________________________________
[Imprimis]
How to Meet the Strategic Challenge Posed by China
March 2018 • Volume 47, Number
3<https://imprimis.hillsdale.edu/how-to-meet-the-strategic-challenge-posed-by-china/>
• David P. Goldman<https://imprimis.hillsdale.edu/author/davidgoldman/>
David P. Goldman
Columnist, Asia Times
________________________________
David P. Goldman is a columnist for Asia Times. He also writes regularly for PJ
Media and the Claremont Review of Books and is the classical music critic for
Tablet magazine. He has directed research at investment banks and served as a
consultant for the National Security Council and the Department of Defense. A
senior fellow of the London Institute for Policy Studies, he is the author of
How Civilizations Die (And Why Islam Is Dying Too). In 2017, he was a Pulliam
Distinguished Visiting Fellow in Journalism at Hillsdale College.
________________________________
The following is adapted from a speech delivered on February 21, 2018, in
Bonita Springs, Florida, at a Hillsdale College National Leadership Seminar.
China poses a formidable strategic challenge to America, but we should keep in
mind that it is in large part motivated by insecurity and fear. America has
inherent strengths that China does not. And the greatest danger to America is
not a lack of strength, but complacency.
China is a phenomenon unlike anything in economic history. The average Chinese
consumes 17 times more today than in 1987. This is like the difference between
driving a car and riding a bicycle or between indoor plumbing and an outhouse.
In an incredibly short period of time, this formerly backward country has
lifted itself into the very first rank of world economies.
Over the same period, China has moved approximately 600 million people from the
countryside to the cities—the equivalent of moving the entire population of
Europe from the Ural Mountains to the Atlantic Ocean. To accommodate those
people, it built the equivalent of a new London, plus a new Berlin, Rome,
Glasgow, Helsinki, Naples, and Lyons. And of course, moving people whose
ancestors spent millennia in the monotony of traditional village life and
bringing them into the industrial world led to an explosion of productivity.
Where does America stand in respect to China? By a measure economists call
purchasing power parity, you can buy a lot more with $100 in China than you can
in the United States. Adjusted for that measure, the Chinese economy is already
bigger than ours. In terms of dollars, our economy is still bigger. But the
Chinese are gaining on us, and in the next eight to ten years their
economy—unlike the economies of our previous competitors—will catch up.
China, on the other hand, is an empire based on the coercion of unwilling
people. Whereas the United States became a great nation populated by people who
chose to be part of it, China conquered peoples of different ethnicities and
with different languages and has kept them together by force. Whereas our
principle is E Pluribus Unum, the Chinese reality is E Pluribus Pluribus with a
dictator at the top.
China once covered a relatively small geographic area. It took about 1,500
years for it to reach its current borders in the ninth century. These borders
are natural frontiers. China can’t expand over the Himalayas to India, while to
its extreme west is desert and to its east is the ocean. So China is not an
inherently expansionist power.
Nor is China unified. It has a written system of several thousand characters
that takes seven years of elementary education to learn, working four hours a
day with an ink brush, ink pot, and paper. Learning these characters well
enough to read a school textbook or a newspaper is how the Chinese are
socialized. The current generation is the first where the majority of Chinese
understand the common language, due to the centralization of the state and the
mass media. But the Chinese still speak very different languages. Cantonese and
Mandarin are as different as Finnish and French. In Hong Kong, you’ll see two
Chinese screaming at each other in broken English because one speaks Mandarin
and the other speaks Cantonese and they don’t have a word in common.
China is inherently unstable because all that holds it together is an imperial
culture and the tax collector in Beijing. It is like a collection of very
powerful, oppositely charged magnets held together by super glue—it looks
stable, but it isn’t.
Within the living memory of older Chinese, China underwent an era of national
division, warlordism, civil war, starvation, and degradation. The Century of
Humiliation, as the Chinese call it—which began with the opium wars in 1848 and
ended with the success of the Communist Revolution in 1949—was a century in
which civil war claimed untold millions of lives, and the terror of a return to
those conditions is a specter that haunts the Chinese leadership.
