This morning (April 25, 2018), Ian Bremmer of the Eurasia Group was the guest host for the last hour of Squawk Box on cable business channel CNBC. Mr. Bremmer is promoting his new book, Us vs. Them, The Failure of Globalism, one of many books coming out about the rise of populism and the decline of democracy around the world.
The brief ten minute session went through a host of problems facing the world in rapid-fire succession but there was one topic that caught my attention. Mr. Bremmer was asked about the potential for a trade war with China. Mr. Brenner opined that he was not very worried about a US/China trade war because these two economies are intertwined to an extent that a trade war would be devastating to both sides and was, therefor, unlikely.
Mr. Bremmer also dismissed the possibility of China dumping its holdings of US Treasury bonds because dumping the bonds on the market would cause the price of the securities to fall precipitously creating huge losses for the Chinese government.
But Mr. Bremmer went on to say that his principal concern was the potential long-term impact on the United States caused by the ongoing technology war between the US and China. He asserted that there are only two technology giants in the world, the US and China and CNBC co-host and star of Shark Tank Kevin O'Leary agreed saying that Europe had regulated itself out of technology industries and was not a factor.
Mr. Bremmer stated that US technology giants such as Google and Facebook have virtually no presence in China and that within ten years there will be no US technology companies with a significant market share in China. This is because of Chinese mercantilist policies that require US companies to divulge their trade secrets and intellectual property to their Chinese partners while Chinese government backed monopolies compete with the US companies in China and globally using their own stolen technology.
Mr. Bremmer said that China was investing billions in artificial intelligence, robotics and facial recognition that this was outstripping the “million flowers blooming” of small entrepreneurs and start-ups in the US. Mr. O’Leary opined that in the long run the competitive free market system in the US would eventually surpass China’s state directed system.
Now Mr. Bremmer and Mr. O’Leary are very smart men but I thought, “they are looking at this all wrong.” They were looking at these technological advancements as business opportunities but China looks at them as political and strategic opportunities. China isn’t developing artificial intelligence and facial recognition software to make money. They are developing these technologies to better control their population.
We have been viewing China from our Western American perspective for centuries and we have been getting it all wrong. When China was poor and backward this did not affect us much (but it affected China a lot). Now that China is the world’s second largest economy and on the way to becoming the biggest, it affects us and everyone else a lot.
With the rehabilitation of Deng Xiaoping after the death of Mao Zedong in 1976, China instituted market based reforms described as “Socialism with Chinese Characteristics”. The world welcomed these changes and thought that China could eventually integrate into the world community, even though these changes might come slowly. China adopted a mercantilist strategy to replace the autarky of Mao's old communist strategy. Exports to the United States doubled between 1987 and 1989 and doubled again by 1992 and again by 1996.
We should not be surprised that China adopted a mercantilist strategy to open trade with the rest of the world. After the American Revolution, the United States also adopted a mercantilist strategy (which, to be fair, was the strategy of all the other nations of the world at that time). Tariffs were the young nation’s principal source of revenue and were designed to favor American goods and manufactures. We even stole European (and especially British) intellectual property through spying and bribing engineers and technicians knowledgeable about British manufacturing techniques to come to America to help develop our nascent industries. Alexander Hamilton even bragged about it. The prospectus of one of Hamilton’s industrial ventures noted “means ought to be taken to procure from Europe skillful workmen and such machines and implements as cannot be had here in sufficient perfection”, even though their export was prohibited.
But eventually the United States and other western nations increased their international trade and reduced tariffs and other trade barriers, resulting in tremendous economic growth worldwide. It was initially believed that poor, backward China would need some latitude in their early efforts to develop its manufacturing base and, because it was so very poor, it had to export because only foreigners had the money to purchase their manufactures.
Now China has become strong and powerful but it still continues to employ the mercantilist practices that helped it to get started. China joined the World Trade Organization in 2001 but does not comply with its rules or believe in its philosophy. It continues to maintain tariff barriers, require investors to take on local partners, subsidize numerous industries and steal intellectual property.
From our perspective it is now time for China to renounce its mercantilist ways and join the rest of the world in free and (as is so very important to President Trump) fair trade. However, from their perspective their mercantilist practices are working perfectly well. Chinese President-for-Life Xi Jinping believes that China has found an alternative to the western trade practices - one that does not involve messy and chaotic (from their perspective) western democracy or individual liberty.
The rule of law (on which our western economies and democracies are based) does not work well when someone can flout the law with impunity. A lawbreaker cannot be allowed within the edifice of trust that makes up the western post-WWII world. If China is unwilling to operate on the same basis as western nations then western nations need to defend their interest as strongly as China defends its interests.
This is not a task that the United States can accomplish on it own. China has become a strong and powerful regional hegemon with global aspirations. We need the cooperation of our western allies and trading partners in order to confront this challenge to the western system that has worked well, not only for western nations, but for the entire world.
President Trump is short-sighted to attack our trading partners and allies when we will need them in the coming struggle. Multilateral trade agreements encompass more than trade. They are strategic alliances that bind us together with our allies. We need to update and sign NAFTA. We need to reenter the Trans-Pacific Partnership (TPP) and also negotiate the Transatlantic Trade and Investment Partnership (TTIP). We need to get the WTO to enforce global trade standards and punish violators.
President Trump is correct that we can negotiate better deals in bilateral agreements but only by bullying our trade partners. He thinks in business terms, just like Messrs. Bremmer and O’Leary. But in this complex world we need to think strategically. The world is realigning and China’s autocratic approach has great appeal to other autocrats who disdain western ethics. We need to compete with China’s alternate vision on multiple fronts if we hope to preserve the peace, prosperity and security the world has enjoyed since the end of World War Two.