China has the world’s largest economy, bigger than the US economy. Yet I rarely hear stories of the Chinese telling the US to privatize Amtrak, or reform Social Security, or abolish the Ex-Im Bank. In contrast, the US government frequently tells the Chinese how to run their economy, in all sort of ways that go beyond narrow trade issues.
Over recent decades, the US government has been demanding that China open up its capital account. Now, just as they are beginning to succeed, the US is suddenly trying to close China’s capital account:
Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations.
The discussions are occurring as Washington and Beijing negotiate a potential truce in their trade war that’s rattled the world’s two biggest economies and investors for more than a year. They also come as China is removing limits on foreign investment in its financial markets.
What happened to “deregulation”?
In a recent “threat briefing” — which is how the group titles its meetings — Bannon said American financing have helped spur China’s economic ambitions and technological advances.
“The Frankenstein monster that we have to destroy is created by the West. It’s created by our capital,” Bannon said at the Sept. 12 briefing.
That’s former Trump aide Steve Bannon, who is also uncomfortable with the idea of lots of Asian-Americans in Silicon Valley.
This policy won’t work. China will become a developed nation regardless of what the US does. Instead, our attacks on China will make them even more nationalistic, and in the long run we will be less secure than if we treated China fairly. (Taiwan will also be less secure.)
Chinese people used to tell me that the US was trying to hold China back. I didn’t believe them. Now I think that they were correct. Future historians won’t look kindly on this generation of Washington policymakers. We are repeating the mistakes of the 19th century.
READER COMMENTS
Iskander
Sep 27 2019 at 4:53pm
19th Century China policy was about opening up trade with China, 21st century China policy is about shutting down trade with China.
nobody.really
Sep 27 2019 at 6:23pm
Kung Pao Chicken.
Benjamin Cole
Sep 27 2019 at 8:08pm
I too have wondered why the US sticks its nose incessantly into the internal affairs and economic plans and operations of other nations, including that of China.
My deduction is that US foreign, trade, and military policies reflect the will of multinationals, who want free access to all nations and want to operate within those nations freely.
This leads to a fascinating example in mainland China. Presently, multinationals use mainland China as a manufacturing platform and have allied with Communist Party of China to that end. Of course, multinationals are also eyeing sales to burgeoning upper classes of China.
Unlike past US presidents, Trump is curiously loath to do the bidding of multinationals. Trump appears to be listening to voices such as that of Michael Pettis or Dani Rodrick, but to suggest that Trump thinks too much about any topic is precarious.
Whether Trump is right or wrong on China and whether his tactics are right or wrong are huge topics and I think can be argued endlessly without result.
Something bad does happen to nations when they begin to offshore industry. Wages go down and we see in developed nations that employee classes are not paid enough to reproduce. The globalist solution to lack of reproduction in developed nations is to import new workers.
China also has a decreasing population, or will soon. This issue of a decreasing population may be misunderstood. It may allow for higher living standards due to lower housing costs, and, of course, less needs to be spent on new infrastructure.
I do not know if I will live long enough to see how these population changes in China and Japan play out. If labor is continually scarce in Japan, perhaps wages will rise and population reproduction rates will rise also.
P Burgos
Sep 27 2019 at 9:14pm
What is the source of those quotes (I don’t see a link or citation)? I am curious because I want to make sure it comes from a reputable source of information. If true, I think it is a really big deal, because it would be the first confirmation (that I have seen) that the idea of government led US disinvestment in China goes beyond an idiotic Trump tweet. As Prof. Sumner said, this shows that the US government is planning on how to hold back China. That is a really big deal, and a colossal error.
Scott Sumner
Sep 28 2019 at 2:34pm
Sorry. I just added a link.
Mark Z
Sep 27 2019 at 10:28pm
I think the US was actually pushing China forward (for the US’s benefit) when it encouraged free trade and capital flows. But it would seem Steve Bannon et al. are convinced each nation is merely running on a collective hedonic treadmill, and what determines our collective well-being is the ratio of our GDP to China’s GDP (though I’m not sure even with that as the target the policy would be a success). I’m half-joking, but I think that’s the most coherent articulation of the Trump/Bannon ideology on international relations I can come up with.
