By Eamonn Fingleton
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Table of Contents
A Dragon on Steroids 1
“Don’t Worry, Be Happy” 34
Genesis of a New System 79
Let There Be Savings! 116
Power Begets Power 139
In a Confucian America 168
The Dragon’s Fey Friend 214
A Few Good Confucians 261
Globalism or Democracy? 281
Notes 311
Bibliography 335
Acknowledgments 341
Index 343
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Chapter One
Two bets are on the table. One has been placed by the Washington establishment, the other by the Chinese Communist Party.
Analyzing China’s prospects in terms of fashionable globalist ideology, Washington is betting that a rich China will be a free one. The theory is that the only way China can continue to grow is by embracing Western democracy and capitalism. Moreover, the very process of China’s enrichment is supposedly undermining the Beijing government’s authoritarianism. More wealth means more freedom means more wealth.
Here is how President George W Bush put it: “As China reforms its economy, its leaders are finding that once the door to freedom is opened even a crack, it cannot be closed. As the people of China grow in prosperity, their demands for political freedom will grow as well.”
Similar optimism pours forth from the American press. The Wall Street Journal commented, “Sooner or later China’s economic progress will create the internal conditions for a more democratic regime that will be more stable, and less of a potential global rival.”
Abroad too the Washington view is increasingly prevalent. After visiting Chinese premier Wen Jiabao, then British Prime Minister Tony Blair cited the rise of a Chinese middle class and the spread of the Internet as factors that had produced “an unstoppable momentum … towards greater political freedom [and] progress on human rights.”
The Washington view has become so widely accepted that almost no one has noticed that there is second bet on the table–that of the Chinese leadership. It has been placed on a disturbingly different outcome: that a future China can be both rich and authoritarian.
If Washington is right, the future is unclouded, and a fast-rising China can readily be accommodated within the existing Western-defined world order. But what if China’s leaders turn out to understand the Chinese character better than anyone in Washington? What if in 2025 or 2030 the United States finds itself facing off against a China so rich that it has surpassed all other nations in military technology yet remains resolutely opposed to Western values? The implications are hard to exaggerate.
***
In the great debate over China’s future, Chinese leaders’ jobs, if not their heads, are on the line. It is reasonable to conclude that they have considered their options carefully. Moreover, they enjoy the advantage of local knowledge. They have studied their nation’s history and know its mind.
Those on the other side are pathetically uninformed. They don’t understand that the Chinese economic system is not capitalism, nor is it converging toward capitalism. China is operating an adaptation of the East Asian economic system launched in Manchuria in the 1930s, perfected in Japan proper in the 1950s and 1960s, and now widely copied throughout East Asia. As itemized by Richard Bernstein and Ross Munro in their 1997 The Coming Conflict with China, features of the Chinese version of the East Asian economic model include a labyrinthine system of trade barriers; an artificially undervalued currency; an industrial policy focused on developing pillar industries and using export subsidies to give them competitive advantage; and pressure on foreign companies to transfer their production technologies.
In some ways, this approach resembles capitalism–it makes extensive use of markets–but its fundamental logic is quite different. Whereas authoritarian political controls constitute a hindrance to the efficacy of capitalism, such controls are essential to the functioning of the East Asian system.
Part of the West’s comprehension problem is ideological: American opinion leaders hold as a matter of high ideology that Western logic is universal and destined to sweep the globe. And East Asian leaders have gone to extraordinary lengths to keep Western policymakers complacently misinformed. For good reason. If their model were more widely understood, it would be comprehensively opposed in the West, for like the Soviet system before it, the East Asian model is incompatible with Western capitalism. In fact, because the East Asian model is so much more successful than Soviet Communism, it entails an even greater problem of compatibility.
From a Western point of view, the most obvious problem with the East Asian economic system is its mercantilist approach to trade. Yet American policymakers have consistently chosen to make light of it. As the U.S. has unilaterally opened its markets ever wider to East Asia’s concept of “one-way free trade,” American elites have argued that East Asian protectionism does not represent a failure of intent in East Asia but merely a pattern of temporary political glitches that will soon be rectified. In the meantime therefore an enlightened West should simply be patient while the East Asians sort themselves out.
For many years now, it has been obvious that this interpretation has been no more than a convenient fiction. To anyone who watches what the East Asians do rather than merely listens to what they say, the evidence is undeniable that the East Asian system is fundamentally mercantilist. This is particularly clear in the case of Japan which was the first East Asian nation to come under sustained market opening pressure from the United States. Although Japanese leaders have constantly proclaimed a sincere commitment to the principle of free trade, they have worked with great ingenuity to frustrate all American market opening efforts. Thus even today Japan continues, in targeted industries at least, to pursue a comprehensively protectionist trade policy.
