America Can’t Beat China by Ignoring Its Market Economy

The conflict between the United States and China is escalating. The two countries have already fought a trade war, countering tariffs with retaliatory tariffs. After exchanging tariff blows worth $34 billion in July and $16 billion in August, the United States imposed an additional $200 billion in September, and China immediately struck back with $60 billion. China then also attempted to pressure the United States by selling off its holdings of U.S. Treasury bonds.

The United States has once again raised the level of its containment of China. In the new trade agreement (USMCA) signed with Canada and Mexico, it included a clause requiring a country to notify the other two if it enters trade negotiations with “a country that has not obtained market economy status”; otherwise, it cannot conclude an FTA. “Non-market economy” is an expression aimed at China. The United States has indicated that it may include this clause in agreements with other trading partners as well. In other words, third countries are being told not to sign FTAs with China and serve as channels for China’s indirect exports.

China, which has taken a hard-line stance in its economic war with the United States, already appears to be struggling. The United States, at the center of the global economic boom, recorded a second-quarter growth rate of 4.2%, the highest in four years. China, by contrast, is facing slowing growth, capital outflows by investors, and instability even in the foreign exchange market.

China is also internally confronting a serious problem: the deterioration of its economic structure. Enormous debt, ghost cities, and excess capacity are representative examples. But the real issue is the Chinese authorities’ will and direction in resolving these problems. Their attitude of avoiding and covering up problems is worrying, as it could make them even worse.

As a latecomer, China has the advantage of being able to learn from the experiences of neighboring countries. Japan’s Plaza Accord, the collapse of the Soviet Union, and Korea’s foreign exchange crisis are all cases that clearly show what choices China should make. But China is turning away from those lessons. Instead, it is increasing rigidity and amplifying risk. The trend points toward a worst-case scenario.

China’s true crisis lies in its choice of the wrong path—turning away from the market economy. China’s past economic development was achieved through free trade with the global economy. That also meant accepting the principles of the market economy. As a result, it enjoyed more than 30 years of growth and prosperity, and its economy expanded greatly. Yet its political and economic structures still remain stuck in outdated socialist methods. This should be the moment for China to overcome the limits of a state-directed economy controlled by the Communist Party and transition to a market economy system. Instead, however, China is strengthening state control and employing anti-market solutions such as shrinking the private sector and expanding state ownership.

China is now seeking to withstand U.S. pressure through a long-term strategy of tighter internal control. But it will be difficult to overcome this crisis by ignoring openness, flexibility, and the revitalization of the private economy, while strengthening the socialist method of democratizing and controlling the economy. China’s past opening-up policy may have alleviated the deprivation of its people, but it is not a fundamental solution. China needs to remember that it can advance to the ranks of developed countries only by expanding individual freedom and establishing an autonomous system.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 중국 시장경제 외면해선 미국 못이긴다

Author: Sung-no Choi

Date: 2018-10-12

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=11146