America’s Belt and Road?

The US may be stepping up its game to counter China’s multi-trillion-dollar development strategy known as the Debt Trap Diplomacy–… sorry, the Belt and Road Initiative:

The US is preparing to create an agency that can invest up to $60bn in the developing world in an effort to counter what some in Washington describe as China’s use of debt to wage “economic warfare”.

In what observers say is the biggest shake-up of US commercial lending to developing countries in 50 years, the Overseas Private Investment Corporation will be folded into the new agency and allowed to invest in equity. At present Opic can invest only in debt, putting it at a disadvantage to European development finance institutions (DFIs).

Ray Washburne, president and chief executive of Opic, told the FT that China – by using what he called “loan-to-own programmes” – was “creating countries that have the shackles of debt around them”. That amounted to “economic warfare”, he said.

By more than doubling Opic’s lending ceiling to $60bn and allowing it to invest in equity, he said, it would be put on “an equal footing with other DFIs”.

According to the report, OPIC well be folded into the new agency, called the International Development Finance Corporation, and “The arrangement has been sold to the president.”

Of course, the US has other ways of creating potholes in China’s Belt and Road… This could get very interesting indeed. On a quasi-related note, China is ramping up its PR campaign in the US, according to Bloomberg reporter Jennifer Jacobs:

China Daily advertising supplement

Text of the full thread:

CHINA sends a message to Trump and Ambassador Branstad by taking over 4 pages of Des Moines Register. Advertising supplement has “news” on:

—China buying soybeans from South America due to “trade row”

—Xi Jinping’s “fun days in Iowa”

—“Beijing can set an example for the world.”

The advertisement, labeled as paid for by the “China Daily, and official publication of the People’s Republic of China” is like a 4-page tweet from the Chinese government. It calls the trade war with Trump the “fruit of a president’s folly.”

In 15 years of covering Iowa news, I cannot recall the Chinese making a play like this. Certainly unprecedented for China to take out a four-page advertisement in the DMR. [Emphasis added]

China uses this advertising format regularly—“news” inserts have appeared in Nepal, Australia, U.S., etc. per @kashishds, @lillebuen, @DavidMDrucker and others. Beijing seems to be talking straight to Trump with this Iowa ad on “China-U.S. economic interdependence.”

Newspaper advertorials are a relatively clunky way of getting the message out, and unlike, say, troll armies on social media, they aren’t plausibly deniable. Nevertheless, as much as Americans (and others) may roll their eyes at such obvious and heavy-handed PR efforts, the cumulative impact of China’s vigorous overseas messaging is likely to be non-zero.

Greg’s foreign media doctrine

The US is getting tough on Chinese state-owned media. But is it enough?

The Justice Department ordered two leading Chinese state-run media organizations to register as foreign agents, according to people familiar with the matter, as U.S. officials ramp up efforts to combat foreign influence operations and toughen their stance on a variety of China policies.

The DOJ in recent weeks told Xinhua News Agency and China Global Television Network—known as CGTN now and earlier as CCTV—to register under a previously obscure foreign lobbying law that gained prominence when it was used in the past year against associates of President Donald Trump, including Mr. Trump’s former campaign manager, Paul Manafort, the people said.

The DOJ order comes as Washington and Beijing are involved in an escalating trade conflict, with China announcing on Tuesday it would retaliate for the U.S. tariffs unveiled Monday on $200 billion in Chinese goods. […]

The Justice Department told the senators it couldn’t comment on any potential continuing investigations and wrote that not all state-controlled media would necessarily be required to register as foreign agents, such as those that run news bureaus in the U.S. to report on events for an audience in their home countries.

“Unless there is an effort by the state-controlled media organization to use its reporting in the United States to target an audience here for purposes of perception management or to influence U.S. policy, there would probably be no obligation for it to register under FARA,” a DOJ official wrote in a letter dated Feb. 20 that was reviewed by The Wall Street Journal.

It’s unclear whether Chinese media organizations like Xinhua and CGTN have significant audiences in America (although some of their messaging is clearly aimed at Americans). It’s also unclear what (if anything) separates normal “journalism” from “perception management,” and it’s unclear why media outlets such as Xinhua and Korea’s KBS America should be registered as foreign agents but not, say, the BBC.

