The Perils Facing China

As global trade retreats and is replaced by regional trading blocs, power will flow to those countries that are most self-reliant.

By self-reliant, I mean countries that are best able to a) maintain vigorous economic growth without relying excessively on exports; b) feed their populations without importing vast amounts of food; and c) be more or less energy self-sufficient.

Nations that cannot flourish without significant export income by definition lack strong consumer-based economies, crippling their ability to grow ex-exports. And nations that depend on other countries for critical items such as food and energy are, by definition, subject to external blackmail.

A somewhat simplistic way to identify countries that will fare best over the next three to five decades is to rank them according to what percentage of their GDP is currently accounted for by exports.

Germany, for example, has prospered along with the rise in global trade, while France has fallen behind. But looking forward the German economy will come under intense pressure because 46 percent of German GDP is represented by exports. France, less than half as dependent on exports, will fare much better, altering the balance of power in the EU.

In the U.S., exports represent only 12 percent of GDP, and since American exports go overwhelmingly to Canada and Mexico, globalism’s retreat won’t much affect the U.S. economy.

China’s exports aren’t as large a percentage of GDP as many people imagine (20 percent), but China still faces daunting problems, for two reasons.

The first is that, as global trade routes begin to atrophy and as Cold War II reduces America’s willingness to trade with China, China will lose its largest trading partner—the U.S. That partner can’t be replaced because no other economy in the world can accommodate the volume of exports from China that the U.S. currently accepts.

The second problem for China is that, while it is possible over time for a country to shift its economy from export-based to self-reliant, that shift takes many years—decades, in fact—as massive installed production capacity has to be replaced or repurposed.

A country like Germany will make that shift over time, and in the meantime the Germans will simply have to put up with extremely slow, or even negative, growth. But Germany is a wealthy nation and a democracy and the Germans will persevere.

Matters will be very, very different in China. The Chinese Communist Party (CCP) has a straightforward deal with the Chinese people—give us all power and we will make you rich.

But to create a dynamic consumer economy that can pick up the slack from declining exports would require China to liberalize, to give both individual businesses and individual consumers the freedom to make and buy whatever they wish—the very antithesis of the CPP’s state-directed economic model.

Even if the CPP were willing to liberalize, thus putting itself at risk, the massive shift from exports to self-reliance will require decades to accomplish. In the meantime, the Chinese economy will stop growing, or even shrink, perhaps drastically.

Under conditions of negative economic growth, the CCP would in all likelihood be liquidated and China would—at last!—begin to “converge” with the West. The only other option would be for China to become a closed totalitarian state in which all internal dissent was brutally suppressed. A North Korea, let’s say, or a USSR under Stalin.

Finally, even if the CCP liberalized and somehow survived the shift from trade-based growth to self-reliance, China would find a self-reliant world a very harsh one. Looking back at my definition of “self-reliance,” we find that China would struggle on all fronts:

• Decline in global trade would harm China far more than the U.S., as China is more dependent on trade and would lose its largest trading partner, while the U.S. would continue to trade with Canada and Mexico, its largest trading partners.
• China is the world’s biggest importer of food and grain, and in many years, starvation would be widespread if China were forced to depend solely on its own agricultural resources. Meanwhile, the U.S. is fully self-sufficient in terms of food production and, in fact, is far and away the largest exporter of farm products in the world.
• China has never, during the era of the People’s Republic, been energy self-sufficient. Domestically produced energy relies heavily on pollutive coal (70 percent of China’s energy use) and China is the world’s largest importer of oil. Meanwhile, the U.S. is now energy self-sufficient and is the world’s lowest-cost oil producer, thanks to shale. America has been a net exporter of coal for many decades and became a net exporter of natural gas in 2017.

The CCP may be tyrannical, but it isn’t stupid. Xi Jinping recognizes that the future that is shaping up for China is not a happy one.

Xi has been criticized for abandoning Deng Xiaoping’s famous dictum: “Hide your strength, bide your time.” But Xi knows all-too-well that time has run out for China and that it must challenge the West now – or never.

Xi also knows that the iron-clad deal between the CCP and the Chinese people (power-for-wealth) is collapsing. As a result, he is already establishing the groundwork for a new deal: power-for-stability. The CCP, he argues, must brutally suppress dissent of any kind in order to avoid the chaos that has bedeviled China throughout the millennia.

True enough, in the 2,200 years since China was first unified under the Qin Dynasty (which lasted only 12 years), China has suffered through many dissolutions, especially involving non-Han populations in Inner Mongolia, Tibet, Manchuria and Xinjiang. During those two millennia China was almost as often in chaos as it was unified.

It remains to be seen whether increased oppression will be accepted by the Chinese people in exchange not for economic growth but for social stability. But Xi’s  conclusion that the CCP has no choice but to move in that direction bodes ill for any chance China might have had to succeed in its competition with the West.

Next up: Cold War II, Part 10