline
China was for thousands of years the dominant power and civilization in Asia as well as the world’s wealthiest society. The Chinese considered their Emperor the supreme political authority and themselves the geopolitical center of the world. China’s last dynasty, the Qing dynasty (1644-1911) at its high point around 1760, was cultured and wealthy, held sway over a vast territory, and received tributes from neighboring states. Henry Kissinger has noted that: “As late as 1820 China produced over 30% of the world’s GDP, an amount exceeding the GDP of Western Europe, Eastern Europe and the United States combined” (p.12.)
When the Western powers, whose military and economic strength was being fueled by industrialization and scientific advances, arrived in Asia in the 17th and 18th centuries, they sought to trade with the prosperous Chinese Empire. The Chinese viewed the new arrivals as barbarians who offered little that China needed. The British, however, found they could trade opium grown in India to the Chinese for the tea, silk and porcelains the British wanted. The Chinese imperial authorities, disturbed by the harmful economic and social consequences of opium addiction, tried to shut off the opium imports. (Westad, p.40). The British launched the first Opium War (1839-1843) in the name of free trade, and the Chinese were shocked to discover their opponent’s superior military technologies and capabilities. Over the next thirty five years after a series of other conflicts between China and Western powers, China’s industries and wealth were partially destroyed and “ its population declined from roughly 410 million in 1850 to roughly 350 million in 1873.” (Kissinger, p.65).
Steve Mosher notes that “from a pinnacle of greatness, China was brought low by the Western Powers, divided into spheres of influence, and very nearly carved up into colonies” (p. 5). Moreover, it was not only the Western Powers taking advantage of a declining China. Japan, after winning a war with China in 1894, took over Korea and Taiwan from China. The Chinese Empire and its once wealthy and proud people were humiliated. In the foreign enclave of Shanghai, one of China’s great cities, signs posted purportedly read, “No Dogs or Chinese Allowed.”
The United States opposed dividing China up into colonies or spheres of influence and instead pushed for an “Open Door” policy in which all parts of China would be open to all foreign companies (White, p.15). Despite such support China continued its decline and in 1911 the Qing Dynasty Emperor fell. China then experienced a further disastrous period of political turmoil, famine, and foreign control of major sections of key cities. In the 1930’s Japan invaded and occupied large swaths of China, followed by an intensified civil war between the Communist and Nationalist Chinese. (Mitter, p.366).
China’s Effort to Rebuild Itself
During its decline, China struggled to find a way to restore its great power status and former standard of living. Noted China scholar David Lampton writes that the universal goal “in China for the last 150 years, since the Qing Dynasty went into decline, was to make China rich and powerful and to regain the nation’s former status as a great power that controls its own fate” (p. 25.) To help defeat the Japanese invasion, which began in earnest in 1937, both the Communist and Nationalist forces combined efforts with the Western Allies and forced Japan’s surrender in August1945.(Mitter, p.362).
The civil war in China then renewed and intensified and the Communist Party, led by Mao Tse Tung, eventually triumphed over the Nationalists led by Chiang Kai-Shek who fled to Taiwan in 1949. On October 1, 1949, at the Gate of Heavenly Peace in Tiananmen Square, Mao announced the founding of the People’s Republic of China (PRC) and proclaimed:
The Chinese have always been a great, courageous and
industrious nation. It is only in modern times they have
have fallen behind. Our nation will no longer be a nation
subject to insult and humiliation. We have stood up (Mosher, p.35).
In short order, Mao drove foreign influences, including foreign companies and missionaries, out of China. The trauma suffered by China during its “century of humiliation” still drives China’s policies. China’s President Hu Jintao in an October 1, 2009 speech marking the 60th anniversary of the founding of the PRC stated:
Sixty years ago, Chairman Mao solemnly proclaimed to
the world the establishment of the People’s Republic of
China, and stated that the Chinese had stood up. The
Chinese nation, with some 5000 years of civilization and
history, thus entered a new historic era of development
and progress.
From 1949 to his death in 1976, Mao and his Communist Party-controlled government attempted, without success, to restore China’s great power status by rebuilding its economy through a domestic-based and centrally planned autarkic economy. The government also threatened to use force to drive the Nationalist Chinese from power in Taiwan. Both of these attempts ultimately ended in failure. The Communist government failed to regain Taiwan, and the Great Leap Forward (1958-1962) and Great Cultural Revolution (1966-1976) instituted by the Communist Party under Mao have been judged as economic and political failures. At the time of Mao’s death in September 1976 the country was still mired in poverty. Its total population of 900 million produced a GDP of only $200 billion (Haas, p. 31).