The results are abundantly clear in Japan’s current account surpluses. Though largely ignored by the American press since Japan’s financial bubble burst in 1990, these have continued to grow strongly with the result that the 2007 figure, at an estimated $201 billion. For Japanese policymakers mercantilism has thus proved highly effective in building wealth and, by extension, national economic power. The experiences of South Korea and Taiwan offer hints of China’s future trajectory. Both adopted the East Asian system in the 1960s, when they ranked roughly as low as China does today in per capita income. They proceeded to enjoy some of the fastest sustained growth in history. As scholar Robert Wade documented, in both cases per capita income measured in current U.S. dollars increased more than 20 times between 1962 and 1986. If the Chinese economy were to match South Korea’s 2008 income level, it would be by far the world’s largest economy, with roughly twice America’s total output.
Asked to identify the secret of Chinese economlc growth, Western economists reflexively point to China’s high savings rate. But why do the Chinese save. More important, why do they save more now than they did in the past?
These questions have never been satisfactorily answered in previous English-language attempts to explicate the Chinese economic miracle. The problem in large part is one of Western ideology, which leads Western observers to assume that a nation’s savings rate is merely the aggregate of millions of freely made, uncoordinated decisions by individual savers. This assumption totally obscures from the West the epochal fact that Chinese leaders have established an ingenious, almost invisible, administrative ability to force society to save.
Dozens of government policies have been conceived to suppress consumption, with the consequential of powerfully boosting the savings rate. This approach is hardly new. According to J.K. Galbraith, by curtailing consumption during WW II, Franklin D. Roosevelt’s administration raised the American savings rate from 5 percent to 25 percent in three years. The resulting capital flows underwrote a massive expansion in production of everything from tanks to fighter planes.
Depending on the methods used to suppress consumption, the increased saving sometimes arises in the household sector, sometimes in the business sector. In the latter case this occurs when artificially induced shortages of luxury goods generate huge profits for oligopolistic local suppliers. Provided such profits are reinvested, they count as part of the national savings rate. This explains the paradox that while the macroeconomic data indicate East Asians underconsume, Western media run stories about East Asians paying exorbitant prices for Louis Vuitton handbags or Rolex watches. While it is easy in East Asia to spend (because prices of luxuries are high), it is difficult to consume (because big spenders get little for their money). The larger economic point is that suppressed consumption creates savings. Exactly where is secondary.
Think of a drain blocked by leaves. No one leaf can stop the flow of water, but 50 leaves are a different matter. The Chinese policy depends on a panoply of constrictions on consumption:
* Trade barriers. If China does not import things, it can’t consume them.
* Credit controls. Consumer credit hardly exists in China and even home loans are rare. Thus those who aspire to own household appliances or cars, let alone homes, must first save prodigiously for years or even decades so they can pay in cash.
* Anticonsumer land policies. China’s zoning policies restrict home size and retail space. Home prices and rents are extraordinarily high relative to incomes, so demand for everything from heating fuel to Swedish furniture is curtailed.
* Corporate price gouging. Price-fixing cartels dominate, so living costs are higher than in other nations at a similar level of development. High prices reduce consumption directly, and the cartels’ profits add to the national savings rate.
* Travel restrictions. The Chinese travel industry is tightly regulated to make it difficult and expensive to take vacations abroad.
A high savings rate is not a sufficient condition for nations to grow. It is important that they invest their savings surpluses not only productively but in ways that avoid creating destabilizing capacity gluts. In China as elsewhere in East Asia, industrial cartels help smooth the path by overseeing corporate investment plans, shutting down obsolete capacity, and fixing prices to ensure that member firms earn adequate returns on capital.
All of this requires regulatory oversight and thus a central role by government in the economic growth process.
***
By definition the suppressed consumption policy condemns the Chinese people to a considerably lower standard of living that they would are condemned to a lower standard of living than they would otherwise enjoy, how long they will put up with such deprivation. Western wisdom says not very long. Supposedly as living standards improve, political conditions will become more liberal and newly assertive Chinese citizens will insist on consumer-friendly economic policies.
But the idea that rising living standards will necessarily lead to political liberalization is a myth. After studying 150 nations, political scientists Bruce Bueno de Mesquita and George W Downs reported: “Authoritarian regimes around the world are showing that they can reap the benefits of economic development while evading any pressure to relax their political control. … Economic growth, rather than being a force for democratic change in tyrannical states, can sometimes be used to strengthen oppressive regimes…”
Why do so many Westerners assume that a rich China will be a free one? They simply cannot imagine the extent to which leaders control the agenda in a Confucian society.
