The trade war shows China’s economic dream is dying. Beijing now has a choice: open up or stagnate

The US is demanding that China change course and, for all its growth and promises, Beijing is in no position to argue: in tech, it still lags at least 10 years behind the US and doesn’t have the depth of skills to produce its own high-end goods

Graeme Maxton

Published: 3:00am, 11 Jun 2019

Why you can trust SCMP

For decades, China’s development path has seemed clear. State management of key industries coupled with some level of free-market liberalisation elsewhere have made it easy to imagine that the country would soon return to superpower glory.

But that will not happen now. China will have to accept a US-dominated world order or step into the slow lane. There will be no Pacific century and all those historical wrongs will not be righted, certainly not this time.

America has played its Trump hand very well. What China has achieved socially and economically over the past 40 years is remarkable by any standard. From being a poor agriculture-based country at the end of the Cultural Revolution, it has become the second-largest economy in the world. It has transformed its infrastructure by building a network of roads, high-speed railways, ports and airports.

It has lifted hundreds of millions of people out of poverty – more than any country in human history, and in barely a generation. It has constructed vast new cities, attracted trillions of dollars of inward investment and spread its influence across the world, most recently through the Belt and Road Initiative.

While it is easy to imagine that some on Capitol Hill have seen what is coming for a decade or more, it will be hard for people in China, especially among the country’s leadership, to accept that this path to glory is coming to an end. Yet China has been fooling itself, its hopes stoked by enthusiastic foreign investors, the rhetoric of local academics and the dreams of its own people.

It is the trade war that has laid China’s weaknesses open for all to see. It is now clear that Huawei, China’s big hope in hi-tech, along with ZTE and several other IT firms, are not much of a force to reckon with. Without US hardware, operating licences and software, these firms have been beached.

They are at least 10 years behind technologically and cannot develop the skills needed to survive in anything like their current form. A link to Russia does not solve this problem. Two countries without cutting-edge technology does not add up to much.

Stronger ties between China and Russia must not leave others out in cold

It is the same in defence, the auto industry, aviation and many other sectors. Despite decades of effort and lots of state planning, China lacks the depth of engineering skills, patents and technology needed to manufacture globally competitive high-end products. Dismantling a flight management system, a car braking system or a smartphone and reproducing the parts does not make it possible to build them from scratch.

The trade war has not only exposed all this, it has also left China with a stark and unpalatable choice. It must open up, as the US demands, or go it alone without the skills needed to win.

The US is now making the demands its strategic advantage allows. It wants an end to state subsidies. It wants an end to counterfeiting and laws which force foreign investors to hand over their technology. It wants access to China’s farmers. It wants access to data, so that America’s tech giants can compete without restrictions. It wants China to play by America’s rules, knowing that China’s home-grown rivals cannot win.

Markets are focused on the wrong trade war risk

Ultimately, it wants China to conform to the Western liberal free-market system with an end of one-party rule. “Do it our way” is the message, and remember that America is the unrivalled global superpower.

From left, US Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross, Trade Representative Robert Lighthizer and senior White House adviser Peter Navarro, seen in the White House in Washington. The hawkishness of the Trump economic team towards China represents a marked contrast from previous administrations. Photo: Washington Post

For a long time, it seemed as if China might have been able to resist such pressure. It could take comfort in its vast holdings of US government bonds, its control of those rare earth deposits, its rising national champions, its modern infrastructure, its 1.4 billion people, 5,000 years of history and growing influence in Asia. But the Huawei problem has revealed the hollowness of these hopes.

How Huawei can reverse its fortunes: offer its 5G for free

So what comes next? Accepting America’s trade terms will be hard. China can probably retain its role as a global production hub but only if it pays financial tribute for the privilege. It will be allowed to develop hi-tech firms like Huawei but the keys to the technology will stay in the US, Germany, Japan and South Korea.

It will be able to send its armies of tourists and their renminbi to make friends. But it will only be able to buy raw materials if the US agrees. It must gradually open its markets and stop subsidising industries, while accepting the slow beat of the democracy drum.

Going it alone will be just as difficult. Rejecting the US means accepting that China cannot compete in the economic sectors which offer global power because it cannot catch up technologically. It will only be able to offer defence, automotive, telecoms and other high-end products to countries which cannot afford the best, and only then if the US and its allies allow.

Going it alone means that the tide of inward investment will gradually flow in the opposite direction, and China will become more closed to the world, the Soviet Union of the 21st century, perhaps.

The choice between accepting one humiliation or the other will have consequences for Chinese society for decades, and for the rest of the world.

Graeme Maxton is an economist and author

Post