Mao, according to most observers, should be credited with uniting China and giving the nation its modern identity. Yet his failed economic policies such as the Great Leap Forward in the 1950’s, and his record of purges and incitement of political turmoil such as those that took place during the Cultural Revolution that began in 1966 and lasted until 1976, have led to his very mixed reputation even in China.( Westad,p.363).
Deng Xiaoping: The Master of Leverage
- Engaging The United States With Bargaining Leverage
In the struggle for power after Mao’s death, Deng Xiaoping – one of Mao’s lieutenants who was twice removed from power by Mao because of his pro-market, revisionist economic views – emerged as China’s new ruler. Deng wanted to find ways for China to rebuild its economic power in order to shore up its military strength and political power, and thus restore the nation’s “comprehensive national power”. His favorite slogan, which Mao hated, was “white cat, black cat, catch mouse, good cat”, meaning that whatever economic policies worked to build China’s economy, as long as they did not threaten the rule of the Communist Party, were good policies (Vogel, p. 164.)
Deng knew that he needed to normalize political relations with the United States in order to get access to the capital, direct investment, know-how, and markets that China needed to modernize its economy. He also wanted to send China’s young students to U.S. universities to learn science and engineering skills. Deng’s shift away from an industrial command economy and collective farms for agricultural production is well known, but what has not been fully appreciated is how he relied on a range of leveraging strategies to entice foreign nations and companies to help China achieve its economic transformation. (Westad, p.373).
Deng used bargaining leverage with great dexterity to start the process of economic transformation by improving political relations with the United States. From 1949 to 1972, the U.S. government refused to engage with the Communist government in China and continued to recognize the Nationalist Government in Taiwan as the legitimate government of all of China. That began to change in 1972 when President Nixon went to Beijing to improve relations with China because of a growing concern about the Soviet Union’s strength; but efforts to improve relations got bogged down due to political turmoil in both the U.S. and China. Deng knew when he took power in 1978 that the U.S. feared the Soviet Union – with its new naval presence in now Communist Viet Nam and its then recent invasion of Afghanistan – much more than it feared China. In fact, the Carter Administration then in power and its national security adviser Zbigniew Brezinski wanted to wean Communist China away from the Communist Soviet Union and make it a partner in containing Soviet power in Asia. (Westad, p.374).
Deng understood this dynamic and used it as bargaining leverage to move forward the process of normalizing political and economic relations with the United States on terms favorable to China. By 1979 he obtained formal recognition from the United States that his Communist Party was the legitimate government of China and also obtained MFN (Most Favored Nation) trade status from the U.S., meaning that China got the benefit of the lowest tariffs given to any other U.S. trading partners on items it desired to export to the United States. This granting of MFN meant China could more easily export its production to the United States. The hardline anti-communist Reagan Administration (1981-1989) continued to give China MFN trade treatment and treated China as a de facto ally in containing the Soviet Union “giving it access to technology that was unavailable to others outside the United States.” (Westad, p.374). Deng’s plan was to make China into one of the world’s “top military powers within twenty years.” (Westad, p.375).
- MFN Trade Status: Leveraging Resources To Grow The Economy
American political recognition and the granting of MFN trade status gave China what it needed, namely, “an opening to the non-communist world which alone could provide the capital, technology and markets that China needed to break out of its cul-de-sac of Marxist economics and start to grow” (White, p.20). Prior to 1979 and the normalization of political relations and the granting of MFN tariff treatment by the U.S., Chinese goods coming to the U.S. would have faced an average tariff of over 40%. Once China got MFN trade treatment in 1979, that average tariff was reduced to around 4%. (Mosher, p.121). China, under Deng’s leadership, then used various subsidies and strategies including tax forgiveness, free land, cheap labor, and lax environmental laws to encourage American and other foreign companies to make greater profits by moving production to China and exporting back to the U.S and other markets outside of China.
Foreign companies were also leveraged to transfer know-how to China. Adam Segal argues that “Beijing brokered joint venture agreements with the explicit understanding that the Western partners would transfer know how to its Chinese counterparts” (p. 86). This economic strategy is really a leveraging strategy, what Anderson has called “resource leveraging”. Deng Xiaoping noted that China would “grope for stones while crossing the river” (Vogel, p.391), meaning essentially that the Chinese would improve and increase their resource leveraging capabilities as they gained greater experience. The Chinese have done exactly that through the utilization of additional types of subsidies, including underpricing their currency in order to give Chinese-produced goods a further export subsidy, and adopting a value-added tax policy that rebates the tax on Chinese-produced goods meant for export. China has also developed other policies to encourage U.S and other multinational companies to transfer high technology and R&D (research and development) to China.