The guidelines for FARA registration seem very vague. Another issue is that FARA-registered media entities are not required to stop producing content, including for American audiences (although they are required to disclose their funding and activities and pay a fee). Some laud this as a positive transparency measure, while others denounce it as a troubling assault on journalistic freedom, and yet others wish FARA had more teeth.

The whole situation is complex, murky, and unsatisfactory to a lot of people. I propose cutting through all the complexity by applying the principle of reciprocity. Quite simply, the US should treat foreign media outlets the way their respective countries treat US media outlets. For example, since China bans the publication and printing of foreign newspapers and magazines for sale in the mainland, the US should not allow China Daily to be sold from newspaper boxes on the streets of America’s major cities:

China Daily New York

(Benjamin Chasteen/The Epoch Times)

And since China would never allow CNN, for example, to broadcast US foreign policy propaganda on Beijing’s giant Sky Screen, neither should Xinhua be allowed to broadcast Chinese foreign policy propaganda on a huge LED screen in Times Square:

Xinhua Times Square

(The Nanfang)

The same principle would apply to Russia, in whose capital city you allegedly can’t find a major foreign newspaper. (It should be pointed out that Russia’s attempts to control and limit foreign media predate the Kremlin’s recent move to label foreign media outlets as foreign agents, ostensibly in retaliation for the US doing the same to RT and Sputnik Radio.)

Besides being irreproachably fair, this policy would also expose the severe hypocrisy of any authoritarian governments that complain that their media outlets are being muzzled in the US, since the US would simply be mirroring the restrictive policies of those governments. Optimistically, this could even prompt some authoritarian governments to relax their controls on US media to regain their American footprint.

Now, this policy would do little to curb the Russian information warfare and influence operations that so terrify America’s political and media elites, as social media is the main battlefield for those alleged activities, carried out by armies of invisible trolls and bots. The rule of reciprocity hardly makes sense in the context of Twitter and Facebook. But that’s another story for another day.

Declining well-being of Americans

Professor Peter Turchin explains his observation that the well-being of Americans has been declining over the last four decades — a process called immiseration:

Last year I had an interesting conversation with someone I’ll call the Washington Insider. She asked me why my structural-demographic model predicted rising instability in the USA, probably peaking with a major outbreak of political violence in the 2020s. I started giving the explanation based on the three main forces: popular immiseration, intra-elite competition, and state fragility. But I didn’t get far because she asked me, what immiseration? What are you talking about? We’ve never lived better than today. Global poverty is declining, child mortality is declining, violence is declining. We have access to the level of technology that is miraculous compared to what previous generations had. Just look at the massive data gathered together by Max Rosen, or read Steven Pinker’s books to be impressed with how good things are.

There are three biases that help sustain this rosy view. First, the focus on global issues. But the decrease of poverty in China (which is what drives declining global poverty, because Chinese population is so huge), or the drop in child mortality in Africa, is irrelevant to the working America. People everywhere compare themselves not to some distant places, but to the standard of living they experienced in their parents home. And the majority of American population sees that in many important ways they are worse off than their parents (as we will see below).

Second, the Washington Insider talks to other members of the 1 percent, and to some in the top 10 percent. The top-income segments of the American population have done fabulously in the last decades, thank you very much.

Third, many economic statistics have to be taken with a grain of salt. […]

So what has been happening with the well-being of common, non-elite Americans? In my work I use three broad measures of well-being: economic, biological (health), and social.

Briefly:

-Economic: Wages of non-elite workers show “rapid, almost linear growth to the late 1970s, stagnation and decline (especially for unskilled labor) thereafter”; the “relative wage” (the nominal wage divided by GDP per capita) drops sharply after 1960; labor participation has been trending downward regardless of education level since at least the late 1970s.

-Biological: Average height of native-born Americans stopped growing after the 1980s (and has declined for some demographic groups); life expectancy growth has lagged behind Western Europe and for some groups, life expectancy has declined in absolute terms; suicide rates are climbing for all ethnic groups.

