China trade war

The trade war with China continues. The U.S. declared a 90 day truce which ends on March 1. Negotiators from the two sides will meet in Beijing on January 7. Many are looking for a “sign” from the Chinese government on the position China will take in the negotiations.

As stated in the U.S. Section 301 complaint, the United States’ position is that China must make major changes in the fundamentals of the Chinese economic system. So the question is whether such a major change is likely? Or will the Chinese side simply offer the same old thing? To date, no formal proposals from the Chinese government have been revealed to the public. So we are required to look for other indicators.

Normally, the strongest indicator would come from the CCP Central Committee meeting held each November. However, no meeting was held in 2018. This is in itself big news because major reform proposals are usually unveiled at this meeting. See The biggest story in Chinese politics right now — silence over Communist Party’s autumn meeting. The absence of a Central Committee meeting then logically suggests no reforms of the Chinese system are planned for 2019. So if the U.S. plan is designed to precipitate a series of reforms in China, this is not likely to happen.

This conclusion is supported by Chairman Xi Jinping’s recent speech at the meeting commemorating the 40th year of China’s reform and opening-up program. The content of that talk is generally taken as the definitive statement of the Chinese government program for 2019. A copy of the full speech (in Chinese) can be found here.  Foreign response to the speech has not been positive. See Xi’s Scary Interpretation of the Last 40 Years of Chinese History.

What did Xi actually say? He started by listing the obvious achievements of the Chinese economy over the past 40 years. This remarkable economic progress was initiated with the announcement of the reform program at the 3rd Plenum of the 11th Party Congress convened on December 18, 1978. There are two initial points to note. First, the reform and opening up program was initiated at exactly the type of meeting that was cancelled for 2018. This suggests we can expect no such reform for 2019. Second, the achievements listed by Xi are entirely economic. Nothing else counts.

In the talk, Xi concludes that Communist Party guidance was entirely responsible for the success of the 40 year economic development program. No other factor is of any significance. Assuming this conclusion is correct, Xi then quite reasonably concludes that the future of China and the fate of the CCP depends on two things. First, the CCP must remain in absolute control of China. Second, the standard for evaluating the success of the CCP depends entirely on the continued economic development of the Chinese economy.

On this basis, Xi then lists the following nine standards the Chinese government will follow for the near future:

1. The CCP will remain in complete control of the government, military and civil society.

2. The sole measure of CCP success is the living standards of the Chinese people.

3. Marxism will remain the core guiding ideology. That is, input from Harvard trained economists and MBAs will mostly be ignored.

4. China will continue to hew closely to socialism with Chinese characteristics. This recognizes that China’s Marxism does not exactly correspond to the works of Marx or Engels.

5. China will follow on and improve the institutions of socialism with Chinese characteristics. No new institutions will be introduced.

6. Economic development is the top priority.

7. China will remain “open” to the rest of the world but it will not accept attempts by other countries to meddle in its internal affairs and it will oppose attempts by any foreign country to impose its will on China. This has to be read as referring to demands from the U.S. and many other countries that China comply with its treaty obligations and follow the rules of international trade and and international relations. China is only obligated to comply with rules that benefit China.

8. The only authority with power to regulate the CCP is the CCP itself. In other words, single party rule outside the constitution and the legal system will continue.

9. Dialectical materialism and historical materialism will be the standards for planning and control of the reform process. Once again, this means no Wharton business school graduates need apply as advisors to the Chinese government.

This set of nine standards is China’s plan for the near future and it should dash the hopes of U.S. analysts pining for a return to the policies of Deng Xiaoping and Zhu Rongji. What does this mean for the U.S.-China trade war and the meetings for next week? It means that if the only solution for the U.S. is for China to fundamentally overhaul its basic economic and trade policies, there will likely be no solution.

However, this rigid view is not the only possible outcome. The truth is that from the standpoint of economic development, China needs the U.S. and the U.S. needs China. Xi’s talk places economic development at the center of Chinese government policy. There is no question the U.S side also sees economic development as a core objective. Given the alignment in those core objectives, it is not unlikely the two sides will put aside ideology and come to some form of agreement. However, that agreement would almost certainly need to be quite different from what is currently being demanded by the U.S. trade representative. What it will look like is anyone’s guess.