In 1980 the U.S. trade deficit with China was $500 million; in 2012 it reached a staggering $315 billion. In 1980 China’s GDP was $400 billion; three decades later, after growing its economy at more than ten per cent a year, its annual GDP is $7 trillion (Haas, p. 23). The following sections explain how many of Deng’s market based reforms can be better understood as the work of “a master of leveraging”, further bolstered by changes that the system of capitalism was undergoing in the United States.
- Entry into the WTO: Investment Leverage
Before China joined the WTO it remained subject to the Jackson-Vanik provision of U.S. trade law that denied MFN trade status to non-market economies. The President could waive that provision with respect to a particular country on a one-year basis but any such waiver could be overridden by a joint resolution of the Congress. Starting in 1979 with President Carter and continuing under Presidents Reagan, Bush and Clinton, U.S. Presidents regularly waived this provision with respect to China and each year China received MFN trade treatment. After the Chinese government crushed the nascent democracy movement in the 1989 Tiananmen Square massacre, the annual Presidential waivers to continue giving MFN to China became hotly debated in Congress. While no waiver was overridden the ongoing controversy resulted in a greater reluctance by U.S and other foreign companies to transfer production to China to export back to the U.S. They could not be sure the grant of MFN trade treatment would be renewed and thus investment flows into China declined.
In 1992 Deng stepped aside as the ruler of China but arranged to have a key lieutenant, Jiang Zemin, elevated to head the Communist Party and thus the Government of the People’s Republic. He and Deng shared the view that China’s political stability would be enhanced by continued economic growth driven by continued market reforms and an export-led growth strategy. Deng also advised his successors “to hide our light and nurture our strength” (Nathan & Scobell, p. 45). Most experts believe by this phrase Deng was telling his successors to conceal China’s growing power and to not engage in foreign policy adventurism that might hinder a single minded focus on growing China’s economy to form the basis of China’s long term rise.
It was Jiang Zemin who started negotiations to get China into the GATT, which became the WTO (World Trade Organization) in 1995. To circumvent the contentious debate in Congress each year over whether to grant China MFN status, China desired to join the WTO in order to ensure permanent MFN trade treatment from the U.S. China’s proposed entry into the WTO meant that Congress would have to repeal the Jackson-Vanik provisions with regard to China; in 2000, it did so at the urging of U.S. business interests and the Clinton Administration. These proponents of giving Permanent MFN to China argued that it would help Chinese officials lock in market reforms and shrink our then large trade deficit with China. The Congress was told by the Clinton Administration and U.S. multinational companies that China’s WTO entry would create jobs in the United States while our companies increased exports to China’s growing economy (Lighthizer, pp. 1-4).
China, in contrast, was not focused on market reforms that would increase foreign access to its market, but rather pursued WTO membership in order to further its rapid economic growth by attracting more foreign investment and technology transfers from U.S. and other multinational corporations (China Commission, 2002 Report to Congress, p. 59). With its continued focus on the vigorous leveraging strategy initiated by Deng, China’s Government believed if the U.S. market was locked open by a grant of permanent MFN to China, it would increase foreign investment and the production of more exports from China to the U.S. by foreign companies. That quickly began to happen. China also wanted to nullify the ability of the U.S. to use Section 301 of its trade law to unilaterally sanction China for unfair trade practices such as currency manipulation and the theft of intellectual property. Under WTO procedures such sanctioning could only be done after first winning a case in the WTO dispute settlement process (Lighthizer, p.23). This took away bargaining leverage from the U.S. to ensure China did not engage in such unfair trade practices. In December 2001 China completed negotiations with the U.S. Administration of George W. Bush and other WTO members and joined the WTO. This was the crowning achievement of President Jiang Zemin and his Premier Zhu Rongji.
