The U.S.-China trade war may kill the WTO. And that is a good thing.
Yes, the world needs a rules-based international system for multilateral trade. But the WTO rules, Rodrik says in an interview, were forged at the height of the “market fundamentalist consensus” during the Reagan-Thatcher era and the following decade. By reaching too far into the sovereignty of nations, it primed the ground for today’s populist reaction.
As Rodrik sees it, the 1990s were “a watershed period where we moved into a different kind of globalization, very different from the previous version in the immediate postwar period. I have called this ‘the push into hyperglobalization.’ In finance, this phenomenon was marked by financial globalization — or the normalization of free capital mobility. In trade, it was the creation of the WTO. Essentially, globalization went from being a means for national economic prosperity to becoming the end — with national domestic priorities having to adjust to globalization’s needs instead of vice versa.”
To make globalization work, Rodrik calls for a return to a set of rules akin to the WTO’s predecessor, the General Agreement on Tariffs and Trade. “It was a very thin and unambitious set of rules,” says Rodrik, “and yet it worked extremely well. I think the secret to its success was that the old regime understood you need to provide countries with much greater policy space. A healthy international economy requires healthy domestic economies and policies.”
In Rodrik’s scheme, the “Made in China 2025” industrial policy, aimed at conquering new technologies like artificial intelligence and robotics and targeted by Trump’s trade policy, should not be contested. “I am in favor of allowing countries much greater latitude in the conduct of industrial policies,” he argues. “When they succeed, this is good not only for the countries themselves but also for other nations because it enables economic growth and hence, greater trade opportunities. When they fail, the costs are borne primarily by domestic consumers and taxpayers.”
Writing from Beijing, Fred Hu, a top Chinese private equity banker, evaluates the reality and the fiction behind China’s high-tech industrial policy. While acknowledging charges of Chinese intellectual property theft and practices requiring foreign companies to hand over their trade secrets, he dismisses it as marginal in the context of China’s massive investment in research and development, its heavy push in STEM education and its vibrant entrepreneurial culture. After all, China’s biggest firms, such as Alibaba, Baidu and Tencent, are private companies with little state support.
Even so, Hu says, “The fear that China will displace the United States as the global tech superpower is grossly exaggerated.” As the prime example, he notes that “China continues to import 90 percent of its microchips from foreign countries, predominantly from the United States. That is why the U.S. threat to cut off critical chip supply to ZTE, a Chinese telecom equipment firm, has been dubbed a ‘Sputnik moment’ in China: a sober reminder of China’s continued weaknesses in critical technologies.” Innovation, he says, also remains unduly stifled by restrictions on individual freedom.
He concludes with advice for his own country: “Beijing should resist the prevalent yet ill-justified self-complacency and triumphalism that contributed to the fear in Washington in the first place, and it should make serious efforts to reform and open its domestic economy. Unless Beijing amends its heavy-handed statist approach to economic development, China’s potential as a leading nation in science and technology could be seriously curtailed.”
Yan Xuetong, the dean of Tsinghua University’s Institute for International Relations and one of China’s most respected strategic thinkers, agrees. He sees the fate of President Xi Jinping’s vision of “national rejuvenation” linked to further opening. He writes: “The U.S.-China trade tensions this year have bolstered protectionist forces in both countries that support a tit-for-tat trade war, posing a serious threat to China’s development. Since it started opening up its economy in 1978, China’s rise has been inextricably linked to globalization. For it to realize its goal of general prosperity, that link must be maintained and strengthened.”
For Yan, opening up to the world has disciplined China’s economy by exposing it to competition and fueling its drive to develop homegrown talent and capability in all fields, from university education to high tech. Industries that remain protected are falling behind world standards. For example, Yan writes, “Today, China’s foreign trade is more open than its financial institutions. Consequently, the former is more competitive than the latter. China is the world’s largest trader, but the renminbi is not even a principal settlement currency, let alone the world’s principal reserve currency.” Furthermore, he argues, globalization spreads China’s risks so it is not vulnerable to dependence on trade and investment relations with any one country.
Revealingly, Yan seems not wholly confident China’s leadership will make the right choice. “Whether it’s overcoming the trade spat with the United States or other obstacles,” he concludes, “China’s rise can only be guaranteed by continuing to open up. China’s leader has promised that ‘the more developed China becomes, the more open it will be.’ How much the Chinese government turns this into practice will decide the fate of China’s national rejuvenation.”
A nation’s wealth is linked to the health of its cities
“In a country where the economy and politics are healthy,” writes Nicolas Berggruen, “there are almost always a significant number of flourishing cities — cities with leadership in different industries, with distinct cultural scenes and with social cohesion. But as a country slumps into decline, the number of healthy cities tends to shrink. Even if a primary city does well, it is still a bad sign when secondary and tertiary cities start to stagnate.”
While New York or Los Angeles may be thriving, Berggruen notes, the decline of once vibrant American cities such as St. Louis and Cleveland compares unfavorably with the rise of robust regional urban centers such as Chongqing in China or Bangalore in India.