Done with ‘Schism’, a good book by Paul Blustein. It is recommended reading for those animated by these issues such as global trade and geopolitics. Gives us a good insight into what has shaped China’s emerging attitudes towards the West. As much as it has to do with Mr. Xi Jinping’s background, his belief in Mao and his determination to see that the Communist Party is not contaminated by the West, it has a lot to do with the Western failure of capitalism.
Before we get into some of its interesting contents, some words on the book: It is well written. Easy on the reader. Paul Blustein’s style is fluid and lucid. Trade is a dry topic and he makes it interesting.
We do get a good glimpse of the processes of WTO appeals. We also understand the naivete of some of the WTO appellate members when they ruled that Chinese government’s ownership of state-owned enterprises did not mean that the government dictated their functioning. How nice and innocent?!
Also, we do learn how hard America negotiated on China’s admission into the WTO. It should not be a surprise if the very process itself made China determined to game the system in its favour. It can be and it was humiliating and condescending.
2008 heralded a geopolitical seismic shift:
Early on in the book, Paul Blustein cites Charlene Barshefsky saying that China’s attitude changed in 2008:
In the years since striking that agreement, Barshefsky, now back in private law practice, has outspokenly criticized the direction of China’s economic policies. “The environment in China has shifted negatively for foreign businesses,” she said at a 2016 event on the fifteenth anniversary of China’s WTO accession. “Multinationals saw enormous gains in China…from roughly 1999 to 2007-08. But at that juncture, opening began to sputter…and in the place of reform and opening, increasingly what is seen [are] zero-sum, mercantilistic policies. (p.99)
Not surprising. That is when Hank Paulson had to literally plead with the Chinese to bail them out. Honestly, how does one expect to dominate the world and a relationship after such a plea for assistance?! In fact, I would say that it is either delusional or chutzpah to think that one can beg China for a bailout and then try to put China in its place. If I were in China’s place, I would respond with lots of snigger and derision too:
“He wanted me to know that the financial crisis in the U.S. had affected the way he and others in the senior ranks of the Party saw us,” recalled Paulson, who quotes Wang as saying: “You were my teacher, but now here I am in my teacher’s domain, and look at your system, Hank. We aren’t sure we should be learning from you anymore.” (p.203)….
The depths that America plumbed — and the crisis in Europe that followed — thoroughly discredited Western-style capitalism in the eyes of many Chinese. (pp. 203-204).
In that regard, it will be interesting to speculate on whether the IMF delay in issuing its Article IV report on China with the inclusion of a judgement that its exchange rate was ‘fundamentally misaligned’ prevented a big adjustment in China’s exchange rate. A Board meeting was scheduled for Sept. 22, 2008. On Sept. 15, Lehman Brothers’ collapse was announced to the world.
Everything changed after that:
Here is the crucial wording from the report’s executive summary: “There are significant concerns that the exchange rate may be fundamentally misaligned and exchange rate policies could be a significant contributor to external instability….Accordingly, staff recommends that the executive board initiate an ad hoc consultation with China that would be expected to be concluded within about six months.” The September 22 board meeting was never held. The Article IV report was buried. Indeed, the US Treasury lost interest in prodding the IMF to label China. (p. 170).
Now, even if the report was released a week before that, given America’s desperation and its turn to China for assistance would have sealed the fate of that report in any case:
Paulson’s book, On the Brink, offers helpful insight regarding the reasons for that seismic shift. In his chapters about events immediately following the Lehman bankruptcy, the former Treasury secretary recounts numerous phone calls to Beijing in which he and other Treasury officials were essentially imploring Chinese leaders to see that it was in their own self-interest to help keep the rest of the US financial system afloat. (p. 171).
Nothing captures the changed geopolitical power balance than this paragraph:
Humiliating retreat for the IMF came almost exactly two years after the board’s approval of the 2007 rule change, when the Fund essentially vowed to abandon the term “fundamental misalignment.”24 Only then, in July 2009, did China allow the long-delayed completion of its Article IV report — and the report placed before directors contained much softer language on the RMB than the one that had been drafted in the fall of 2008.25 This was emblematic of the elevated geopolitical status with which China emerged in the wake of the crisis. (p. 173).
We can debate, until the cows come home, as to whether Hank Paulson should have wielded the exchange rate card with China. I doubt if anyone would do that with knees bent and hands folded.
Obama administration tried to wrest back the initiative:
Given that, frankly, it is creditable how much initiative that the Obama administration wrested back. Yes, there is some revisionism on my part here, admittedly.
