RUSSIA AND CHINA TOGETHER AGAIN

Was the Nixon-Kissinger Opening to China a Mirage?

Secretary of State Anthony Blinken said recently that China is preparing seriously to supply Russia with war material aimed at Ukraine. Today, Chinese Foreign Minister Wang Yi arrived in Moscow after leaving the annual Munich Security Conference (also known as the Davos of Defense) where he slammed the U.S. and NATO for defending Ukraine.

As I read his comments at Munich this morning, I remembered watching President Nixon and his National Security Advisor Henry Kissinger on television in February 1972 as they toasted their Chinese hosts in the Great Hall of the People to celebrate what was called the American Opening to China. Leading up to this had been tensions between the Soviet Union and China complete with some border gunfire. Mao did not see Soviet maximum leader Leonid Brezhnev as at all an equal. Rather, he saw himself as the rightful leader of global communism. Kissinger sensed opportunity for the U.S. in this internal communist strife and with Nixon’s blessing engineered the “opening” that I had watched as the President and Chinese dignitaries toasted each other for all the world to see.

The democratic world heaved a huge sigh of relief as the risk of global conflict seemed to diminish. No one in the free world could imagine that in fifty years China would be far more of a potential threat than the old Soviet Union ever was or that China and Russia would be back together again as the co-leaders of a global anti-democracy movement.

What happened? Was it just the accidental workings of history? Were Kissinger and Nixon and their successors for the next forty five years all blind? Did America’s China experts, Wall Street tycoons, and big business mavens not know what they were doing? Was the free trade doctrine so strongly promoted in that period flawed or based on misperception of reality?

All of the above along with hubris, greed, and failure to do homework is the answer.

At the heart of the matter was/is a failure to understand some realities of China and the Chinese Communist Party. China’s is a hierarchical society. There are no equals. There is smaller or bigger, older or younger, senior or junior and so on. A former high official of Singapore once mentioned to me that he knows the place of Singapore in the Chinese hierarchy and it is not very high. For that reason he has no desire for Singapore ever to come under the dominance of China.

For much of human history China has been the largest, richest, most scientifically advanced society. It thought of itself as the center of the universe with a kind of authority over “all under heaven.” Only in the mid 19th century did China fall from that exalted position. It was a very hard fall for such a hierarchically oriented and proud society. More than anything else, Chinese leaders of the 20th and now the 2lst century have striven to reverse China’s fall, overcome the humiliation (to the hierarchy sensitive Chinese) of that fall and to reverse it and regain what they see as China’s rightful position at the top of the hierarchy. For what does Xi Jinping constantly call today? For the “Great rejuvenation of the Chinese people” of course, and for rectification of the great humiliation suffered by the Chinese people over the past hundred and eighty odd years.

It will be very difficult if not impossible for Xi, the Chinese Communist Party, and probably the vast majority of China’s leaders to rest easy until China once again becomes number one among nations. It’s just released Global Security Initiative concept paper is an attempted step in that direction.

This is what Mao’s successor Deng Xiaoping had on his mind when, in the wake of his apparent “opening of China” in the 1980s, he cautioned his comrades to “hide your light and bide your time.” In other words, show a happy face and encourage these free world dunces to believe that China will be striving to be like them, but never forget that the real purpose of the game is to beat the hell out of them.

Another conversation among China’s leaders at around the same time is also significant in light of today’s situation. Deng was pushing to “open” China to foreign business and foreign scholars and commentators. Some of this comrades warned that doing so would allow “flies to enter the house.” Deng admitted that was so, but insisted he was confident that the Chinese Communist Party could swat them if they became a nuisance.

Leaders and commentators in Washington and elsewhere in the free world were largely unaware of these intra-party discussions. Having served as Counselor to the Secretary of Commerce in the first Reagan administration in the early 1980s, I can affirm that Washington and Wall Street and business board rooms around the U.S. were euphoric about the opening of China. It was seen as a big blow to the Soviet Union and a big opportunity for U.S. business.

