Understanding China Since Nixon

Understanding China Since Nixon

Shang-Jin Wei,

NEW YORK – On February 21, 1972, Richard Nixon became the first US president to visit the People’s Republic of China, setting in motion a process that would end China’s decades-long isolation and kick-start the emergence of a modern, dynamic economy.

But, despite the seismic economic changes in China in the intervening half-century, many in the West regard today’s People’s Republic as an unreformed communist country whose unfair trade practices are harming Western workers and consumers.

Although this impression is partly a by-product of today’s geopolitical competition, it also reflects a lack of historical perspective.

At the time of Nixon’s visit, China was as isolated and closed off from the world as North Korea is today. Ordinary Chinese had no freedom to choose where to work and had to accept jobs assigned by their local government.

Almost every Chinese adult worked for the state or in a state-owned firm because no privately owned domestic enterprises or foreign firms operated in the country.

Nixon’s entourage also noticed an astonishing lack of color on the streets, as most Chinese wore either blue or green. There was not a single foreign brand on the streets of Beijing or Shanghai.

Today, Chinese can choose their place of employment, more than 80% of the workforce are employed by firms not owned by the state, and wages are determined by supply and demand in the labor market.

An international tourist cannot tell from people’s clothing alone whether she is in Shanghai, Seoul, Tokyo, or Taipei.

Virtually all major global brands that can be seen in New York, London, and Singapore, are ubiquitous in major Chinese cities as well.

Apple, Boeing, Caterpillar, Starbucks, and many other foreign companies are currently doing brisk business in China, supporting the returns of US pension and mutual funds that invest in them.

General Motors sells more cars in China than in America or any other market. And firms in China that are wholly or majority-owned by foreign investors account for 40% of China’s exports.

At the time of Nixon’s visit, the Chinese government’s most important border control policy – as in East Germany then or North Korea now – was to prevent ordinary Chinese from escaping the country for good.

In 2019, the last year before the COVID-19 pandemic began, 150 million Chinese tourists visited the United States, Europe, Southeast Asia, and other regions, and returned home voluntarily. The personal freedom ordinary Chinese have now was unimaginable in 1972.

China’s transformation has not resulted in Milton Friedman’s brand of capitalism, in which the state plays a minimal role in the economy.

But China has adopted many regulatory institutions similar to those in Germany, Japan, and even the US. China’s Food and Drug Administration, established in 1998, is partly modeled on its US counterpart.

And the design of its State Environmental Protection Administration (now called the Ministry of Ecology and Environment) was influenced by that of the US Environmental Protection Agency.

Even China’s much-criticized industrial policy took its intellectual inspiration from Alexander Hamilton, who pioneered the concept.

The China 2025 program, which aims to promote what the Chinese government regards as the industries of the future, resembles not so much Soviet central planning as Germany’s Industrie 4.0 initiative or even America’s own numerous industrial policies.

So, was Nixon right to help China reconnect with the world? To the extent that his visit and subsequent US policies contributed to China’s success in lifting a billion people out of abject poverty, it is difficult to think of another initiative that could have done more to promote human welfare.

Of course, that was not the motivation for Nixon’s diplomatic coup, which strengthened America’s hand in its struggle with the Soviet Union.

But it is equally important – yet somehow often overlooked – that US households and firms have benefited tremendously from China’s economic rise.

US exports to China have increased faster than US exports to Europe, Japan, Mexico, Canada, Brazil, or Australia over the last three decades.

While imports from China seem to have contributed to a decline in US manufacturing jobs, employment and value-added in America’s modern service sectors grew faster, because low-cost Chinese products such as laptops and electric equipment boosted efficiency.

Cheaper Chinese goods undoubtedly helped to hold down goods prices in Western economies from the 1980s until recently.

And throughout the period of America’s increased economic engagement with China, there was no secular increase in US unemployment.

Former US President Donald Trump’s misguided trade war with China implies a reversal of these trends. By raising tariffs on Chinese imports to the level that prevailed under the Smoot-Hawley Tariff Act before World War II, Trump ensured that American households and firms faced higher prices than they otherwise would have.

America’s trade deficit has widened rather than narrowed, partly because US firms are losing competitiveness in the global market as a result of the trade war.

While US policymakers are tempted, for geopolitical reasons, to end the policy of economic engagement toward China pursued by successive administrations in the decades following Nixon’s 1972 visit, the risks are significant.

US living standards would likely increase less fast. While Chinese economic growth would suffer, the support for American institutions and ideals among many ordinary Chinese could decline as well.

If a US decoupling strategy were to accelerate China’s strategic rapprochement with Russia, perhaps even resulting in a formal alliance, a combination of Russia’s nuclear arsenal and China’s mighty economy could present a more nightmarish challenge to US global hegemony.

Fifty years after Nixon’s historic visit, Sino-American relations are at a historic nadir. While finding common ground with China seems challenging in the current geopolitical context, the logic that engaging China in the world can enhance the personal freedom of the Chinese and also provide benefits to American households and firms remains as true as ever.

Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.

Copyright: Project Syndicate, 2022.