Foreign investment now poured into China as U.S. and other foreign companies moved more of their manufacturing capabilities there. The U.S. annual trade deficit with China grew from $80 billion in 2000 to $315 billion in 2012. Although China pledged in its WTO entry commitments not to force U.S. companies to transfer technology for market access, China is now using its market to leverage technology out of foreign firms on the basis that they are doing so voluntarily and not because of force by the Chinese. The companies are making decisions to transfer sophisticated technologies and even R&D activities to China. They do this so the Chinese will consider them “friends of China” who will be rewarded with more favorable treatment by the Chinese government. Such resource leveraging intertwined with bargaining leverage helps companies earn higher profits at least in the short term. Adam Segal pointedly asks:
What does it mean if American companies remain leaders (profitable) by moving research and development abroad? Are we witnessing a divergence between what is good for CISCO (or Microsoft, Intel, G.E. or any other large American technology company) and what is good for the United States? (p. 193).
Changes in U.S. corporate government practices over the last 25 years have increased companies’ focus on short term profits, as we have moved from a stakeholder to shareholder basis of capitalism. The Chinese have benefited from this change. Under the previous stakeholder based capitalism, which governed U.S. corporations from WWII until around 1985, CEO’s were charged with creating value for shareholders, lenders, employees, communities, and so on (D’Aveni, p. 156). For example, the Business Roundtable, a forum that represented CEO’s, stated in 1981 that “‘the long term viability of the corporation depends upon its responsibility to the society of which it is a part” (Yang, p.1). That view changed in the 1980’s spurred on by Milton Friedman and others affiliated with the “Chicago school” of free market economists who argued the “only social responsibility of business is to increase its profits” (Yang, p.2). This movement exerted serious impact on corporate behavior when CEOs’ compensation began to be tied to their ability to increase shareholder value and the compensation of CEO’s “soared to previously unheard of heights.” (Gomory and Sylla, pp.108 and 109.)
Richard D’Aveni of the Tuck School of Business at Dartmouth College writes: “From the perspective of the nation it makes no sense to have a capitalist system that maximizes stockholder wealth by transferring capital to foreign markets… while leaving the vast majority of the nation’s people without good jobs…” (p.xvi). But this is what China is providing incentives for U.S companies to do and the CEO’s of U.S. companies focused on short term shareholder value and their own increased compensation are doing it. This is not because the CEO’s are evil men. It is a systemic problem that the Chinese are taking advantage of. D’Aveni contends that if corporate executives want to keep their positions many have to export American jobs to China and “share product and process secrets and mentor joint venture partners… just to make money for their shareholders” (p.155). Our own government can help resolve this systemic problem and reduce the leverage China is using to benefit its economy at the expense of the vast bulk of our citizens.
Ken Lieberthal, formerly on the U.S. National Security Council staff under President Clinton wrote the following about this complex resource and bargaining leveraging process: “China is also focusing on upgrading its technical capabilities and on leveraging technology out of Western firms in exchange for access to Chinese markets” (Lieberthal, p. xiv.) This leveraging policy by China enhances the growth of China’s high tech economy and its military capabilities and is one illustration of the divergence that now exists between the interests of U.S. multinational corporations and the national interest. Jeff Bader, who was President Obama’s National Security Council (NSC) staffer responsible for China policy noted in his 2013 book that China “forced foreign investors to transfer technology thereby reducing or eliminating their competitive advantage.” (p.112.)
Enticing investors in the name of increasing short term corporate profits is not the only way China leverages tech transfer. President Obama’s first Ambassador to China Jon Huntsman notes in a recent Report he co-authored about China’s theft on intellectual property rights, in violation of their WTO obligations, that: “ National industrial policy goals in China encourage IP theft and an extraordinary number of Chinese in business and government are engaged in this practice” (IPR Report, p. 3.)
Lieberthal also notes how the Chinese government acts to deter our own Congress from attempting to correct some of the trade illegal measures, such as currency underpricing, that the Chinese government uses to make manufacturing and exporting from China more profitable for the foreign firms that produce almost sixty per cent of China’s exports. When Congress debates what the Chinese government considers trade distorting legislation, he states, it is not unusual for the Chinese government “to pressure multinational companies to weigh in with Congress to prevent the legislation from passing” (Liberthal, p. 89). American companies give into such pressures because the Chinese leverage them to do so in and it helps to ensure higher profits, at least in the short run, for their shareholders and top managers.
- Rebalancing Its Economy And The “Three Represents” Policy
The Chinese have fostered a belief that they have a market based economy with free enterprise. This is not the case. “It is the Party and not the market that runs China and its capital-allocation system” (Walter and Howie, p.78). The Party runs the government.
