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China Hasn’t Invented A New Type of Capitalism; It’s Following A Proven One

China Hasn’t Invented A New Type of Capitalism; It’s Following A Proven One

As competition and tensions between the U.S. and China rise, it’s all too easy for the West to focus on the things it most dislikes: Communist China engages in predatory trade practices, subsidizes its firms, pollutes the environment, relies on forced labor, and oppresses its citizens through brutality, censorship, and propaganda. Many have claimed that these practices amount to a new and dangerous form of state-sponsored capitalism. But if heavy-handed government intervention was enough to make a nation thrive economically, the world would be full of prosperous authoritarian capitalists. It isn’t.

China has lifted its people out of poverty by using the same economic model as Japan, South Korea, Taiwan, and Singapore. But whereas their populations are 125 million, 51 million, 23 million, and 5.4 million, respectively, China’s is 1.4 billion—seven times the other four combined. Rather than inventing a new economic approach, China has taken a proven one to an unprecedented scale. It’s this combination of vast size and Asia’s development model that best explains why China is now an economic, military, and financial rival to the United States. By focusing primarily on the significant but lesser role of China’s state-sponsored capitalism and social policies, American leaders have often lost sight of vital U.S. national interests.

Revisiting the “Asian Miracle”

During the second half of the 20th century, there was a great deal of international debate about why many Asian economies were developing so much faster than other countries around the world. But the reasons were always easy enough to identify. The formula for Asian economic development was both articulated and implemented by Lee Kwan Yew (LKY), who served as Prime Minister of Singapore from 1959 to 1990. LKY is widely seen as the father of Singapore, but because of his unapologetic belief that developing nations are best served by a strong and effective one-party state, he has been called the father of modern China as well.

All of the tigers relied on the same basic building blocks: effective mass education, elite technical and managerial expertise, a compliant and low-cost workforce, an export and manufacturing focus, access to foreign investment and IP, modern infrastructure, high savings rates, social stability, low crime, a willingness to initially serve the commodity end of the value chain, the nurturing of strategic industry sectors, and efforts to move up the value chain and become world class over time, all backed by a strong, engaged, and effective state. China ticks all of these boxes, but its vast size has resulted in much greater global influence and power.

The Tigers’ approach has been especially important in computer and related electronics hardware markets, most of which have evolved from the bottom up. Japan, Korea, Taiwan, and China all began with inexpensive, commodity offerings such as keyboards, printers, and system assembly. But over time they used this experience to move up the value chain into semiconductors, networking equipment, storage devices, high-resolution displays and other forms of advanced, high-volume production. World leadership has now been achieved in most manufacturing areas.

In contrast, U.S. technology firms have primarily focused on the upper ends of the value chain—system design, software, customer experience, etc. While this top-down approach has been very successful in capturing the most profitable market segments, it’s vulnerable to innovation and supply chain bottlenecks from below, as well as erosion of market share from commodity suppliers who move up the value chain. America’s lack of manufacturing capacity and its dependence on rare earth minerals are now making these risks obvious.

Democracy as an Output

Although Asia’s economic miracle was generally applauded, it had one dimension that the West often found uncomfortable: authoritarian, one-party, sometimes brutal governments. Despite Singapore’s growing prosperity, many in the West criticized Lew Kwan Yew for not tolerating dissent. Similarly, South Korea didn’t become a stable democracy until 1987, the same year that Taiwan ended martial law, while Japanese industry initially developed during its imperial era. In all four nations, multiparty democracy came relatively late, and thus was more the output of economic success than a necessary input. In the post WWII era, American leaders mostly overlooked the lack of Western-style democracy because all four countries were anticommunist U.S. military allies. Obviously, this is not the case with China.

The realization that the political liberalization of Asia came after economic success explains why many experts believed that China would follow a similar path, and there’s still a chance that someday it will—perhaps if and after it achieves its goals of reunifying Taiwan and developing a deeper “common prosperity.” Although many global leaders are reluctant to admit it, the fact that democratic elections around the world have often failed to improve national prosperity also reinforces the democracy-as-output view. Both the fundamental building blocks and a strong, engaged and effective state have been required. This is the essence of the Asia model.

Open China’s Potential

At this stage of its development, China might be even more successful if it becomes more open, as there are growing downsides to its authoritarian practices, just as there were with the Asian Tigers at roughly similar stages. Oppressive practices make China a less attractive place for international professionals to live and work; they discourage international students from attending China’s universities; they reduce tourism and limit the global appeal of China’s culture, language, and brands. They also make it difficult for Chinese professionals, scientists, and students to engage with their counterparts around the world, increasing the risks of groupthink while dividing and diminishing the influence of the global Chinese diaspora. Most importantly, they limit the creativity and innovation of the Chinese people. To gauge the lost potential, imagine Taiwan operating at China-like scale.

