Heiner Flassbeck: Who’s afraid of China?

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Sinophobia is a widespread political disease. Beyond China, industrialised countries are also pursuing an unjustifiably confrontational course towards other developing countries.

Beijing/ China

Reading the press in industrialised countries attentively and listening to their politicians, the impression of an aggressively adversarial West-North global divide is unavoidable. This standoff must be kept in check by all means to avoid escalation, including a military standoff. We are talking about China and a pathological Sinophobia that started in the United States and is apparently, but inexorably, spreading to Europe.

On reflection, it is unclear what triggers this paranoia. The most important factor seems to be that China is immense and remains alien to us in many important ways. Other factors, including conflicts with religious minorities in the country, border disputes, and perceived intransigence on issues of political sovereignty vis-à-vis Hong Kong and Taiwan may be regarded as understandable in a region that only a century ago the West regarded as a sphere of influence, as the so-called Boxer Rebellion demonstrates (1900). It is no accident that China refers to the Sino-Japanese War of 1937 as the “War of Resistance,” giving rise to a doctrine that holds that foreign powers must be kept away from the country’s borders at all costs.

Consequently, the roots of northern paranoia must lie deeper. Specifically, the euphoria over the celebrated Chinese turn toward a market economy in the 1970s – seen as a presumed victory over socialism – has been followed by deep disillusionment. Forty years down the line, the communist party still runs the country with a firm political grip and the legitimacy of successfully implemented market reforms. Weren’t we quite sure that a successful market economy can only work with a democratic order?

The “victory” of the free-market doctrine and democracy over communism was supposed to follow a different course. Probably the GDR was thought to be a role model, where the West was able to appropriate the means of production to a large extent, independent enterprises disappeared almost completely from the scene, and any serious social movement was defamed as a successor to failed socialism.

Action triggers reaction 

Over and over again, we are told that China is evolving from a peaceful and passively developing country to an increasingly assertive and aggressive superpower. Undoubtedly, Chinese posture and policy have changed considerably, but that change cannot be simply attributed to radical leadership. First of all, China’s role has objectively changed because of its unique economic success and relative economic prowess compared to thirty or forty years ago.

It is to be expected that when a country of that size successfully catches up with industrialised countries it will claim a far more active role in world politics and, sooner or later, articulate its interests as a global powerhouse. After all, many states seek Chinese government credit and assistance, even developed economies, let alone African states tired of Western paternalism. 

More importantly, however, China has come under enormous political pressure from the West, especially the United States, because of its success. Hardly anyone remembers how hard the country fought for World Trade Organisation (WTO) membership, as China was not accepted as a “market economy.” One should recall strong American pressure on China for full currency convertibility and the pressure to abandon a unilateral peg on the U.S. dollar.

Demanding the elimination of China’s global current account surplus, Washington demanded an appreciation of its currency. China bowed and staged a strong real terms appreciation, reflected on substantial real wage increases, a relatively stable exchange rate and the dissipation of the current account surplus. Still, the Trump administration introduced tariffs designed to address China’s persistently high bilateral surplus with the United States.

Even more threateningly from Beijing’s perspective, Washington frames China as a global threat. This perceived threat is inferred by the country’s emergence as an economic actor whose current rate of development suggests it could emerge as the biggest economy in the world, although there are statistical uncertainties this will happen. For ideological reasons.

China’s growth is not seen as a systemic success with broader significance, namely a new and efficient way to use market forces. Instead, China is primarily regarded as a threat to U.S. hegemony, a theme that distracts from the real intellectual tension over the balance between market and state. That is a friction the United States fails to acknowledge. 

How will China react to being signalled out as a rival while it remains the country with the largest population, a growth rate that outperforms its rivals, and is on the verge of becoming the undisputed leader of the global economy? Can China simply accept being lectured on domestic affairs, particularly human rights, in every political dialogue with a small Western country? 

Action by liberal states leads to Chinese reaction. Historically, it is much more likely that the Chinese will rally behind their government to ward off what appears to be an irrational external threat. That is exactly what has happened in China in recent years. Given the surge of external threats, from a Chinese perspective, reverting to autocracy and enhanced state control appears to be the only logical response. Interference in domestic affairs increases the pressure for a firmer grip over political and military affairs, so as to keep external interference at bay. 

All regimes need to prevail over “the other”

The West attributes China’s undeniable economic successes to some sort of state conspiracy; that is, the regime’s need to guarantee development so as to keep people in line. That is certainly true, but the same logic holds in Western democracies. There too, economic success is instrumental to maintaining a hold on power. Both systems are reliant on economic success.

The difference is that Europe talks up its own success while China delivers it. For over a decade Europe has been undergoing a financial crisis of its own making and is unable to reduce unemployment. In that sense, Europe looks at China with envy and fear, because the supposedly ideological inferior actually proves to be superior.

The state’s powerful role in the Chinese economy has proven beneficial. China never accepted, let alone applied, the Western dogmas of market dominance and the night-watchman role of the state. The fact that various attempts toward democracy have fallen by the wayside in the process is lamentable. But better economic performance does indeed bring legitimacy. Presumably, Americans will still be using dated last century train infrastructure as the Chinese hop on self-propelled super trains roaring at 400 kilometres per hour. Western infrastructure pales in comparison to the Chinese. 

Are developing nations our enemies?

In general, the West should stop treating developing and emerging nations as foes. Competition is often fierce between partners but it is plainly absurd between rich and poor countries. 

For two centuries, the theorem of comparative advantage has given us the impression that poorer countries could participate in international trade on an almost equal footing without further intervention. That is wrong. The theorem has nothing to do with the reality of poorer countries in open goods and capital markets. There, success is always about absolute advantages and the ability to produce modern products with modern technology. 

As the Chinese experience suggests, developing countries only succeed if they can lure Western technology into the country on a large scale. That process creates new political and economic dependencies that require regimes to hold a firm grip over foreign investors. If one wants to prevent this political development from the outset, one must rely on cooperation rather than confrontation.

Along these lines, the West could propose a global currency system that can substantially reduce the developing nations dependence on capital markets for the refinancing of their public and private debt. But to eliminate currency speculation, Western leaders would have to confront a strong financial lobby that does not prioritise the development of poorer economies.

Heiner Flassbeck is an Economics Professor (Hamburg University), former Deputy Minister of Finance of Germany (1998-1999), and the former Director of Globalisation Strategies for the United National Conference on Trade and Development (UNCTD, 2003-2012). Flassbeck has also worked as Chief Macroeconomist at the German Institute for Economic Research (DIW), and member of the staff of the German Council of Economic Experts. In 2016 he founded the Makroskop consultancy for global macroeconomics.

(Source: Who’s afraid of China? (brusselsmorning.com))