Deception and Manipulation inside China’s Growing Economy – Part 2/3

Author: Prince 小王子

Made in China, Stolen From America

“The only thing necessary for the triumph of evil is for good men to do nothing.”

― Edmund Burke

In part 2, we continue the discussion of Chinese predatory economic practices in the context of Manufactur Industry which is key to China’s economic rise post-WTO. We will first cover the necessary theoretical underpinning and historical background via the discussion of (1) the origin of Chinese membership in the WTO and (2) the principle of “unrestricted warfare” in order to understand (3) the role of the party in guiding economic decisions. We conclude from these that the Chinese economy features (1) state-mercantilism, (2) illegal protectionism, and (3) a heavily manipulated currency. Then, we will extend the research to include specific analysis of the manufacturing industry to show that (1) the party plays an important role in guiding and encouraging predatory trading practices, (2) the party actively weaponizes the economy as a way of achieving political results. We conclude from these analyses that a growing Chinese economy is harmful to a fair and reciprocal global trade order because (1) the negative social and environmental externalities associated with China’s economic growth, and (2) the existence of predatory trading practices resulting in unfair competitive advantage.

WTO: Exporting Tyranny With Chinese Characteristics

While President Trump waged his signature Trade War against China in 2016, the CCP has in fact long declared its all-encompassing assault against America. Since its founding, the CCP has regarded America, especially American values, as the primary threat to the regime. Anti-Americanism is so embedded in communism ideology that it is included as part of the party constitution. The communist’s plan to eventually overtake the U.S. goes back not months or years, but decades. For evidence of this, one needs to look no further than the book titled “Unrestricted Warfare” written by top military strategists in the People’s Liberation Army and published in 1999. It is arguably the most significant book written on warfare since the publication of “The Art of War” by Sun Tzu, and forms the guiding principle for how China engages with the rest of the world.

The book explores the various ways in which a poor country can defeat a technologically superior country by engaging in unconventional and oftentimes non-military means such economy and technology. It advocates for the use of “unrestricted warfare” and envisions an all-powerful state, unbound by morality or law, that advances its agenda using whatever means possible at whatever cost necessary. Perhaps most significantly, the book provided cynical interpretations for how such a regime can weaponize economy and technology to wage war against another country without firing a single bullet. These radical ideas of “Unrestricted Warfare”, summarized in just a few sentences, would go on to define the world for decades to come. In a sense, it has became the Pandora box of the CCP, per se, in its relentless pursuit of global domination.

But China’s ambitions would be elusive without first being able to trade with America. Since the Tiananmen Square Massacre, China had been struggling to formalize trading relationships with other countries, especially the U.S. due to economic sanctions. This would all change over the course of just a few years when two financial crises and the handover of Hong Kong tilted the balance in favor of the CCP. Plagued by the 1997 Asian financial crisis and the bursting of the dot-com bubble, the world economy faced unprecedented challenges coming into the new millennium. The U.S. was not only undergoing economic havoc brought about by the dot-com bubble but also embarking on a global anti-terrorism campaign in wake of the September 11 tragedy. The global order seems to have come to its Achilles heels, and uncertainty became the norm. Meanwhile, on the other side of the world, the Hong Kong hand-over by the British to the Chinese in 1997 marked an end to 156 years of British rule of the southern Asian island. As a portal island, Hong Kong had grown to be one of the most vibrant economies in the world, contributing more than 18% of total Chinese GDP in 1997. The peaceful handover of Hong Kong was made possible by the CCP’s promise that Hong Kong would remain autonomous under the political structure known as “One Country, Two System”. The CCP’s willingness to give concessions stood in stark contrast with other communist regimes, and the Hong Kong handover proved a huge success in improving China’s international image. This came at a time when the rest of the world economy was faltering and the U.S. was diverting its attention from fighting communism to fighting terrorism, thus making it possible for the CCP to present China as the solution to both problems. Due to the significant lag in economic development between China and the rest of the world, the luring of cheap labor and resources at the age of rapid technological revolution seemed irresistible. It also helped that China was intentionally playing down its ambition, and had just successfully engineered the peaceful handover of Hong Kong. Together, these would turn the sentiments in favor of China in the U.S.., paving the way for its accession into the WTO.

President Clinton, as a strong advocate for China’s entry into the WTO, argued to other world leaders that by committing to opening up its economy, China would become wealthier and more democratic, enriching and benefiting the rest of the world. His arguments soon won support from business interests and the general public. Consequently, in 2001, China was granted permission to join the WTO, beginning what President Trump would later describe as “the greatest wealth transfer in history .”