Thaomas
Sep 28 2019 at 6:23am
The Trump administration seems to have no idea of what it want from China. A smaller trade deficit? Guarantees of more imports of X. Lord only knows. What we should want is lower restrictions on imports, especially restrictions aimed at underpaying for technology. It might even make sense for the US and other nations like those in the TPP to negotiate with China (offer some reduction on our own restrictions/threaten additional restrictions in return) over some of those Chinese restrictions.We should be concerned about the growing ratio of Chinese to US GDP but the thing to do about that is reduce the structural/full employment fiscal deficit, attract all the smart ambitious immigrants we can, overcome restrictions on housing and commercial development in US cities and reducing the costs of infrastructure. Being the first country to have a revenue neutral tax on net CO2 emissions would probably be a relative advantage, too.
Phil H
Sep 28 2019 at 10:20am
Why does the US tell China what to do, even though China’s bigger now? I’m thinking part of it is simply habit, like a parent telling their child how to run their lives, even when the child is conspicuously more successful than the parent ever was.
What does the US want… honestly, I think the political classes mainly want a whipping boy at the moment. I can’t see any other coherent approach.
What should the US want… unfortunately, I suspect the USA is correct to fear China right now. Not because China will necessarily harm America’s economic interests, but because China is seizing the position of the world’s most important country, and Davos really won’t be as fun any more. That period when Americans could boast about how their country is obviously the best may be coming to an end, and psychologically I think it really will hurt.
It would be nice if America could let go of its exceptionalism and embrace a bipolar world. But I find it hard to imagine that that’s what’s going to happen.
Scott Sumner
Sep 28 2019 at 2:34pm
Phil, I think that the US will still have a better system even when China’s total GDP is twice as large. Does anyone doubt that Switzerland has a better system than India?
Edward Zimmer
Sep 28 2019 at 5:02pm
Do you really see a big difference between U.S. & China’s governments? Our’s is ruled by monied interests – their’s by party interests. Currently, I’d judge China’s superior as most of their leaders have STEM backgrounds – I sometimes wonder how many of ours even know what the acronym means. Currently, I’d judge China’s entrepreneurial spirit comparable to what we saw in the ’70s & 80’s (eg, they have 60-some active AI businesses whereas we have 30-some.). Long-term, which will prove better, IMO, will come down to which (if either) can maintain entrepreneurial freedom. (And who can keep their nose out of other country’s business. Piece from RT on the 23rd: “We Don’t Need Aircraft Carriers, We Need Weapons to Sink Them With” – Russian Defense Minister.)
Scott Sumner
Sep 28 2019 at 9:11pm
Yes, the US is much freer than China; it’s not even close. And the US has lots of areas were we are not as free as we should be.
Mark Z
Sep 28 2019 at 10:58pm
“Currently, I’d judge China’s superior as most of their leaders have STEM backgrounds”
That’s not really a good measure of quality of leaders in a country. It’s actually very common for developing countries to have STEM professionals – especially engineers – in political positions. This is the case in the Middle East as well. Maybe it’s a consequence of politics being less ‘specialized’ in those countries, and having fewer lawyers and academics, which means engineers and doctors and people in more practically useful professions are a more important part of the educated/political class.
MarkW
Sep 29 2019 at 10:02am
Do you really see a big difference between U.S. & China’s governments? Our’s is ruled by monied interests – their’s by party interests. Currently, I’d judge China’s superior…
China is a repressive authoritarian regime without democracy or freedom of speech (or religious or assembly or … ). And for a number of years, under now president-for-life Xi, China has been getting more repressive (and aggressive), not less. You have heard about the Uyghurs, right? But this is a superior system because STEM-educated technocrats? What an appalling thing to say (and believe).
Phil H
Sep 28 2019 at 7:14pm
Yes, I do still think that the USA’s systems are better. But the USA is completely unprepared to be Switzerland. There’s a good historical example here: Britain. It’s now more than half a century since Britain stopped being a major empire, but the aftereffects are still messing us up, hence Brexit. I don’t think the US’s institutions will adapt easily to being the world’s second power (and then third power, assuming India sorts itself out).
P Burgos
Sep 28 2019 at 8:01pm
I still don’t understand exactly why cosmopolitans in Britain are so upset about Brexit, besides party/tribal affiliations. The reason being that the inherent underlying issue is national sovereignty, not immigration or xenophobia or cosmopolitanism. Brexit comes and goes, and sooner or later the conservatives lose an election, and the left government then gets to govern and to set the UK’s immigration and naturalization policies. I really fail to see how being in the EU matters to the cosmopolitans except as a symbolic issue, except perhaps if you value it as a neoliberal battering ram. Which is how I think Corbyn views it and why he really didn’t oppose Brexit. But I don’t really see how EU membership makes the UK more cosmopolitan than it otherwise would be. Are politics in the UK a cold civil war like they are in the US?
