Ultimate Economic Conflict between China and Democratic Countries

An Institutional Analysis

C.Y.C. Chu, P.C. Lee, C.C. Lin, C.F. Lo

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000577631
• Edition: 1
• Topic: Economia
• Subtopic: Economia politica

This book investigates various dimensions of the economic conflicts between the US – and other democratic market-economy countries – and state-capitalist communist China in the past decade, examining how differences in institutions and ideology bring these about.

Through the lens of institutional analysis, the book elaborates and explains the underlying institutional designs and reasons behind the disputes, highlighting how such variances are embedded and reflect fundamental value divergences between China and other democratic countries.

This book will be of key interest to scholars, students, and practitioners in law, economics, political sciences, international relations, international organisations and global governance.

1Introduction: When the ‘Socialist Market Economy’ Meets the Globe

DOI: 10.4324/9781003276807-1

The US–China Escalating Conflicts

It may be fair to say that, between 2017 and 2020, during the Trump administration, the most important event in international relations was the escalation in conflicts between the US and China. This is certainly not the first time in history that the US had trade conflicts with other countries. One of the most notable cases might be the US–Japan trade conflict in the 1980s. Nonetheless, the ongoing US–China trade war is critically different from that between the US and Japan. In the latter case, although there were some institutional differences between the US and Japan, economic decisions in both countries still generally followed the rationale of the market.¹ This was different from, say, socialist economies, in which ‘state ownership of the means of production, state planning, and bureaucratic goal-setting are not rational means to a developmental goal … they are fundamental values in themselves, not to be challenged by evidence of either inefficiency or ineffectiveness.’² From this perspective, it is not surprising that the conflicting issues between the US and China, which were originally to do with unfair trade, were soon extended to encompass technology and even finance. Bolton (2020) argued that the trade issue is just the tip of the iceberg, and it is the structural problems between the US and China that are the true factors contributing to the US–China conflicts. This is certainly not Bolton’s individual hawkish view; in fact, many have made similar statements.³ The following paragraphs provide a sketchy description of the above-mentioned structural problems, as well as the evolution of this conflict. Detailed references will be provided in later chapters, and hence we will skip them in this introduction.

On 22 March 2018, the Trump administration started to impose tariffs on $60 billion of Chinese products imported into the US. This pure trade measure was soon expanded to cover the technology aspect, when the US announced on 16 April 2018 that it would ban US exports of components to ZTE, a Chinese telecommunications manufacturer. Then, on 1 December 2018, at the request of the US Justice Department, the Canadian government arrested Meng Wanzhou, the deputy Chair and CFO of Huawei, the leading telecommunications company in China. The charge was that Huawei had used some US components in its products and had exported such products to Iran and North Korea, violating the US sanctions imposed on these two countries. Because Huawei was the Chinese leader in the development of the fifth-generation telecommunications (5G), it was believed that arresting Meng reflected the US’s attitude toward the 5G competition between the US and China.⁴

On 6 August 2020, the Trump administration ordered that a number of companies listed on the New York Stock Exchange and the Nasdaq be subjected to US auditing, or they would be delisted by 2022. Although this administrative order did not refer to specific company names, all of the news reports pointed out that the 283 listed companies affiliated with China and Hong Kong were the target. This was the first time the US–China conflicts had spread to the financial dimension. Moreover, at various times in 2020 the US government gradually increased the number of sanctioned items against China by including more and more Chinese companies on the Entity List.⁵

This book’s goal is to analyse various dimensions of the above-mentioned economic conflicts between the US and China. To analyse the fundamental reasons why such US–China conflicts arise, we review the institutional and ideological differences between China with its authoritarian communism and the democratic capitalist countries such as the US, Japan, Germany, the UK and Australia. In our book, we use ‘market economy’ and ‘state capitalism’ to refer to the economic models in Western liberal democracies and in China respectively. According to Musacchio and Lazzarini (2014), state capitalism refers to ‘the widespread influence of the government in the economy, either by owning majority or minority equity positions in companies or by providing subsidized credit and/or other privileges to private companies’. By contrast, a market economy is an economic system in which the role of governments is limited, and economic decisions are driven and influenced mainly by supply and demand. Notably, we are fully aware that these two models are just ideal types. Namely, they cannot precisely describe the economic behaviours in either the West or in China. Also, there are many intermediate or hybrid models that combine elements of both ideal types. With this limitation in mind, we believe the two concepts, albeit imprecise, could still serve as useful analytical tools for the purpose of our book.