Hide Your Strength, Bide Your Time: “China Inc.”

There are many factors which played into China’s economic success since joining the WTO. The masterful utilization of cheap land and labor with imported technology or the golden age of globalization and consumer goods could both explain China’s success. It was the ingenious utilization of unrestricted warfare that best explains China’s success. In fact, an argument could be made that unrestricted warfare is the only reason for China’s economic success. To understand why this is the case, let us first examine some fundamental differences between the Chinese economy and a free-market economy. In doing so, we will focus on understanding the unique characteristics of the state-led mercantilism and the implications it has for countries wishing to do business with China.

In both economies, there exist companies, consumers, regulators, and financiers. However, in the Chinese model, the regulator, or the CCP, would actually assume the roles played by financiers and companies, leaving only the government and the consumer. It does so by monopolizing key industries such as telecommunications, transportation, and banking via State-Owned-Enterprises, while also maintaining a sphere of influence on private enterprises through a multitude of measures such as mandating every company to have a party committee on its board. In recent years, we have also seen an increasing tendency for the state to use the capital market as a way of controlling companies whereby the state, using its army of SOEs, set up oftentimes ambiguous holding companies to acquire ownership stakes in companies that the CCP intends to control. Given the notorious lack of transparency in China, the complexity of the ownership structure and the lack of clear legal definition which separates a private company from its SOE, it is usually very difficult to distinguish between the two.

Taken together, the economic structure underpinning China made it impossible to do business in China without government backing. From access to capital and land to complying with regulation, the CCP remains firmly in control of every aspect of the economy. It also allows the party to use a strategy of “picking the winners” where the government select companies that are “loyal” and provides it with everything necessary to grow. It is not business acumen that determines success in China, rather, it depends on how well one’s interest aligns with that of the party. It is not an exaggeration to say that the CCP by doing so has turned every single Chinese company into accomplices and made them part of a coalition of companies, the socalled “China Inc.”, that the CCP uses to advance its agenda.

We should also note that, by controlling all companies in the economy, the state is able to exert a level of control over both the supply and the demand side of the economy that is unthinkable in a free market economy. In particular, this allows China the ability to manipulate its currency, the Chinese Yuan, by imposing strict controls on the country’s capital account. Whereas in a developed economy both the private sector and the public sector contribute to foreign currency reserve, in China, the central government collects every single dollar that flowed into the country and actively uses the reserve to intervene in markets. Moreover, China imposes strict capital controls on individuals as well as companies, allowing only USD $50000 per person per year and actively tries to stop companies from transferring assets out of China. The U.S. has long accused China of currency manipulation based on numerous well-documented foreign exchange market intervention by the People’s Bank of China, and the Treasury Department in 2019 officially designated China as a currency manipulator. The PBOC itself also openly admits to accusations of foreign exchange market intervention, but rationalizes it by citing it as a necessary measure to stabilize the economy and ensure growth.

Taken together, these important characteristics of the Chinese economy enables Beijing to structure a state-led merichantilstic economy whose currency’s value is determined not by markets but by the CCP. In the context of unrestricted warfare and given the CCP’s notorious reputation for disregarding the rule of law, these features of the economy allows for China to gain considerable advantages in bilateral trading over other economies: currency devaluation allows for cheap exports, total control over the economy makes sure that only Beijing-approved company can prosper, and unrestricted warfare allows Beijing to coordinate IP theft which benefits the CCP at the cost of its trading partners.

Manufacturing

We can further illustrate the effect of these implications by examining the manufacturing industry in China. As the world’s largest net exporter, China accounted for nearly half of global exports in 2018. However, the stellar growth of the industry in the past decades were built on the false premise of state-mercantilism led by unrestricted warfare. Indeed, in the process of growing its manufacturing base, the CCP routinely make use of predatory trading practices that are harmful to other nations in three significant ways: (1) outrageous government subsidy resulting in cost-advantage, (2) state-sponsored intellectual property theft, and (3) loss of strategic manufacturing capabilities and jobs for America.

There was a saying in China that anybody with half a brain can get rich doing manufacturing in China, and reality strays not far away from it. Indeed, the manufacturing industry in China is a prime example of how state-mercantilism weaponizes economy in unrestricted warfare. While it is true that China has a natural comparative advantage in cost when compared with developed economies, due to the lower cost of labor and raw materials, it is far from justifying the ultra low cost of Chines products. Chinese manufacturers in general benefit from receiving explicit and implicit state subsidies in the form of tax rebates and regulatory support. For example, a Chinese manufacturer of toy would benefit from being able to operate with no regards to labor or environmental regulations, receiving state subsidies, and exporting its product using an undervalued currency.

Most important of all, because the existence of state-led IP theft and non-existence of rule of law, Chinese manufacturers often have very little to no R&D costs in producing counterfeit goods. The more technologically advanced is the product, the more profitable it is for Chinese manufacturers to counterfeit the product. And the government actively plays a role to help these manufacturers by sponsoring corporate espionage, cyber attack, or even forced technology transfer. In fact, Chinese law makes technology transfer a prerequisite for anybody wishing to do business in China. The government’s role in allowing, encouraging, and directing IP theft and the production of counterfeit goods is well-documented. China is the world’s largest counterfeit goods producer and has a complete monopoly in many industries. The U.S. government reported that at least 88% of seized counterfeit goods in 2016 came from China, a truly staggering number.

Moreover, Chinese manufacturers reduces labor cost from being able to exploit the workforce using forced labor and child labor. It is a known secret in China that if you go to jail, you will end up being forced to work without pay. China has one of the highest incarceration rates in the world, and routinely lock up millions of people for their outspokenness against the regime’s suppressive practice. In addition to that, child labor widely exists in China, and workers of all kinds have no rights in negotiating their pay, no guarantee of workplace safety, and no option to dispute any of their unfair treatment for fear of incarceration . From acquiring capital, land and labor, to R&D and finding a willing buyer for its goods, Chinese manufacturers receive outrageous state support that defies one’s basic understanding of how business and government, or really, human beings, ought to behave. It is hard to imagine how many products that we in the wealthy countries use daily are being made by these modern slaves, and the fact that nobody speaks up against this constitutes a true tragedy for all of mankind who believes in decency. Unbound by law or morality and with complete power, it is inevitable that corruption and evil become the heart and soul of the Chinese economy.

Concluding Remarks

Even as a buyer of Chinese goods, the U.S. is a victim in this game of no winners. While the CCP quietly built up its manufacturing base using stolen U.S. technology, it at the same time sought to weaken America. China has been aggressively growing many of its raw material producer, and encourages irrational over-capacity with no regard to economic reality. Then, by selling at or even below cost, China undercuts every other producer of the same material and captures the market in a very short amount of time. The same could be said of all manufacturers in China, but China strategically targets America’s raw material manufacturers in a bid to weaken America’s manufacturing capacity in producing goods that are integral to national security.

Take the rare earth industry for example. Historically, the rare earth industry started out here in the U.S., and the country has been a world leader in the industry. Today, however, the U.S. has nearly no production of rare earth, while China accounts for 90% of global rare earth production. Rare earth metals are integral to the production of electronic devices, in fact, anything that uses electricity will require at least some rare earth. By monopolizing this market and undercutting US producers, China has completely destroyed America’s rare earth production capacity, so much so that America today can not even produce many of its key military supplies without parts imported from China. This threatens not only national security, but also incurs job losses whose impact on the economy can compound like a snowball. The Economic Policy Institute estimates that since China joined the WTO in 2001, 3.4 million American jobs have been lost, encompassing all fifty states and every congressional district. Trading with China has reduced wages of those directly displaced by $37 billion through 2011 alone, and it is largely responsible for the loss of nearly $2,000 per worker per year, due to wage suppression, for all non-college-educated workers in the United States. This is in addition to the hundreds of billions of dollars of cost in lost productivity, increased social welfare, IP theft, and the list goes on.

While this process might have taken decades, let us never forget the damage done to both the American and the Chinese people as a direct result of the rise of Chinese manufacturing capacity and with it, the Communist Party of China. Steve Bannon, former Trump chief strategist, ex-Goldman executive, and US Navy officer, chaterarizes the U.S.-China relationship: “Let us be brutally frank, slaves in China made products financed by London and New York for the unemployed in the West. That’s exactly what we’ve had – slaves in China making product for a neo-feudalist system where the working-class and the lower class own nothing and buy cheap products. They can continue along the hamster wheels because the shit is so cheap because it’s provided by slaves and yes, equity value goes up, margins are higher. But it is not a way humans should live.

By Prince 小王子

Please click here to read part 1: https://test.gnews.org/19065/

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