-Social: Average age of marriage and percentage of people unmarried are on the rise.

Remember when the original Star Wars came out? That was around the historic peak of American economic, social and biological well-being. Hard times are coming, and for an increasing number of people, have already arrived.

American serfs

Steve Bannon provides a useful metaphor for the economic state of current-day Homo Americanus:

All the economic textbooks you’ve got before 2008? Throw them out. They’re totally irrelevant.

Your generation, the readers of New York Magazine, you’re nothing but 18th-century Russian serfs. You’re better fed, and you’re better dressed, and you’re better educated. But you don’t own anything. And you’re not going to own anything.

The state capitalism of the big technology companies has taken away your digital, your data sovereignty. They’ve totally taken it away. You generate intellectual property all day long, and they don’t pay you for it. They take it for free, they monetize at huge margins.

The quote is from a fascinating interview regarding the aftermath of the 2008 financial crisis. There is surely a connection between the decline of private ownership in the US — ranging from homes and cars to technology and books — and the rise of a permanent class of social media serfs who create content for free. The collapse of ownership is also a useful framework for measuring the actual wealth and economic well-being of Americans. Are you wealthy if you have access to everything you want, but you own nothing? Obviously not, because access can be revoked, whereas property can only be taken away with difficulty, if at all.

On a more practical note, Bannon sees big economic policy changes ahead:

But now McMaster is gone, Cohn is gone, Tillerson’s gone. Look what Trump’s done in six months. He’s reorganized the world’s commercial system. We’re very close to having a massive reorganization in six months. The Wall Street stuff will all come. Trump wants to make sure first, get the economy revved back up again —

What if it doesn’t?

Well, the economy is going to be at 4 percent growth. Wages are going to start to follow. We’ve got time. You can’t do everything at one time. Let’s change the world’s commercial relationships and change the supply chain away from China, okay? First off, that would be Herculean, because for 30 years we looked the other way and exacerbated and we helped its growth.

CIA debacle in China

From Foreign Policy, we learn how China managed to roll up the CIA’s entire network of informants across the country in 2010-12, executing about 30 people in total:

It was considered one of the CIA’s worst failures in decades: Over a two-year period starting in late 2010, Chinese authorities systematically dismantled the agency’s network of agents across the country, executing dozens of suspected U.S. spies. But since then, a question has loomed over the entire debacle.

Now, nearly eight years later, it appears that the agency botched the communication system it used to interact with its sources, according to five current and former intelligence officials. The CIA had imported the system from its Middle East operations, where the online environment was considerably less hazardous, and apparently underestimated China’s ability to penetrate it. […]

The former officials also said the real number of CIA assets and those in their orbit executed by China during the two-year period was around 30, though some sources spoke of higher figures. The New York Times, which first reported the story last year, put the number at “more than a dozen.” All the CIA assets detained by Chinese intelligence around this time were eventually killed, the former officials said. […]

Some staggering technical incompetence on the part of the CIA appears to have been involved:

Although they used some of the same coding, the interim system and the main covert communication platform used in China at this time were supposed to be clearly separated. In theory, if the interim system were discovered or turned over to Chinese intelligence, people using the main system would still be protected—and there would be no way to trace the communication back to the CIA. But the CIA’s interim system contained a technical error: It connected back architecturally to the CIA’s main covert communications platform. When the compromise was suspected, the FBI and NSA both ran “penetration tests” to determine the security of the interim system. They found that cyber experts with access to the interim system could also access the broader covert communications system the agency was using to interact with its vetted sources, according to the former officials.

In the words of one of the former officials, the CIA had “fucked up the firewall” between the two systems.

And a tweet from the author, Zach Dorfman:

This didn’t make it into the piece, but here’s how the Chinese treated people working with the CIA: According to one source, one asset working at a state tech institutes, and his pregnant wife, were executed live on closed circuit TV in front of the staff.

What a disaster. HUMINT is a dangerous game, even more so when sloppy tradecraft is being used. Also, I question the value of this type of high-risk skullduggery. Chinese intentions with regard to the US are not hard to discern, and access to all the secrets in the world is useless if a country is not willing to defend its national interests.