China, like Russia, responds to its past humiliation by challenging American
power. It would be naïve to expect the Chinese or the Russians to be our
friends; the best we can hope for is peaceful competition and occasional
cooperation in matters of mutual concern. But it is also important to recognize
that American policy errors exacerbate their suspicion and distrust. For
example, our decision to impose majority rule in Iraq created a Shi’ite
sectarian state now allied to Iran, and it left Iraq’s Sunni minority without a
state to protect them. This drove the Sunnis into the hands of non-state actors
and unintentionally helped al-Qaeda and ISIS. Sunni jihad is a serious security
threat to Russia and China, and Russia’s intervention in Syria is, in part, a
response to our mistakes.
The Chinese live a double life. If you walk down the street in Beijing, you see
people who dress very drably, who show little emotion and do their best not to
draw attention to themselves. But if you go to a Chinese wedding or a
restaurant where families gather, the same people are loud and bumptious. Their
real existence is a family existence. During the Lunar New Year, the Chinese
have the largest migration in history—three billion long-distance journeys are
undertaken—because all Chinese will travel long distances to be with their
family.
Here in the West, we have a concept of rights and privileges that traces back
to the Roman Republic—we serve in the army, we pay taxes, and the state has
certain obligations in return. There is no such concept in China. Beijing rules
by whim. The Chinese do whatever the emperor—or today, the Communist
Party—asks, hoping they will be rewarded. But there is no sense of anything
deserved. The idea of the state held together by a common interest as in
Cicero, or by a common love as in St. Augustine, is unknown in China. The
imperial power is looked on as a necessary evil. The Chinese had an emperor for
3,000 years, and when they didn’t have an emperor they killed one another. It’s
all very well to lecture the Chinese about the benefits of Western democracy,
but most Chinese believe they need the equivalent of an emperor to prevent a
reprise of the Century of Humiliation.
>From the standpoint of most Chinese, the Communist Party dynasty that took
>charge in 1949 has brought about a golden age. It’s the first time in Chinese
>history when no one is afraid of starving to death or of a warlord coming
>through and raping the women and burning the crops. So for the time being, the
>regime has a great deal of support, even though it is more comprehensively
>totalitarian than Hitler or Stalin could have imagined. As deplorable as the
>regime looks to us, the prospects for transforming China’s way of governance
>are for now negligible.
China’s Communist Party government is a merciless meritocracy, which is one
reason the Chinese have difficulty understanding American politics. If you’re
in the Chinese leadership, you made it there by scoring high on a long series
of exams, starting at age twelve—which means you haven’t met a stupid person
since you were in junior high school. The fact that democracies can frequently
advance stupid people—we are entitled to do that if we wish—doesn’t make sense
to the Chinese. The one thing President Xi Jinping cannot do is get his child
into Peking University unless that child scores high on his exams. Here in
America, you can buy your way into Harvard. You can’t do that in China. So
while the Chinese Communist Party is not a particularly efficient organization,
and is certainly not a moral one, it has a lot of incredibly smart people in it.
Along with ensuring internal stability at all costs, China’s leaders are
determined to make China impregnable from the outside. We hardly hear the term
South China Sea these days, because that sea has become a Chinese lake. It has
become a Chinese lake because the Chinese have made it clear they will go to
war over it. There’s a Chinese proverb: “Kill the chicken for the instruction
of the monkey.” China has an even greater concern over Taiwan. The Chinese
Communist Party is terrified that a rebel province like Taiwan can set in
motion centrifugal forces that the Party will be unable to control. So the
adhesion of Taiwan to the Chinese state—the imperial center—is for the Chinese
government an existential matter. They will go to war over it. By demonstrating
their willingness to fight over the South China Sea, they are demonstrating
that they will fight all the more viciously over Taiwan.
[China Graphs]
Turning back to our two economies, consider the three graphs above. China does
something that Japan, Korea, and other Asian nations do—it massively subsidizes
capital investment in heavy industry. From the Chinese standpoint, a steel mill
or a semiconductor fabrication plant are public goods—the Chinese look at these
things the way we look at highways and airports. And as a result of Chinese
subsidies for heavy industry, America has been pushed out of any major
capital-intensive manufacturing. Thirty years ago the Japanese were doing this,
which is why the Reagan administration took steps to force the Japanese to
build car plants in the U.S. But Japan’s economy was very small compared to
ours. Because China’s economy is roughly the same size as ours, the impact of
Chinese subsidies is huge.
