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A representative of Shangdong Orange Paper Import and Export Company introduces its paper globe at a trade fair in Hong Kong in January. The “China model” of development has come under attack recently for being insufficiently open to foreign companies. Photo: Nora Tam
Opinion
Opinion
by Dani Rodrik
Opinion
by Dani Rodrik

Capitalism with US and Chinese characteristics can peacefully coexist – if we give up on ‘hyper-globalism’

  • The idea that countries must fully open their economies to foreign companies, regardless of the consequences for their own growth strategies or societies, is flawed. The US and China should give each other greater policy space
Dani Rodrik
Dani Rodrik
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The world economy desperately needs a plan for “peaceful coexistence” between the United States and China. Both sides need to accept the other’s right to develop on its own terms. The US must not try to reshape the Chinese economy in its image of a capitalist market economy, and China must recognise America’s concerns regarding employment and technology leakages, and accept the occasional limits on access to US markets implied by these concerns. 

The term “peaceful coexistence” evokes the cold war between the US and the Soviet Union. Soviet leader Nikita Khrushchev understood that the communist doctrine of eternal conflict between socialist and capitalist systems had outlived its usefulness. The US and other Western countries would not be ripe for communist revolutions any time soon, and they were unlikely to dislodge the communist regimes in the Soviet bloc.

Peaceful coexistence during the cold war was successful in preventing direct military conflict between two superpowers armed to the hilt with nuclear weapons. Similarly, peaceful economic coexistence between the US and China is the only way to prevent costly trade wars between the world’s two economic giants.

Today’s China-US impasse is rooted in the faulty economic paradigm I have called “hyper-globalism”, under which countries must open their economies to foreign companies maximally, regardless of the consequences for their growth strategies or social models.

This requires that the domestic rules governing markets converge considerably. Without such convergence, national regulations and standards will appear to impede market access.

Senior US and Chinese officials take part in trade negotiations in Washington in February. Photo: AP
The main US complaint against China is that Chinese industrial policies make it difficult for US companies to do business there. Credit subsidies keep state companies afloat and allow them to overproduce. Intellectual property rules make it easier for copyrights and patents to be overridden and new technologies to be copied by competitors.
Technology-transfer requirements force foreign investors into joint ventures with domestic firms. Restrictive regulations prevent US financial firms from serving Chinese customers. US President Donald Trump has threatened additional punitive tariffs on US$200 billion of Chinese exports if Beijing does not yield to US demands in these areas.
Meanwhile, China has little patience for arguments that its exports have been responsible for significant whiplash in US labour markets or that its firms are stealing technological secrets. It would like the US to remain open to Chinese exports and investment. Yet China’s own opening to world trade was carefully managed and sequenced, to avoid adverse impacts on employment and technological progress.

Peaceful coexistence would require that the US and China allow each other greater policy space, with international economic integration yielding priority to domestic economic and social objectives in both countries, and in others.

China would have a free hand to conduct its industrial policies and financial regulations to build a market economy with distinctive Chinese characteristics. The US would be free to protect its labour markets from social dumping and to exercise greater oversight over Chinese investments that threaten technological or national security objectives.
The objection that such an approach would open the floodgates of protectionism, bringing world trade to a halt, is based on a misunderstanding of what drives open trade policies. As the principle of comparative advantage indicates, countries trade because it is in their own interest.
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When they undertake policies that restrict trade, it is either because they reap compensating benefits elsewhere or because of domestic political failures – for example, an inability to compensate the losers. In the first instance, freer trade is not warranted because it would leave society worse off. In the second case, freer trade may be warranted, but only to the extent that the political failure is addressed and compensation is provided.

International agreements and trade partners cannot reliably discriminate between these two cases. Even if they could, it is not clear they can provide the adequate remedy (enable compensation, for example) or avoid additional political problems (capture by other special interests, such as big banks or multinational firms).

Workers make stuffed toys for export at a factory in Linyi, Shandong province, China, in June 2018. Photo: Reuters
Consider China in this light. Many analysts believe that China’s industrial policies have played a key role in its transformation into an economic powerhouse. If so, it would be neither in China’s interests, nor in the interest of the world economy, to curb such practices.
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Alternatively, it could be that these policies are economically harmful on balance, as others have argued. Even in that case, however, the bulk of the costs are borne by the Chinese themselves. Either way, it makes little sense to empower trade negotiators – and the special interests behind them – to resolve fundamental questions of economic policy on which there is little agreement even among economists.

Those who worry about the slippery slope of protectionism should take heart from the experience under the General Agreement on Tariffs and Trade before the establishment of the World Trade Organisation. Under the GATT regime, countries had much greater freedom to pursue their own economic strategies. Trade rules were both weaker and less encompassing.

Yet world trade expanded, relative to global output, at a more rapid clip in the 3½ decades after the second world war than it has under the post-1990 hyper-globalist regime. Similarly, one could argue that, thanks to its unorthodox growth policies, China today is a larger market for foreign exporters and investors than if it had stuck to WTO-compliant policies.

Finally, some may say that these considerations are irrelevant because China has acceded to the WTO and must play by its rules. But China’s entry into the WTO was predicated on the idea that it had become a Western-style market economy, or would become one soon.

This has not happened, and there is no good reason to expect that it will or should. A mistake cannot be fixed by compounding it. A global trade regime that cannot accommodate the world’s largest trading economy – China – is a regime in urgent need of repair.

Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy. Copyright: Project Syndicate

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