What comes through loud and clear from the book is not that the Obama administration was squeamish about dealing with the Chinese or tackling their trade practices. There is enough information to make the case that the Obama administration pushed back, including making aggressive and unilateral changes to the appellate body of the World Trade Organisation. It did not convey the ‘Market Economy’ status on China despite China’s strong insistence.
That conveys two things. Contrary to what was thought, the Obama administration was not too meek. I must add the following, however, from the book:
The main economic policy heavyweights in the Obama White House — Geithner and National Economic Council Chairman Larry Summers — “were critical of the direction the Chinese economy had taken in recent years and were disturbed by the impact of its discriminatory practices on U.S. competitiveness,” so they laid out a variety of options for the president to consider “from relatively anodyne to draconian ones,” according to Bader’s book. “But at the end of each discussion or memorandum, they consistently concluded that the impact of China’s practices on the U.S. economy was in fact quite small, and that even positive corrections would have considerably less impact in the United States than most people imagined. (p. 213).
The book he is referring to is this one: ‘Obama and China’s rise’ [Link]
Two, equally, it also means that the Trump administration did not take a wrecking ball to the trade relations with China or to the international body WTO. It was merely continuing to tread on the path paved by the previous administration. It imparted – in fits and starts – some more momentum and teeth – to those efforts.
Trump re-negotiated NAFTA and it is illuminating to note that the Obama administration too thought that NAFTA conferred unfair advantage on Canada and Mexico. In fact, Yanis Varoufakis grudgingly praised Trump for renegotiating NAFTA:
he tore up Nafta, the North American Free Trade Agreement that took decades to put together. Remarkably, he replaced it swiftly with one that is certainly not worse – at least from the perspective of American blue-collar workers or, even, Mexican factory workers who now enjoy an hourly wage considerably greater than before. [Link]
Bush administration was insufficiently alarmed:
The administration that missed more than a trick or two is the Bush administration. It was partly ideological and partly convenient. They were either naive in their belief that China would change or become a little more liberal or they believed that they should not interfere with market forces or that recourse to both of those positions was simply convenient.
Perhaps, China would have but for the repelling effect of the chaos of American democracy and capitalism. We should not forget how America damaged its own credibility with its war on Iraq on phoney grounds, as it turned out. So, the Bush administration, in many respects, turned out to be the one that prepared the ground for the political polarisation in America, its diminished economic clout and fiscal wherewithal too, forcing the country to rely on monetary policy snake oil.
Post-retirement, the Bush family is cosying up to China as well. Recently, it conferred an award on Henry Kissinger and senator Dianne Feinstein for furthering Sino-American relations!
The decision to negotiate with China for its integration into global trade via membership in the World Trade Organisation was not wrong. The Chinese government and its record up to 2000 from 1979 made the case for a punt on its economic integration, notwithstanding Tiananmen in 1989.
It is wrong to say that America failed to foresee the turn that China would take under Xi. Perhaps, that is true. But, that does not matter. What America failed to foresee was the collapse of its own capitalist model which has turned overwhelmingly predatory. It continues to be weighed down by it. American finance and technology czars are pushing the country into abyss and are hamstringing its policy flexibility for they are putting their selfish interests ahead of the nation, as they did before 2008.
The failure of American capitalism and the failure to foresee that failure are both hubristic. That is no surprise given the way empires have eventually collapsed historically.
Just as George Bush paved the way for the collapse of American clout, prestige, influence and geopolitical advantage over China, on China’s side, the understated Hu-Wen combination facilitated the return of the public sector, state control and party control over the commanding heights of the economy and even of the society under Xi. Paul Blustein does well to document that.
One man who comes across as being very astute about Chinese intentions and methods is Tim Stratford, former Chairperson of the American Chamber of Commerce in China:
“There’s an ambiguity that China’s government delights in fostering — they like to have it both ways,” (p.214)
It seems unfortunate that his practical wisdom and understanding have not been utilised as much as it should have been, by successive American administrations. At least, that is the impression that one gets from the book.He seems to have resigned from government role in 2010.
Would multilateralism have worked? Perhaps
Perhaps, where Paul Blustein errs, in my view, is that he thinks that China could have been handled better or more effectively through WTO rather than through the bilateral and arbitrary mercurial methods of President Trump. He may be right about his criticism of the Trump approach which was not consistent. In fact, Robert Lighthizer was more consistent than Trump was. But for Covid, we cannot be sure of how Trump would have dealt with China. He might well have cut some deals and touted it as victory. But, that does not mean that multilateralism or globalism would have succeeded.
