June 6, 2013

The most important economic story today and in the foreseeable future is not the Dow, tomorrow’s jobs report or rising income equality. It is China’s economic policies and their implication for our own.

As reported in the New York Times, China’s state-sponsored capitalism is moving aggressively to grow its economy. It starts with a massive and growing pool of capita enabled, in part, by the fact that the savings of Chinese citizens receive a negative return. The Chinese state then deploys capital in a number of highly strategic areas, including energy and other natural resources. China is also notorious for its pursuit of Western technology through hacking and the placement of Chinese nationals in U.S. corporations where they can essentially steal the technology and send it back home. Then, armed with stolen knowledge, they build products which they then sell to the world below the cost of production, gaining dominant market share. The impotence of the U.S. response to the China challenge, so far, was perhaps best summarized this week by the report that China, not the United States, is reaping the benefit of Iraq’s oil.

The United States seems ill-equipped to respond coherently to the rise of China. Our brand of capitalism, which champions free markets and individual reward, is threatened by China’s subsuming the individual for the sake of the perceived national interest. We play by a set of trade and intellectual property rules that China ignores; perhaps they use the history of Western exploitation of China as an excuse for this flagrancy.

And our national priorities are still too skewed to projecting an international footprint of military power; we spend trillions on defense and neglect other vital areas of national interest, like infrastructure. You know who is guarding those oil pumps in Iraq as China buys the oil? The U.S. military.

Some — David Brooks, among them — have argued that China’s economic upside is limited by its lack of entrepreneurial panache. China, Brooks says, doesn’t sell the kind of sexy, stylish brands that world consumers crave. That may be true today, but China is at the first stage of economic development: the basics of energy, technology and education.  And they are accumulating these assets much faster than the West did in its formative years of ascendance. What will stop them from figuring out how to make China cool to a consumer culture? That may be harder to steal, but it isn’t hard to buy.

Others point out that China faces its own tricky internal tensions that may slow its economic rise: How long, for example, will its rising middle class accept the restrictions the state puts on individual economic freedom? But neither of these arguments is a strategy; they are a little more than wishes. For many centuries the Chinese regarded the West with arrogant passivity; China was the center of the universe. (Its critics scoffed when the first map of the world failed to account for this geography.) For much of history, China was vastly more advanced than the West and thus failed to take the rise of the West seriously. By the late 19th century, China’s government was weak, besieged by internal dissidents and foreign enemies. It made a series of concessions to imperialist Western governments that furthered weakened it and led to revolution.

The parallels here may be a stretch, but Washington today too often seems to regard Beijing with bemused arrogance and passivity. Our leaders either cannot truly imagine that China will displace our global economic leadership, or are at a loss on how to engage with China constructively.

China itself serves as a useful model on what happens to nations that fail to deal creatively with existential threats.