This will be the tenth year that I have taught a course at Yale called “The Next China.”
The course focuses on modern China’s daunting economic transitions. It frames the moving target that eludes US President Donald Trump’s administration, which is taking dead aim at the Old China (a convenient target for a leader who wants to resurrect Old America). The incoherence of Trump’s trade and economic policies, with all their potentially grave consequences for the global economy, is a destabilizing byproduct of this disconnect.
My course starts with the urgency of the challenges addressed by Deng Xiaoping in the late 1970s. But its main focus is how the resulting Chinese growth miracle presents President Xi Jinping with four transitional imperatives: the shift from export- and investment-led growth to an economy driven increasingly by domestic private consumption; the shift from manufacturing to services; the shift from surplus saving to saving absorption in order to fund the social safety net desperately needed by China’s rapidly aging middle class; and the shift from imported to indigenous innovation, which ultimately will be decisive for China’s goal of being a “moderately well-off society” by the middle of this century.
The confluence of these four transitional challenges would be daunting for any country. That is especially true for China, with its blended political economy – the so-called socialist market system, with an ever-changing balance of power between the Communist Party and a vibrant private sector. It is a very tricky balancing act, to be sure.
I date the pivotal point on the path from Old China to the Next China to early 2007, when then-Premier Wen Jiabao correctly diagnosed the high-flying Chinese economy of the time as increasingly “unstable, unbalanced, uncoordinated, and unsustainable.” The Four Uns, as they famously came to be known, sparked a vigorous internal debate in China that led to major rethinking of the Chinese economic-growth model and a series of new strategic plans and reforms – the 12th and 13th Five-Year Plans (of 2011-15 and 2016-20, respectively) and the so-called Third Plenum Reforms (of late 2013).
Notwithstanding all the criticism of China in the West (to say nothing of the bipartisan political angst now boiling over in Washington, DC), progress on the road to the Next China actually has been quite extraordinary over the past dozen years. The middle-class Chinese consumer has come to life, and the services sector has emerged as an increasingly powerful growth engine. China’s outsize current-account surplus has all but vanished, a trend that is crucial to the saving absorption that its domestic economy requires. And the signs of indigenous innovation are everywhere, from e-commerce and fintech to artificial intelligence and breakthroughs in the life sciences.
True, like all sagas of economic development, China’s progress since 2007 has been uneven at times, and new challenges have emerged along the way. Wen’s Four Uns provide a useful way to frame the pitfalls that still lurk. Instability remains an ever-present threat, underscored by China’s voracious appetite for debt, which has sparked an aggressive deleveraging campaign aimed at avoiding the dreaded Japan syndrome. Imbalances persist, underscored by private consumption’s sub-40% share of Chinese GDP – a shortfall that can be addressed only by a more robust social-safety net (especially pensions and healthcare). Persistent regional disparities, in conjunction with mounting income inequality, are visible manifestations of a lack of coordination. And, of course, despite recent progress in dealing with air pollution, environmental degradation remains central to China’s challenging sustainability agenda.
But the trade conflict with the United States is a new and important sustainability challenge for China. Despite years of denial, there can no longer be any doubt that the US is pursuing a containment strategy vis-à-vis China. From an ever-escalating tariff war and the weaponisation of trade policy by blacklisting leading Chinese technology companies, to Trump’s “order” to US companies to cease doing business with China and Vice President Mike Pence’s declaration of a new Cold War, the US political establishment has swung dramatically from viewing China as an opportunity to regarding it as an existential threat. And public sentiment has followed suit. A recent survey by the Pew Research Center found that fully 60% of Americans had an unfavorable view toward China — up 13 percentage points from 2018 and the most negative assessment of China since the Pew survey’s inception in 2005.
Forget about whether this about-face is justified. I am less concerned than most about the so-called China threat, but I understand the fear and anxiety that grips the doubters. The real problem is less the merits of the allegations than the deep inconsistencies of Trump’s policies to address them.
An anger-driven US president doesn’t seem to grasp that bilateral trade implies the possibility of prompt retaliation when one side imposes tariffs on the other. Nor does his administration show any understanding of the linkages between ever-expanding budget deficits, subpar domestic saving, and multilateral trade imbalances. On the contrary, it has embraced a China-centric bilateral fix for a multilateral problem just when America’s own lack of fiscal discipline virtually assures a widening trade deficit with the world at large.