As we compare the ideological differences behind state capitalism and market economy, our focus is not on the often-mentioned differences in values such as freedom or liberty per se, but rather on the economic implications of such differences in values and institutions. To understand why differences in values will bring about ultimate economic conflicts, we begin by discussing the well-known critique made by the Trump administration: that allowing China to enter the WTO was a mistake made by the US.⁶ What does it mean to say that the US government made a mistake? If China’s economic practices did not turn out to be as the US and other democratic countries expected, why was that? If China retains its current political regime, what economic conflicts can we predict and expect?⁷ Furthermore, and most importantly, how are such conflicts related to the institutional differences between authoritarian communism and democracy?

Will Economic Development Lead to Democracy?

As to the relationship between economic development and political regime changes, when China was admitted to the WTO two decades ago, the orthodox beliefs were that bringing China into the global market-economy system would eventually change its political institutions, and that it was likely it would move toward democracy, at least to some extent or in some domains. It turned out that instead of living up to that expectation, China has abused its exponential economic growth to further its dictatorial goals since joining the WTO. In other words, the problem is not only that China has not democratised, but that China has become even more totalitarian than it used to be, in parallel with its economic success. The above-mentioned orthodox belief, now realised to be purely unrealistic wishful thinking, was actually backed by some theoretical analysis in the literature on political science. We will first review such a discussion, before providing our own interpretation.

The interaction between democracy and economic development has long been discussed by social scientists. The pioneer was Lipset (1959), followed by Diamond and Linz (1989), Inglehart and Welzel (2010), Acemoglu and Robinson (2012, 2019), and many others. Lipset (1959) argued that economic development may lead to democracy because it produces certain socio-cultural changes that shape human actions. Diamond and Linz (1989) referred to three possible channels for such interactions, which we discuss one by one below.

First, it was argued that poor economic performance is likely to raise public anxiety and dissatisfaction. An increasingly anxious social atmosphere usually welcomes strong-arm leadership, which is not compatible with the development of democracy. Thus, a healthy economy is a necessary condition for a sustainable democracy. We note, however, two things: 1) this argument does not suggest that economic development is a sufficient condition for democracy, and 2) this argument is about the sustainability of democracy, and not about switching from an authoritarian regime to democracy.

Second, researchers found that economic development often goes hand in hand with urbanisation, increasing literacy, an expansion of educational opportunities, and more intensive interactions with people in democratic countries. These all facilitate human rights perceptions and the promotion of democratic ideas. However, again, this argument is only based on the simultaneity or correlation between economic development and a social environment that is compatible with democracy. There is no causal implication that economic development will lead to democracy.

Third, we observe that economic development also helps promote the rise of the middle class and related social organisations, which in turn help generate pressure and impose checks and balances on government policies. These checks and balances are of course coherent with democratisation. Once again, the argument here is not rigorous: whether the rising middle class will indeed drive the regime toward democracy is a presumption, and there are many factors that may lead the regime in other directions.

To sum up, the above-mentioned arguments provide conceptual support for the correlation between democracy and economic development, but do not constitute a rigorous causal argument. Researchers such as Inglehart and Welzel (2010) have provided numerous examples that economic development has not led to democracy. Even with the help of data from large-scale cross-country surveys, scholars have still been unable to identify a clear-cut pattern of causality from economic success to democracy. Furthermore, since the speed of political regime change is slow, it is difficult for researchers to observe the full picture of political regime stabilisation, and to draw rigorous inferences from the limited observations. Finally, the case of Singapore also characterises a grey area: It is neither democratic nor completely authoritarian, but it has had one of the fastest-growing economies in the world for half a century.

The most disturbing example in the past three decades is, of course, China. In the period from 1990 to 2020, China experienced unprecedentedly high economic growth, which has increased its GDP roughly 40 times in 30 years. China tends to interpret its economic success as a role model of a socialist market economy, or a market economy with socialistic characteristics. Leaving aside what exactly a socialist market economy means, if this role-model story is valid, it evidently refutes the prediction that economic development will lead to political liberalisation. Regardless of the measures used, in 2021 China is perhaps one of the most authoritarian nations in the world.