Daily links: Economic stresses mount

Debbie Downer

We apologize for this depressing post

The rate of seniors filing for bankruptcy has tripled since 1991. The elderly have little financial cushion in the event of catastrophic health problems, and of course medical costs are rising. And more people are entering retirement age with debt.

More people are living in their cars as homelessness rises in America. “The problem is ‘exploding’ in cities with expensive housing markets, including Los Angeles, Portland and San Francisco, according to Governing magazine.”

Outstanding education debt in the US now exceeds $1.5 trillion (roughly the GDP of Australia), after tripling over the last decade, and more than one million student loan borrowers go into default each year.

The average American works longer hours than a medieval peasant: “Juliet Shore, economist, told the site that during periods of high wages, such as 14th-century England, peasants worked no more than 150 days a year.”

Trade war drives CPC rifts

Reports are surfacing that the escalating trade conflict with the US is driving a wedge between elements of the Chinese leadership:

BEIJING (Reuters) – A growing trade war with the United States is causing rifts within China’s Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.

President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party.

A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources familiar with discussions in leadership circles.

A prominent and influential academic whose views have found favor in some party quarters has also come under attack for his strident views on Chinese power.

There are hints — which, given the totally opaque nature of elite Chinese politics, we should take with a dollop of salt — that the factional tensions could even be weakening the “core leader’s” grip on power:

China, for all its problems, seems set on an inexorable rise to superpower status to rival the US. On multiple benchmarks – economic, technological, military and diplomatic – Beijing is making rapid advances.

We are a long way, in other words, from peak China. But that begs another question which has been sweeping Beijing over the northern summer – whether we are now witnessing peak Xi Jinping.

In recent weeks, the signs of a nascent pushback against Xi’s absolute power have started to emerge. Some are cryptic, given the nature of Chinese politics, contained in coyly worded postings on social media. Some are the stuff of rumour, or back alley news, as the Chinese call such information, which flourishes in the absence of a free press.

More background on CPC factional disputes.

Daily links: Fentanyl and state failure

China is the main source of the insanely potent synthetic opioid fentanyl in the US, which killed more than 27,000 people in the 12 months through November 2017. “The biggest difficulty China faces in opioid control is that such drugs are in enormous demand in the US,” an official of China’s equivalent of the DEA is quoted as saying. The Opium Wars in reverse?

The trade deficit has sliced $457.2 billion off the US economy’s cumulative inflation-adjusted growth, or 14.33%, from the start of the recovery in mid-2009 through the first quarter of 2018, according to last week’s revised GDP figures. But we are told that trade deficits don’t matter.

Britain is probably not going to run out of food in the event of a “no deal” Brexit. Nevertheless, it’s interesting to note that the British government cannot guarantee food security for its people, and seemingly expects the food industry to take all the responsibility for stockpiling goods. Meanwhile, the food industry has absolutely no plans to do this.

A simulation models the release and spread of a moderately lethal and moderately contagious virus. It kills off 150 million people over the course of 20 months, including 15 to 20 million people in the US.

Over 100,000 Russians marched last month in the city of Yekaterinburg to mark the centennial of the slaughter of the Romanov imperial family by rabid Communists.

Duterte publicly destroys more than A$8 million worth of contraband luxury cars in the Philippines:

Book review: Free Trade Doesn’t Work

Years before the problematic aspects of US trade policy had erupted into the national political conversation, economist Ian Fletcher laid out a powerful intellectual case against free trade in a 2011 book, which I read and reviewed in April of that year. Given the extreme timeliness of the topic and the very superficial level of most punditry on the trade question, I thought it might be useful to republish my review (lightly edited) below.

Few things are more fervently and universally extolled than free trade. Economists, editorial boards, and politicians join in singing its praises. That free trade benefits all nations is an article of faith for America’s ruling elite. Protectionism is regarded as self-evidently stupid and evil; it is sufficient to call something “protectionist” to discredit it.

