Four reasons China can't reset the world

The country presents much less of an economic opportunity, and much more of a risk, than it did in 2015.

"xi and obama" by vhines200, CC BY-ND 2.0.

The weekly link roundup is delayed this week, but it’s coming. There’s just a lot of stuff happening in the news that I should probably write about before it goes stale. Anyway, consider this an installment in my recent China series.

I see China’s basic strategy right now as trying to reset the world of 2015. Eight years ago, China’s economy was still growing rapidly, investment and technology transfer from Western companies were still pouring in with very little resistance from Western governments, and China was viewed warily but not negatively on the international stage. After two years of economic stumbles and a hardening geopolitical environment, it’s understandable that Xi Jinping would want to reset the board to when he was clearly winning.

The big news this week is that China seems to be making progress toward pulling off exactly such a reset. U.S. Secretary of State Antony Blinken traveled to Beijing to meet with Xi, in what was widely seen as an attempt to strike a tone of detente. More hawkish observers were dismayed at the tone of the meeting, in which China’s leaders aired their grievances with seemingly little overt pushback:

“My hope and expectation is we’ll have better communications, better engagement going forward,” Blinken told reporters in Beijing…Shortly after Blinken’s plane left Beijing, China’s Foreign Ministry…took a downbeat tone, playing down the Xi meeting as purely a matter of “courtesy” and laying the blame on the US for the frictions, according to state TV…In his meeting with Blinken, Wang Yi, China’s top foreign policy official blasted “illegal” US sanctions and putting the blame for worsening ties on Washington, which he said had misunderstood China, according to China’s Foreign Ministry. The US called it a “candid and productive discussion”[.]

A number of small details of the meeting suggested that Blinken went to China to get a lecture. China’s leaders vocally blamed the U.S. for the deterioration in relations and demanded that America make amends, while also failing to give the U.S. anything it asked for; in particular, China refused to establish military-to-military communications that might help avert an accidental war. Meanwhile, President Biden declared that the Spy Balloon incident this February wasn’t the Chinese leadership’s fault. (Update: Biden also called Xi Jinping a dictator, which is true, and which also angered the Chinese foreign ministry.)

On the economic front, too, China seems to be winning concessions. The Biden administration has been working hard to tamp down talk of “decoupling”. Although Biden took a harder line toward China on economic policy during the first two years of his presidency, he has recently been walking some of those policies back:

The Biden administration has delayed punitive economic measures against China and played down Beijing’s intensifying intelligence-gathering to avoid jeopardizing its efforts to revive diplomatic talks between the two governments, according to former U.S. officials, congressional aides, Western diplomats and regional experts.

From planned restrictions on investment in China to declassifying intelligence about the origins of the coronavirus, the administration has been “slow walking” certain decisions in recent months as officials have sought to mend relations with Beijing, the sources said.

Meanwhile, Xi had a friendly meeting with his “old friend” Bill Gates, and Micron Technologies, a U.S. chipmaker whose products were recently banned in China, announced a $600 million factory expansion in that country.

All these signs seem to point toward a reset to 2015, where the developed democracies bend over backwards to accommodate an aggressive China in order to retain access to its markets and workers. But I see several key reasons that a hard reset isn’t going to happen. Diplomats can choose to be as diplomatic as they want, but relations between countries are also driven by deep-seated economic factors that won’t be changed by conciliatory language. And in the past decade, the economic pressure to play nice with China has fallen considerably.

1. China is a direct competitor rather than a cog in the supply chain

China’s attractiveness as an investment destination in 2015 was closely related to its position in the global supply chain. Even after China’s labor cost advantage had dried up, companies from developed countries like the U.S., France or Japan took advantage of the country’s uniquely enormous scale to manufacture whatever they wanted, whenever they wanted. China became the “make-everything country” — deciding where to locate your factory was a no-brainer, a push-button exercise.

This meant that no matter how much Chinese competition hurt the workers in rich countries, rich-world companies had an incentive to maintain the system. I’m not cynical enough to think that capital’s power always trumps labor’s power in the political arena. But the fact that the rich people in rich countries were benefitting from the China gold rush made it very difficult to assemble the coalition required to really do something about China’s espionage, mercantilist policy, and growing military might.

That has now changed. China has moved up the value chain, meaning that it now makes many more of the high-value components for the products it exports. The most striking example is in the auto industry, where China has gone from a bit player to a world-beating export powerhouse overnight:

Source: Brad Setser