Because the Chinese system is so authoritarian, no trend of any significance can develop without at least the tacit approval of those at the top. For political challenge to get underway, individuals need some way of setting up associations and communicating with sympathizers. But independent Chinese associations, newspapers, and websites are a contradiction in terms. Those who assume that a political challenge can arise by osmosis are making an elementary mistakes in logic: assuming what is to be proved. The fact is, Chinese society is explicitly structured to preclude bottom-up liberalization.
China’s leaders are unlikely to co-operate in their own downfall, and given that the Chinese Communist Party controls the People’s Liberation Army, this would appear to settle the matter. It did at Tiananmen Square. And in any case, digital-era authoritarianism rarely has to resort to massive shows of force. Modern surveillance and communication facilitate a preferred strategy of “soft authoritarianism.” People who pose a threat can be identified early and taken out of circulation or rendered ineffectual through denunciation and sabotage. The sort of societal metamorphosis apologists posit can only be led by individuals. The problem is that in China, individuals are tightly controlled ciphers. They always have been.
In modern East Asia, Confucianism enjoins the populace to obedience, loyalty and sacrifice. Hence it plays an important role in legitimizing undemocratic, unaccountable forms of government. In the West, we think of groups as amorphous hordes. But in the East, a group is a disciplined, hierarchical entity. Not only are its leaders well defined, but their right to lead is reinforced by institutional structures. Robust methods are available to pressure anyone who wavers. Moreover, the whole of society arrayed in hierarchical groups. The top group–the Chinese Communist Party–maintains powerful levers of control over every other group.
If one individual steps out of line, his group expects to be punished. In premodern China, an entire family could be punished for the offenses of a single member. This powerfully concentrated the minds of, in particular, political dissidents. Punishing a whole family was revived in the Maoist era, and even today an important variant is the punishing of an entire work group for the lapses of one member. In his book A Mother’s Ordeal, Steve Mosher writes of how the Chinese establishment whips up societal wrath against couples who flout China’s one-child policy. The government threatens pay cuts for all workers in an enterprise if any of them has a second child. The effect is to co-opt hundreds of workers in pressuring a woman to have an abortion.
This side of Chinese reality has had less attention than it deserves because, to the extent that they ever experience more negative aspects of Confucian group logic, foreign correspondents dismiss the problems as transitional ones that will soon be swept away by the inevitable triumph of Western individualism.
***
If the rise of Chinese power were the only thing to worry about, America’s geopolitical quandary would be serious. But another concern is at least as significant: It is fair to say that the United States is undergoing the fastest power implosion of any major nation in history.
Few witnesses are better placed to testify than Andrew Grove, chairman of Intel. He told Newsweek, “America … [is going] down the tubes and the worst part is nobody knows it. They’re all in denial, patting themselves on the back, as the Titanic heads for the iceberg full speed ahead.”
Then there is the world’s most successful investor, Warren Buffett: “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil.”
Even Jeffrey Immelt, chief executive of General Electric, has joined the clamor: “More people will graduate in the United States in 2006 with sports-exercise degrees than electrical engineering degrees. So if we want to be the massage capital of the world, we are well on the way.”
Nowhere is American weakness more apparent than in advanced manufacturing. Leadership in this category has long been a sine qua non for a superpower. Indeed, America’s mid-20th-century dominance was based on little else. But those industries have been eviscerated that a 2005 Department of Defense report pronounced America’s security at risk. “There is no longer a diverse base of U. S. integrated circuit fabricators capable of meeting trusted and classified chip needs,” the report said. “From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation’s strategy to undermine U.S. military capabilities.”
For anyone who takes for granted that corporate America is destined to dominate the world economy in perpetuity, the reality abroad is chastening. Apart from a few token brands such as Coca-Cola. America’s economic influence has long since disappeared. Other nations have been quick to fill the void, and China is at the fore. Here is a sampling of how fast China has been turning the tables on the U.S.:
1. China’s foreign currency reserves are now the largest in world economic history, multiplying more than sixfold since the end of 2001.
2. In partnership with other major East Asian central banks, the People’s Bank of China effectively controls American interest rates and the value of the dollar. To finance America’s trade deficits, it has become a huge purchaser of treasury bonds. Absent this buying, the dollar would collapse and interest rates would soar.
3. Chinese interests have established control of the formerly American-owned Panama Canal. The key ports at either end have been bought by a Hong Kong tycoon regarded as a Beijing surrogate. He also controls ports on Mexico’s Pacific coast that are playing an increasing role in shipping Chinese goods to the American market.
4. Chinese and other East Asian interests now largely control the network of satellites and undersea cables that make up the international telecommunications system. The system had been under American control until our high-technology stock crash, when dozens of telecommunications companies on the verge of bankruptcy were bought by East Asian interests.
5. Of the components of the next Boeing plane, the super-advanced 787, only the vertical fin will be made in the U.S. This will constitute the big-league debut for China’s fast-rising aerospace industry.