And rather than view Huawei as a legitimate competitor in 5G telecommunications, Trump wants to put a chokehold on China’s leading tech company. Never mind the resulting value-chain disruptions, which would do great damage to US suppliers, or that targeting Huawei does nothing to address America’s own glaring lack of 5G capability.
Reminiscent of Don Quixote, Trump is tilting at windmills. His administration is flailing at antiquated perceptions of the Old China that only compound the problems it claims to be addressing. Financial markets are starting to get a sense that something is awry. So, too, is the Federal Reserve. Meanwhile, the global economy is fraying at the edges. The US has never been an oasis in such treacherous periods. I doubt if this time is any different.
Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2019, published here with permission.
33 Comments
Hell , I knew Trump's administration was going to be everything from a comedy show to about a million editorial views castigating him , but he is doing exactly what he told his voters he was going to do:-
Put American interests first
Ensure the economic slide was halted ( and you may disagree but he has almost full employment )
Put a stop to CHINA stealing almost everything from the West , cheating , manipulating and generally behaving badly in world trade
Try to stop the American opioid epidemic form worsening by cutting it off at the source ( the Mexican Border )
Level the playing field in its trade with Europe which concessions Europe were given after WW2 to help it rebuild
Get everyone to pay their share for NATO
Sort out Iran and its breaking the Nuclear Agreement
Does the USA actually need the rest of the world as much as the rest of the world needs the USA. Trump obviously thinks not. He might well be right. The USA doesn’t need to export much because in reality, they themselves are the world’s biggest and richest market. Is it that simple? Definitely not! But Trump will be long gone before the consequences, good or bad, of his reign really eventuate. Just like Reagan?
Trump's instincts, his unpredictability, his on the road thinking, impromptu answers to questions, his astute sense of who the public hate, etc are his strengths. Doesn't matter what he had said before or how he is ostensibly changing his opinions, views and thinking. It is what he says at the moment that grabs the attention and also appeals to his constituency. He is a master at wrong footing others. What a canny operator with great skills for self preservation.
No point in rueing his shenanigans. Just watch history in the making, whether of the right kind or not, whether we like it or not.
How has Trump wrong footed others ? He has made a claim that China want a trade deal and that phone calls were made -China are confused about what he is on about. He makes statements about Greenland and then gets shot down - I'm more confused about his actions than anything else. He seems to trying to force people to his idea's using publicity.
It is Chinese leadership at fault. Post war Japan, Singapore, Hong Kong, Korea, Taiwan all eventually liberalised and without being hegemonic and belligerent hit western levels of development within 3-4 decades and were welcomed into 1st world. Eastern Europe ditto. Ethnic chinese prosper when they immigrate to liberal economies more than they do in stultifying PRC. Game theory says 'be the mirror' is optimal trade policy. With china cheating in every way they can, and being genocidally evil to boot, they should be treated as pariahs.
You seem to miss the point, if they are capable, hardworking, socially united people, they will prosper in a US controlled environment (does not mean that US is great, or it does not only pursues its own interest). Examples are Japan, West Germany and South Korea (and to a lesser degree, Hong Kong and Singapore) compared to those who were under the influence of others.
We had the unbelievable opportunity to see two real life experiments. Two countries, with relatively homogeneous populations and cultures were split in two (Korea and German). North Korea has been a disaster for both its own people and the whole world (well maybe except for China, who is their true masters), South Korea has been great for both people and the world. The same was true for West Vs East Germany.
I do not understand people who hate the USA so much that they turn blind to what the actual, existing alternatives to the USA do. The world is lucky that the interest of its most powerful country opposes those of the second and third (Russia and China). So lucky. Regardless of all atrocities that the USA have committed (e.g. South America).
Why and how am I missing the point. Just because I don't think the US is a benevolent as other people believe doesn't make what I think wrong (or missing the point) only that I think something different. That is the beauty of living in a democracy - I am allowed to think or would you rather a dictatorship.
About Eat and West Germany - are you aware that the West had all the industry and the East was mainly agricultural. Does make a difference. Additionally it is not as if East Germany was given a choice (as a side note one of the Eastern Bloc countries wanted to participate in the Marshall Plan but was forbidden).
