Telling the truth about China’s success

 The truth is that Western corporations sold out to China; they offshored jobs, gutted trade unions, and handed over their IP for a quick buck.

As missiles, bombs, and drones fly across the Persian Gulf, the prospects of an even more devastating war in the Pacific are strengthening. De-escalation of the new cold war between the US and China must now become the world’s top priority. To that end, it is essential to explode a powerful myth that makes war more likely: the idea that China has cheated its way to prosperity.

The Chinese economy does contribute to serious global macroeconomic imbalances, and this must be addressed. But that is a different matter than the convenient fiction, woven by Western elites to hide their own failures, that China owes its success to duplicity, dishonesty, and deceit. And it is not just a convenient fiction. To the extent that it primes Western public opinion for war, it is also a dangerous one.

The myth comprises five bogus accusations. The first is that China has “stolen” Western companies’ intellectual property (IP). In fact, Western multinationals were falling over each other for decades to hand over their IP in exchange for access to China’s gargantuan market.

The Chinese authorities, who have a 50-year planning horizon, simply made them an offer they could not resist: You can enter our markets, but you will have to teach our people how to manufacture your wares. Western CEOs, obsessed with the next few quarters and ensorceled by magnificent medium-term prospects, eagerly accepted.

The second charge is that China is undervaluing its currency. This assumes that there exists a “correct” exchange rate and that the Chinese authorities are pushing the renminbi below that rate.

In theory, the correct exchange rate is the one that equilibrates each country’s current account. In practice, this means the dollar is massively overvalued, as evidenced by the enormous US current-account deficit.

In short, accusing the Chinese of keeping the renminbi too low is the flipside of the accusation that the US pays for its deficits by attracting other people’s capital. Westerners relying on an overvalued dollar are, in this sense, living in glass houses. Throwing stones is unwise.

The third charge is levelled at China’s capital controls, which are presented as another form of cheating. Have we forgotten that the golden age of capitalism, the Bretton Woods era of the 1950s and 1960s, was predicated upon capital controls in the US, Europe, and Japan?

The rationale was straightforward: no government is legally or morally obliged to permit financiers to flood its country with impatient “hot” money at will or, equivalently, to allow an unchecked exodus of money on a whim.

The myth’s fourth pillar—the alleged massive overcapacity of Chinese industry—is refuted by the data: China’s capacity utilisation hovers below 75%, which is less than America’s. Inventories are stable. Chinese exporters’ profits are up over 10%. So, there is no overcapacity.

The accusation serves as a defense against what really stings Western authorities: the hyper-competitiveness China has achieved through excellent planning and investment in top-notch, inexpensive education and training.

Seeing how a company in Shenzhen can iterate four prototypes for a fraction of the cost and time it takes in Stuttgart or Illinois to run a single prototype, one cannot plausibly conclude that China’s competitiveness is due to dumping.

But that claim is more politically palatable to Western leaders than explaining to voters that China has developed a unique distributed neural network of manufacturing intelligence.

The fifth charge, and perhaps the most common, is that Chinese under-consume and are under-paid. Perhaps. But relative to whom? Consumer spending in China has grown much faster than in Western-allied Asian manufacturing powers, from Japan and South Korea to Indonesia and Malaysia.

Moreover, when these miracle economies reached a comparable level of development, they experienced a sharp slowdown in consumer spending growth that is absent in China.

Likewise, Chinese wages have increased dramatically. Two decades ago, China’s hourly manufacturing labour cost was lower than India’s. Since then, it has increased eightfold, while India’s only doubled. Indeed, wages in China are now higher than in any other developing country in Asia.

These truths sit uncomfortably in the corridors of Western power. China’s technological prowess is a threat to Western corporations that used to feel invincible. Other developing countries now look to China for more reliable, high-quality, cheaper wares.

While responding with accusations of cheating may be understandable, we in the West must take this opportunity to reflect, because telling the truth serves the cause of peace. And the truth is that Western corporations didn’t lose to China; they sold out to China. They offshored jobs, gutted trade unions, and handed over their IP for a quick buck.

While the US, the UK, and the European Union bailed out criminal bankers and pursued unlawful wars, China invested in education, railway networks, functioning health systems, green energy, smart grids, and production hubs capable of research, development, and innovation that most Western countries cannot match.

It is time the West stopped blaming China for the decisions of its own Big Business, Wall Street, and their pliant politicians. Sanctions against China are a ludicrous substitute for industrial policy.

Even worse, lazy Sinophobic narratives, peddled by the same people who have created an instant quagmire in the Gulf, may be paving the way for an even madder military confrontation in the Pacific. - FMT

Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and professor of economics at the University of Athens.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT