THE CONTRASTING WESTERN AND CHINESE ECONOMIC MODELS

https://itif.org/publications/2024/09/16/china-is-rapidly-becoming-a-leading-innovator-in-advanced-industries/

Economist Larry Summers once stated, “The laws of economics are like the laws of engineering. One set of laws works everywhere.”243 It is this widely held notion that has led many experts and policymakers to dismiss the threat from Chinese techno-economic policies. For them, since there is only one law of economics, China must be like us—or at least working to become so, especially if we teach them—and so China will eventually structure its economic policy to focus on consumer welfare generated through free markets. To the extent China now violates those universal laws, it’s China’s economy that suffers, not ours’. Because the Chinese economic and innovation system does not comport to the U.S. system, it’s easy for so many to dismiss the China challenge. Experts endlessly repeat such statements as China is wasting money; China’s growth is not sustainable; and, of course, China is not innovative. The first two are irrelevant, and the last is false.

China’s Dream: Techno-Economic Leadership

If China were trying to achieve the Western economics goal of allocation efficiency (the market-based allocation of goods, services, and investments), Western economies would have little to worry about, because as a rising economy, its innovation capabilities would be limited. Chinese leaders and experts do understand the Western economic model and know that, according to it, China should accept developing-nation status. China’s economists have read The Wealth of Nations. They attend conferences where neoclassical economists tout the importance of free markets and consumer welfare. But they don’t care because the CCP wants something completely different. Chinese leaders are not seeking to maximize short-term consumer welfare or even to provide good jobs for Chinese workers. The CCP, especially under President Xi Jinping’s leadership, is focused first and foremost on maximizing global techno-economic power, including through an array of predatory mercantilist policies whose principal focus is on growing China’s advanced economy at the expense of the rest of the global economy, especially Western technology leaders.

As the China Institutes of Contemporary International Relations, a branch of the Ministry of State Security, stated, “Economic growth is a prerequisite to and a necessary foundation for the rise of a great power.”244 But it is not just any kind of economic growth China is seeking; it is advanced manufacturing. As a Chinese report titled “General Laws of the Rise of Great Powers” states, “Manufacturing can Rejuvenate a Nation …‍ For a modern economy to be prosperous and strong it requires a powerful, diversified, and creative manufacturing industry…. Becoming a major manufacturing power provides crucial security for the goal of realizing the Great Rejuvenation of the Chinese Nation.”245

Similarly, Wen Yi, a professor at Tsinghua University, has argued, “So long as a nation steps out onto the road of Industrial Revolution and becomes the factory of the world, it has the possibility of becoming the world leader in technological innovation. But if an industrialized nation abandons its manufacturing industry, it will very likely come by degrees to lose its technological advantage and capacity for innovation.”246

Similarly, the China Institutes of Contemporary International Relations wrote, “The state that esteems industry will increase in wisdom day by day.”247 The opposite is also true, as we see in the United States. The state that is indifferent to or even dismissive of industry will decrease in wisdom day by day.248

As Tanner Greer and Nancy Yu wrote:

Xi explained the logic behind [this] to a gathering of Chinese scientists held [in 2016]… He argued that “historical experience shows that [these] technological revolutions profoundly change the global development pattern.” … Some states “seize” this “rare opportunity.” Others do not. Those who recognize the revolution before them and actively take advantage of it “rapidly increase their economic strength, scientific and technological strength, and defense capabilities, thereby quickly enhancing their composite national strength.”249

As such, China’s economic, trade, and technology policy is all about gaining relative global power through advanced industry leadership. Chinese economic policy, unlike American, does not privilege consumer welfare. And it is OK with wasting money; efficiency is not its top goal. Likewise, Chinese leaders do not care about “distorting the market”; in fact, the only way China can become the global leader is to distort the market, because otherwise market forces would suggest that China remain a low-wage manufacturer for many decades to come.

China is focused first and foremost on maximizing global techno-economic power through an array of predatory mercantilist policies whose principal focus is on growing its advanced economy at the expense of the rest of the global economy, especially the technology leaders.

Consider the term “domination.” For China, domination does not come from cooperation or global market specialization along Ricardian lines (i.e., nations prospering by leveraging their distinct comparative advantages); it comes from battle. As such, Yi Changliang, a leading official of China’s NDRC, wrote, “At a time when this new round of techno-scientific revolution and industrial transformation has not yet gained its [full] momentum, there are grand expectations for artificial intelligence, big data, and cloud computing and [these areas] have become the main battlefield for innovation.”250

In other words, the CCP sees economics, trade, and technology as a battlefield on which to fight for dominance. This is so vastly far from how Western economics views international economics that very few economists, policymakers, or elected officials understand it or take it seriously. After all, they believe what Larry Summers believes.251

China is focused first and foremost on maximizing global techno-economic power.252

And as China advances, the CCP sees and hopes that America is retreating. As Xie Tao, dean of the School of International Relations and Diplomacy at Beijing Foreign Studies University, wrote, “All tides that rise must fall. All living men must age, sicken, and die. Therefore, the United States must accept that the day will come where it too will fall into decline.”253

Likewise, the China Institutes of Contemporary International Relations wrote about the United States turning its back on globalization: “The reversal of the open-door policy is another step down the road to America losing its status as a great power.”254

China is engaged in a battle to win the war for global techno-economic power. An article by Suchodolski, Harrison, Heiden talks about “innovation warfare”:

Improving the living conditions of one’s citizens is a justifiable and laudable goal. However, especially savvy nation states, such as China, also pursue such ends as a mechanism to influence or diminish the national security and geopolitical power of the United States. These actions also threaten the post-WWII liberal economic order and worldwide peace and security. There is no need to inflict upon the world the carnage of war if geopolitical aims can be achieved via alternative competitive means.255

Finally, it’s important to come back to the Chinese term “Great Rejuvenation of the Chinese Nation,” which President Xi Jinping regularly touts. Is this just increasing per capita income growth, or something more? As the Center for Strategic Translation has argued, one aim associated with China’s National Rejuvenation is for “China’s return to national greatness as a process of ‘advancing toward the center for the world stage.’” They quoted an official Xinhua commentary on the 19th Congress of what this advance entails:

China has stood up, grown rich and become strong. It will advance toward center stage and make greater contributions for mankind. By 2050, two centuries after the Opium Wars, which plunged the “Middle Kingdom” into a period of hurt and shame, China is set to regain its might and re-ascend to the top of the world…. China’s success proves that socialism can prevail and be a path for other developing countries to emulate and achieve modernization. China is now strong enough, willing, and able to contribute more for mankind. The new world order cannot be just dominated by capitalism and the West, and the time will come for a change.256

At the very least, Western policymakers should take seriously the possibility that China is seeking not just growth, not just gradual development, and not just technological advancement according to Ricardian principles; but rather global dominance in advanced industries, which it sees as a source of power.

The CCP sees economics, trade, and technology as a battlefield on which to fight for dominance. This is so vastly far from how Western economics views international economics that very few economists, policymakers, or elected officials understand it or take it seriously.

American Neglect

Unfortunately, few in America recognize that the United States is even in such a competition. To the extent U.S. leaders pay attention, they myopically focus on limiting Chinese military capabilities, thinking that is the main threat to American global leadership, and go out of their way to assure CCP leaders that export controls and other limitations are only for weapons systems. Even worse, many leaders in Europe selfishly portray this as a trade war between China and the United States, which the United States instigated to keep its power; not a conflict between China and the West that China instigated. This way, EU governments hope their firms can sweep in and take U.S. market share as it kowtows to Beijing.

One reason for this lassitude is most U.S. (and EU) economists and international trade think tanks see economic interchange as a win-win, based on Ricardian comparative advantage and specialization generated by market forces. Not China. It sees this as a war wherein there will be winners and losers, and they intend to be the winner and make the West into the loser. To be sure, this framing as techno-economic war is seen as extremist in the West because of just how deeply engrained the 200-year-old economics of trade and market-based allocation focus has become. Indeed, U.S. economic pundits have long scoffed at the very notion that America even competes with other nations. For them, only economic illiterates believe this. Indeed, as one DOC official stated during the Obama Administration when talking to an expert group to advise DOC on developing a national competitiveness strategy, “It seems wrong for us to try to compete with other nations. After all, we don’t want to hurt them.”257 To paraphrase Trotsky, you may not be interested in techno-econ war, but techno-econ war is interested in you.

Imagine going to war when thinking that the enemy is both fighting and wanting to cooperate—and to the extent they are not cooperating, you think that it is they who will suffer. That is the idea that dominates too much of American and European thinking.

Even if some recognize that China has a different set of goals than Western nations do, many fail to take China seriously because they have bought into the increasingly fashionable claim that China’s techno-economic policies are now simply to achieve self-sufficiency in the face of U.S. export controls and other measures to restrict China’s access to technology.258 Of course, China is seeking to reduce dependence in the short run, but its goal for many years before export controls has been to reverse dependence and make the Western nations dependent on China.

It is the failure to recognize that Summers is wrong and there are two very different economic systems with different rules that is the core problem for the West. The West sees national economies as not in conflict, but rather with specialization based on comparative advantage generating win-win outcomes. China sees competition as akin to war. As Xi Jinping stated, “Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.”259

It is the failure to recognize that there are two completely different economic systems with different rules that is the core problem for the West.

Thus, the key issue is not about whether the Chinese system fits the Western system or even if the Western system can be improved within its intellectual confines. The key issue is whether the Western or Chinese system is superior. Surprisingly, Xi Jinping admitted as much when he stated to a CCP gathering, “Institutional/System advantage is a country’s greatest advantage, institutional/system competition is the most fundamental competition between countries.”260 We should take him at his word. When Chinese officials talk to the West about win-win, moving to consumer-led growth, how the United States is trying to hold back China, or how it was the United States that started the trade war, we should not take them seriously. And it is amazing that so many outside China do. They are spinning propaganda. But when Xi talks about system competition, we do need to take him deadly seriously. He means it. He is arguing that the very techno-economic system China has constructed is their main advantage against the West—and in many ways he is correct.

Rather than reflectively dismiss the Chinese system as ineffective or even harmful, or to judge it on the basis of U.S. goals (allocation efficiency), the real question to ask is, “What system is superior when it comes to winning the global techno-economic war?” In China’s conception, there are winners and losers, and the CCP wants to be the winner. And the way to win is to build up weapons (globally leading firms) and use them to destroy one’s enemies (Western nations’ advanced industry firms). At minimum, it is time for Western nations’ experts and policymakers to open their minds and at least have a considered dialogue and debate about this point, rather than hide their heads in the sand and ignore China’s aims and fall back on the inherent superiority of Adam Smith’s and David Ricardo’s classical economics model for free markets and free trade, especially the notion of all countries gaining from trade based on their comparative advantage.