A World Divided

U.A World Divided
Remarks to the Cambridge Executive Leadership Programme

Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
Visiting Scholar, Watson Institute for International and Public Affairs, Brown University
By Video, 26 October 2023

Sometimes history is the product of strategic design, sometimes of miscalculations and blunders.  The peace managed by the Concert of Europe was an artifact of statecraft.  World War I was a mishap that ushered in almost a half century of ruinous turmoil.  Bretton Woods and the post-World War II order were the creations of statesmen.  Ours is an age of irrational antagonisms born of strategic misjudgments and bungling.  It is off to an unfortunate start.

There is renewed warfare between great powers in Europe and open antagonism between the United States and China.  It is pointless to ask who is to blame.  Future generations of historians will render judgments on this that transcend our current passions.  We live in the present and must look to the future.  The international system we have known, in which China, America, and others cooperated and prospered, is disintegrating.  The questions before us are: what new world is being born and how shall we as societies or individuals fare in it?

For seventy-three years – from 1944 to 2017 – the world was mainly regulated by internationally agreed norms, obligations, and conventions grounded in the United Nations Charter.  This system was originally advocated by Washington, though not necessarily always respected by it.  It worked out well for the United States until many Americans thought it did not.  Then a disgruntled American electorate elected a populist administration that was long on resentment of the constraints of the international order, untutored in statecraft, economically nationalist, and indifferent to critical foreign opinion.  The current U.S. administration has doubled down on both its predecessor’s national security-based protectionism and its economic warfare against presumed adversaries.  As a result, Russia has decoupled from Europe and North America.  And China, which pioneered self-reliance, is once again seeking refuge in autarky.

We are beginning to see the shape of things to come.  Many familiar features of both the pre- and post-Cold War international systems are being eroded or erased.  As senior Chinese government or party officials and corporate executives concerned with international affairs, you will have to navigate a world divided not between rigid alliances and blocs, as was the case during the Cold War, but between amorphous and shifting groupings of nation states and regional associations that make rules for their interactions with each other and the outside world and set the engineering standards for the technologies they use.

• This newly variable international geometry is beginning to reflect the extent to which nations are aligned with, aligned against, or equidistant between China and the United States. Affiliations are also beginning to vary kaleidoscopically from function to function, with economic or financial alignments, for example, not necessarily coinciding with political, military, or regional relationships or vice versa.
• The Sino-American technology war is dividing the world into disparate zones in which the dominant technologies are either Chinese, non-Chinese, or a mixture of the two. Who sets the standards owns the market.  But technology industries are now likely to bifurcate, with companies seeking to serve both non-Chinese and Chinese-dominated markets even as these continue to separate and diverge from each other.
• Export controls and supply-chain rearrangements by various countries are disrupting long-established trade patterns and eroding scientific and technological ties. They are also beginning to affect the extent, pace, and global distribution of national innovation.
• U.S. export bans have set a precedent for the wider imposition of national-security-inspired export controls on essential commodities and industrial inputs by other countries, including China. The emerging consequences of this are escalating international trade wars, increasing investor uncertainty, lessened economic confidence, reduced foreign direct investment, and lower growth in both trade and the global economy.
• The current Sino-American trade war and the disruption of the grain trade by the Russian invasion of Ukraine have raised concerns about the possible cut-off of essential food and feed grain supplies to countries that depend on them. Just as when Washington unilaterally embargoed soybean exports in 1973, other countries are being driven to invest in developing new sources of supply in places like Brazil and to raise farm productivity and output at home.  This increases foreign competition with American farmers and promises to deprive them of foreign markets they have long dominated.
• The politicization of trade is causing Chinese companies and their foreign investors – like Europeans, Japanese, and Americans before them – to export labor-intensive manufacturing activities to less developed countries in Southeast and South Asia, Africa, and Latin America. This is accelerating these countries’ industrialization and boosting their participation in the global economy.  It is also elevating Chinese influence in countries like Bangladesh, Brazil, Ethiopia, Indonesia, Malaysia, Mexico, the Philippines, Thailand, and Vietnam as well as in parts of Eastern Europe.
• Capital generated by China’s extraordinarily high savings rates and the profits from Gulf Arab oil and gas exports is eclipsing lending by the Bretton Woods legacy institutions and the G-7 economies. As Chinese, Arab, and other non-Western peoples’ wealth grows, so does their influence among those who seek to borrow their money.
• Regional powers have begun to form expanding – if still embryonic – sub-global coalitions and trading systems associated with the so-called “BRICS,” the Shanghai Cooperation Organization (SCO), and other groupings. They seek in this way to reduce and eventually end domination by the United States and the former colonial powers of the ‘G-7,’ while avoiding subordination to rising great powers like China and India.
• Western sanctions imposed as part of the US-Russia proxy war in Ukraine are accelerating the loss of global influence by the ‘G-7’ and the emergence of a sometimes-testy non-Western global majority.
• Middle-ranking powers are exploiting great power rivalries to expand their independence and freedom of international maneuver at the expense of their former patrons.
• Global regulatory bodies like the United Nations (UN), World Trade Organization (WTO), World Bank (IBRD), and International Monetary Fund (IMF) are yielding their rulemaking, regulatory, and facilitative roles to regionally based coalitions and organizations. Examples include fora centered on the Association of Southeast Asian Nations (ASEAN), the Regional Comprehensive Economic Partnership (RCEP), the Asian Infrastructure Investment Bank (AIIB), and the New Development Bank.  This will require governments and companies to cope with variegated, sub-global trading and investment orders.
• The U.S. abuse of dollar sovereignty to impose sanctions on other countries is incentivizing other countries, not just China, to develop alternatives to dependence on the dollar for trade settlement. The many experiments underway that aim to reduce reliance on the dollar promise in time to create distinct financial zones, one in which transactions remain dollar-based and others that are de-dollarized.
• International economic competition is now increasingly driven by contending models of industrial policy. In both China and the United States industrial policies not only distort markets but generate waste, fraud, and mismanagement.  In China government subsidies are largely directed by profit-driven policy banks, which conduct due diligence before investing.  In the United States, they are allocated by political processes.  Sometimes industrial policies work.  Sometimes they do not.  In ever more countries, governments are being asked to subsidize industries that previously profited from markets they have lost to national security-driven policies.
• Finally, in both the United States and China (and to some extent in other countries), a combination of politically encouraged social pressure and heightened xenophobia by internal security agencies has increasingly circumscribed freedom of thought and speech, repressed dissent, and precluded thoughtful challenges to questionable or counterproductive government policies.