One way the Chinese government has been able to subsidize its industries is
through low cost bank loans made possible by low rates of return to Chinese savers. If the government does seek to replace export demand with domestic consumption (as has been a stated goal in their last two five year plans), the domestic savings rate will decline and China’s government will have less ability to subsidize its favored companies most of which are state owned and Party controlled. These companies are resisting a movement away from an export led growth strategy. The U.S.-China Economic and Security Review Commission in its 2013 Report to the Congress noted that “China has had little success in transitioning toward a consumption led growth model … and.. it continues to manipulate the value of its currency … to foster a trade surplus with the United States” (China Commission 2013 Report p. 7.) That surplus in 2012 was $315 billion and will be higher in 2013.
Many members of China’s ruling elite have made a vast amount of personal wealth from the export led growth strategies of the last 15 years. President Jiang Zemin welcomed these new wealthy Chinese into the Communist Party in 2002 by amending the Party Charter to allow entrepreneurs and capitalists into the originally proletarian based Party, thus embracing the richer and more successful classes emerging from a market economy (McGregor, pp 30-31). This was the so-called “Three Represents” Amendment to the Chinese Communist Party’s Constitution. Schell and Delury believe that adopting such an amendment represents “a shift that is little short of mind boggling for a revolutionary party that had come to power with the support of the dispossessed” (Schell and Delury, p. 348). The powerful interests that have profited from an export led growth strategy have thus acquired an increasing portion of the new wealth being created and have an enormous influence in the Party and over the government. Odd Westad notes in his 2102 book on China entitled Restless Empire (winner of the Bancroft Prize) that: “While the early Communists had dreamed of a China that was modern and strong and socially just…China today is one of the most socially stratified societies on earth. While more than a third of the population … live on slightly more than $2 income per day. China has 128 billionaires and half a million millionaires. …Party leaders defend themselves by quoting Deng’s maxim that some people have to get rich first.” (Westad, p.389). Inequality in Communist China is now “at least twice as high as in the U.S and Britain with higher ratios to relatively equal societies such as France and Germany.” (Westad, p. 448.)
Another factor that stymies economic reforms in China is that the provinces have historically maintained some independence from the Beijing government. As a consequence, even the central government’s adoption of new policies does not mean that the policies are implemented by the various provinces. There is an old Chinese saying ‘that the sky is high and the emperor is far away.” The difficulties for the central government implied by that saying give an insight into another key reason why China is finding it so difficult to rebalance its economy and move away from its export led growth strategy. Many provinces have their own economic plans that do not necessarily mesh with the policies pushed by the central government.
It should be noted as well that despite the rhetoric about China having a private sector owned market economy, the fact is that state-owned enterprises produce forty percent of China’s GDP and the Government has enormous influence over another set of companies that produce an additional ten percent (D’Aveni, p. 60). This is why so many commentators refer to China as an example of “state capitalism”.
Leverage at the Center of China’s Relationship with the United States
The national strategy that China has adopted and followed since Deng’s ambitious leveraging strategy begun in the late 1970’s has enabled the Chinese to grow their economy at more than a ten per cent annual rate for over thirty years. That unprecedented economic growth underpins the domestic rise of China’s military power and global political and financial influence. By using a combination of bargaining and resource and investment leverage, China has succeeded in reversing its economic decline, has begun to regain its role as the dominant power in Asia, and now aspires to be a world super power. This has caused a relative decline in the power of both the U.S. and the European Union. China has, in short, reversed the table on the Western powers whose own economic gains at one time fueled China’s decline and inflicted upon it a “century of humiliation”.
The many constructive ways that leveraging has been used by China to grow its economy and enrich a portion of its populace has also caused major problems in the U.S. economy. These problems include the Chinese theft of intellectual property that harms innovation here and the outsourcing of production by U.S. manufacturers to China that also hurts America’s ability to innovate and even make items essential to our defense capabilities. The outsourcing of production also increases our unemployment and contributes to our trade deficit and exploding international debt problem which will lead to increasing ownership of the U.S. economy by Chinese communist party state-controlled enterprises. This is a particular problem because the close cooperation between the Chinese government and its businesses “mean it is easy for China to apply commercial leverage for diplomatic ends” (White, p. 42).
