How the West got China catastrophically wrong
Fifty years of encouraging closer economic links with Beijing was misguided, says George Magnus
At the start of the Winter Olympics in Beijing in early February, Xi Jinping, and Vladimir Putin stood shoulder to shoulder to declare the two countries’ “friendship without limits”. In a 5,000-word statement meant to highlight their unbreakable bond, the pair sought to exploit what they believed to be the terminal decline of the West. Their intention was to make the world safe for autocracy.
Since then, world affairs have not evolved as the pair expected, to say the least. Europe, the US and their allies around the world have come together in support of Ukraine. The old global system the two autocrats had been so dismissive of is fighting back. Putin’s Russia has become a pariah in the global system, and Xi’s China will have to bear the consequences of committing to support it.
Yet for all the horror and carnage in Ukraine, the mass graves and the atrocities, China represents the larger and more enduring challenge to the world order of the two authoritarian empires. It is a $16trillion (£12.7trillion) economy, the biggest export nation in the world, and the hub of global supply chains. It is deeply integrated into a global system spanning trade, commerce, investment, finance, science and education. And it has become a geopolitical rival and ideological adversary of the West, amid intense mutual distrust over national security, values, standards and beliefs.
President Nixon’s famous trip to China in 1972 kicked off decades of optimism that the country could be integrated into the global liberal order. Its 50th anniversary was noted earlier this year without fanfare or enthusiasm by either side – unsurprisingly, given how badly wrong the West’s great gamble has gone.
From golden arches and eras, to dust
It was not all smooth sailing. Decades of generally improving and closer economic relations with China were frequently punctuated by spats over human rights, trade, currency manipulation, jobs and weapons sales to Taiwan, as well as an array of foreign
The US-China relationship is one of the most interdependent in the world
policy tensions, including over North Korea and Iran. After the brutal suppression of the Tiananmen Square protests in 1989, America even imposed trade and technology sanctions.
But as the world gazed at China from the outside, welcome developments were unfolding under the leadership of Deng Xiaoping. Under the “reform and opening up” campaign, which lasted until relatively recently, China did change greatly. It experimented with different forms of ownership, incentives and elementary property rights in agriculture, and later in industry, and encouraged mutual exchanges of experts with foreign countries to learn about markets and different economic practices.
After a Tiananmen hiatus, Deng re-energised the reform agenda and passed on the baton to his successors. In the 1990s, China abandoned its housing welfare system for a proper residential market and undertook sweeping reforms in state enterprises, embraced privatisation, and created special economic zones to attract foreign businesses and promote exports.
This led to a partnership that was regarded as extraordinary, not just in China but in the West as well, as we tried to take on board the consequences of the fall of the Soviet Union, including what many regarded as a green light for globalisation. Bill Clinton, who criticised the George HW Bush administration for “coddling with dictators” as a candidate for the presidency in 1992, began his term by passing an executive order linking China’s trade status with human rights.
But by 1995, when China applied formally to join the World Trade Organisation, the mood in Washington had changed. Clinton went to China in 1998 and made a deal with premier
Zhu Rongji that paved the way for accession in 2001.
The American commentator Thomas Friedman epitomised the optimism of the age with his Golden Arches Theory of Conflict Prevention, according to which no two nations with McDonald’s restaurants would go to war.
This was just a more colloquial take on the 19th-century notion that high levels of economic integration would stop conflict because the economic costs would be too high. Friedman later refined this with the Dell Theory, in which no two countries that were part of the same global supply chain would fight or punish one another. This proved to be accurate in the case of America’s spats with, say, its ally Japan, but turned out to be woefully misguided with regard to autocracies and zealots.
China’s WTO accession remains one of the most controversial developments of the past few decades. In 1992, independent presidential candidate Ross Perot grabbed 19 per cent of the vote, helping defeat Bush, partly owing to a critique of trade with the Chinese. In 2000, when Congress agreed to permanent trade liberalisation with Beijing, the United Steelworkers of America denounced the deal as a “betrayal of workers’ interests” and warned that factories would disappear as a result. Blue-collar discontent has lingered since then and was played on heavily by Donald Trump.