Indeed, in the fall of 1982, I was a leader of the first U.S. trade mission to China. About a hundred businessmen were in our group and were encouraged both by us in the Reagan administration and by the Chinese to set up shop in China. Thus did the gold rush to China begin. The Chinese were anxious to learn and there was a feeling on the free world side that free trade would not only be profitable but also democratizing. Free world leaders of all stripes were convinced that free trade would inevitably lead to capitalism, rule of law, freedom of speech, and competitive elections in China. Through trade, argued most of America’s elites in virtually all disciplines, China would become both a market oriented capitalist economy and some kind of democracy.

And, indeed, for several years, the opening seemed to be working well for all parties. China’s economy was beginning to achieve real growth and foreign businesses couldn’t get into China fast enough. By 1989, however, the flies were literally swarming. So many that in April- June, 1989 over 50,000 students demonstrating in Beijing’s Tiananmen Square built a statue of the Goddess of Democracy and demanded democracy and a free press. The world held its breath. Then, on June 4, Deng unleashed his fly swatters, the soldiers of the People’s Liberation Army, the armed wing of the Chinese Communist Party. They rolled their tanks into Tiananmen Square and killed at least 700 demonstrating students. Some reports put the number of bodies much higher.

Did that sober up free world leaders and businessmen about China? A bit, but none other than President George H.W. Bush, on whose staff I served for a time, immediately sent his national security advisor, Brent Scowcroft, to Beijing to tell Deng that he, Bush, was Deng’s best friend at this moment, and would “keep the boats from rocking.” Despite the killings, Bush was convinced that capitalist free markets and free trade would liberalize and eventually democratize and even Americanize China. Nor was he alone in this conclusion. It remained the dominant theme of the American establishment.

A good example was my friend Bob Galvin, then the Chairman and CEO of Motorola and a major donor to my Economic Strategy Institute think tank. In the wake of Bush’s comments, he traveled to Beijing, met personally with Deng, and took the decision to establish a Motorola factory in China. Other business leaders followed. Indeed, so enchanted with China did American CEOs become that they pressed Washington to negotiate China, a country ideologically opposed to capitalism and freedom, into the World Trade Organization (WTO). The Chinese method of swatting flies seemed more than acceptable to free world CEOs. Bill Clinton, who had campaigned for the Presidency on the slogan “no dictators from Baghdad to Beijing”, not only changed his tune, but welcomed high ranking Beijing officials to the White House and pulled out all the stops to get China into the WTO. Indeed, when the dictators in China built their Great Fire Wall in 1997to cut the Chinese internet off from the Worldwide Web, clearly demonstrating their abhorrence of free speech and symbolically of free anything, including maybe trade, Clinton laughed and said that for the dictators to try to control the Internet would be like “trying to nail Jello to the wall.” Couldn’t be done, he scoffed. What he did not understand was that the Great Firewall was a matter of swatting flies. Of course, they were a different kind of flies, but Deng and his chosen successors knew a fly when they saw one and made sure to swat them.

One important event that gave Clinton, free world CEOs, political analysts, commentators and virtually the entire free world great confidence was the collapse of the Soviet Union in 1991. Frank Fukuyama’s book, The End of History, captured the euphoria that swept through the free world. History from here on was going to be democratic with a rule of law and free speech for everyone. No need to worry about Chinese who called themselves communists or their fly swatters and Great Fire Walls. No need to pay any attention to China’s successive Five Year Plans, the continued life and growth rather than decline of state owned enterprises, or the huge government investment in targeted technologies. Indeed, now was the time to get into China early and profit from its inevitable transformation into a kind of giant Germany.

Needless to say, no one in Zhongnanhai (home of the top CCP leaders) saw things that way. They were devastated by the collapse of the Soviet Union and launched countless studies of what had happened and why and of how to avoid the same kind of collapse of the Chinese system and Communist Party. Particularly disturbed and seeking answers was a rapidly rising party official named Xi Jinping. He was a true believer in Marxism and the historical dialectic. What had happened in Russia and the Soviet Union ran against where history was inevitably supposed to have gone. Why? What mistake had been made? What had the Soviet Communist Party missed? Xi desperately wanted to know even if the Americans and their fellow travelers didn’t care.