So, if the prediction that economic development will lead to political liberalisation is not valid, what will happen to the authoritarian nations next? In this period of irreversible globalisation, how will the world cope with two economic regimes, one a democratic market economy, and the other the authoritarian socialist market-economic structure represented by China, and perhaps Russia as well? Should we expect to see a world economic order somehow harmonising these two regimes? Alternatively, are there fundamental institutional differences between these regimes which mean that future conflicts are unavoidable? This book tries to provide answers to these questions.

The Peculiar Role of Chinese Businesses in the World Economy

The economic success story of China is also related to the US–China conflicts that we mentioned at the beginning of this chapter. In various WTO documents,⁸ the United States Trade Representative (USTR) has argued that China’s economic success was (at least partly) due to its forced technology transfers, intellectual property theft, substantive government subsidies, exchange rate manipulation and many other measures that either violated the existing WTO rules, or took advantage of the loopholes. According to Chu and Lee (2019), the US’s accusations are valid in the sense that there are indeed loopholes in the Marrakech Agreement enacted in 1994. The world today is very different from what it was in 1994, and China did take advantage of the old WTO rules enacted long ago.

Chu and Lee (2019) pointed out three environmental discrepancies between now and the time when the Marrakesh Agreement was framed. Here we only briefly mention two of them; more details will be provided as we proceed in later chapters. The first discrepancy between the situation of the present time and that of 1994 is the rise of the knowledge-based economy. By 1994, Moore’s law was only a conjecture; the human genome initiative had not yet been started; the R&D-based high-tech industries and venture capital firms were not yet popular, and many high-tech giants today had not even existed at that time. The General Agreement on Tariffs and Trade (GATT) rules enacted in 1994 were mainly concerned with traditional industries. To ensure fair international competition in these traditional sectors, the trade rules mainly regulated government subsidies between the factory and the market. For high-tech industries, however, a new and perhaps more important subsidy arose: from the R&D laboratories to the factories. In China, many government subsidies were provided at this early stage, but the current WTO rules cannot regulate these subsidies effectively.

The second aspect not foreseen in 1994 relates to the consequences of the rapid marketisation of the Soviet Union and China. The Soviet Union began to disintegrate in 1991, and Deng Xiaoping’s southern-tour speech, which fully launched China’s marketisation, was delivered in 1992. At the time when the Marrakesh Agreement was drafted, the general assumption was based on the orthodox Western market-economy background, namely, that businesses and governments are separate entities. However, in China, the situation is totally different.

In China, the rapid privatisation of the previously wholly government/party-owned enterprises created a large percentage of pseudo-private businesses, in most cases owned or controlled by individuals who had good connections with the government’s or party’s high officials. This bizarre economic situation can be referred to as state-party crony capitalism. Thus, in China and perhaps Russia as well, business and government entities actually overlap considerably in terms of their institutional designs and key personnel.

According to McGregor (2010), in terms of decision making, there are no real ‘private’ businesses in China; all businesses, especially large ones, are strictly controlled by the Chinese Communist Party (CCP). McGregor (p. 199) cited others and concluded that only 20–30 per cent of Chinese GDP is contributed by truly private businesses. Many CEOs of large Chinese businesses have a ‘red telephone’ in their office (p. 29), which is a within-CCP communication line, and which allows these CEOs to be instructed by the CCP about the direc...

Table of contents

• Cover
• Endorsements Page
• Half-Title Page
• Series Page
• Title Page
• Copyright Page
• Contents
• List of Illustrations
• Preface
• Authors’ Preface
• List of Abbreviations
• 1 Introduction: When the ‘Socialist Market Economy’ Meets the Globe
• 2 Made in China 2025: The Issue of Government Subsidies
• 3 E-commerce Mercantilism: The Issue of Internet Blocking
• 4 Banning TikTok and WeChat: The Issue of Privacy Protection and National Security
• 5 Enacting HFCAA: The Issue of Listed Company Accountability
• 6 Antitrust Laws in the Globalisation Era: The Issue of Competitive Neutrality
• 7 Cross-border M&A Control: The Issue of State Capitalism
• 8 Forced Technology Transfer: The Issue of Insufficient Remedies
• 9 How to Dance with the Dragon?
• Index