China has run over $3.5 trillion in trade surpluses with the United States since 1979 as our companies’ outsourced domestic production to China and we have had to import more and more of the types of manufactured goods we once made. As a partial result of its massive trade surpluses with the United States, the Chinese government now has almost $3.7 trillion in foreign currency reserves, most of which are in dollars. The Chinese Government controls outward investment by Chinese companies whether or not state owned. It has instituted a “go out” strategy “targeting ‘strategic industries’ such as energy resources, metals, advanced technology and ‘famous brands’.” (Congressional-Executive Committee on China, p.7.) These types of investments also give the Chinese Government new resource leverage by which to pursue political goals in the societies in which such investments are made. Some contend that the Chinese use many of the dollars gained by running trade surpluses with the United States to buy its treasury bonds and thus make it easier for us to finance our budget deficits by having lower interest rates. (D’Aveni, p. 15). Of course the interest payments on such bonds flow out of the United States increasing its debtor nation status. Some experts contend that a concern over the need for China to buy our treasury bonds makes the Treasury Department a voice in the U.S. interagency trade process that speaks against proposed actions to sanction China for its currency manipulation and other unfair trade practices. In regards to the Obama Administration’s much discussed Asian Pivot, more than one observer has noted that we are borrowing money from the Chinese to defend Asia from the potential threat to our interests posed by a rising China that we continue to help rise. (D’Aveni, p.112).
Even as China is ascending again to be a great economic and military power, it faces many domestic challenges including an increasing concentration of wealth which was discussed above, endemic corruption, dire air and water pollution, and an aging population. Many of these circumstances result from excessive leveraging designed to increase economic growth. The leaders of China profess to want to address these challenges by shifting from an export led growth strategy to a strategy that emphasizes increased domestic demand and a cleaner environment. The Chinese would appear to be seeking, in the language of the leverage taxonomy of this book, the “leverage mean.”
Whether they will be able to do so when they have so many vested interests tied to the current policies is a key question in U.S./China relations going forward. Certainly the U.S. Government and its allies and international organizations will be pushing China toward being a partner in resolving many of the current issues facing the international community such as global warming, international terrorism and global economic imbalances. The Chinese and the West may find a “leverage mean” whereby we rebalance our economic relationship and make it possible to work together to resolve other global problems. Our own government does not need China to help change the behavior of U.S. corporations to better serve our national interests over those of China; a change in our corporate governance and tax policies can help to do this by changing the present economic incentives presently driving corporate behavior. Doing so will help both countries move toward what Anderson calls the “leverage mean.”
Human Rights and China’s Economic Growth
A final matter that we must examine in looking at China’s rise is whether we have inadvertently helped strengthen a one party dictatorship. Those in the U.S. government who strongly advocated economic engagement with China argued such engagement would strengthen the rule of law and human rights in China (Lighthizer, p. 5). This has not happened to the degree that was hoped. In fact the U.S. Congressional Executive Committee on China unanimously notes in its 2013 Report that “China continues to pursue economic modernization without political reform or guarantees to fundamental human rights.” (p.1). Mr. Liu Xiaboa, who while imprisoned in China was awarded the 2010 Nobel Prize for Peace, represents many in China who feel their country can regain a sense of national pride by governing itself justly and treating its own people with dignity and respect. They want China to move toward a two party system, free speech and democracy.
The Communist Party, on the other hand, thinks its undisputed leadership is essential to enable China to continue to grow its wealth and power. The vast majority of Chinese seem to agree, but their support of the Party is contingent on it being able to increase the nation’s wealth, power, and standing in the world. Deng Xiaoping, who mastered leverage brilliantly in order to transform the Chinese economy, nonetheless crushed efforts by some who wanted democratic reform to accompany economic reform by imprisoning those advocating such policies. He justified this by saying that he needed “to scare the monkeys by killing a chicken”. In 1989 Deng crushed a student led democracy movement at Tiananmen Square since he believed democracy would interfere with the efforts of the Party to rebuild a powerful China.
It has been easier for China to pursue its leverage strategies through one party authoritarian rule. Yet whether China can solve the new economic problems it faces without major political reform in the direction of increased democracy, is the paramount question facing China as well as the international community. This is really a test of whether a Communist Party led state capitalism for 1.3 billion people is a stable long term alternative to mixed-economy democratic capitalism in the West. Having leveraged the West in order to move itself away from Maoist state communism, history will show whether state capitalism can peacefully and productively co-exist with Western mixed-economy democratic capitalism. As things stand today, though, the leverage mean of a more balanced global economy and international cooperation has not been attained from the perspectives of either China or the world community. Finding the leverage mean will require changes in policy both in China and the United States, as the present policies in both countries are feeding China’s economic and technological growth along with its political and military power at the expense of America’s own geopolitical standing and the future standard of living of the vast number of our citizens.
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