On April 26, Chinese President Xi Jinping said that China will “eliminate improper rules, subsidies, and practices that impede fair competition and distort the market.” If this is true, a win-win deal between the United State and China should arrive shortly, and President Donald Trump will have saved America from what Vice President Mike Pence calls China’s “predatory capitalism.”
But in all likelihood, none of this will happen. That’s because the trade war is, to a large extent, a conflict over the Chinese Communist Party’s most important means of keeping itself in power: subsidies and the state sector. These practices are inflicting great harm on China’s trading partners, and the United States, Europe, Japan, and South Korea are growing less tolerant of them. If the United States is determined to halt the economic damage of China’s trade practices, it has two choices: either attempt to get the Chinese government to give up the tools it needs to hold power—an unrealistic and possibly dangerous goal—or greatly reduce economic ties with China, which would also bring great pain and risk.
China’s subsidies and state sector are as much about politics as they are about economics. In a panel hosted by the Asia Society in 2018, Chinese politics expert Minxin Pei said, “China has such a large state sector, not for any economic reasons. It’s a purely political tool for the Chinese Communist Party to control the economy and keep itself together.”
Xi Jinping’s government almost certainly uses the state sector to distribute income to politically significant individuals and groups, which helps prevent challenges to his power. The presence of many thousands of zombie companies in China is a case in point. And if anything, the Chinese state sector and its subsidies are only set to increase in political consequence. Over the last few years, Xi has rewired China’s political system, severely damaging the intra-party democracy that Deng Xiaoping established to prevent a repeat of the horrors of Mao Zedong. The destruction exacted on the Chinese political system, and the accumulation of personal power, make these tools more vital for the Chinese government to hold onto power because they increase the likelihood that political threats will come from Chinese elites.
From the American perspective, the costs of living with these trade practices are far too high to justify perpetuating an unreformed trade relationship with China. Hence the bipartisan consensus against China’s trade practices. For example, China’s subsidization of its metals industry has decimated steel and aluminum industries globally, causing great pain for industrial regions all over the world. Steve Bannon insists that the impact of China’s trade practices on the American Rust Belt contributed to the opioid crisis and led to Trump’s election. For many years, it was politically viable for American leaders to ignore China’s trade practices. The election of Trump abruptly ended all that.
What many seem to underappreciate is that significantly changing China’s trade practices would mean forcing the Chinese Communist Party to upend a core piece of what is holding its fragile political system together. A meaningful U.S. victory in the trade war would mean getting China to eliminate its subsidies and overhaul its state sector, which could also mean the downfall of the Chinese Communist Party. China’s leaders are well aware of this risk. They are unlikely to give the United States, the EU, Japan, and South Korea what they are looking for.
Of course, some of the Americans who are most interested in aggressively reforming the trade relationship with China are also those most interested in seeing the Chinese regime collapse. But that may not be such a wise outcome, given that it could cause China to descend into horrific violence and potentially lead to a major war.
So if the United States is determined to no longer bear the painful consequences of China’s trade practices, it can either get Beijing to significantly reform its economy—extremely unlikely given the nature of Chinese politics today—or it can decide to curtail the trade relationship. For now, America is trying the first option, but it does not take a genius to see why it is likely to fail. Some think the second option is our only bet.
Ultimately, this conundrum suggests that the Chinese and American systems are wholly incompatible as trade partners, unless the United States becomes willing and able to find some domestic way of accommodating the distortions of Chinese practices. But sooner or later, American policymakers will have to face this reality and the uncomfortable implications of it.
At the moment, it appears likely that Trump will accept an underwhelming deal with China that fails to seriously address the latter’s subsidies and state sector. As a consequence, the United States will likely continue to hemorrhage jobs to China. This will cause the political viability of trade with China to continue to decrease, and we’ll be staring at the same problem all over again.
Nick Taber is a writer on Chinese politics and economic policy. He has contributed to The American Interest, OZY, Quillette, The Diplomat, and The Weekly Standard. He received his masters degree from the London School of Economics in 2016 where he researched Chinese state-capitalism. You can follow him on twitter @TaberTooth.