The belief in free trade is, in short, a sacred cow. It is unchallengeable in the realm of American politics and punditry because the economic case for it is considered airtight. Facts about industrial decline, job losses, and mounting debt are irrelevant. Common sense is irrelevant. Economic theory tells us that free trade benefits the US overall; therefore, no matter how high the costs of free trade, we can be sure that our economy is somehow reaping benefits that exceed the costs, and that any form of protectionism will necessarily do us more harm than good.

Ian Fletcher, Senior Economist of the Coalition for a Prosperous America, explains why this isn’t so. His book Free Trade Doesn’t Work: What Should Replace It and Why is a methodical dismantling of the assumptions, arguments, and popular beliefs that undergird free trade. In lucid prose that even an economic ignoramus (like me) can understand, Fletcher lays out the arguments against free trade and in favor of a flat tariff. It’s a fact-filled, rigorously argued, and highly readable book.

Dissecting Ricardo

The intellectual core of the case for free trade is, of course, David Ricardo’s 200-year-old theory of comparative advantage, which holds that (in Fletcher’s words): “If we could produce something more valuable with the resources we currently use to produce some product, then we should import that product, free up those resources, and produce that more valuable thing instead.” All well and good — but the theory depends on a host of dubious assumptions which simply do not hold true in the real world. Those assumptions are that:

  1. Trade is sustainable
  2. There are no externalities
  3. Factors of production move easily between industries
  4. Trade does not raise income inequality
  5. Capital is not internationally mobile
  6. Short-term efficiency causes long-term growth
  7. Trade does not induce adverse productivity growth abroad
  8. There are no scale economies

All of these assumptions are false at least some of the time. Assumption (2), for example, ignores both the negative externality of environmental damage and the positive externality of technological spillover (i.e. free trade wipes out industries that could have spawned new technologies and new industries). Assumption (5) is necessary for free trade to be a guaranteed win-win, rather than a potentially win-lose, proposition; the theory of comparative advantage says that market forces drive all factors of production to their best uses in the economy, but assumes that these factors cannot be driven right out of the economy to other countries. Of course, they can be. Capital is highly internationally mobile, and while this benefits the world economy as a whole, it certainly can hurt individual countries.

Assumption (1) falls apart when a “decadent” nation, which prefers short-term consumption, trades freely with a “miser” nation, which prefers long-term consumption. The decadent nation buys all the imports it can get, paying for them with a combination of exports, debt, and the sale of assets. The decadent nation is happy because it gets to consume more right now; the miser nation is happy because it gets to invest more and accumulate wealth. In the short run, both nations are “better off”; in economic terms, they have “maximized their utility.” Eventually, however, the decadent nation will exhaust its ability to assume debt and sell assets, leaving it poorer than it would have been without free trade. Trade restraints for this nation would be like restrictions on an heir’s squandering his inheritance.

And so on. Comparative advantage is, in short, a deeply flawed and inadequate picture of reality. Insofar as its assumptions hold true, it’s useful. “Fairly open trade, most of the time, is a good thing,” Fletcher concludes. But what about when it’s not?

Are tariffs the answer?

Neither the Ricardian view that free trade is always good, nor the pessimistic view that international trade is a zero-sum game, war by other means, is correct. The truth lies in some synthesis of these two extremes. The work of economists Ralph Gomory and William Baumol, set forth in their 2000 book Global Trade and Conflicting National Interests, tries to provide that synthesis. Gomory and Baumol observe that, contrary to Ricardo’s model, countries that get a head start in certain industries can lock other, potentially more-efficient, countries out of those industries due to the effects of economies of scale. Therefore, competition is imperfect and free trade outcomes are not always optimum.

Gomory and Baumol’s analysis suggests that international trade is sometimes win-win, and sometimes win-lose. Fletcher explains the policy implications of their work thusly: “Basically…a wise nation will willingly let other nations have their share of the world’s industrial base, but will try to grab the best industries for itself. Then it will sit back (here’s where laissez faire plays its legitimate role) and let the rest of the world compete…to produce for it the things it doesn’t want to produce at home.”

Fletcher’s preferred policy is the Natural Strategic Tariff — a flat tariff of around 30% on all US imports. It is “strategic” because, due to the different sensitives and responses of industries to import competition, it tends to cause the relocation of “good” industries like high-tech manufacturing to the US, but not “bad” industries like textiles. It works — for the US, not for other countries — because it interacts with the existing competitive strengths of the US economy. It is relatively politics-proof because it does not single out any industries for protection. It is, overall, an elegant and pragmatic response to the problem of America’s free-trade-induced industrial decline.

