China’s economic Cold War
China is systematically hollowing out the West’s industries, not just toys and T-shirts, as was the case decades ago, but increasingly strategic industries vital to national security. China isn’t succeeding simply because of its comparative advantage in cheap labour. It’s succeeding because of its comparative advantage elsewhere — in its ability to overwhelm target industries using the power of the state.
Take steel, where China now controls 50 per cent of the world’s production, and where — until U.S. President Donald Trump imposed tariffs on steel imports — it was one to two years away from collapsing what was left of America’s steelmaking capacity. China became the world’s largest steel exporter more than a decade ago on the strength of energy subsidies, which allowed it to undercut competitors by 25 per cent. Or take aluminum, another target of Trump’s tariffs, where similar energy subsidies propelled China into control of 56 per cent of the world’s production.
Or take rare earths, elements indispensable in military uses such as laserguided missiles and the F-35 fighter jet as well as cellphones and other consumer products. Here China controls some 90 to 95 per cent of world production, having either bought out competitors or bankrupted them by flooding the market with cut-rate rare earths. China may be prepared to do more, too, to enforce its monopoly. Chinese vessels have been entering Japanese waters, where last week a study confirmed the discovery of a rare-earths deposit large enough to meet global demand for centuries.
China knows that Japan, its historic enemy, would be unwilling to part with this deposit voluntarily for any price, particularly since China tried to cripple Japan’s high-tech economy in 2010 by withholding rare-earth supplies. China’s weaponization of rare earths followed a policy set decades earlier: “The Middle East has oil. China has rare earth,” said Chinese leader Deng Xiaoping in 1992, in deciding to exploit rare earths for their strategic advantages.
The renewable energy industry — both solar panels and wind turbines — are now dominated by China, as is the nuclear power industry. The next strategic resource that China plans to control is semiconductors, a backbone of electronics and telecom. Industry analysts predict that China will control 60 per cent of the global semiconductor market within five years, raising national security alarms in the West. The Obama and Trump administrations have both blocked attempted takeovers by China of U.S. semiconductor companies to prevent furthering Chinese advantages in surveillance, an area in which it already excels.
Chinese industry can become dominant in virtually any area it chooses, not through its technological prowess or business acumen, but through government diktat. China’s industries are no more independent of government than Soviet Russia’s industries were during the Cold War. China is able to play this strategicdominance game because its ultimate prize isn’t profit but power. The subsidies the Chinese government directs to securing strategic industries come at the expense of the overall economy, as the Chinese leadership well understands. It justifies these expenditures on a military calculus: These extravagant subsidies to strategic industries complement China’s extravagant expenditures on its conventional military, which U.S. military officials believe could soon rival American power.
Soon after the 1989 massacre at Tiananmen Square, the West decided to win China over to liberalization and democracy by encouraging it to open its economy, abandon its theft of intellectual property and trade honestly with the West, a process that led to China’s admission into the World Trade Organization in 2001. With freemarket reforms, the thinking went, China would develop a powerful commercial class that would act as a counterweight to the political power of the Communist Party and neutralize the threat that the Chinese military and its nuclear weaponry represented.
China did open up its closed economy, but few of the economic reforms and none of the democratizing political reforms happened. At home, where President Xi Jinping has acquired an absolute power not seen since Mao, China has clamped down on dissent more completely than at any time since Tiananmen, imprisoning political dissenters along with any lawyers who dare represent them, taking over the NGO sector and, with new tools at hand, surveilling the populace more thoroughly than ever before possible.
Abroad, China’s access to Western industry allowed it to thieve intellectual property on an unprecedented scale; simultaneously, it became increasingly belligerent toward its neighbours. China is now involved in territorial disputes with Japan, the Philippines, Vietnam, Bhutan, India, Indonesia, Malaysia, Brunei, Pakistan, Russia, Myanmar, Kazakhstan, Tajikistan, Mongolia and North Korea, as well as laying claim to the waters of the East and South China Seas. Although China is not in the Arctic, it this year nevertheless laid claim to Arctic resources as a “near-Arctic” state.
An expansionist China, not Russia, represents the greatest long-term military threat to the West. In past wars, countries bombed their enemies’ factories, steel mills, electricity plants and other infrastructure to compromise their ability to wage a protracted war. In this new de facto Cold War, China is compromising our resiliency by deploying its economic might to take over our industries without needing to fire a single bullet.
Through all this, what’s known as China’s Rise, the West has been its financier and enabler, fecklessly comforting ourselves with the gains gotten from China’s cheaper consumer goods, and putting out of mind the longterm pains that await us.
ITS ULTIMATE PRIZE ISN’T PROFIT BUT POWER.