These outcomes are certainly not the results that the architects of the U.S. trade and technology wars with China sought.  They compel me to conclude that, far from perpetuating American power and influence in the world, current U.S. policies are accelerating their erosion.  In practice, many of these policies undercut U.S. economic competitiveness while incentivizing China to achieve the very technological advances U.S. policies were intended to retard or preclude.  It remains unclear whether US-style industrial policies will result in the self-strengthening they are aimed at achieving, but it is certain that they will increase the national debt.  Meanwhile, truculent U.S. statements and sanctions intended to weaken and isolate China are perversely forging stronger commercial and financial connections between China and U.S. allies, client states, and friends.  In my view, this is no way to reaffirm American global leadership.  Quite the opposite.

I do not sense that many Chinese are happy about the way things are going either.  In some respects, the tension in US-China relations is collateral damage from domestic American political contortions.  But China has made its own contributions to the estrangement of its former admirers and partners.  Its burgeoning restrictions on access to international internet-based communication systems make it increasingly difficult for foreigners to cooperate with Chinese partners.  And as China has grown powerful it has emulated the United States by harshly criticizing and imposing sanctions on countries whose pronouncements or policies it objects to, while imposing its laws and extending police activities ever more extraterritorially.  As a result, negative attitudes and apprehensions are replacing once favorable views of China in many other countries.  Some are joining anti-China international coalitions.

Like the United States, China now seeks to decouple important parts of its economy from countries it considers unreliable, while at the same time retaining the trade and other benefits of interdependence.  This is a self-contradictory, risky endeavor – as the Chinese phrase has it: 泥菩萨过河自身难保.[1]  Some degree of self-destructive failure seems certain.  Together with ongoing government efforts to re-engineer the private sector’s role in Chinese politics, well-founded apprehensions about the prospects for further increases in trade with developed countries have helped to reduce confidence in China’s economy, which is now in recession, with rising unemployment among educated youth.

More than seven decades ago, the combination of an inconclusive civil war with international events resulted in the political division of China.  Beijing’s long effort to repair this disunity by peaceful means now seems to be going nowhere.  There is much talk of combat with Taiwan to compel reunification.  Such a war would be a catastrophe for all concerned and would almost certainly undo a great deal of what China has accomplished over the past four decades.  But few anywhere see anything effective now being done by anyone to forestall a renewal of the Chinese civil war in the Taiwan Strait.

To put it bluntly: like the United States, China is losing face and credibility internationally.  To many, China’s advance seems to be losing momentum.  Is the rise in Chinese wealth and power that Deng Xiaoping’s liberation of the Chinese mind and pragmatism inaugurated now faltering?  Does this threaten the “great rejuvenation of the Chinese nation?”

As I have indicated, as an American, I consider it my duty as well as my right to speak out when I see my own country doing things that may harm it.  I believe that Washington’s newly adopted neomercantilist policies and the consequent deterioration in the Sino-American relationship are harming the United States.  China has had past periods of ideological befuddlement and what can only be called ‘national brainlessness.’  The United States now seems to have entered such a period.

I have had a lot to say about this elsewhere.  I will not repeat myself here.  But I wish to offer a few observations about the likely consequences of specific U.S. policies that seem to me to be based on unstated, erroneous or outdated presuppositions and of China’s responses to these.

Washington’s lurch into xenophobic nationalism and Beijing’s renewed emphasis on autarky seem to me to be creating a post-WTO global trade subsystem that will reduce economic growth and prosperity not just in the United States and China but in the world as a whole.  I believe that this will further erode industrial employment in the United States and reduce the international competitiveness of the American economy.  There is little to no “reshoring” of industry to the United States going on and even less in prospect.

