Like China In A Bull-Shop

It has been fashionable for many years to say that China will soon be the world's number one power. Its rise has been unstoppable. But the long threatened trade war is coming, and China seems more vulnerable now than for many years.

Shanghai, We Have A Problem

President Trump has been threatening to reduce foreign imports since his campaign for office, and after a year of relative quiet on the issue, he’s begun taxing goods from China, the EU, Canada, and Mexico. 

In March he applied charges on aluminium and steel, then in July openly considered a 25% tax on Chinese imports worth $200bn. Right now, the White House is studying the potential for further tariffs. (A handy update on what trade wars and tariffs are, here) 

Twenty years ago, this would be a non-issue. But China has moved away from self-sufficiency, first doing mass-production, and now moving into internet technology. 

This means it has to rely on a strong Yuan-Dollar rate to sell to their new foreign markets. And if you a) use the dollar, or b) export anything to the US - you’re now an easy target.

China has responded with its own tariffs on $110bn of its US imports, putting the two economies at loggerheads. But Chinese tariffs have been slapped on most of its American imports. 

The United States, however, imports $385bn more from China than China does from them, i.e. it can tax Chinese firms selling in the US way more than China can tax US firms selling in China. 

Investors know this, and they trust the dollar more than the yuan, so they’ve been selling the yuan as fast as possible, causing it to depreciate against the dollar. This makes Chinese goods more expensive in the United States and across the world, even before adding on the extra tariffs. 

The dollar's influence also gives the US power to wield over foreign businesses. ZTE, a large Chinese telecoms firms, was faced with American sanctions for dealing with Iran and North Korea. 

The influence of the US was great enough to be driving a multinational company, based in a different country, out of operating. (It was eventually pardoned after some major overhauls.) That is a sure warning sign for China.

Therefore China could lose the trade war. Its newfound emphasis on exports has given it an Achilles heel against a marauding United States. Well-known firms such as Huawei are finding big bills facing them for operating on the other side of the Pacific.

Just two years previous, China was the most threatening economic power in the world, driving many western firms out of business. But the trade war is making China weaker.

Decentralised Centralisation

One of the historic challenges of ruling China is that the huge population size and diversity means that a centralised government, based in one place, can only control some of the country. 

Yet since 1949, the Communist Party has done a remarkable job of unifying the nation, helped by propaganda, the occasional tank, and (more recently) modern technology. Peacefully regular changes of national leadership helps, keeping policy fresh and up-to-date. 

But this is changing. The consolidation of power by Xi Jinping, who’s abolished term limits and refused to name a successor, probably means he’ll govern for life. 

This isn’t good news for China anyway, as it will lead to an increasingly powerful government in Beijing, but also because he seems to encourage a stagnation of ideas and reforms. 

One of the less understood reasons for Chinese success in the 1990s and 2000s is the quiet encouraging of experimentation. While being an outwardly fixed and dogmatic ruling class, the party inwardly sponsored thousands of innovative trials such as land reform.

Many (such as the coastal free-market zones) became national policy and ended up being key factors in China’s economic growth. Under Chairman Xi however, there has been a severe decrease in these experiments. 

That will mean less productivity in the economy, and far less of the groundbreaking reform that has made private Chinese firms some of the most valuable in the world. As Jinping centralises and stifles, he will limit Chinese potential.

State-Owned Morality

China will soon be the world’s economic giant. But that does not mean it will be our biggest global power. The two great nations of modern history, the USA, and the USSR, occupied positions of inspiration and leadership. The USA as the figurehead of democracy, capitalism, and freedom; the USSR as one of revolution, equality, and might. 

China is a hybrid of the two, and cares for neither. 

It has never tried to assume a military standing outside of its own backyard, and it rarely enforces its own style of regime upon other countries. It does not submit many troops to the UN, it has only one overseas base (in Djibouti, left), and its foreign aid is negligible. 

In no way does it inspire other nations to follow its lead (unlike the United States). And it is this absence of moral and ideological power which will ultimately limit it from becoming a superpower.

Its main foreign adventure is the clunky ‘Belt and Road Initiative’, developing trading routes across Eurasia, and loading countries with enough loans that they’re literally indebted to China for years. But this is running into problems. 

The complex B & R plan

One key component is Afghanistan, which is in no condition to maintain a new infrastructure program. Likewise, many of the old Soviet states around the Caspian Sea. And when countries begin to default on these loans (as some look likely to do) this will surely dissuade other nations from cuddling too close to China.

Keep Your Chin-a Up

Of course we’re not discussing anything remotely near a Chinese collapse. But the evidence from these three areas alone seems enough to show that China is not going to rule the world within five years. That is not to say that trade war is a good thing. However, through his destructive trade policies, President Trump has inadvertently made China seem far weaker.