But Clinton believed it would enhance American exports, and push China even further towards economic reforms. The thinking was that as China became wealthier and more stable, the threat to global stability would diminish and liberalisation would liberate the potential of the Chinese people to demand more inclusive government.
Today, these judgments look naive. Despite concerns about China’s industrial policies, currency management and technology transfer and market access practices, the direction of travel regarding economic and commercial engagement was cast in stone and pushed on by both George W Bush and Barack Obama.
Bush labelled China a strategic competitor, but cosied up to the regime anyway. He allowed ongoing negotiations on a wide range of economic and financial matters. He believed that commercial incentives, even in totalitarian countries, would make “the move to democracy become inexorable”.
The Obama administration, formed in the hurricane of the financial crisis, was similarly warm towards China and resisted demands to stand up to the country as it became more truculent in its foreign policy. Obama did little after 2012, when the country’s new leader, Xi, developed the Belt and Road Initiative to influence global trade and militarised islands in the South China Sea.
The financial crisis was also used by China to speak out more forcefully. While noting that foreign investment was still flowing strongly into the country, Beijing sought to emphasise that the American economic model was no longer fit for purpose and that the world should forsake a moribund US dollar-based financial system. It was a theme the party continued after Trump’s inauguration in 2017, when China’s state press attacked the “heavy drawbacks” in Western democracy and said that the future belonged to “socialism with Chinese characteristics”.
Cameron and Osborne’s late show After the financial crisis in 2008-09,
Britain also needed to recover its sea legs. UK and Chinese political and trade delegations visited one another between 2010 and 2014. In 2015, Britain broke ranks with the US when it announced it would be the first G7 country to join the China-created Asian Infrastructure Investment Bank. David Cameron’s government promoted Xi’s lavish visit to the UK that year by celebrating the start of a “golden era” in UK-China relations.
Xi was welcomed with a 41-gun salute, and rode to Buckingham Palace in a gilded carriage with the Queen. At a state banquet, she called his visit a “defining moment in this very special year”. A deal was struck for China to invest in the Hinkley Point C power station.
The timing was poor, bearing in mind the radical change in economic and political direction that was evident in China.
The UK government and its advisers saw golden economic opportunities, but paid no attention to China’s politics, governance, or protectionist industrial policies. Amnesty International was already warning about a crackdown on human rights, claiming that 245 lawyers and activists had been arrested in the space of just five months.
There was also nothing especially golden about the UK from China’s perspective. Britain, nevertheless, was the biggest EU recipient of Chinese foreign investment, and Beijing certainly had designs on the UK government’s new nuclear energy programme, the opportunities for yuan finance in the City, and our science and technology and education sectors.
By 2020, the gold in this short era had turned to dust. America’s trade war with China, which started in 2018,
migrated into technology, communications and national security, and gradually, we too became more aware of the darker side of China’s involvement and its interference in UK business, academia and politics.
Theresa May was among the first Western politicians to adopt an overtly hostile attitude to China, delaying a deal on Hinkley in 2016 because she had security concerns. She appointed Nick Timothy, a China hawk, as one of her most senior advisers.
May’s resistance – coupled with Donald Trump’s use of China as a populist tool to stoke up opposition to Democrat trade liberalisation – marked a significant turning point.
After years of pressure, Boris Johnson was forced to agree in 2020 to strip kit made by Chinese business Huawei out of mobile internet infrastructure over security concerns. Meanwhile, major universities, including Oxford and Cambridge, earn an increasingly large income from Chinese students and have been paid donations by companies in the country. An academic in the China Centre at Jesus College, Cambridge, warned colleagues against holding debates on China’s human rights abuses in November 2020. Jesus insisted afterwards that it had always upheld freedom of expression.
The UK Government is now paying far more attention to military and technological takeovers by the Chinese, and has reformed laws so it is able to intervene in a far wider array of deals on national security grounds.
A raft of investigations have been started into takeovers such as the sale of Newport Wafer Fab, Britain’s biggest microchip factory, to a Hubei-based tech business.
In the US, trade with more than a dozen Chinese tech companies has been restricted and Trump sought to ban TikTok, a Chinese-owned socialmedia company.
