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The indispensable opponent

by Ingo Schmidt Saturday, Feb. 03, 2024 at 3:05 PM

The West's hostility towards China has increased since China's engine began to stutter. At the same time, the US government is pumping massive amounts of money into the economy and has thus been able to prevent an impending recession for the time being, but is far from regaining its former role as a global engine of growth.

The indispensable opponent

by Ingo Schmidt

[This article posted on 12/1/2023 is translated from the German on the Internet,]

The long economic boom has turned China into a challenge, a danger, if not an enemy for Western foreign policy makers. Many economic policymakers share this opinion, but are also worried that the end of the Chinese boom will stifle the economy in the West. After the real estate and financial crisis in the USA plunged the global economy into a barely contained recession in 2008, China became the indispensable engine of capital accumulation. Also in the West.

The West's hostility towards China has increased since this engine began to stutter. At the same time, the US government is pumping massive amounts of money into the economy and has thus been able to prevent an impending recession for the time being, but is far from regaining its former role as a global engine of growth. China is indispensable in this role, but is not playing it as reliably after the coronavirus recession as it did in the years following the global economic crisis of 2008/09.

The politicians of the West, accustomed to global power, find it difficult to admit their economic dependence on the upstart China. It is equally difficult to reconcile their increasingly hostile attitude with the long-held ideology of peace and prosperity through free global trade. This is why current reporting on China says less about actual developments in China than about the contradictory relations between China and the old imperialist centers. The country serves as a projection surface. The "oriental stories" told about China in the West provide an insight into the fears and desires of the storytellers.

Projection surface

Reference is often made to state capitalism in order to characterize China as "the other". This deviates from the norms of liberal capitalism or a free market economy set by the West. The accusations that China does not adhere to the rules of free competition and thus takes advantage of its Western business partners are correspondingly frequent. They then have to ask "their" heads of state for protective measures in pure self-defense. The central role of the state in the emergence and reproduction of capitalism in the West is ignored. Just like colonialism and imperialism, which have helped and continue to help Western capitalism achieve world domination and extra profits.

Instead, China is repeatedly branded as a colonialist or imperialist power. By liberals, because states, unlike markets, are "naturally associated with the pursuit of power" and in China the state is in charge. By conservatives, because China is a communist wolf in market-economy garb and communism is the most domineering of all forms of state rule.

Finally, the accusation of colonialism and imperialism also comes from some Western Marxists, who see China as a country whose rulers try to conceal a particularly exploitative capitalism under clichés about socialism with Chinese characteristics.

On the left of center, there have always been voices who believe that there is something to be learned from the state economic management in China, even if you don't like the political system. Liberals, on the other hand, have always warned, ignoring the massive interventions of Western states, that every step of state interference leads to political servitude.

The debate has changed since industrial policy has been discussed in the West and US President Biden has openly distinguished his economic policy from the neoliberalism of his predecessors and positioned himself in the tradition of Roosevelt's New Deal and Johnson's Great Society, although his approaches to domestic social reform are significantly more modest than those of Roosevelt and Johnson. Instead, they are accompanied by a militarization of foreign policy that defines China and Russia as authoritarian opponents of the free West.

Export boom

Nothing has remained of the earlier hopes articulated by Clinton, in particular, of getting China to adopt the rules of world trade, which are largely shaped by the USA, through admission to the WTO. This would make China, like Germany and Japan, an economically large but politically subordinate country to the USA. This hope was linked to the Faustian pact that the Chinese state and party leadership had entered into with the US capitalists after the collapse of the USSR. The latter hoped that the relocation of production to China, a low-wage country, would generate substantial extra profits and that the spread of the market and private property would undermine the rule of the Communist Party. The Chinese Communist Party was banking on the opposite: by retreating to the commanding heights of the economy, it sought to maintain its political power and turn the country into an economic giant that could not be pushed around at will, even by the superpower USA.

The market reforms of the 1980s, which were primarily aimed at the domestic economy, had already triggered an upswing. Towards the end of the decade, however, real growth rates fell while inflation soared - one of the reasons for the Tiananmen protests in 1989. After these were suppressed and the country turned to the world market, there was a renewed upswing, again accompanied by rising inflation rates.

After joining the WTO, real growth rates soared without inflationary side effects. But the investment ratio and export surpluses also rose to unprecedented heights. US politicians, who until recently had praised the relocation of production to China as good business, shed crocodile tears over the loss of American jobs. And worried that the import deficits were accompanied by increasing debts to China.

Higher wages and booming investment

After the crash on the US real estate market triggered a global economic crisis, US Federal Reserve Chairman Bernanke complained that China had flooded the US with loans, tempting many households that were not actually creditworthy to take on debt. But the assumption that the US debtor is just as dependent on creditors as the countries of the indebted South are on their Western creditors was wrong. As the investment of Chinese export surpluses in dollars shows, the dollar was still the world currency. Therefore, it was not the US that had to worry about repaying the accumulated debt. The creditor, China, had to worry about servicing the loans extended to the US. US demands to limit Chinese export surpluses and the associated borrowing were therefore also heard in Beijing. All the more so as demand for Chinese manufactured goods had plummeted during the global economic crisis.

One way to reduce the share of exports in overall economic demand was to increase wages and thus domestic consumption. This is what happened, not least because over-exploitation in the export industries led to mass strikes. Between 2010 and 2016, the wage share rose from 54% to 58%, just one percent below the level set by the planners under Mao and which was also achieved in the 1980s, the decade of domestic market reforms.

However, investment in real estate and infrastructure, both domestically and abroad since the start of the New Silk Road project in 2013, played a decisive role in reducing dependence on foreign trade. The foreign trade ratio was reduced from a high of 64.5 percent in 2007 to 38 percent in 2022 - to the value in the year of WTO accession or twice the value from the time of the transition to the global market in the early 1990s. On the other hand, the investment ratio, which had already risen from 33% to 38% during the export boom from 2001 to 2007, climbed to a high of 45% in 2013. Since then, it has fallen to 42%, a consequence of the massive overcapacities that have arisen in the face of the unprecedented investments of previous years. The overcapacity has also led to a decline in the growth of overall economic demand.

Prospect of stagnation

Following the end of the export boom, China has transformed itself from the world's mercantilist workbench into the engine of the global economy. There are no other candidates for this role in sight; China can no longer play it because the existing overcapacity is driving down the return on future investments in production facilities, real estate or infrastructure. A period of stagnation lies ahead in which China can neither be an exporter nor an engine of growth, given the economic size and technological capabilities that the country has achieved in these two roles, but has become a potential rival to the previous world power, the USA. And must be seen as a challenge or opponent by its capitalists and rulers because they cannot be sure of the foundations of their rule.

Ingo Schmidt is a Marxist economist and lives in Canada and Germany.

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