Academic journal article Business Economics

Does China Change the Game?

Academic journal article Business Economics

Does China Change the Game?

Article excerpt

Abstract

It is vastly overdone to suggest that China changes the game. The challenges posed by the Chinese economy will not disappear because the U.S. puts pressure on them. The swing to statism in China's internal and external polices, however, is raising backlash abroad and driving down its growth rate at home. In the national security context, there is no one hyper-cool technology that is going to suddenly enable the Chinese to establish dominance. Technological prowess, including military capacity, is about system integration. Protectionism, instead will weaken the U.S. through cronyism, decreasing competition by statism. The sign of the self-inflicted damage from the Trump administration's policies is the marked decline in net inwards foreign-direct investment. Though troubling, it is not by itself sufficient to generate a recession.

Keywords China * Protectionism * Economics of National Security * Technological Competition

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It is good to concentrate our discussion on the general issue of China-US relations. Turning NAFTA 1.0 into NAFTA 0.8, or putting tariffs on steel, or unilateralism vis-a-vis the European Union, we all know why those are bad ideas. The evidence is clear. Everything has transpired basically as the textbook would tell you. The interesting questions instead are, first, does China change the game? Does the nature of China as a very, very large economy that is not developing politically in the ways that Western people hoped for or expected mean that arguments for openness are in doubt or reversed? Secondly, as a matter of policy, was the separation between economics and national security, which has largely been the intent of the United States since the post-World War II system was set up, mistaken? Or is it at least a mistake in the current context? Thirdly, notwithstanding what among us economists here know, politically, is there a need to pursue something called 'Economic Security' in order to prevent people from chasing after bad ideas?

I think it is vastly overdone to suggest that China changes the game, whatever the intentions of the leadership of the Communist Party of China. I hold no illusions about the potential of liberal reformers of the Chinese Communist Party or the ability of outside forces to encourage them. Changing China's regime is not what this relationship is about.

The questions, instead, are whether the current Chinese regime in economics is something that is going to go away? Is this something that we can realistically hope to alter? And does its persistence present a meaningful direct threat to the U.S.? I think the answer to all three is no.

First, there is no fantasy life in which the challenges posed by the Chinese economy disappear because suddenly the U.S. puts pressure on them. That holds even if we were able to get the Europeans and the Japanese to sign onto some kind of exclusionary zone. Even in the best John Bolton case, the fact remains that China, like the U.S., is fundamentally a domestically driven economy. It is a continental economy of huge size. But also, the fact remains, trade in a sense always gets through as long as demand and large price differentials or specialized products exist.

What we have been seeing in recent months is that the reason we do not like protectionism is because of what it does to investment, and what it does to competition and corruption, in the protected society. Tariffs, in general, are inefficient, but you get around them. Trade, in a sense, goes on. And we are already seeing this, despite disrupted global value chains. Supply chains and investment sites are shifting. It probably is not as close to optimal that firms are doubling-up facilities, stockpiling, or delaying investments. Or firms which previously chose to produce goods in China are going to shift, some to Vietnam and some to Mexico. But fundamentally, that is not a huge change in the system.

Domestic productivity is why we do not want the U. …

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