Tim Stratford tells him that China thrives in ambiguity and in mixed messaging. They want to have the cake and eat it too and they do it very well:
Recounting his numerous interviews with managers of technology-intensive multinationals based in China, Lee Branstetter, an economics professor at Carnegie Mellon University, stated: “I have heard personal and detailed accounts of the lengths to which Chinese companies and the Chinese government have gone in their collective efforts to extract technology from foreign multinationals,” and although the transactions might technically be “voluntary,” they are “only voluntary in the sense that the business transactions engaged in by the fictional gangster of the Godfather series, Vito Corleone, were voluntary. China is effectively making an offer multinationals cannot refuse.” (p. 296).
While many tactics of China in the international arena are not worthy of replication either out of civility or out of a sense of fairness and mutual respect, people from many developing countries would wish their politicians and bureaucrats would negotiate as hard and devise as many ways as China does to get the best technology, knowledge and skills for their country.
To be fair to Blustein, he just does not simply stop with admonishing Trump for his unpredictable and inexplicable policy zig-zags. He cites two specific avenues through which the United States could have assembled a ‘coalition of the willing’ to take on China through WTO. Developing countries should focus on the second one at least as long as WTO is still around:
(i) But the heart of the case she (Jennifer Hillman) proposed involved Article XXIII of GATT/WTO rules, called “nullification or impairment.”4 Obscure and seldom used though it may be, this provision might be the perfect ace in the hole for playing against China Inc. Under this provision, a WTO member can be found in violation of its obligations and subject to sanctions if its policies nullify or impair the legitimate expectations of its trading partners by violating the overall intent of the rules — even if no specific rules are being broken. (pp. 398-399).
(ii) section 15 (b) of the protocol (he is referring to the China WTO accession protocol), states that if distorted market conditions in the Chinese economy cause “special difficulties” to trading partners in estimating Chinese subsidies, the calculations can be made using prices and costs for comparable goods and inputs in other countries — which makes it much easier to conclude that subsidization is occurring and high duties are warranted. This provision doesn’t expire, unlike other discriminatory rules that China accepted (for example, the special China safeguard, which had a 12-year duration, and the non-market economy status for anti-dumping cases, which was supposed to last 15 years). (p. 401).
While I am prepared to give Paul Blustein the benefit of doubt for his recommendation of an alternative approach to dealing with China than the one that the Trump administration took, his coverage of Huawei and 5G borders on naivete. His defence is that this article on how the rise of Huawei coincided with the decimation of Nortel (through spying and hacking) came out after his book was published. Here is another one – by John Sawers, former chief of MI6.
Again, to reiterate, they lost all respect for the United States after 2008. That is why China decided to up the ante in the race for global dominance, with its own global ‘institutions’ and ‘initiatives’ such as the BRICS Bank (New Development Bank), Asian Infrastructure Investment Bank (AIIB), Shanghai Cooperation Organisation, Regional Comprehensive Economic Partnership and the Belt and Road Initiative.
Simply put, China is not interested in such a world that the West has created. It is determined to create such a world on its own terms where all other countries will be its tributaries.
Considering how much America has made a meal of its economics, capitalism and politics, it is hard to fault China for harbouring such ambitions no matter how unviable its own model is. On present evidence, the former stands more discredited than the latter.
That said, I think America was wrong to withdraw from the Trans-Pacific Partnership. Trump made that call. Not because it would have mattered in economic terms. It would not have. At the very least, it would have been an irritant for China just as the Quad is, for example. That irritation would have made them commit some errors and antagonise some more countries even more spectacularly than they have done so far.
Wall Street had a big hand in bringing America to its knees in 2008, making its government beseech China for support. It continues to romance China. See this story in WSJ published in Dec. 2020 and this one in FT published on 29th May 2021. Wall Street might have played a big role in bringing Didi’s Initial Public Offering to America, even as it appears increasingly likely that the company was indeed warned by Chinese regulators to postpone the IPO and address their security concerns because a news-story in WSJ discloses that Bytedance heeded precisely such a warning and postponed its public offering in America. It may be a coincidence (or not) that Jean Liu, the president of Didi Chuxing, was previously a Managing Director in Goldman Sachs. Simply put, it appears that Wall Street has encouraged a Chinese company to raise money from Americans by withholding critical information from them. Just think about it.
In the end, too much of finance is behind America’s decline which, in turn, is behind the story of the schism that Blustein tells. Too much finance continues to stalk America.