June 4 / July 4 — America’s China Conundrum at … Thirty?

Xi’s China rose on the crushed bones of its June 4 demonstrators; today’s America offers only populist political grandstanding and trade disruption as its only-about-the-money response

by Louis Putterman

June 4 marks the 30th anniversary of the Chinese government’s crackdown on and massacre of Tiananmen Square protestors and innocent by-standers. That anniversary comes this year in the midst of the worst spate of trade tensions between China and the United States since the U.S. established diplomatic relations with China and China began its Reform and Opening policies. Those policies and U.S.-China relations have anniversaries to celebrate this year as well: both were announced in December 1978, so we’re just halfway through the 40th anniversary year marking the process that gradually transformed China from an industrializing but poor centrally planned economy into a hybrid market-cum-state economy belonging to the ranks of the world’s “high middle income” countries (a World Bank classification which China shares with countries like Argentina, Chile, and Malaysia). Reform and Opening in China were but a decade old when the Tiananmen violence occurred. China’s new economic strategy, the Communist Party’s declaration with tanks and bullets that the reform was to be economic only, and today’s trade war are all of one piece. Business has boomed and the prospects for democracy have taken a beating on both ends of the China-America see-saw across these forty years. And the row over trade is Donald Trump’s politically successful populist play, pretending to champion the American working class who became casualties of the de-industrialization that China’s economic rise has helped to hasten. Let’s pause for a moment to take a deep breath.

First, we can set a few things straight. China was not entirely an economic basket case in 1979 when the about-face from being on the left of the Soviet Union with respect to egalitarianism and suppression of market forces, to embracing those forces as key to a new “socialism with Chinese characteristics,” began. The best available estimates suggest that its total output value grew at about 6% per year between 1952 and 1979, with heavy industrial output growing much faster than consumer goods, non-staple crops and services. Comparisons indicate that despite the numerous policy swings between ultra-leftists supported by Mao Zedong and more pragmatic bureaucratic plan advocates like Deng Xiaoping and Zhou Enlai, and despite political and economic calamities caused by the Great Leap Forward (1959–60) and the launching of the Cultural Revolution (1966–69), the three decades between the ascension to power of the CCP and the beginning of Reform and Opening saw considerably higher rates of economic growth, more rapid rates of basic industrialization, and far better improvements in life expectancy and literacy than in India, China’s fellow Asian mega-country which began independence at a similar level of poverty, and which passed through the same years under a bureaucratically supervised capitalist and politically democratic system. What proved most intolerable to would-be modernizers like Deng was not the complete absence of progress under the planned economy, but the glaringly poor comparison with Taiwan, South Korea and Hong Kong’s paces of catching up with the industrialized West. That, and the sense that China had been holding itself back through ideological rigidity, and that it could almost double its growth pace if it seized the opportunities that relative poverty, a largely healthy and disciplined workforce, a long coastline and abundance of ports, and geographic and cultural proximity to the fastest growing economies in the world, afforded it.

Did the U.S. and the other western countries aid and abet China’s economic rise after 1979? Absolutely. I clearly recall sitting in numerous seminars at the U.S. universities I attended in the late 1970s and being told again and again that China would never be able to follow in the footsteps of Taiwan and S. Korea, were it to try such a thing, because their rapid growth had relied heavily on exporting to relatively open western markets. Such markets, many economists felt, could absorb the manufactures of some small, strategically allied countries, but would never be left so open to the several times larger flow of manufactures from an export oriented continental country with many times the populations of Taiwan and S. Korea. And yet when China proceeded to follow those Japan-inspired growth models by establishing special economic zones along its southeastern coast and inviting in private investment, investment that proceeded to flow especially rapidly from an “overseas Chinese” diaspora possessed of approximately the same volume of capital in private hands as the nation of China had accumulated in public hands during its three decades of central planning — the U.S. and other western markets proved remarkably open. Far from boycotting Chinese goods in order to “contain” China, the primary response was to celebrate the fact that China seemed to be abandoning Communism, and to welcome its entrance into world markets while gradually tutoring it in that market’s rules.

