The China Battle Has Just Started

History’s lesson: The U.S.-China fight will be with us for a long time to come.

By Richard Vague

Tagged ChinaForeign PolicyInternational Relations

Long-term, intense economic competition between China and the United States is inevitable. It’s simply a result of China’s new economic size. It’s about wealth and power, not political systems or ideology. Forget these two countries per se. Take any country that has been an uncontested economic leader for decades, add a rapidly rising country that is becoming an economic threat, and watch the battle for markets, trade, and intellectual property unfold.

The current trade negotiations could get uglier and derail. But even if they don’t, both sides will likely feel they did not get what they needed, and future rounds could get worse. There’s almost never a situation where the two leaders in a market don’t get locked in a protracted, high-stakes struggle.

It echoes the intense dislike and competition between the United States and Britain during the entire span of the nineteenth century. This competition was at its heart economic, and this was the very period during which the United States approached and then surpassed Britain in both population and GDP. (It pulled ahead of Britain in GDP in roughly 1872.) The United States steadily pilfered British manufacturing IP in the early years. It almost went to war with Britain in 1837 when some Americans backed a Canadian rebellion, and again in 1838, over a border dispute between Maine and New Brunswick. The United States only admitted Texas in 1845 after learning that it might ally with Britain against Washington’s interests. There was acrimony when Britain gave early support to the Confederacy in the Civil War.

In 1895, the United States again almost went to war with Britain over a Venezuelan border dispute, invoking the Monroe Doctrine, which warned against European interference in all matters in the U.S. hemisphere. (President Grover Cleveland needed an issue to distract voters from that year’s economic depression.) U.S. farmers at that moment especially hated Britain, blaming British capital and influence for blocking farm reform, since they were routinely warned that this reform would frighten away British investors and bring the American economy to a halt. The situation got very serious very fast. Senator Francis Cockrell of Missouri asked, “Shall we bow the knee to England?” Rising star William Jennings Bryan made it a campaign issue, stating, “It is time we act for ourselves and not be consulting England.” Populist icon William “Coin” Harvey announced: “War with England would be the most just war ever waged by man.”

The United States became overtly friendly with Britain only at the point when it was so much larger that its economic supremacy and ability to dictate terms were unquestioned. By World War I, the United States was three times Britain’s economic size.

It’s also worth noting the history of free trade. The United States was one of the most protectionist nations in history during most of the nineteenth and early twentieth centuries, the very period in which it rose to economic supremacy, with tariffs routinely as high as 50 percent. More politicians than not backed tariffs because they protected American industry. And supporters liked tariffs because they kept wages high. In addition, in the era before the income tax, tariffs were our chief source of revenue, and Washington relished the fact that they created a government surplus (and many a congressional debate of that era was about how to spend that surplus). The subject dominated the halls of Congress.

The mental image here should be of President McKinley toting thick books filled with tariff information to help determine exactly which tariff to apply to which product. The United States only became a free trader when its manufacturing dominance was so pronounced that it was to its advantage to be a free trader. A lot of its early free trade deals were bilateral agreements with Latin American countries that had no manufacturing capability—they got our equipment, and we got their bananas, so to speak. After World War II, free trade got an added dimension—America’s desire for political support during the Cold War. The United States imported other countries’ goods and gave them aid, and in turn those countries pledged to rebuff the communists (though this often meant sacrificing manufacturing jobs). My own view is that while free trade is a hoped-for outcome with any nation, it should not be blindly applied.

One last subject to touch on: population.

With China, the United States has yet another challenger to its economic dominance. It bested the post-war Soviet Union. It bested a surging Japan and its economic miracle, which by 1994 had taken Japan to a whopping 18 percent of global GDP (it is now only 6 percent). But China has one advantage that neither Japan nor the USSR had: an overwhelmingly larger population.

Many decry population growth and size, but to prevail economically, it’s indispensable. It’s only a slight exaggeration to say that whoever has the largest domestic market wins. The United States only overtook Britain in GDP after its population overtook Britain’s in the late 1850s. When the United States was locked in the Cold War with the USSR, the populations of the two countries were at rough parity—though if you exclude the captured and coerced part of the USSR’s population, the United States population was twice as large.

In the 1980s, as Japan seemed to be dominating the world, its population was only 110 million compared to 220 million in the United States, so its chances of overtaking America were never realistic.

China is different. At 1.3 billion, China’s population is four times America’s. The threat of its ascendancy is thus far more sustainable and credible. Some Hollywood movies now make more in China than in the United States. In their race to grow, Apple and Facebook have often kowtowed to China (irony intended).

In the 1980s, we watched as Japan gutted our bellwether automobile industry. And though the United States staved off Japan’s ascendancy, the auto industry has never regained its previous market share. The same threat now exists from China for an array of industries that collectively represent the future. 5G. Artificial intelligence. Electric vehicles. Robotics. Supercomputing. Renewable energy. Genetic engineering. Largely unnoticed until recently, China’s businesses have been catching up to and surpassing their U.S. counterparts, amply funded by government, and prying and pilfering American IP along the way.

Now that the United States has woken up, my best guess is that it is not going to sit idly and let China’s encroachment continue. Trump’s approach may be poorly conceived and ham-handed, but some kind of more assertive response was overdue. China’s raison d’être is its own wealth and preeminence, and it is not likely it will permanently stand down, even if it does so strategically from time to time. In fact, in discussing this trade negotiation, Xi is now invoking China’s almost mythic tale of heroic perseverance, the Long March. Absent a China implosion—a la Japan in the late 1990s—even occasional rapprochement won’t abate the ferocity of this competition. The only question is how polite or impolite, or even bellicose, it will be. Will the two countries ever reach a stasis in these matters? That’s unlikely, given the high stakes and rapid pace of technological change.

This competition will be with us for decades.

Read more about ChinaForeign PolicyInternational Relations

Richard Vague is author of The Paradox of DebtThe Case for a Debt JubileeAn Illustrated Business History of the United StatesA Brief History of Doom, andThe Next Economic Disaster. He is a former banking executive and the former Secretary of Banking and Securities for Pennsylvania.

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