WASHINGTON, DC/BERKELEY/KYIV – On his recent visit to the United States, Chinese President Xi Jinping encouraged American companies to regard his country as a close trading partner. In fact, US companies should be seeking to move their supply chains and other business away from China – while they still have the time. Through its deliberate and repeated actions, China is heading for an economic showdown with the US.
For many decades, Western governments have pursued versions of what Germans call Wandel durch Handel (change through trade), hoping to achieve global stability, reduce international confrontation, and (perhaps) promote more democracy through economic interaction with authoritarian regimes. The idea is simple: countries that trade extensively with each other will not jeopardize the resulting profits and jobs by going to war; prosperity and interdependence mitigate aggression.
In the post-World War II era, this strategy has sometimes worked astonishingly well. The establishment of the European Coal and Steel Community in 1952 took the key inputs for weapons production out of the hands of national governments and led to the European Union today. Germany and France (and later other Western European countries) became tightly linked by mutual trade and investment, so that war between any of them would impose an unbearable cost on victim and aggressor alike. Western Europe, a region that for centuries had been the most prone to interstate violence (often with disastrous global spillovers), became a bastion of peace.
But Wandel durch Handel is far from being a sure bet, because it depends crucially on initial institutional conditions and the strength of ideologies. And today’s world contains several prominent and extremely dangerous examples of where expanded trade has gone badly wrong, from a democratic perspective. Russia’s full-scale invasion of Ukraine is the most spectacular example.
After the collapse of communist rule in 1991, Russian President Boris Yeltsin’s administration was given much economic aid and invited to the club of leading democratic countries: the G7 became the G8. But once Russia became richer in the mid-2000s, owing to a rise in oil prices, the rhetoric of its leaders and the tenor of its public opinion turned sharply against the West, and former Soviet republics whose independence had been internationally recognized for a generation were treated as “not real countries.”
Eventually, bellicose rhetoric turned into military aggression. But, after invading Georgia in 2008, Russia did not face sweeping sanctions and isolation. Instead, it got a “reset” with the US and even more power in the EU energy market. In 2015, then-Vice President Joe Biden explained the US administration’s reasoning: “All of us, we all invested in a type of Russia we hoped – and still hope – will emerge one day: a Russia integrated into the world economy; more prosperous, more invested in the international order.”
The Nord Stream gas pipeline linking Russia and Germany, for example, was a classic case of Wandel durch Handel. Although the precise mix of strategic and commercial motives was not clear, the net result of this approach is a dangerous tyrant with deep pockets, able and willing to fire a lot of missiles at innocent civilians in a neighboring country.
Standing behind Russian President Vladimir Putin is Xi. China is apparently ready to sell Russia anything and everything it wants, including missile components. Western sanctions are far from perfect, but China greatly facilitates the flow of goods into Russia. China could put decisive pressure on Russia to withdraw from Ukraine, just as it could push Iran not to support terrorists. But it does no such thing, because Wandel durch Handel has failed spectacularly with regard to China, too.
Since the 1990s, Western companies have invested a fortune in the Chinese economy, and tens of thousands of Chinese students have studied in US and European universities or worked in Western companies. None of this made China more democratic. On the contrary, over the past decade, Xi has rapidly moved China toward totalitarianism, eliminating even those rudimentary checks and balances implemented after the death of Mao Zedong. It is ironic and appalling that China uses Western technologies to suppress dissent, spy on Western countries, and spread disinformation.
Even worse, the trade between democracies and autocracies in recent decades seems to have made democracies more dependent on autocracies, rather than vice versa. This was obvious from democracies’ reaction to Russia’s full-scale invasion of Ukraine in 2022. The EU was very reluctant to stop buying Russian energy and paid Russia €140 billion ($152 billion) between March 2022 and March 2023; hundreds of Western companies remain in Russia and thus help finance the war (through their tax payments and in other ways).
The US bought goods worth $536.8 billion directly from China in 2022 (plus services worth another $27 billion) – nearly one-sixth of total US goods imports of $3.3 trillion. According to the US Trade Representative, American direct foreign investment in China is valued at $126 billion. All this trade and investment served a decades-long good-faith effort to strengthen bilateral relations. But a lucrative commercial strategy was also a failed foreign policy.
There is a growing bipartisan consensus in Washington that sourcing from geopolitical friends and reshoring production to the US are urgently needed to correct externalities that markets themselves cannot fix. Other much-needed policies include accelerated promotion of green technologies, to make the world less dependent on terrorist regimes for fossil fuels, and prohibiting politicians, educational institutions, think tanks and media from receiving money (and influence) originating in countries with antagonistic regimes.
Whatever happens in the next US election cycle, expect further sanctions and myriad other restrictions on trade with China. Unless the Chinese leadership changes course radically, a major trade war will become increasingly likely. The writing is on the wall: US investors should diversify their suppliers as soon as possible.
Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at the MIT Sloan School of Management and a co-author (with Daron Acemoglu) of Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity (PublicAffairs, 2023). Yuriy Gorodnichenko is Professor of Economics at the University of California, Berkeley. Ilona Sologoub is Editor of VoxUkraine.
Copyright: Project Syndicate, 2023.