Major second thoughts followed the brutal 1989 crackdown. Beijing university students had taken advantage of the relatively liberal atmosphere permitted by the recently purged and then deceased Hu Yaobang, and by his successor and reformist partner, Zhao Ziyang. They had begun staging protests on a larger scale than had been witnessed since the early months of the (Maoist) Cultural Revolution, and the government was showing surprising forbearance. Events then took a surreal turn. Top U.S. and European television news anchormen and camera crews descended on Beijing in mid-May, 1989, to cover the historic visit of Mikhail Gorbachev, itself marking an effort to turn the page on a Sino-Soviet dispute that had been roiling world political waters since 1960 (including the spawning of several proxy wars between opposing militias in Africa). The demonstrators realized that the government couldn’t stage a crack-down in China’s central political square in front of so many cameras, and the number of demonstrators ballooned, with similar demonstrations beginning in many other cities. Once Gorbachev and some of the cameras were gone, China tried using local troops to clear the square but Beijing residents stood up for the demonstrators and the local army units accepted flowers from them and refused to crack down. With many protestors believing they had outmaneuvered the government, Deng Xiaoping and hardliners dismissed the too tolerant Zhao, brought in loyal army units from more remote regions in the dead of the night of June 3, and turned the area around Tiananmen Square into a battle scene with uncounted numbers of dead. The burst of unrestrained killing followed by months of political education and propaganda convinced the public that political reform was off the table and that their survival required silence. The West greeted as heroes those protest leaders who managed to be smuggled out China safely, and many voices were raised to call for strong sanctions against China’s government. Foreign investment briefly declined, and the harder line Communist elements who replaced Zhao even flirted with scuttling some 1980s era reforms. But within three years, Deng succeeded in drumming up a new burst of reform, and foreign investment started to rise on an unprecedented scale. Soon a new generation of Chinese leaders committed to both rapid economic growth using a blend of the E. Asian export promotion model, massive state investment in supporting industries and infrastructure, and bottom up entrepreneurial spirit in city and countryside, were planning to meet the requirements for WTO entry, which would further ramp up Chinese export growth and guarantee growth of the market side of the hybrid economy. Even they probably didn’t realize how little of the state control side of this hybrid they would really be required to concede to achieve the bargain. By the 2010s, the Chinese government was sitting atop mountains of foreign currency, buying companies and geostrategic access around the world, and investing massively to bring its scientific technological capabilities up to the international frontier and in some areas even to begin surpassing a U.S. whose anti-state ideology was starving its scientific labs of proper funding.

Was it a mistake for the West to permit China’s economic rise without demanding more political reforms? We clearly have to answer in the affirmative if we’re thinking of the tens of thousands of Han Chinese dissidents still in prisons and re-education camps or under house arrest, or of the millions of Uyghurs, Tibetans, and other minorities being imprisoned and seeing their ancestral lands be systematically Sinicized by growing ethnic Han populations, or of the millions of Chinese men who will be unable to find wives due to the gender imbalance created by the excesses of China’s one child policy, or of the tens of millions of “missing” or unborn Chinese women, or of the hundreds of thousands who will be victims of petty violence caused by the attendant social stresses, etc., etc. We have to answer in the affirmative if we think that China’s transition from Scandinavian-like low levels of inequality to Guatamela-like heights of economic inequality is not entirely a good thing. We have to answer in the affirmative if we think of the hundreds of millions of Chinese who grew up in ignorance of their government’s blatant trampling on basic human rights and values, and of the tens of thousands who continue to leave China year after year to seek out better lives in freer countries, robbing their nation of its best and brightest. But the question on the strictly economic side of the ledger is more complicated.