Many commentators insist that the U.S. is turning the corner, but the test of all optimistic manufacturing talk is the international trade figures–and these tell a bleak story.
From the volume of its exports to the strength of its trade surpluses, the U.S. was once the world’s strongest trading nation. It also generally ranked as the largest source of other nations’ imports. No longer. With its trade surpluses now a distant memory, the U.S. ranks first in a different category–as the world’s largest deficit nation.
As of 2007, the U.S. has been passed by China in the total value of its exports. As recently as 1996, the United States outexported China by four to one.
In 1991, Japan bought nine times as much from the U.S. as from China. As of 2006 it bought 50 percent more from China than from the United States. Moreover, the U.S. no longer even ranks as China’s largest source of imports: Japan’s exports to China are twice America’s.
***
The evidence is in: the Confucian values by which China is ruled are not only incompatible with those of the West, they prove strikingly more robust. Far from China changing, Westerners who do business in China are modifying their behavior–often quite troublingly–under Beijing’s influence. Picture a phalanx of chocolate soldiers marching into a blowtorch.
The most common way Westerners compromise is simply by doing business “the Chinese way.” Writing from Shanghai in 2005, Peter S. Goodman of the Washington Post commented, “American business leaders often describe their China operations idealistically, suggesting that their presence here will compel Chinese competitors to adopt more ethical business practices. But in one key regard, the dynamic operates in reverse, with U.S. companies adopting Chinese-style tactics to secure sales, as they compete in a market in which Communist Party officials routinely control businesses, and purchasing agents consider kickbacks part of their salary.”
In the words of Carolyn Bartholomew, chairman of the United States-China Economic and Security Review Commission, many American companies have “Faustian bargains” with Beijing. She cites Yahoo!, Google, and Microsoft, which have agreed to abide by China’s censorship rules in serving Chinese Internet users. Yahoo! voluntarily handed over evidence that led to one Chinese Internet user being sentenced to ten years in prison. Bartholomew commented, “Far from capitalism changing the Chinese government, it is the Chinese government changing capitalists. Rather than the birth of freedom with telecommunications and the Internet serving as the handmaiden of democracy, we have the Internet entrepreneurs selling rope to the hangmen.”
In a world that has been drastically shrunk by fast travel and cheap telecommunications (not to mention intercontinental missiles), it is hard to see how Confucianism and Western individualism can continue to coexist as equals. By proclaiming American values not only more desirable but inherently stronger, Washington has virtually guaranteed that Beijing’s rejoinder will be a sotto voce “We’ll see.”
Chinese leaders are not looking for war, at least not against the world’s major nuclear powers. That said, they are greatly influenced by the ancient Chinese military theoretician Sun Tzu, one of whose aphorisms seems particularly relevant: “To subdue the enemy without fighting is the acme of skill.”
The betting is that China will penetrate American society by stealth in a process best called reverse convergence. Building on the extensive if unobtrusive groundwork laid by earlier East Asian industrializers, China can be expected in the fullness of time to become a major factor in shaping outcomes in Washington. The effect of globalism has been to create a political vacuum in Washington, where an alert eye to the American national interest was once present.
Of particular concern is how well Western intellectual organizations will stand up. The idea that Western media might be vulnerable to pressure from Beijing may seem preposterous, but there is evidence that things are already going the wrong way. When was the last time a major American newspaper took a searching look at the car markets of Japan or South Korea? In truth, any attempt by the American media to focus serious attention on East Asian protectionism would raise the specter of a boycott by key advertisers, probably acting in concert under government leadership. Give them 15 to 20 years and the Beijing authorities will enjoy similar clout in the American advertising market.
Top American Internet companies have already reneged on Western values in pursuit of lucrative business in their Chinese subsidiaries. How long before they prove similarly malleable in their domestic operations? Writing for the New York Times on a conference in Shanghai in 2005, Tina Rosenberg recounted how top American business leaders fawned on Chinese Communist Party officials. She added: “Let’s not pretend that foreign investment will make China a democracy. That argument was born out of desperation and self-interest. Because China is too lucrative a market to resist, American and European businessmen have ended up endorsing the party line through their silence–or worse. They are not molding China; China is molding them.”
Any American who understands the dynamics by which the Chinese empire has been held together over the last 3,000 years will not be sanguine about the outcome. It is time Uncle Sam looked over his shoulder: his coattails are caught in the jaws of a dragon.
Excerpted from In the Jaws of the Dragon by Eamonn Fingleton.Copyright 2008 by Eamonn Fingleton. Published by St. Martin’s Press. All rights reserved. This work is protected under copyright laws and reproduction is strictly prohibited. Permission to reproduce the material in any manner or medium must be secured from the publisher.