An avoidable disaster

If you have any doubts as to the existence of the problem, consider:

  • US imports are 17% of GDP while the entire US manufacturing sector is only 11.5% — meaning the US could export its entire manufacturing sector and still not balance its trade.
  • The US has run a deficit in high technology since 2002.
  • Every few years there emerges an entire new industry which has no strong American players (e.g. hybrid cars).
  • The US invented photovoltaic cells, but is now fifth behind Japan, China, Germany, and Taiwan in their production.
  • In 2007, the US was a net importer of spacecraft.
  • American companies had 90% of the world market in semiconductors in 1980, but have less than 10% today.
  • The printed circuit board industry is on its last legs in the US. (From Manufacturing and Technology News: “There isn’t one single vertically-integrated North American shop that could independently supply a circuit board.”)

Says Fletcher: “Losing positions in key technologies means that whatever brilliant innovations Americans may dream up in small start-up companies in future, large-scale commercialization of those innovations will increasingly take place abroad.”

The more one looks at the actual history of trade, the more unnecessary and avoidable this outcome seems. Contrary to popular belief, American policy was basically protectionist from Independence until after World War II. All four presidents on Mount Rushmore were protectionists, as Fletcher points out. So was Alexander Hamilton, who worried that Britain’s lead in manufacturing would remain entrenched, relegating America to banana republic status, and proposed tariffs, import and export bans, and subsidies for exports and key innovations. From 1812 until 1846, America had high tariffs (up to 40%). A brief episode of free trade from 1846 to 1861 was followed by more tariffs. From 1865 to 1932 — when America’s economic performance surpassed the rest of the world by the greatest margin — tariffs remained high. The overwhelming consensus in favor of protectionism did not end until free trader Woodrow Wilson reduced tariffs in 1913. Then Congress pushed them back up, making the Roaring Twenties a tariff era. Under FDR in 1930s, tariffs came down again — and stayed down. JFK’s Trade Expansion Act of 1962 marked America’s decisive turn against protectionism; America has not run a trade surplus since 1975.

Tariffs, then, apparently worked for most of America’s history. But didn’t the Smoot-Hawley tariff of 1930 cause the Great Depression (and even World War II)? Nonsense, according to Fletcher. Smoot-Hawley applied to about one-third of America’s trade — a mere 1.3% of GDP. It increased duties, on average, from 44.6% to 53.2%. (“Tariffs as a percentage of imports were higher in almost every year from 1821 to 1914.”) And as for the myth of a death spiral of retaliation by foreign nations, the State Department reported in 1931 that “With the exception of discriminations in France, the extent of discrimination against American commerce is very slight.” Says Fletcher: “Smoot was a moderate and routine adjustment to America’s trade regime, not a major shock to the world trading system.”

Free trade doesn’t exist

So much for America. Is free trade good, at least, for the rest of the world? Not really, argues Fletcher. Opulent Japan and South Korea are highly protectionist. If industrial policy and neo-mercantilism are somehow crippling them, it’s hard to imagine what these countries would look like with free trade (the Jetsons, perhaps?). The developing world is not well-served by free trade either. Rapidly-growing China, whose government owns 30% of the country’s industry and systematically manipulates foreign trade to increase economic growth, arguably would not be better off embracing laissez-faire. Trade liberalization has either hurt or not helped most other developing nations.

Free trade tends to mean that the industrial sectors of developing nations either “make it to the big time” and become globally competitive, or else get killed off entirely by imports, leaving nothing but agriculture and raw materials extraction, dead-end sectors which tend not to grow very fast. Free trade eliminates the protected middle ground for economies, like Mongolia or Peru, which don’t have globally competitive industrial sectors but were still better off having such sectors, albeit inefficient ones, than not having them at all.

