Neoliberalism Has Met Its Match in China
Neoliberalism Has Met Its Match in China
Donald Trump and Chinese President Xi Jinping. (Andy Wong / AP)
When the Federal Reserve cut interest rates last week, commentators were
asking why. According to official data, the economy was rebounding,
unemployment was below 4% and gross domestic product growth was above 3%. If
anything, by the Fed's own reasoning, it should have been raising rates.
Market pundits explained that we're in a trade war and a currency war. Other
central banks were cutting their rates, and the Fed had to follow suit in
order to prevent the dollar from becoming overvalued relative to other
currencies. The theory is that a cheaper dollar will make American products
more attractive in foreign markets, helping our manufacturing and labor
bases.
Over the weekend, President Trump followed the rate cuts by threatening to
impose, on Sept. 1, a new 10% tariff on $300 billion worth of Chinese
products. China responded by suspending imports of U.S. agricultural
products by state-owned companies and letting the value of the yuan drop. On
Monday, the Dow Jones Industrial Average dropped nearly 770 points, its
worst day in 2019. The war was on.
The problem with a currency war is that it is a war without winners. This
was demonstrated in the beggar-thy-neighbor policies of the 1930s, which
only deepened the Great Depression. As economist Michael Hudson observed in
a June interview with journalist Bonnie Faulkner, making American products
cheaper abroad will do little for the American economy, because we no longer
have a competitive manufacturing base or products to sell. Today's workers
are largely in the service industries-cab drivers, hospital workers,
insurance agents and the like. A cheaper dollar abroad just makes consumer
goods at Walmart and imported raw materials for U.S. businesses more
expensive.
What is mainly devalued when a currency is devalued, Hudson says, is the
price of the country's labor and the working conditions of its laborers. The
reason American workers cannot compete with foreign workers is not that the
dollar is overvalued. It is due to their higher costs of housing, education,
medical services and transportation. In competitor countries, these costs
are typically subsidized by the government.
America's chief competitor in the trade war is obviously China, which
subsidizes not just worker costs but the costs of its businesses. The
government owns 80% of the banks, which make loans on favorable terms to
domestic businesses, especially state-owned businesses. If the businesses
cannot repay the loans, neither the banks nor the businesses are typically
put into bankruptcy, since that would mean losing jobs and factories. The
nonperforming loans are just carried on the books or written off. No private
creditors are hurt, since the creditor is the government and the loans were
created on the banks' books in the first place (following standard banking
practice globally). As observed by Jeff Spross in a May 2018 Reuters article
titled "Chinese Banks Are Big. Too Big?":
"
[B]ecause the Chinese government owns most of the banks, and it prints the
currency, it can technically keep those banks alive and lending forever. .
It may sound weird to say that China's banks will never collapse, no matter
how absurd their lending positions get. But banking systems are just about
the flow of money.
Spross quoted former bank CEO Richard Vague, chair of The Governor's Woods
Foundation, who explained, "China has committed itself to a high level of
growth. And growth, very simply, is contingent on financing." Beijing will
"come in and fix the profitability, fix the capital, fix the bad debt, of
the state-owned banks . by any number of means that you and I would not see
happen in the United States."
Political and labor unrest is a major problem in China. Spross wrote that
the government keeps everyone happy by keeping economic growth high and
spreading the proceeds to the citizenry. About two-thirds of Chinese debt is
owed just by the corporations, which are also largely state-owned. Corporate
lending is thus a roundabout form of government-financed industrial policy-a
policy financed not through taxes but through the unique privilege of banks
to create money on their books.
China thinks this is a better banking model than the private Western system
focused on short-term profits for private shareholders. But U.S.
policymakers consider China's subsidies to its businesses and workers to be
"unfair trade practices." They want China to forgo state subsidization and
its other protectionist policies in order to level the playing field. But
Beijing contends that the demanded reforms amount to "economic regime
change." As Hudson puts it: "This is the fight that Trump has against China.
He wants to tell it to let the banks run China and have a free market. He
says that China has grown rich over the last fifty years by unfair means,
with government help and public enterprise. In effect, he wants the Chinese
to be as threatened and insecure as American workers. They should get rid of
their public transportation. They should get rid of their subsidies. They
should let a lot of their companies go bankrupt so that Americans can buy
them. They should have the same kind of free market that has wrecked the US
economy. [Emphasis added.]"