I'm not saying that East Germany was an economic "success". What I am saying is that East German was stripped of anything that was not nailed down by the Russians , made to pay "reparations" , was not allowed to participate in the Marshal Plan so was hamstrung from the start. A more interesting comparison would be between West Germany and Denmark (as a proxy for East Germany) - what do the figures look like then.....
You haven't really addressed how I am missing the point. Only that I don't hold the same point of view as you.....
Is your rational that the USA is the lesser of two evils ?
Actually Foyle I quite admire China and its ability to rise to number one in the world. I think we have to remember we are fed negative media/propaganda all the time about China and we seldom see the flipside on their progress. You simply cannot argue that they are not a powerhouse and a dictatorship works if you have the right person at the top, stuff just gets done, forget about slogans like lets do this, its just HAPPENS and on a scale that is mind blowing. Trump cannot stop it now, too late they have been on the rise for decades the Dragon is finally awake.
I have some admiration for them too, though the Party has done a bad job of lifting their nation and is highly corrupt. But I absolutely do not want them as the pre-eminant power in the world until or unless they reform and liberalise. Current PRC leadership are Han cultural supremacists and racists, they are wiping out other cultures (Tibet, Uigher) in China, and will have no compunction about doing so in any other country they get control of. They have a strong sense of manifest destiny driving their hegemonic ambitions (wouth china sea) and great anger at the relatively low position of China in the world (the fault of their historically inwards looking culture)
It is wrong to assess China with western standards. They don't play by the same rule book. Their economic goals are not easily known/displayed. They are engaged in mopping up as much money from trade as possible, which they use to invest overseas for different purposes, the most important of which is to buy friends and influnce.
China will gobble up near by islands, starting with Hong Kong (earlier than the 2050 timeline). And it may start working seriously on making the Yuan or a Chinese govt origin crypto as a stronger threat to US Dollar. It will continue to be the obvious visual and economic challenge to the US, with a few wins. It will have growing trouble with its Muslim population though.
The US will be tied with internal politics, unless a very strongly charismatic, Kennedyesque young President comes along. Not likely in the next 10/12 years, it seems. The US economy will have to deal with cryptos in a more serious manner soon. New brains and thinking are necessary to keep the US leading the free world.
In the meantime, Trump is being his mercurial self, spouting policies, speeches, sound bites, etc on the run, upsetting other world leaders, who however are compelled by history and geography to tolerate these whimsical outbursts and wild ideas and ignore them silently, hoping for deliverance next election.
Which may not happen, looking at the disarray in the Democrats line up. Too many contenders with no real base of support or charisma.
Brace yourself for 4 more years of more of the same.
Interesting read.
Yes 500 million people raised out of poverty is good for the world. However, enough is enough. The communist party doesn't play by the same rules as the west.
Let's not forget about intellectual property theft, gross human rights violations, and totalitarianism.
This Trump derangement syndrome is fascinating. I've only heard the US government talk of having fair trade with China which makes complete sense.
A commentator once said it's not the Chinese but rather the chinese communist party which is the problem.
I don't think an unelected communist regime is good for the world.
What This Trade War Is Really about
Wednesday, 21 August 2019
Albert Park, Melbourne
By Greg Canavan
Dear Reader,
The Australian Financial Review has a headline today that comes straight from the mouth of captain obvious: ‘Trump's trade war threatens resources boom’.
Thanks for the heads up…
It’s in response to BHP reporting its full year results yesterday. The stock price initially fell on the news, but a strong overall market dragged the mining bellwether back into the green for the day.
The gist of the Fin Review article is that this is as good as it gets for BHP:
‘BHP’s confirmation of a sturdy 2019 profit and a record final dividend has landed with fair warning that a three-year-long resources boom that has swelled the coffers of shareholders and nation alike could well be snuffed out by Donald Trump’s trade war with China.
‘The message delivered with BHP's full-year profit by an otherwise relentlessly positive chief executive, Andrew Mackenzie, was that President Trump’s coalition of political populism and market protectionism has started to hurt more than just global sentiment and its unsettling effect on trade flows and commodities prices will likely mean that, at a headline financial level at least, these 2019 results could prove a high water mark.’
I agree. In my view, the bull run for BHP is coming to an end.