China already possesses one-third of the world’s manufacturing capacity, but it does not make sense for the United States to fashion global trade policy by reference to a single market or competitor, even one as big as China.  Doing so just creates tensions in U.S. trade and investment relations with the EU, Japan, Britain, south Korea, and other members of the Organization for Economic Cooperation and Development (OECD).  The primary beneficiaries of American neomercantilism have been and seem certain to continue to be third countries that are open for business – like Vietnam, Malaysia, and Mexico – to which U.S. policies are displacing industrial investment in and from China.

The U.S. imposition of controls on the export of capital to China on national security grounds is wide of the mark.  China does not lack capital.  It has developed a robust network of venture capital firms and private investors.  In recent years, well over ninety percent of investment in start-ups in China has come from Chinese, not foreign sources.  Unlike Washington, which must sell bonds to foreigners to fund its government operations, Beijing is fiscally self-sufficient.  China generates remarkably high rates of domestic savings and investment.  It exports capital to other countries in the form of infrastructure investment and lending.  The Belt and Road Initiative is far from the only vehicle for this.  Foreign direct investment in other countries by wealthy Chinese individuals and companies is also growing rapidly.

Of course, China’s public capital markets are less developed than those in the United States and roughly twice as risky.  The average price-earnings (P/E) ratio of shares on Chinese exchanges is about thirteen, compared to twenty-one or so in New York.  This means that equity is much cheaper in America than in China and that Chinese entrepreneurs pay more for capital than their American counterparts.  These and other constraints on the Chinese private sector explain why developing more vigorous and reliable equity markets and incentivizing initial public offerings (IPOs) on them are important to China’s continued advance and are now receiving the attention they currently are from Beijing.  China seems determined to avoid the pernicious consequences of financializing capitalism while pioneering new additions to its hybrid, “market Leninist” economy.  The new U.S. capital controls seem more likely to accelerate the growth and evolution of distinctively Chinese capital markets than to deny capital to Chinese companies.

Four decades ago, when China began its reform and opening to the world, its exposure to America and Europe was key to overcoming its scientific and technological backwardness.  China has done so.  It now exports as well as imports intellectual property.  Over one-fourth of the world’s scientists, technologists, engineers, and mathematicians are Chinese, and the proportion is growing.  Denying American corporate capital to China will not prevent Chinese from developing new technologies, including militarily relevant technologies.  All it will do is deprive American investors of profits from Chinese industry and inspiration from Chinese innovations as they occur.  As a result, Americans will not participate in Chinese growth and Chinese innovations will not be shared with the United States.  Who is hurt most by that?

The withering of Sino-American scientific collaboration is another case in point.  The benefits of such collaboration once accrued almost entirely to China rather than the United States.  No more.  A recent study by the Wall Street Journal found that between 2017 and 2021, U.S.-China collaborations accounted for 27% of U.S.-based scientists’ high-quality research in nanoscience, but only 13% of China-based scientists’ research.  The gap in telecommunications research was even more pronounced, with collaborations accounting for 10% of China’s output but more than 33% of America’s.  China has overtaken the United States in its output of the most cited, innovative research papers.  The pace of scientific advance in both countries will suffer from the divorce that is now in progress but the biggest loser from this seems certain to be the United States.  This is a case of cutting off America’s nose to spite its face or, as you might say in Chinese: 搬起石头来打自己的脚.[2]  Not too smart!

It is clearly a mistake to see everything through a militarized national security prism, as the United States currently does.  To sustain its primacy, Washington now offers security to other countries for a political price, while China offers trade and investment at no political cost.  Faced with a choice between accepting US-dictated changes in their domestic politico-economic systems or pursuing national prosperity by opening their economies to Chinese investment, all but a few are likely cautiously to choose China over the United States.  As a thought experiment, ask yourself, was Chinese global influence greater when Beijing sought to export revolutionary regime change than it is now, when China focuses on the export and import of goods and services unaccompanied by ideological demands?  The answer is obvious.

Let me conclude.

One troublesome behavior that the United States and China have in common is that neither will ever admit to having been in error.  But in managing both our bilateral and international relations both have made mistakes in the past.  Neither has ceased to do so.  Should we not “seek truth from facts?[3]”

The famous French diplomat Talleyrand observed that “if everyone always understood, there would be no history.”  I am told that there is a passage in Laozi that suggests what the answer to policy failure born of misunderstandings should be.  Supposedly, Laozi said:

A great nation is like a great man:
When he makes a mistake, he realizes it.
Having realized it, he admits it.
Having admitted it, he corrects it.
He considers those who point out his faults as his most benevolent teachers.
He thinks of his enemy as the shadow that he himself casts.

Not bad advice.  What are the prospects that the United States and China will take it?

Were he still alive, the great Palestinian-Israeli writer Emile Habibi might say about the United States and China what he once said about his own country’s tragic mistakes: “I hear the echo of history’s laughter.”

[1] “A Boddhisatva [an idol] made of mud that tries to cross a river will find it hard to save its own body [from dissolving and disintegrating].”

[2] “Lifting up a rock only to bash one’s own foot with it.”

[3] 实事求是。