Kurt Campbell and Jake Sullivan, writing on Aug. 1 in Foreign Affairs (the
journal of the Council on Foreign Relations), call it "an emerging contest
of models."
An Economic Cold War
To understand what is happening here, it is useful to review some history.
The free market model hollowed out America's manufacturing base beginning in
the Thatcher/Reagan era of the 1970s and '80s, when neoliberal economic
policies took hold. Meanwhile, emerging Asian economies, led by Japan, were
exploding on the scene with a new economic model called "state-guided market
capitalism." The state determined the priorities and commissioned the work,
then hired private enterprise to carry it out. The model overcame the
defects of the communist system, which put ownership and control in the
hands of the state.
The Japanese state-guided market system was effective and efficient-so
effective that it was regarded as an existential threat to the neoliberal
model of debt-based money and "free markets" promoted by the International
Monetary Fund (IMF). According to author William Engdahl in "A Century of
War," by the end of the 1980s, Japan was considered the leading economic and
banking power in the world. Its state-guided model was also proving to be
highly successful in South Korea and the other "Asian Tiger" economies. When
the Soviet Union collapsed at the end of the Cold War, Japan proposed its
model to the former communist countries, and many began looking to it and to
South Korea's example as viable alternatives to the U.S. free-market system.
State-guided capitalism provided for the general welfare without destroying
capitalist incentive. Engdahl wrote:
"
The Tiger economies were a major embarrassment to the IMF free-market model.
Their very success in blending private enterprise with a strong state
economic role was a threat to the IMF free-market agenda. So long as the
Tigers appeared to succeed with a model based on a strong state role, the
former communist states and others could argue against taking the extreme
IMF course. In east Asia during the 1980s, economic growth rates of 7-8 per
cent per year, rising social security, universal education and a high worker
productivity were all backed by state guidance and planning, albeit in a
market economy - an Asian form of benevolent paternalism.
Just as the U.S. had engaged in a Cold War to destroy the Soviet communist
model, so Western financial interests set out to destroy this emerging Asian
threat. It was defused when Western neoliberal economists persuaded Japan
and the Asian Tigers to adopt a free-market system and open their economies
and companies to foreign investors. Western speculators then took down the
vulnerable countries one by one in the "Asian crisis" of 1997-8. China alone
was left as an economic threat to the Western neoliberal model, and it is
this existential threat that is the target of the trade and currency wars
today.
If You Can't Beat Them .
In their Aug. 1 Foreign Affairs article titled "Competition without
Catastrophe," Campbell and Sullivan write that the temptation is to compare
these economic trade wars with the Cold War with Russia; but the analogy is
inapt:
"
China today is a peer competitor that is more formidable economically, more
sophisticated diplomatically, and more flexible ideologically than the
Soviet Union ever was. And unlike the Soviet Union, China is deeply
integrated into the world and intertwined with the U.S. economy.
Unlike the Soviet communist system, the Chinese system cannot be expected to
"crumble under its own weight." The U.S. cannot expect, and should not even
want, to destroy China, Campbell and Sullivan say. Rather, we should aim for
a state of "coexistence on terms favorable to U.S. interests and values."
The implication is that China, being too strong to be knocked out of the
game as the Soviet Union was, needs to be coerced or cajoled into adopting
the neoliberal model and abandoning state support of its industries and
ownership of its banks. But the Chinese system, while obviously not perfect,
has an impressive track record for sustaining long-term growth and
development. While the U.S. manufacturing base was being hollowed out under
the free-market model, China was systematically building up its own
manufacturing base and investing heavily in infrastructure and emerging
technologies, and it was doing this with credit generated by its state-owned
banks. Rather than trying to destroy China's economic system, it might be
more "favorable to U.S. interests and values" for us to adopt its more
effective industrial and banking practices.
We cannot win a currency war through the use of competitive currency
devaluations that trigger a "race to the bottom," and we cannot win a trade
war by installing competitive trade barriers that simply cut us off from the
benefits of cooperative trade. More favorable to our interests and values
than warring with our trading partners would be to cooperate in sharing
solutions, including banking and credit solutions. The Chinese have proven
the effectiveness of their public banking system in supporting their
industries and their workers. Rather than seeing it as an existential
threat, we could thank them for test-driving the model and take a spin in it
ourselves.
Ellen Brown
Ellen Brown is an attorney, chairman of the Public Banking Institute, and
author of thirteen books including her latest, "Banking on the People:
Democratizing Money in the Digital Age."
Ellen Brown