At the same time, an ex-KGB officer in Russia was asking similar questions. Vladimir Putin was not necessarily wedded to Marxism/Leninism as was Xi, but he was strongly wedded to a great, powerful Mother Russia and had no use for democracy whose early, green sprouts he crushed as he consolidated power around himself and began to meditate on reconfiguring, if not exactly the old Soviet Union, certainly the grand old, imperial Russia of the Czars.

Few, if any, in the democratic world paid attention. They had come to believe, as New York Times foreign affairs columnist Tom Friedman said, that the world was flat. It was all going to be the same homogenized thing. If any two countries were hosts of a McDonalds hamburger shop, they would not go to war with each other was a thought that became widely believed. Globalization was going to lead to both wealth and democracy. Of course, if you were a business person, this meant that you could pretty much invest and produce wherever you liked with no risk. China, with its cheap labor, absence of environmental standards, purposely undervalued currency, and literally a billion potential customers was the obvious place to go if you could do so at no risk to your business or your country which seemed to be the case because your country was urging you on as its leading economists emphasized that loss of domestic manufacturing jobs was a good rather than a bad thing for the U.S. economy. Consumers would get less expensive import products and the workers who lost jobs would easily get new jobs in service industries like McDonalds and Walmart, they said.

One wonders what Kissinger and Nixon thought as these trends emerged. Before his death in 1994, Nixon did give voice to some concern about possibly having given birth to a Chinese Frankenstein monster. On the other hand, Kissinger was getting richer and richer as the champion consultant on China where he was always warmly welcomed by the top officials.

In 2012, Vladimir Putin was elected President of Russia for the second time and apparently for life since his grip on power since then has been unyielding as he has jailed and expelled all possible opponents. Shortly afterward, Xi Jinping became Chairman of the Chinese Communist Party and President of China. Neither of them had read The End of History or ever given any thought to creating or supporting a democracy. Putin nursed dreams of restoring Russia to its post Napoleonic glory if not to its post World War II domination of eastern Europe and part of Germany. Xi nursed dreams of restoring China to its historic position at the top of the hierarchy of peoples and nations.

Few if any in the democracies paid these two much attention. Davos man increased his grip on the flat world of the End of History. Costless globalization was king.

What the leaders and advisors of the democracies did not recognize was that there was a fundamental conflict between their concept of the future and those of Xi and Putin. The democratic leaders anticipated a smooth, unending spread of capitalistic democracy. Both Xi and Putin anticipated an entirely different scenario. One wonders particularly what the China experts of the democracies were thinking, but very few if any of them gave warning of a potential conflict. Indeed, most of them were cheerleaders for Chimerica, the close coupling of the U.S. and Chinese economies. No one in the United States raised any questions about, for example, Apple closing all of its production in California and moving it all to China, a country without free speech or a rule of law where corporations were guided by the government’s use of informal coercion. Far from questioning it, the experts cheered. Wall Street maneuvered to get around its own rules in order to list the shares of state owned Chinese corporations. Yes, it effectively urged its clients to buy shares in the Chinese Communist government and thereby effectively to help finance China’s drive to surpass America and to regain its old position as number one among nations.

Finally, in 2015 a wake up call began to get a bit of attention. China announced its Made in China 2025 program. As the title suggested, it aimed to have most of its demand for semiconductors, telecommunications equipment, artificial intelligence and about twenty other cutting edge products met by production done in China. Of course, this was industrial policy, a huge no no among free world economists. It was also, in effect, a huge violation of the rules of the World Trade Organization that China had joined in 2001-02. It was clearly based on the assumed continuation of China’s policies that forced foreign corporations to transfer technology and production to China as the price of admission and continued toleration in the Chinese market. The cows all had to submit to milking and clearly China aimed to keep milking them until it could raise enough homegrown cows to supply the demand for advanced technology milk.

There was a ripple of attention to this in the democracies. And yet, and yet neither their governments nor their international corporations expressed much discontent.

Just prior to this, in 2014, Putin had ordered his troops into the Crimea and seized it away from Ukraine. Shortly after that, Chinese dredging ships began turning reefs and small islands in the South China Sea into what looked like military airfields and naval support platforms. In 2016, President Xi came to America to meet with President Obama. At Obama’s request, Xi promised not to turn these reefs into military bases. Or, at least, that is what the White House said that Xi said. In fact, nothing stopped or changed. Today, China has effective military control of the South China Sea if it wishes to exercise such control.

