- - Sunday, March 11, 2018


Mao and his Chinese Communist Party ruled for 30 disastrous years beginning in 1949. Tens of millions were murdered, social chaos was constant, China was cut off from the world, and its underdeveloped economy stagnated.

Deng Xiaoping’s era of reforms started in 1978 and continued for 30 years. The cult of personality was replaced with a collective leadership. The CCP rule became less oppressive (except for the Tiananmen massacre).

Private enterprise and foreign investment were permitted, and China grew at an astounding rate. It became the world’s factory, its most dynamic exporter and its second largest economy.

Xi Jinping took power in 2012. Politically, he is more like Mao than like Deng: The cult of personality is back, the CCP is reasserting itself throughout society, and personal liberties are curtailed.

Economically, Xi’s China has adopted a predatory mercantilist policy. A European doctrine abandoned in the 18th century, mercantilism argued that the state should use its power to promote exports and discourage imports. In this win-lose philosophy, success is measured by the size of the trade surplus.

Mercantilism was replaced by the comparative advantage and free trade doctrines and their win-win philosophy: If each country produces what it is best at and trades freely with others who do the same, everybody prospers.

Chinese mercantilism is not new. Its currency manipulation, for example, is notorious. For decades, the Renminbi was kept below fair market value by over 30 percent to help exports. It worked, and China accumulated vast trade surpluses. With America alone, China’s annual trade surplus grew from nothing in early 1980s to nearly $375 billion today.

Chinese industrial espionage is not new either, but it is practiced more openly these days. China branches of foreign companies must use Chinese firms for communications and data storage. And foreign joint ventures are forced to add a CCP representative to their board of directors, just like domestic firms.

But predatory mercantilism is new. Foreign firms that want to sell in China are often required to manufacture locally through a joint venture with a Chinese firm. And they are forced to transfer their technology to the joint venture.

Recently, China decided to go bigger. State-owned enterprises buy leading foreign companies to capture their superior technology. The buyer can then grow and dominate the Chinese market and make imports unnecessary.

In 2016, for example, a Chinese firm paid $3.9 billion for Germany’s Kuka AG, a global leader in robotics. It is meant to become the top robotics firm in China.

The U.S. is paying attention to these developments because of China’s dreams of world dominance. Asian and European countries also care, because there are military applications for the acquired technologies. And they are looking to the U.S. to lead a global response.

At the World Trade Organization summit in December 2017, the U.S., Europe and Japan issued a joint statement criticizing countries that subsidize domestic companies and require foreign firms to transfer technology to local joint ventures. And they are preparing a joint suit at the WTO against Chinese policies.

The U.S. and Europe are also stopping more Chinese acquisitions of strategic technology firms. France’s finance minister talked recently about rejecting many proposed acquisitions. Chinese investments are welcome, he said, but not the “looting” of French assets.

The steel and aluminum tariffs announced last week by President Trump are sending a related message. Chinese government subsidies have enabled tremendous overcapacity. Which leads to dumping and depressed global prices. The Chinese government must do more to reduce overcapacity.

Most importantly, Mr. Trump said that the U.S. may rejoin the TPP if the treaty is improved. And there are reports of preliminary negotiations. A TPP that includes the U.S. would be a powerful check on China.

Mercantilism does not work because it elicits a strong reaction from other countries. Communism has never worked either, because it kills human creativity. Combining them is not a winning formula.

Global manufacturing trends are not moving in China’s favor. The main reason why developed countries outsourced production to China was its cheap labor. But robotics and artificial intelligence promise to make manufacturing in developed countries even cheaper. And robots don’t misplace intellectual property.

This trend can already be seen in the Global Manufacturing Competitiveness Index. Deloitte Global and the Council on Competitiveness produce the index by polling senior manufacturing executives from around the world.

China was voted the most competitive manufacturer in 2010, 2013 and in 2016. The U.S. was fourth, third and second in those years. But for 2020, the U.S. ranks first and China second. Mostly because robotics and artificial intelligence, industries in which America leads, are becoming more important.

China will not win the race with America. Warren Buffet, the greatest investor ever, put it best: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”

J. William Middendorf II is a former secretary of the Navy and ambassador. Dan Negrea is a New York investor.

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