Trump is picking up pennies as China steamrollers trade

Britain could be forging a strategy for the capitalist, liberal world, but instead it is merely drifting

Sometimes, faced with a big, intractable problem, we humans spend all our energy on avoiding it. A report deadline, an ailing relationship or an existential challenge to capitalism and global trade – such challenges, approaching like steamrollers from afar, all seem to push us to remarkable new heights of creative procrastination.

The steamroller, in this case, is China. And the governments and institutions picking up pennies before it are the US, Britain and, to a lesser extent, the EU. Donald Trump has just started a major trade dispute with America’s closest allies. Britain is embroiled in arcane arguments about customs procedures. And the EU, though it is genuinely trying to have a strategic trade policy, is preoccupied with the ongoing failings of its single currency and migration system, while blowing up its security alliance with the UK for good measure. All the while, China’s trade dominance grows.

The underlying problem is that the West was wrong about China. Or at least, if we were right, it’s not evident yet. Drawing on our Cold War victory, the view was that China’s democratisation or collapse was only a matter of time. Once a substantial middle class emerged, the theory went, they would demand political rights. Instead, China’s enrichment and enormous technological advances have only tightened the grip of the Communist Party. A new model – a type of authoritarian, mercantilist capitalism – has emerged and it is now the biggest threat faced by the Western conception of freedom.

The main reason it threatens us is that it seems to work. By “work”, I don’t mean that it’s a good thing. I mean that it achieves two aims: propelling China to the forefront in trade and technology, and keeping the Communist Party in power. Its toolkit includes many positives such as massive investment in education and science and segments of great economic freedom and entrepreneurialism. However, it also deploys socialist or mercantilist mainstays: technology theft, enormous subsidies, state ownership of industry and quiet, ongoing bailouts. And it relies on another truly dark set of tools: propaganda, censorship, imprisonment, execution, torture, forced relocation, mass surveillance and social engineering.

This innovative blend has helped China become the world’s biggest exporter, the biggest filer of patents and the second biggest economy. Their companies can buy ours and sell many goods and services here, but we don’t get the same access there. Our businesses have to compete with many Chinese firms benefiting from a protected home market, copycat technology, state political and financial support and much less stringent limits on data usage or genetic engineering. With automation and globalisation having already wiped out a swathe of industrial jobs, the West now faces the prospect of losing its technological edge to a quasi-communist state.

For Britain, there are two potential strategies available. The first is to shrug and reiterate that staying open to trade is always the right policy. Advocates of this approach, such as George Osborne, tend to argue that China’s record is improving on such issues as the rule of law or the protection of foreign companies’ intellectual property. In this view of the world, China’s economic model is legitimate, its subsidies and protections will ultimately only hurt its own economy and its rise is both inevitable and a great opportunity. Therefore, this argument goes, we should throw open the door, confident that the best strategy is to cultivate trade with China, letting its companies sell us goods and services or buy up their British rivals, so that, in due course, we gain the best possible access to its market and technologies.

There is much that appeals in this argument. It fits with economic theory, which says that even unilateral free trade benefits a country. It professes faith in Britain’s ability to compete. Until recently, I thought it was the right approach. Then I considered the other possibility.

The alternative strategy available to Britain and its allies is to try to bring about a significant rebalancing in global terms of trade. The aim would be to persuade China that it must carry out reforms to reduce subsidies, respect foreign intellectual property, obey World Trade Organisation (WTO) rules and open up its market. If it doesn’t, Western voters simply won’t tolerate globalisation and free trade, because our companies can’t compete fairly.

This approach is worth trying. It requires both a carrot and a stick. The

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carrot would take the form of offering China potential trade deals in future and a greater say in international institutions, such as the WTO, conditional on Beijing obeying the rules. The stick would take the form of less market access and targeted tariffs.

Unfortunately, it will only work if it’s embraced by most of the liberal, capitalist world. It requires an alliance stretching from the US to New Zealand, from Germany to Japan, to be taken seriously. This alliance would encompasses many different economic models, but they are all broadly capitalist and share an interest in pushing China to reform. Had Mr Trump travelled to Brussels or Tokyo with this aim in mind, he would have found partners ready to listen. Instead we have a US president picking fights with everyone at once, including his country’s closest allies. He clearly understands the concept of carrot and stick. He has credibility in using the stick. But he seems to think the US can act entirely alone, browbeating everyone into submission, instead of focusing its energies on the most important geopolitical struggle.

Britain, meanwhile, is obsessing over the minutiae of Brexit even as we need clear thinking. Brexit was meant to create a new sense of our role in the world. Whether it’s on China, trade wars, or Brexit, the Government desperately needs to pick a strategy and unite. It could choose to part ways with the EU and US, remaining open to China. Or it could choose to help build an alliance to put pressure on China. As an open, commercially minded nation, Britain should be well positioned to do either – brokering agreements, pulling strings and bridging the gap between east and west. Instead, it’s drifting. And so the moment to act is passing us by.