But there is something much bigger going on here. Journalists love to frame the trade war as ‘Trump’s’. It is simply a result of ‘populism’ and ‘protectionism’.
This is flat out wrong. In the age of Trump, journalists everywhere have a bad case of TDS (Trump Derangement Syndrome), which makes it impossible for them to see the real issues.
And the real issue here is that the US/China trade war is not really about trade. It’s about ideology. It’s about communism versus capitalism.
Because universities are now leftist institutions, the majority of journo’s these days tend to write about China and communism with sympathy. Their contempt for capitalism is obvious.
This is dangerous, because it fails to portray China as it really is. That is, a communist dictatorship trying to cheat and steal its way to economic dominance.
As I’ve said before, China gained entry into the World Trade Organisation on the proviso it would open up its economy and liberalise trade. It didn’t. Instead, it engaged in protectionist policies to amass trillions of dollars in foreign exchange reserves via trade surpluses.
It did so, in part, by trashing its environment and exploiting its workers. The US and other developed nations simply couldn’t compete. Sure, consumers in the West got cheap running shoes, toasters, and computers.
And as Chinese savings were recycled back into the US bond market and interest rates went down, we didn’t notice that it resulted in house prices going up so much that we had to take on mountains of debt to afford one.
But don’t worry. Have you got the latest iPhone?
And thanks to the technological supply chain moving to China too, the communists got to see how advanced technology works. And they stole it.
Now, the Trump administration has said enough is enough. They don’t believe the US should assist the rise of a communist nation.
Hence the trade war. It might be leading to a weakening global economy and wobbly stock markets, but Trump realises it’s in the best interests of the US (and her allies) over the long term.
Another piece from the Fin Review today reports on this issue. I hope you can get past the mild case of TDS coming through in the select quotes below:
‘A defiant Donald Trump has issued a blistering defense of his trade war against a "grifting" China, suggesting any short-term negative fallout was "irrelevant" to the bigger picture.
‘In an impassioned press conference from the White House on Tuesday (Wednesday AEST), Mr Trump insisted yet again that the US economy is "very far from a recession".
‘But he also took aim at economists and other critics of his trade dispute with Beijing — which has been widely blamed for harming the US economy and crunching stock markets.
‘"Somebody had to take China on," a visibly angry Mr Trump seethed.
‘"And it's about time, whether it's good for our country or bad for our country short-term.
‘"Long term, it's imperative that somebody does this."’
The China question is getting more airplay in Australia now too. A few weeks ago, Labour backbencher Andrew Hastie wrote an op-ed in the Sydney Morning Heraldabout China.
Apparently it was controversial. For telling it like it is.
He wrote:
‘We must be intellectually honest and take the Chinese leadership at its word. We are dealing with a fundamentally different vision for the world. Xi Jinping has made his vision of the future abundantly clear since becoming President in 2013. His speeches show that the tough choices ahead will be shaped, at least on the PRC side, by ideology — communist ideology, or in his words, by "Marxist-Leninism and Mao Zedong Thought".
‘Xi’s view of the future is one where capitalism will be eclipsed and "the consolidation of and development of the socialist system will require its own long period of history…it will require the tireless struggle of generations, up to 10 generations".
‘The next decade will test our democratic values, our economy, our alliances and our security like no other time in Australian history.’
Indeed it will. Australia is caught in the middle of this ideological war. China is our largest trading partner, the US is our largest investor and most important ally.
If you’re an investor in commodities, you need to follow this story. If the US gets the upper hand over China (which I think it will), there will be fallout for the Aussie economy in the form of weaker commodity prices, especially for bulk and industrial commodities.
Given we have a coalition government, I think it’s fair to assume we’ll be backing the US in this fight. Perhaps not overtly, but the US is our ally, not China.
To reinforce this point, The Spectator recently wrote about former PM John Howard’s views on China:
‘At a meeting earlier this month with top US officials, he [Howard] described the upheaval in Hong Kong as ‘a glimpse of the future for Chinese society’ and questioned the long-term viability of China’s economic and political system. ‘Australia’s relationship with Beijing is becoming more difficult because the regime in China is a lot more authoritarian’ and that we should not be mesmerised by China’s ‘overwhelming economic importance to Australia’.
In other words, trade isn’t everything. Ideology is.