Phil H
Sep 29 2019 at 3:35am
The simple answer to that is: Brexit is the politics of the stupid, and that’s what annoys us. You’re right, membership of the EU is not itself a huge issue. The problems are (1) the campaign was all xenophobic populism, and it directly caused at least one murder, plus a wave of bullying; (2) Brexit literally cannot happen like the leavers claim because of Northern Ireland. There is a strong chance that the UK will break up over this issue. The refusal to accept reality is what upsets me.
John Arthur
Sep 28 2019 at 12:37pm
Scott, the US is really using China as an excuse for their own internal failings. We are just strong enough to still push them around, even though that will rapidly change. Cyberhacking is still a real issue though, but I’m not sure what can be done about that.
Disagree strongly with your first point. US PPP per capita income is far higher than China and the US is even more successful when you demographically adjust. Per Capita GDP of both White and Asians in this country is probably equal to city states like Singapore. This is probably where the US arrogance comes from. PS: Indians and Jews in America have HIGHER median incomes than Singapore has in per capita income. LOL.
Also I don’t really understand your Bannon comment. China, Japan, and Korea could let million of smart people from disadvantaged countries enter their technology sector, but they don’t. The US does, and small comments from people like Bannon aren’t going to change anything-its a nothingburger. There is this really irritating push from certain pundit circles to reflexively critiize White people for feeling certain ways on issues that everyone else in the world does, there are millions of Steve Bannon’s in China you know…
Michael Rulle
Sep 30 2019 at 8:40am
Scott, good question. I think whatever we are doing around Tariffs is the ultimate example of small ball. Although prohibiting investment ups the stakes from small ball. Global growth is better for all, and we have always believed that authoritarian states are not as good as more political free countries.
That is certainly a questionable assertion, so much so, that at least a few formally western Liberals dream out loud that their way may be better. International Infrastructure companies from America and Europe view China as almost impossible to beat in competition.
Your recent perception that China is far more authoritarian than you originally thought is disturbing. Whatever we “want” is driven, or should be driven, by that concern. I think Taiwan and Hong Kong agree. I am against authoritarianism——and like you——I still believe our Constitution still works—-even if we often seem to fight it.
But China has an extraordinary wealth of human capital——who are economically driven. Trumps vision of the nation state, while half true, is not all true. In the short run I want to see China opened for trade and free investment. If not——then what?
Warren Platts
Sep 30 2019 at 12:14pm
Right, they just tell us what movies we can make and watch in our own theaters, how to draw maps, steal, of course, hundreds of millions worth of IP every year, daily cyber intrusions, destruction of U.S. strategic industries (cf. Magnaquench), not to mention government-sanctioned fentanyl exports that kill more Americans annually than they managed to kill during the entire Korean War, threaten war if the President takes a phone call from the Taiwanese President, and harass our Navy ships freely traversing international waters!
Basically, we are dealing with a 21st century version of Nazi Germany and Imperial Japan rolled into one, complete with concentration camps and crematoria. China, moreover, is not a nation-state in the ordinary sense; it is polyglot empire. If you ask them, the honest ones will tell you that straight up: that the closest equivalent would be if the Roman Empire had survived somehow into modern times.
Thus, I can tell you what at least the nationalist faction within the administration wants from China: regime change, followed by breaking up the country into about 13 pieces with democratic elections and rule of law, including permanent, sovereign independence for Hong Kong and Taiwan. The world will be a much better, safer place when that happens.
Until that happens, China deserves the same economic treatment we reserve for the likes of Iran, Syria, North Korea, Cuba, or the former Soviet Union.
TMC
Oct 1 2019 at 12:55pm
I can’t find a source where China’s economy is even close to the US’s.
https://www.worldometers.info/gdp/gdp-by-country/
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
https://www.investopedia.com/insights/worlds-top-economies/
And, no, PPP doesn’t count.
Jon Murphy
Oct 1 2019 at 8:46pm
Well, of course, if you “don’t count” the measure by which it is larger, you won’t find the measure by which it is larger.
TMC
Oct 2 2019 at 11:05am
Or a better reason, you don’t count PPP because it’s not meant to be used this way. It is used to better understand how individuals fair in an economy. If that’s the intent then also go with GPD/capita.
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