Invincible empire?

Can China's neighbors resist its overwhelming power?

Watching the Netflix documentary “Joshua: Teenager vs. Superpower”, I was left feeling a profound sense of futility and powerlessness. Teen activist Joshua Wong and his allies did something incredible — they managed to spark a street movement that pulled in practically the entire city of Hong Kong. The documentary was made in 2014, but the biggest protests were yet to come. At their height in 2019, almost two million people turned out into the streets, out of a population of 7.5 million — a quarter of the entire city. The movement lasted for years, and garnered massive attention from overseas.

Of course, it just didn’t matter. There was nothing the rest of the world could do; Hong Kong legally belongs to China, and when the crackdown came in 2020, there was no superpower with the ability and inclination to do anything about it. The utmost efforts of those millions of people were like the buzzing of an insect to China, and the insect got backhanded. “Teenager vs. Superpower” turns out well for the teenager in most movies and video games, but fantasy is fantasy; Joshua Wong is in a jail cell now.

Who’s next?

Naturally, a lot of China’s neighbors are worried. Here are the results of a poll taken in December 2019, after the big HK protests but before the security law:

Vietnam wasn’t surveyed, but in 2017 its attitude toward China was extremely negative. And since attitudes toward China in developed countries have soured dramatically in 2020, it’s likely that China’s image among its developing neighbors has deteriorated further.

These countries have reason to be worried. China claims Taiwan, and has stepped up its bellicose threats against the island, where desire for formal independence is growing and the events in Hong Kong were viewed with alarm. A Chinese conquest of Taiwan would leave Japan strategically vulnerable to a rival that still has multiple territorial disputes with it, not to mention a huge amount of historically based resentment. China continues to press its territorial claims in India, slowly encroaching on the latter’s area of control and occasionally engaging in violent battles. Vietnam, Indonesia, Malaysia and the Philippines are all involved in territorial disputes with China in the South China Sea. China also has border and/or maritime territorial disputes with a number of other countries.

That doesn’t mean China wants to conquer its neighbors wholesale, or absorb all of their territories and populations into its nation as it did with Tibet and Xinjiang. In fact, it’s not clear what a China-dominated Asia would look like. But given the concentration camps and dystopian surveillance in Xinjiang, the erasure of Tibetan culture, the crackdown on Hong Kong, and the suppression of domestic dissent, the most reasonable answer to that question is: It’s probably better not to find out.

But that leaves the question: Can China’s neighbors actually resist its overweening power? Or are they as doomed as Joshua Wong and his city?

The military angle

I’m not a military analyst, nor would I pretend to be. There is much ink spilled about whether China could conquer Taiwan, or what that conquest would cost. The U.S. has started to get more serious about giving Taiwan weapons to defend itself, but it remains to be seen if that’s a permanent policy shift or just a Trumpian whim.

Meanwhile, Japan is beefing up its defenses, developing longer-range missiles that will help it implement the same kind of defensive strategy that China hopes to use to keep the U.S. Navy from getting close. But it’s not clear how much of an advantage that will give them against China, especially if China owns Taiwan and can just blockade Japan.

India, meanwhile, has equivalent manpower to draw on, and has some advanced military technology. But it just can’t match China in spending, given how much smaller its economy is — about 1/3 in PPP terms, less than 1/5 in nominal terms.

Ultimately, that’s the real issue here — China’s enormous economy. If all China had were its overwhelming population size, it would be one thing. But China is approaching the technological frontier, and its economy now accounts for about 40% of Asia’s total GDP. Ultimately, my bet would be that it could overwhelm any and all Asian rivals, the way the U.S. used its massive productive power to overwhelm the Axis powers in World War 2.

The economic angle

China’s economy isn’t just huge; it’s essential. Three things make China an irresistible target for foreign investment:

  1. The tempting appeal of the country’s huge domestic market

  2. The presence of supply chains (e.g. if you’re a TV maker, you want to be close to the battery makers, and vice versa)

  3. A huge pool of skilled manufacturing workers to hire from

  4. Continued government efforts to ensure access to cheap financing and energy

This is the awesome power of agglomeration, with a bit of industrial clustering thrown in.

This is why even though countries are eager to diversify out of China, investment just keeps pouring in. China’s neighbors fear it, but they still need it.

This situation couldn’t be more different from the USSR, which had a sclerotic command economy that largely failed at productive manufacturing and ended up relying on oil. Confident predictions that China’s state-directed system will collapse under its own inefficiency, just as the Soviets’ did, are looking increasingly like wishful thinking.

In fact, some analysts are now suggesting that China’s state-capitalist system is a novel innovation that rivals liberal capitalism in its productive effectiveness. The Economist, traditionally a defender of economic liberalism, notes that Xi Jinping is cracking down on bad debts, increasing the rule of law, and riding herd on the financial system. The article concludes:

Xinomics has performed well in the short term. The build-up of debt had slowed before covid-19 struck and the twin shocks of the trade war and the pandemic have not led to a financial crisis. State-run firms’ productivity is creeping up and foreign investors are pouring cash into a new generation of Chinese tech firms…

One thing is clear: the hope for confrontation followed by capitulation is misguided. America and its allies must prepare for a far longer contest between open societies and China’s state capitalism. Containment won’t work: unlike the Soviet Union, China’s huge economy is sophisticated and integrated with the rest of the world...The strength of China’s $14trn state-capitalist economy cannot be wished away. Time to shed that illusion.

