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China’s rise exposes ‘free trade’ myth

Last of 2 parts

I DEVOTED my last column to reprint the first part of a slightly edited version of a New York Times (NYT) magazine February 8 article entitled “The Rise of China and the Fall of the ‘Free Trade’ Myth.” It debunks what’s known as the neoliberal ideology the US and the West have been espousing, with us having been the most gullible in believing and complying with its economic prescriptions in the past 40 years.

Neoliberalism refers to the ideology that free trade, unrestrained capitalism and foreign investments will result in a country’s economic growth. The NYT magazine article debunked this not through abstractions but by narrating mainly the cases of China, which has emerged as the second biggest economy in just a few decades’ time, as well as other East Asian countries.

All of the Asian countries that have become developed economies – Japan, South Korea, Singapore, Taiwan – had never adopted neoliberal economic policies. We did and look where we are. Yet its apologists – intellectual minions of big capitalists in this country like the UP School of Economics and the Foundation for Economic Freedom – still claim we have not been neoliberal enough.

The second and last part of the NYT Magazine article follows: 

In the 1950s, Korea and Taiwan, both former Japanese colonies, inherited Japan’s institutions and protectionist practices. This was most striking in Korea, which was intensely poor in the early 1950s; its few industries were built by Japan during the 1930s. South Korea, too, found solutions for its problems in Friedrich List rather than Adam Smith.

The country’s leader, Park Chung-hee, the military general who came to power in 1961, had worked for the Japanese colonialist regime. A fervent autodidact, Park was also deeply familiar with German theories of protectionism. (The economist Robert Wade reported coming across whole shelves of books by List in Seoul bookstores in the 1970s.) During his long years in power, Park nurtured South Korea’s chaebol business groups — Hyundai, Daewoo and Samsung — and boldly ventured into steel-making.

Because the United States saw Korea, Taiwan and Japan as a buffer against communism, it helped promote such neo-mercantilist strategies — a mix of import substitution and export-oriented industrialization.

American Cold Warriors also gave their strategic allies unhindered access to US markets while tolerating the closure of their own to American investment. By the time the United States realized that its biggest Asian ward had grown too big, it was too late. Japan had taken many products invented in the United States (automobiles, consumer electronics) and manufactured them more cheaply and with superior quality. By the 1980s, Japan had supplanted the United States in aid and investments in East Asia.

When the United States sought to limit Japanese exports, the Japanese responded by deepening their investment in Asia, moving factories and improving industrial skills and technology wherever they went.

Chalmers Johnson, in a book about Japan’s unique growth, called its government the “capitalist developmental state.” In such states, skilled bureaucracies led by authoritarian leaders promoted a project of national development (while either paying lip service to, or ignoring, democratic norms).

Private entrepreneurs made socially beneficial investments; government policies helped build their comparative advantage while also facilitating social stability with land reform, education and other efforts to address income inequality.

The “developmental state” assumed that market failures were to be expected and that the state played a necessary role in designing industrial and financial policy. These included not only trade protection and government subsidies but also, as the political economists Robert and Jean M. Gilpin wrote in Global Political Economy in 2003, “selective credit allocation and deliberate distortion of interest rates in order to channel cheap credit to favored economic sectors.”

Governments were, in fact, very much part of the solution, as even the World Bank, beholden to the Washington Consensus, grudgingly acknowledged in its well-known 1993 report, East Asian Miracle. The high-performing Asian economies, it noted, “have achieved unusually low and declining levels of inequality, contrary to historical experience and contemporary evidence in other regions.”

The authoritarian leader of Singapore, Lee Kuan Yew, whose success in turning Singapore from an economic backwater into one of the world’s major commercial cities was much admired by Deng Xiaoping.

“The rise of China resembles that of the United States a century ago,” the Chinese scholar Hu Angang writes. He is not exaggerating. Friedman may have been right that the Chinese communists were hopelessly ignorant of how free markets work, but ending state intervention in the economy was never on the agenda. After Mao, Chinese leaders looked to Japanese and other East Asian developers, just as the East Asians had once looked to Germany.

The first investments in China in the 1980s came from Japan as well as from transnational Chinese business networks based in East Asia. China benefited from the market networks, management and technical knowhow that accompanied these investments. Encouraged by the Clinton administration, it entered the World Trade Organization in 2001 and quickly seized the opportunity — limitless export markets — opened by American insistence on free trade.

Once Japan became the leading investor in Asia, regional production chains began to link those countries with one another. As Korea, Hong Kong, Singapore and Taiwan moved up the technology and value chains, they invested in developing countries, like Vietnam and Indonesia. This process of regionalizing investment and production, which largely dispenses with Europe and America, has now been accelerated by China’s rise as a manufacturing power. The biggest investor in Vietnam today, for instance, is South Korea, whose biggest trading partner is China.

The success of China’s state-led economy presents, in many ways, the same economic (and ideological) quandary that Japan unexpectedly threw up before the United States when, in the 1980s, it became the world’s leading creditor. A regional trading system dominated by China will make Asian countries less likely to enlist in American geopolitical objectives. Locked into boundary disputes with its neighbors, China has accelerated the militarization of the South China Sea, acquiring more than 3,200 acres of land on reefs and outcrops and installing runways, ports and hangars. But it has also abandoned its abrasive attitude, making determined efforts to pivot Asia away from Trump’s America. And it seems to be succeeding.

With China offering generous infrastructure deals to the former American territory of the Philippines, President Rodrigo Duterte announced that “it is time to say goodbye” to the United States — previously he threatened to ride a jet ski to a Chinese man-made island in the South China Sea and plant his country’s flag there. Other rival claimants to parts of the South China Sea — Malaysia, Vietnam and Brunei — have also moved closer to Beijing since Trump’s election. Smaller countries like Cambodia and Laos now resemble Chinese client-states. China is also trying to repair long-strained relations with Japan by inviting investments by Japanese multinationals.

These attempts to win over major American allies in Asia complement Xi’s ambitious One Belt, One Road initiative, which aims to put China at the center of global affairs through a network of trade links and infrastructure projects stretching from Asia to the Middle East to Africa and Europe.

Investing more than $1 trillion in more than 60 countries — ports in Pakistan and Sri Lanka, high-speed railways in East Africa, gas pipelines in Central Asia — the initiative can claim to be the largest overseas investment drive ever undertaken by a single country. The 11 European Union members and five non-EU Central and Eastern European countries that have joined the China-led political and commercial group called 16+1 have all signed major infrastructure deals with China, enhancing Beijing’s influence in the EU. The remaining 11 members of the Trans-Pacific Partnership have gone ahead without the United States; they are expected to sign a final agreement in March.

By pulling out of the TPP and threatening trade sanctions, Trump encouraged Japan to seek a deal with Europe that shuts out the United States. Britain, another stalwart American ally, is considering joining the TPP.

China, meanwhile, is hectically negotiating more than a dozen trade agreements in Asia while proposing its own alternative to the TPP, a trade agreement called the Regional Comprehensive Economic Partnership. China has also intensified efforts to build alternatives to such Western international institutions as the World Bank and the International Monetary Fund. In 2014, China inaugurated, against staunch American opposition, the Asian Infrastructure Investment Bank, whose members now include all Asian states except Japan.

There is little doubt that Beijing is presenting itself as a benign alternative to the United States. In a speech just before his second term as the party’s general secretary, Xi claimed that there were more takers internationally for Chinese “values.” China, he said, offers “a new option for other countries and nations who want to speed up their development while preserving their independence.”


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