In brief, China’s economy achieved the longest period of the highest sustained economic growth for any large nation in the world’s economic history thanks in part to its openness to the entrepreneurial energies of investors from Taiwan, Hong Kong, S. Korea, and other countries, and to the openness of markets like that of the U.S. to the products this juggernaut has been pumping out decade after decade. (Domestic entrepreneurship and energy, including the impressive efforts of local leaders in tens of thousands of China’s rural towns and small cities, also contributed its part.) The average incomes of China’s people have more than quintupled since economic reforms began, a feat unrivaled in human history. Though income gains within China have been extremely unequal, almost everyone has gained a little, and at least half a billion people have gone from global poverty standards of $2 or $3 a day worth of consumption to joining the world’s middle and upper middle classes, not to mention the tens of thousands who have joined the world’s rich. The costs of the vast majority of consumer goods in the United States, from shoes, clothing and sporting equipment to smart phones, TV sets and computers, have risen less rapidly than would otherwise have been expected thanks to the relatively low wages and efficiency of Chinese production, contributing considerably to Americans’ abilities to maintain their lifestyles despite stagnant incomes for the lower 90%. Numerous countries in Africa, Central Asia, and other regions have seen improvements in rates of economic growth thanks to China’s immense demand for petroleum, minerals, and selected agricultural products (even as China has assiduously maintained food self-sufficiency in staples like rice, wheat and pork). It cannot be counted as bad that the ranks of the world’s economic middle class, people who can comfortably enjoy the advantages of modern indoor plumbing, heating and air conditioning, transport and communication, and some discretionary spending on the occasional movie and meal out, has grown from the small fraction of the world’s people living in Western Europe and its offshoots in the U.S., Canada, and the like, to at least double its 1979 numbers thanks to China’s economic rise.

But in 2019, it’s clear that there’s been a high price to pay. The globalization which raced ahead as China and the U.S. became ever more entangled in an unsustainable economic embrace, with China’s trade surpluses ballooning and the U.S.’s foreign debts correspondingly growing in large parts thank to cheap financing of our public debt by China, coincided with an era in which U.S. economic policy was itself lurching further and further rightwards, with ever less counter-balancing influence from the American working class. This form of globalization worked splendidly for America’s elites, including corporations like Walmart and Apple able to profit handsomely from the stream of low cost Chinese products, and elite universities brimming with the full-tuition-paying children of China’s nouveau riche. Both mainstream Democrats and pre-Trump Republicans were happy enough with the status quo. Everyone was fine with the fact that China’s government’s pumping of money into domestic projects to allow its economy to continue growing through the global financial crisis of 2008–9 prevented the world economy as a whole from experiencing a deeper and more prolonged recession. Then in 2015, a sometimes clever American business huckster and entertainer realized that he might be able to transform himself from one of the world’s biggest debtors to a colossus astride the once-free world by tapping into working class angst about China’s “eating America’s lunch,” along with a few other choice racist, nationalist and populist tropes. And here we are today, with a Chinese Communist Party confidently suppressing information about its totalitarian past and present, and with a U.S. Republican party only slightly less confidently suppressing information about its leader’s anti-democratic and treasonous actions, locked into a great for-the-camera conflict over their economic disagreements. Those disagreements have genuine substance, but they’re being milked by our current administration only for short run political gain and with little chance of actually harnessing the benefits of global trade and economic growth for the benefit of anyone beyond the biggest beneficiaries of Trumponomics — the wealthy beneficiaries of his beggar-your-children tax cuts. The old jobs aren’t coming back. Forming a new world economic order that benefits the large majority of people in both America and China, and ideally in a still broader range of countries, will be a project for another day — neither June 4, 2019 nor July 4, 2019 will see much immediate hope of relief from the big lies and anti-democratic trends on both sides of the Pacific.

About the author: Louis Putterman holds a Ph.D. in Economics from Yale University and has taught Economics at Brown University in Providence, Rhode Island for more than thirty years. His published works include numerous papers on China’s agricultural and industrial reforms, as well as work on comparative economic development and the impacts of very long run historical factors. He has made numerous visits to China and teaches a course on China’s economy to Brown undergraduates. He also conducts research on human normative and economic behavior in laboratory decision making experiments. He is a former president of the Association for Comparative Economic Studies and writes a blog on behavioral economics, The Good, The Bad and The Economy, for PsychologyToday.com.