And it’s not as if liberalization would put an end to having a strong, effective, and engaged state. Significant state involvement is now more the exception than the rule. Like China, just about every nation oversees its commanding heights to at least some extent in areas such as energy, transportation, aerospace, banking, insurance, natural resources, schools, media, and health care. Through the CHIPS and Science Act, the Inflation Reduction Act, and other initiatives, the Biden administration has significantly increased the level of U.S. government economic engagement, especially in technology intensive sectors. Consider the way that China has rolled out more EV charging stations than the rest of the world combined. Governments in every developed nation hope to sponsor similar success, believing that it’s essential to both the transition to electric vehicles and EV manufacturing competitiveness.

Living With a Giant Tiger

America and its allies should continue to push back against many Chinese practices, but putting so much emphasis on hard-to-change issues such as censorship, human rights, and the use of coal has taken the focus off of challenges that more directly affect the United States, especially: China’s domination of the market for many rare earth minerals, its efforts to displace the U.S. dollar, its rapid advances in many industries that challenge U.S. capabilities (including electric vehicles), its investments around the world to gain economic and political influence, and perhaps most importantly how the United States allowed itself to become so dependent on Taiwanese-made semiconductors. These, and other vital U.S. interests will continue to be at risk regardless of the extent of China’s authoritarianism, especially as a more open and “normal” China might make for an even greater competitive challenge.

China’s size and the power of the Asian development model will continue to be the two main issues going forward. In terms of the latter, America would be wise to look at the factors that have enabled the Asian miracle over the last 60 years and ask itself how well it follows this proven formula, much of which is relevant to developed and developing economies alike. Given America’s many internal tensions and divides, its widespread belief in laisse-faire economics, and its weaknesses at the lower and middle levels of so many value chains, it won’t always be a pleasant experience. While some have argued that in an age of robots, AI, and automation, the Asian development formula will become less effective over time, there’s little evidence that this is true today, as the success of Vietnam demonstrates.

As for size, China is—or is destined to be—the world’s largest market, the world’s biggest supplier, and America’s toughest competitor and main geopolitical rival, regardless of whether it liberalizes or not. America needs a strategic mindset that acknowledges these four realities:

1. To remain as world leaders, American companies must succeed in the Chinese domestic market to an extent that is broadly comparable to China’s success in the United States. (Large numbers of Chinese companies, making everything from lawnmowers to televisions, now thrive in the U.S. market even though many consumers are unaware of their national ownership.) Failure to sell in China would put American firms at a distinct global disadvantage. Reciprocity—i.e., if the U.S. government allows TikTok to operate in America, then American social media firms should be allowed to operate in China—should be the overall mindset. If China is limiting U.S. company access, then America should limit similar access to its markets. Any technology transfers between the United States and China should also be broadly reciprocal in nature.

2. America doesn’t have to eliminate all of its China dependencies, but it needs to develop enough mutual interdependence that major conflicts are unattractive to both sides. Other than in the most advanced digital areas, America is currently much more dependent on China than China is on America, and this is a destabilizing dynamic that requires a systematic and sustained national response.

3. The United States and its allies must either lead or maintain parity in strategic industries and technologies. China, of course, feels the same way. Peaceful co-existence and inter-dependence requires that neither side be an outright winner in all major categories. As with interdependence, technology leadership also requires a much more coherent U.S. national effort, one that embraces a full value-chain approach in key industry sectors.

4. Geopolitical stability depends upon the reciprocity, mutual interdependence, and value-chain mindsets above; it cannot be assured via military strength and international alliances alone.

Rising U.S./China tensions should worry everyone, and both nations’ overriding goal must be to avoid military conflicts or major supply chain disruptions. Toward this end, any liberalization by China should be warmly welcomed as it could reduce U.S./China tensions by taking some of the cultural, moral, and emotional issues off the table. But liberalization alone won’t reduce China’s challenges to vital American interests; it might even increase them.

By viewing China more as a giant Asian tiger that we need to live with and compete with through more effective technology industry policies, and less as an unfair aberration that must be tamed, America can better mobilize its resources for the realities ahead. By following the liberalization path of its Asian predecessors, China could do the same. Unfortunately, neither state is stepping up to this challenge, and thus tensions continue to rise. But although there are a great many uncertainties, one thing seems clear enough: No matter how the competition between the United States and China plays out, the need for a strong and effective state is not going away. In this sense, we are all Hamiltonians now.

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