But perhaps the greatest change of all in China’s relationship with the West came with the Covid crisis. The country was sharply criticised around the world for covering up the initial scale of the outbreak, and insisting that there was no clear evidence of human-to-human transmission as late as January 14 2020. British and US intelligence services have even suggested that it is “credible” that the virus originated in a Chinese lab and leaked by accident.
It is not for nothing that the “golden era” has sometimes been referred as the “golden error”.
Where we are now
It is easy to be critical of individuals and naive or poorly informed decisions they made. But there is also a continuity in the behaviour of US administrations – as well as the Cameron government and the EU – that suggests something more systemic was going on, too. In other words, poor or questionable decisions that didn’t acknowledge the risks and consequences of closer engagement with China were perhaps down to a strategy that was misguided from the start.
This approach was based partly on the idea that a stable, prosperous China was preferable to one that was poor, and perhaps in political turmoil. As such, it would then be less of a threat and better serve the national interests of the US and other liberal-leaning democracies, and vice versa. That was probably a fair enough call, even if it turned out to be wrong.
The other premise, that a wealthier China was bound to liberalise, democratise and become a trusted global partner, was less forgivable and should never have guided policy – especially after Xi came to power in 2012. No one should have been in any doubt that China was, at that point, on the cusp of dramatic political and ideological change.
In Hong Kong, Xi has effectively dismantled the “one country, two systems” approach agreed with Britain by enacting a security law that makes political dissent punishable by imprisonment. Protests have been forcibly put down by police.
Meanwhile, the Uyghur minority group in Xinjiang is being subjected to mass internment, round-the-clock monitoring and even forced sterilisation, according to the China scholar Adrian Zenz.
In the West, China has been accused of hacking on a massive scale to steal intellectual property and military secrets. America’s Office of National Counterintelligence Executive has described Chinese actors as the “world’s most active and persistent perpetrators of economic espionage”.
Covid has only made the divide more stark. China’s determination to permanently eliminate the disease has led to prolonged and brutal lockdowns that have damaged its economy and forced it to lock thousands of people in Shanghai and elsewhere indoors against their will.
It has, over a decade, taken action against Norway, Japan, the Philippines, Vietnam, South Korea, Canada, the EU, the UK, and especially Australia, which has endured widespread export bans and political interference following its demands for an international inquiry into the origins of Covid.
In the latest turn of events, a row has blown up over a secret agreement that expands Chinese influence and security arrangements in the Solomon Islands, believed to be the first such bilateral agreement with a country in the Pacific. It is hard for governments and businesses to come to terms with this. They have spent years, if not decades, building their China strategies and getting used to the idea that China’s market and power, warts and all, is the future – and unstoppable.
It is true that high levels of integration are hard to disentangle, but this thinking could turn out to be as flawed as the one that led our politicians astray in the 1990s and early 2000s. And that is before considering the significance and consequence of China’s two most recent shocks – its zero-Covid policy and the Russian invasion of Ukraine.
The world’s dependency on China is legendary. Production of a lot of lower value goods, such as toys and textiles, has moved to the likes of Vietnam and Bangladesh, but China still supplies the West with clothing, footwear, sports equipment, cooking and home appliances, and furniture. We also rely on China for some so-called rare earth elements, the minerals used in mobile phones and for electric vehicles, batteries, solar energy equipment, smartphones, tablets, TVs, computers and other office equipment.
As our experiences of Covid demonstrated, China also supplies large quantities of pharmaceutical and medical equipment, antibiotics and prescription drugs.
The US-China relationship is one of the most complex and interdependent in the world. The value of their engagement is more than $2trillion. Bilateral trade in goods and services runs at a bit more than $700billion a year. The stock of US investment in China is a little shy of $150billion, while China’s in the US is about $60billion.
China’s government holds over $1trillion of US financial assets in its currency reserves of more than $3trillion, and probably more as some assets are held in offshore financial centres or outsourced to private foreign managers.
Bank loans have financed China’s Belt and Road Initiative, accounting for the bulk of the $1trillion or so of loans and projects that have accumulated since 2013. The lending has actually dried up since 2018, but China is still eager to develop what it calls the Digital and Health Silk Roads, where it wants to be the go-to place for public health goods and services and communications and technological equipment and standards.