Regards,
Signature
Greg Canavan,
Journalists love to frame the trade war as ‘Trump’s’. It is simply a result of ‘populism’ and ‘protectionism’.
This is flat out wrong. In the age of Trump, journalists everywhere have a bad case of TDS (Trump Derangement Syndrome), which makes it impossible for them to see the real issues.
And the real issue here is that the US/China trade war is not really about trade. It’s about ideology. It’s about communism versus capitalism.
Because universities are now leftist institutions, the majority of journo’s these days tend to write about China and communism with sympathy. Their contempt for capitalism is obvious.
This is dangerous, because it fails to portray China as it really is. That is, a communist dictatorship trying to cheat and steal its way to economic dominance.
As I’ve said before, China gained entry into the World Trade Organisation on the proviso it would open up its economy and liberalise trade. It didn’t. Instead, it engaged in protectionist policies to amass trillions of dollars in foreign exchange reserves via trade surpluses.
It did so, in part, by trashing its environment and exploiting its workers. The US and other developed nations simply couldn’t compete. Sure, consumers in the West got cheap running shoes, toasters, and computers.
And as Chinese savings were recycled back into the US bond market and interest rates went down, we didn’t notice that it resulted in house prices going up so much that we had to take on mountains of debt to afford one.
But don’t worry. Have you got the latest iPhone?
And thanks to the technological supply chain moving to China too, the communists got to see how advanced technology works. And they stole it.
Now, the Trump administration has said enough is enough. They don’t believe the US should assist the rise of a communist nation.
Hence the trade war. It might be leading to a weakening global economy and wobbly stock markets, but Trump realises it’s in the best interests of the US (and her allies) over the long term.
Another piece from the Fin Review today reports on this issue. I hope you can get past the mild case of TDS coming through in the select quotes below:
‘A defiant Donald Trump has issued a blistering defense of his trade war against a "grifting" China, suggesting any short-term negative fallout was "irrelevant" to the bigger picture.
‘In an impassioned press conference from the White House on Tuesday (Wednesday AEST), Mr Trump insisted yet again that the US economy is "very far from a recession".
‘But he also took aim at economists and other critics of his trade dispute with Beijing — which has been widely blamed for harming the US economy and crunching stock markets.
‘"Somebody had to take China on," a visibly angry Mr Trump seethed.
‘"And it's about time, whether it's good for our country or bad for our country short-term.
‘"Long term, it's imperative that somebody does this."’
The China question is getting more airplay in Australia now too. A few weeks ago, Labour backbencher Andrew Hastie wrote an op-ed in the Sydney Morning Heraldabout China.
Apparently it was controversial. For telling it like it is.
He wrote:
‘We must be intellectually honest and take the Chinese leadership at its word. We are dealing with a fundamentally different vision for the world. Xi Jinping has made his vision of the future abundantly clear since becoming President in 2013. His speeches show that the tough choices ahead will be shaped, at least on the PRC side, by ideology — communist ideology, or in his words, by "Marxist-Leninism and Mao Zedong Thought".
‘Xi’s view of the future is one where capitalism will be eclipsed and "the consolidation of and development of the socialist system will require its own long period of history…it will require the tireless struggle of generations, up to 10 generations".
‘The next decade will test our democratic values, our economy, our alliances and our security like no other time in Australian history.’
Indeed it will. Australia is caught in the middle of this ideological war. China is our largest trading partner, the US is our largest investor and most important ally.
If you’re an investor in commodities, you need to follow this story. If the US gets the upper hand over China (which I think it will), there will be fallout for the Aussie economy in the form of weaker commodity prices, especially for bulk and industrial commodities.
Given we have a coalition government, I think it’s fair to assume we’ll be backing the US in this fight. Perhaps not overtly, but the US is our ally, not China.
To reinforce this point, The Spectator recently wrote about former PM John Howard’s views on China:
‘At a meeting earlier this month with top US officials, he [Howard] described the upheaval in Hong Kong as ‘a glimpse of the future for Chinese society’ and questioned the long-term viability of China’s economic and political system. ‘Australia’s relationship with Beijing is becoming more difficult because the regime in China is a lot more authoritarian’ and that we should not be mesmerised by China’s ‘overwhelming economic importance to Australia’.
In other words, trade isn’t everything. Ideology is.
Regards,
Signature
Greg Canavan,
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