The first graph shows the capital intensity of the companies in the major
Chinese stock index (MSCI) versus their return on equity. The more
capital-intensive, the higher the return. In the United States, on the other
hand, if you look at the S&P 500 on the second graph, the slope is in the other
direction. More capital-intensive industries are less profitable. This
distortion of global investment by Chinese subsidies for heavy industry has led
to a stripping out of capital from American heavy industry. It’s not that
Americans prefer financial assets to real assets—it’s that the Chinese have
pushed us out. That’s why we’ve lost so much ground in terms of industry.
As the third graph shows, China’s share of high tech exports has risen from
about five percent in 1999 to about 25 percent at present, while America’s has
plummeted from about 20 percent to about seven percent. That’s not a
sustainable situation. What it means in practical terms is that America can’t
build a military aircraft without Chinese chips. That’s a national security
issue.
China’s “One Belt, One Road” policy, announced by President Xi in 2013, is a
plan to dominate industry throughout Eurasia—both by land (belt) and by sea
(road).
As a rule, so-called developing economies don’t develop, because 40 percent of
the people are outside of the formal economy—they’re in the “underground”
economy, mostly in small villages, and they live relatively unproductive lives.
What the Chinese have done is to rip out the social structure of village life.
China’s economy is nothing like Japan’s, because Japan wanted to maintain its
social structure. The Japanese protected agriculture, small retail, and small
business. So in Japan we see a few great companies with global capacity sitting
on top of a protected, inefficient economy. In China, which moved the mass of
people from the villages to the cities, their equivalent of Amazon—Alibaba—will
manage labor back in the villages. The Chinese have broadband everywhere, so as
entrepreneurs figure out what villages can make, the villages will work for
them.
The Chinese intentionally dismantled their social structure to avoid Japan’s
constraints. And what they propose to do with “One Belt, One Road” is repeat
that experiment throughout all of Asia—to Sinofy every country from Turkey to
Southeast Asia.
A couple years ago, I visited the headquarters of Huawei, China’s
telecommunications company—the biggest in the world—which hardly existed a
dozen years ago. It has a campus that makes Stanford look like a swamp. Today
it has 70 percent of the world market in telecommunications. How did Huawei do
that? It cut prices and got massive subsidies from the government. After a
three-hour tour, the Chinese sat the Latin Americans I was with down in a
little amphitheater and said, “If you turn your economy over to us, we will
make you like China. We’ll put in telecommunications. We’ll put in broadband.
We’ll bring in e-commerce. We’ll bring in e-finance. You’ll be advanced like we
are.” The Latin Americans didn’t take the deal, but the Turks have taken it.
Turkey plans to be a cash-free society in five years. Chinese
telecommunications companies are rebuilding the Turkish broadband network.
Turkey has given up on the West and is becoming the western economic province
of China.
The impact of what China is doing is felt all over the world. Former allies of
the U.S., including former NATO members, are orienting towards China.
Russia—which has become totally dependent on China—has quadrupled its energy
exports to China, providing China with land-based energy imports in case the
U.S. tries interfering with seaborne energy traffic.
China has an extensive high-speed rail network, with trains going 200 miles an
hour. This has had huge productivity effects, and the Chinese are proposing to
build these trains all over Southeast Asia. Thailand, an agricultural country,
sees that with high-speed trains built by China, it can become the source of
fresh fruits and vegetables for China. So Thailand—which used to be an American
ally—is being absorbed into the Chinese economy. And so on.
One of the most dangerous misconceptions Americans have about the Chinese is
that they can’t innovate. Who do you think invented gunpowder, the magnetic
compass, the clock, and movable type? {Actually
the Chinese invented block printing, movable type was a European creation -BR]
Yes, China’s culture is much more conformist than ours. And on average, Chinese
are less likely than Americans to be innovators. But there are 1.38 billion
Chinese, and their research and development (R&D) spending is quickly catching
up with ours. They’re producing four times as many science, technology,
engineering, and mathematics (STEM) bachelor’s degrees and twice as many STEM
Ph.D.s as the United States. Granted, some of them are of low quality—but many
are excellent.