Dependency is of course a two-way street, and China’s dependency on the rest of the world is similarly high. It needs the $1.5trillion of annual bilateral trade that it does every year with the US and Europe. It needs the foreign firms in China that supply high-tech goods and expertise, aerospace equipment and parts, and extensive know-how.
It wants foreign financial firms to supply wealth management and investment banking expertise. It remains highly dependent on imported technology, especially microchips, on which it spends more than it does on crude oil. With a closed financial sector, capital controls and a managed currency, China still needs global capital markets to be open and to invest the proceeds of its trade surpluses, which seem destined to endure.
Breaking up is not so hard to do
You could be forgiven for thinking that so much dependency working both ways would be hard to disentangle, and it is. Yet it would be a mistake to think that high levels of integration cannot be undone by politics, as our predecessors learnt at great cost after 1914. Today, the political drive to decouple or disengage has become much stronger.
Businesses have continued to prosper in China – until recently, at least – and have adapted to the Communist Party’s idiosyncrasies even as Xi’s Beijing turned more authoritarian and controlling.
But, from about 2020, there has been much greater edge to China’s policies – not only in support of already prominent state enterprise and government involvement in the economy, but also in measures designed to bring private firms and entrepreneurs to heel.
Financial and regulatory punishment of the tech giant Alibaba, and a blizzard of regulation affecting data, finance and technology platforms, have soured the industrial mood as the government piles pressure on private firms to align their activities with the party’s social and political goals and objectives.
Corporate angst and business uncertainty have become more evident in the wake of the clampdown on Hong Kong that started in 2019, and the deterioration in relations following both the outbreak of the pandemic in 2020, and revelations about the incarceration of Uyghurs – where Chinese oppression has even prompted claims of genocide.
The 2018 focus on trade tariffs has been replaced by an extensive network of export controls, greater scrutiny over foreign investment, restrictions on whom domestic firms can do business with, and ultimately sanctions on those who fall foul of the regime.
Some of these have been applied because of Hong Kong, Xinjiang and on national security grounds, but China has also continued to punish sovereign states and companies with whose policies it disagrees. These actions and developments have already begun to compromise firms, drawn increasingly into the awkward crosshairs where they have to choose whose rules and laws to flout and whose to follow.
China’s support for the Russian invasion of Ukraine, and more recently the quarantine and lockdown consequences of its zero-Covid policy, have taken these issues and concerns to a new, higher level. Plans for foreign investment in China may be cut back significantly, while strategies to wean Western companies off their Chinese suppliers are also under way. The Sino-Russian partnership is driving home a new reality in which the US is seeking to strip China out of its supply chains under the expanded umbrella of national security.
China, meanwhile, is attempting to de-Americanise its own supply chains, proclaiming its focus on self-reliance in the face of what it claims is a threat from the US. It wants to secure immunity from sanctions, especially in view of the West’s response to Russia, if that is even possible.
Unlike Russia, which wants to upend the global system, China wants to run it. That at least offers some cause to believe that some form of engagement is possible, even between adversaries.
We have learnt, painfully, that encouraging China’s economy and its rise did not make it less threatening, let alone democratic. There should be no misunderstanding now that Xi’s China harbours aspirations to relaunch liberal reforms or experiment with universal values, the rule of law, and so on. The single-minded purpose of the Chinese Communist Party is to rule unchallenged, and prevail over the US.
Curiously, though, China is hoisting upon itself a contradiction it cannot resolve. On the one hand, it has thrived on the back of engagement with the rest of the world. It wants to exploit an open global system and its institutions to pursue its own agenda. On the other, pushback against the world’s two biggest autocracies by politically aligned Western nations, an enfeebled domestic economy, and China’s own politics and behaviour regarding Covid, Russia and private firms, are all prompting disengagement.
Without engagement, China’s ambition to become the world’s biggest and dominant nation may never be realised. We may have already seen Peak China under Xi Jinping.
Unlike Russia, which wants to upend the global system, China wants to run it