For all the scorn we heap upon it, protectionism works, a fact grasped by our more clear-sighted trading partners. That is why embracing free trade is not even an option for America. International trade is a rigged game, and if America refuses to protect its economic interests, US trade policy will simply be dictated by the governments of Beijing, Tokyo, Brussels, and so forth. Fortunately, the American public is starting to wake up to this reality and vote accordingly, and Fletcher predicts that the free trade consensus will fall apart over the next few years.

I’ve barely scratched the surface of Ian Fletcher’s important and hugely informative book. Anyone interested in trade policy, even (or especially) supporters of free trade, should check it out. Since I do not wish to be an example of the saying that a little knowledge is a dangerous thing, I welcome correction on any of the points made above.

Chinese retrenchment

Must-read article by a British policy wonk who flew to Beijing to sound out Chinese officials and intellectuals about… what else? Trump. Apparently the Chinese are smarter than their Western counterparts, because they have no trouble grasping what the president is up to, they understand the strategy behind his seemingly chaotic policy moves, and they are, quote, “awed.” If the article is to be believed, China is already considering a fundamental reset of its foreign policy and economic strategy in response to a sudden intensification of pressure from the US.

The Chinese view is that Trump is tearing up the existing world order as a prelude to renegotiating America’s relationships with other countries on more favorable terms for the US. Unchained by multilateral institutions, the US will be able to wield its still-superior clout to extract (more) concessions from China on a bilateral basis. This is scary to China. Also, Trump wants to bring Russia into alignment with the West in order to counter Beijing, essentially reversing Nixon’s policy of chumming it up with China to isolate the Soviet Union. (Instead of Nixon-goes-to-China, we have Trump-goes-to-Russia.)

The whole article is very telling, but here are a few key paragraphs:

My interlocutors say that Mr Trump is the US first president for more than 40 years to bash China on three fronts simultaneously: trade, military and ideology. They describe him as a master tactician, focusing on one issue at a time, and extracting as many concessions as he can. They speak of the skilful way Mr Trump has treated President Xi Jinping. […]

In the short term, China is talking tough in response to Mr Trump’s trade assault. At the same time they are trying to develop a multiplayer front against him by reaching out to the EU, Japan and South Korea. But many Chinese experts are quietly calling for a rethink of the longer-term strategy. They want to prepare the ground for a new grand bargain with the US based on Chinese retrenchment. Many feel that Mr Xi has over-reached and worry that it was a mistake simultaneously to antagonise the US economically and militarily in the South China Sea.

Instead, they advocate economic concessions and a pullback from the aggressive tactics that have characterised China’s recent foreign policy. They call for a Chinese variant of “splendid isolationism”, relying on growing the domestic market rather than disrupting other countries’ economies by exporting industrial surpluses.

Now, it’s interesting to consider this potential about-face in light of Edward Luttwak’s predictions in his 2012 book The Rise of China vs. the Logic of Strategy. Luttwak argued that the combination of China’s rapidly growing wealth, power and assertiveness would inevitably provoke increasing resistance from the rest of the world across the economic, military and diplomatic domains. The economic (or as he calls it, “geo-economic”) response to China could include trade barriers, investment restrictions, and technology bans. In Luttwak’s words:

[B]ecause of its inherent magnitude, quite independently of China’s conduct on the regional and international scene, the very rapid growth in its economic capacity and military investment must evoke adversarial reactions, in accordance with the logic of strategy.

Other things being equal, when a state of China’s magnitude pursues rapid military growth, unless the resulting shift in the power-balance passes the culminating point of resistance inducing the acceptance of some form of subjection, it causes a general realignment of forces against it, as former allies retreat into a watchful neutrality, former neutrals become adversaries, and adversaries old and new coalesce in formal or informal alliances against the excessively risen power.

A Chinese pullback in the face of growing international resistance led by the US would certainly put an intriguing twist on the dynamic outlined by Luttwak. On the one hand, it would reduce the perception of threat that is driving the anti-China coalition, thus slowing or even reversing the adversarial reactions to China’s rise. In the short term, this would ease international tensions and would be welcomed by almost everyone. Paradoxically though, this outcome could enable China to grow its economy and build up its technological prowess with less interference from its global peers — thus putting China in an even stronger position over the long term.