Finally, and amazingly on March 3, 2018, The Economist magazine, the pope of the church of free trade conventional wisdom, announced in its cover story that the free world had made the wrong bet on China.

Since then, there has been a half way serious readjustment of thinking and policy in the U.S., Japan, and Australia and maybe a quarter way readjustment in Europe. This readjustment has been greatly stimulated in the past three years by the advent of Covid, the breakdown of the global supply chain, and the demonstration by China of how well an industrial policy combined with a managed trade policy can work. The thinking readjustment has become stronger and broader more recently as a result of the Russian invasion of Ukraine and China’s tacit support of that.

What has become much clearer is that history has not ended. Indeed, if anything, the democracies of the world are now on the defensive both internally and externally.

The breakdown of the global supply chain revealed the fallacies of globalization and conventional free trade doctrine. Far flung supply chains inevitably carry the risk of breakdown. That no one, including Nobel prize winning economists, calculated that risk and that big name CEOs did not insure against it is a very black mark against anything these people have said or might have to say. Such supply chains also inevitably, let me repeat, inevitably cause greenhouse gas emissions beyond what would be emitted by domestic only production. We know that such emissions carry a cost, in fact, a very high cost. Yet that cost is never added to the price of the products made by dint of these emission either in fact or in any of the fancy econometric models used by economists to prove out free trade theory. On top of this, of course, these models assume eternal full employment, fixed exchange rates, complete absence of costs of investment or disinvestment, perfect competition (no single or small group of players has any influence on final prices), absence of economies of scale (the more of a product like semiconductors you make, the lower the cost of each unit), and absence of research and development, of costs of establishment and shut down, and, of course, of labor unions. In short, the combination of collapse of the supply chains and the success of the Chinese economy has resulted in an earthquake in which all the sophisticated globalization, flat world, Davos man theories have been buried.

Even Secretary of the Treasury Janet Yellen, an economist’s economist if ever there was one, is now speaking of “friend-shoring” rather than “off-shoring” of production facilities.

By saying that, Yellen is effectively asserting not only that globalization has not democratized China, but also that China is not a friend. Effectively, she is asserting that the “positive engagement” policies of the Bush, Clinton, Bush, and Obama administrations along with their encouragement of investment in China by U.S. and other free world corporations was a huge mistake.

She is also admitting that China’s industrial polices, long term government-industry planning, mercantilist trade practices, managed dollar/RMB exchange rates, and support of state owned corporations are proving superior for technological development, manufacturing expansion, and overall economic growth and productivity to the free-for-all doctrine of the U.S.

She is right on both counts. While we certainly do not want war with China, it is past time to admit that far from being a friend, China is an adversary of the U.S. on virtually all counts and always has been. From the victory of the Chinese Communist Party in 1948-49, China has always ultimately been an adversary. The so called “opening” of Nixon and Kissinger was a temporary strategic move by Mao and Chou En Lai. It had its pluses, but they were temporary and not fundamental. The only difference between today and the 1980s-’90s is that Beijing is no longer “hiding its light”. It is now making that light a weapon in its eternal competition with the proponents of free speech, rule of law, and democracy.

Yellen is also correct in concluding that coupling with a partner who hates all that you stand for is ultimately not feasible. This does not necessarily mean that Starbucks has to stop selling coffee in China. But it does mean that Apple, and others like it must not remain entirely dependent on China for the production of all that they sell worldwide.

Perhaps even more importantly it means that the U.S. should learn a few lessons from and adopt some of the policies of China. Long term planning, extensive research, complete intelligence, coordination between government and business, the setting of national targets, managing currency exchange rates, aiming to achieve trade surpluses rather than accepting eternal deficits, and scouring the world for new technologies are all policies and actions that the United States should copy from China.

Finally, the free world must understand that today’s Russia and China are back in harness as a team of dictators against the team of democracy. It is not yet exactly the Cold War, but it’s close and it clearly is not The End of History.