The single most troublesome deficiency we have in the United States is not the
industrial base, which is relatively easy to deal with. It is the lack of
scientific and engineering education. Six or seven percent of U.S. college
students major in engineering. In China that number is 30-40 percent. That’s
our biggest problem. Second to that is the fact, already mentioned, that there
is a massive distortion of the global economic system caused by Chinese
industrial policy.
The Chinese play very dirty. One of the issues raised in the Trump
administration’s recent National Security Strategy is forced technology
transfer. That is, if Intel wants to get access to the Chinese market—the
biggest chip market in the world—China requires Intel to divulge everything it
knows. From the standpoint of Intel stock price over the next five to ten
years, that’s a pretty good deal. But it is bad from the standpoint of
America’s national interest. If the U.S. government prohibits the transfer of
technology to China, the Intels and the Texas Instruments of the world will
scream, because it will hurt their stock prices. I’m a free trader, but
national security sometimes supersedes the free market. This would be such a
case.
Virtually all of American investment in R&D today goes to software. This means
that we’ve conceded to Asia, and especially China, the actual manufacturing, to
the point that—this bears repeating—we can’t put a warplane in the air without
Chinese chips.
So what do we do about China? The answer is not to adopt an industrial policy.
As Americans, we believe in individual liberty. We are not good at being
collectivists. China and Germany have industrial policies. Culturally they can
deal with it. We cannot. If we’re going to compete with China, we’ve got to do
it the American way. And what we are best at is innovation.
In the 1970s, all the smart people thought Russia was going to win the Cold
War. Economists at the CIA and in the universities believed that Russia had a
great economy. But by 1989, we realized that the Russian economy was a piece of
junk. It actually had a negative worth, because the cost of environmental
cleanup exceeded the value of whatever Russia was producing.
What happened in the interim was the greatest wave of industrial innovation in
American history. We invented fast, light, small, inexpensive microchips. We
invented sensors that didn’t exist before. We invented the semiconductor laser.
And we did virtually all of this through the Defense Advanced Research Projects
Agency and NASA, in cooperation with the great corporate laboratories.
The U.S. turned the Russian economy into junk by creating an economy that
hadn’t existed before. That was the Reagan economy. During this creation, the
Fortune 500 lost employment. The monopolies were all ruined. New companies no
one ever heard of sprang up to commercialize the new technologies, and
corruption declined because we had challengers taking market share away from
the entrenched interests.
In 1983, I wrote a memo for the National Security Council arguing that the
Strategic Defense Initiative would pay for itself—that the impact of the new
technologies we were researching, once they were commercialized, would generate
more tax revenue than we’d spent on R&D. When you do R&D, you don’t know the
outcome. Manufacturing using CMOS chip technology came about because the
Pentagon thought it would be great for fighter pilots to have a weather
forecasting module in the cockpit. The semiconductor laser came about because
the Pentagon wanted to light up the battlefield during nighttime warfare. These
technologies produced unforeseen consequences that rippled in unimaginable ways
through our economy.
We have failed to continue this innovation in recent decades. Starting with the
Clinton administration, we came to believe we were so powerful that we didn’t
have to invest in national defense and new technologies. Investment went into
the Internet bubble of the 1990s, as if downloading movies was going to be the
economy of the future.
I’m a free marketer. But the one thing markets cannot do is divorce themselves
from culture. It is when we have a national security requirement, forcing us to
the frontier of physics to develop weapons that are better than those of our
rivals, that we get the best kind of innovation. So the government has a role—a
critical role—in meeting the Chinese challenge.
If the Chinese are spending tens of billions of dollars to build chip
fabrication plants and we come up with a better way of doing it, suddenly
they’ll have a hundred billion dollars’ worth of worthless chip manufacturing
plants on their hands. But you can’t predict the outcome in advance. You have
to make the commitment and take a leap of faith in American ingenuity and
science. We can meet the strategic challenge of China, but we have to meet it
as Americans in the American way.
BR Note: The phrase highlighted above says far more than the author inferred
from it.
That is, there is such a thing as social invention, and if there is another
truth
that matters in this context it is that the right kinds of social inventions
would
render the Chinese social system, or parts of their system, into "junk."
My guess is that we will be the country that re-invents education
to the best effect and that in doing so there will be countless secondary
effects that change all kinds of economic equations.
But let's not rule out finance industry social innovations, or even innovations
that make government far more efficient.
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