Already, there are a few areas in which China seems to have performed better than the West. COVID-19 is one; kids are partying on the streets of Wuhan. A second is macroeconomic stabilization; unlike the U.S., which suffered several severe depressions during its period of rapid growth, China sailed through the Asian financial crisis and the 2008 global financial crisis without even dipping into negative territory:

The source of this macroeconomic resilience is probably the fact that China uses its state-controlled banks to do stimulus, instead of relying on monetary and fiscal policy. When recession looms, China’s leaders don’t have rely on low interest rates to induce companies to spend, or fiscal multipliers to get cash pumping through the economy — they simply call up the banks and tell them to build more roads and more apartment buildings. Between that and the ability to dominate a pandemic, the country’s economy looks fairly unsinkable.

Of course, there are probably costs to this approach. Some economic research indicates that China’s stimulus technique lowers its productivity growth, by shifting resources to sectors like construction where productivity is stagnant. (It’s this kind of shift that China’s “Made in China 2025” project is designed to counter, by redirecting resources away from construction and toward high-tech industries.)

Meanwhile, there’s only so many roads you can build before you start building roads to nowhere. And there are only so many apartments you can build before everyone has a decently sized place to live in; after that, you’re just building speculative investment properties that are going to decay as they go unused. Even if you don’t think that malinvestment should be subtracted from GDP, as Michael Pettis does, it seems clear that it lowers productivity too.

Adam Tooze recently flagged a chart showing that both private-sector and state-owned companies have been seeing a fall in their return on assets in recent years:

So China’s economic model has its weaknesses, for sure. But China is just so damn big that these may not ultimately matter to the calculus of comprehensive national power. If China only ever gets half as rich as the United States, it will have an economy twice as large. Already the two are approaching parity, and after adjusting for local prices, China is already 16% larger. And China’s economic size already outmatches all of its Asian rivals combined.

(Note: Most people think PPP is only useful for comparing individual living standards, not total national production, since nominal GDP represents purchasing power on world markets. But in terms of supporting a military, PPP may also be important, since it reflects the cost of employing military personnel, as well as the cost of domestically-made goods used by the military. These cost differences are why the military spending gap between China and the U.S. is smaller than it looks.)

In other words, China doesn’t have to have discovered a new, better economic model in order to overwhelm other Asian countries. It simply needs to have discovered a new, almost-as-good model. Its sheer size will do the rest.

Of course, in addition to economic size, there are more complicated issues of technology — whether China would be missing key pieces of productive capacity in the event of certain kinds of military conflicts. U.S. export controls on Huawei and other Chinese high-tech manufacturers have certainly demonstrated that China isn’t yet self-sufficient in industries like semiconductors (it is racing to change this fact). So the military-economic calculus might be somewhat more complicated than simply looking at aggregate growth and productivity numbers.

But still, as Joseph Stalin is said to have remarked, “quantity has a quality all its own.” China’s technology is advanced enough, and its size is enormous enough, where I wouldn’t bet on supply chain gaps to cripple it in the event of a war, a cold war, or any other protracted contest for geopolitical dominance.

Getting the gang together

The clearest way for a bunch of weaker countries to resist a single strong country is to get a gang together. This worked against Germany in World War 1. Economically, countries can band together in trade blocs that exclude China, in order to make themselves less reliant on the Chinese economy and Chinese supply chains. Militarily, they can form de facto alliances to prevent Chinese control of the seas. Diplomatically they can form unified blocs to push for things like Taiwan’s inclusion in the WHO. China’s stumbles in its Belt and Road project have shown that it’s fairly ham-handed in dealing with other countries both near and far, so getting together a gang to balance the behemoth might be feasible.

The problem is, if it’s only Asian countries forming this gang, it might just not be big enough. It took France, Russia, and imperial Britain combined to fight Germany to a standstill in World War 1. China is much bigger relative to Asia than Germany was relative to Europe, and China also seems to have Russia on its side.

So it seems to me that an Asian China-balancing gang can only be big, wealthy, and military strong enough if it includes the United States. That’s a scary prospect, because the U.S. is going through a time of extreme political dysfunction, social turmoil, and institutional decline. It is far from the power it was in the 1990s. That means the U.S. might simply refuse to join a China-balancing gang, as when Trump pulled out of the TPP. It might reduce appetite for foreign entanglements, to say nothing of a war to defend Taiwan. Opposition to Chinese power could become — indeed, is already becoming — a football in the neverending culture wars.

Thus, Asian countries are in a very tight spot. They’re facing a titanic behemoth of an empire that suddenly looks far less benign than it did a decade ago. And the only big country capable of helping them balance that empire is hobbled by its internal divisions. If the U.S. can’t straighten itself out soon, other Asian countries might find resistance to China just as futile as it was for Hong Kong.

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