The US-China Trade War: 2 Mutually Exclusive Systems

The causes of the trade war currently raging between China and the United States do not come down to America’s huge trade deficit with China, or to an attempt by the world’s No. 1 power to stifle power No 2. Instead, we are confronted with two major market economy models that are quite simply not compatible with each other.

In this Chinese-American conflict, the U.S. strives to make the Chinese government conform to international market economy rules. Among these rules are the interdiction of forced technology transfers as a condition of market access, the enforcement of intellectual property protections, the reduction of government subsidies to state-owned enterprises and the continued opening of key service sectors, such as finance, health and leisure.

December 2018 saw a great celebration in Beijing of the 40th anniversary of China’s opening up and reform under the personal patronage of Xi Jinping. It seems that everyone in China − political leaders, the media and the general public − thinks that the country’s development and current international status are the result of market opening and reform. But what does this market opening and reform really mean? Reform was intended to introduce market mechanisms in order to stimulate business and the overall national economy. As for opening up, it was meant to bring in external elements, such as foreign investment and joint ventures, an international division of labor and international trade rules.

Thus, Beijing’s strategy was to gradually introduce a market economy. In 1978, the country opened four special economic zones in the south near Hong Kong. Three of them, including the one in Shenzhen, were in Guangdong province, where Xi’s father, Xi Zhongxun, was provincial party secretary. These zones were an attempt to initiate market mechanisms within the general planned economy that then existed. In his notable “South China Tour Speech” of 1992, Deng Xiaoping marked a critical moment in the history of China’s reform. At that time, when the country was hesitating between a return to the planned economy model and further marketization, Deng chose the latter. Then in 1993, the “two sessions” of the National People’s Assembly and the Chinese People’s Political Consultative Conference put the phrase “social market economy” into the constitution, ending the planned economy for good and providing a constitutional basis for Chinese market socialism. The Chinese constitution therefore did not establish a market economy in the traditional Western sense, but in a socialist sense. Between 1954 and 1956, Chinese private enterprises languished under the “joint public-private management” policy, which subjected private enterprises to state control.

Yet on March 14, 1993, 23 entrepreneurs including Liu Yonghao, Zhang Hongwei, Wang Xianglin and Li Jing set foot in the Great Hall of the People as members of the Chinese People’s Political Consultative Conference. Although they represented only 1% of its 2,093 members, these heads of private companies came to firmly reclaim their place in the political arena after 40 years of involvement in state management. Such a recognition of the political status of entrepreneurship was an important signal that China would henceforth cleave to a market model. At last, after 15 years of fierce struggle, the country joined the World Trade Organization in November 2001. In gaining this access, China had to voluntarily abide by WTO rules.

As outlined above, the socialist market model is written into China’s constitution. This new system was understood by the international community as a novel economic structure combining socialist administrative control with a free market and free trade. Nonetheless, that is not the understanding of the Chinese government or its publications, which interpret the socialist market economy as being integrated within the general socialist system and reflecting its basic character. And that subtle difference is everything! It is important to remember what “socialism” means in a socialist market economy. Here, socialism clearly refers to the absolute rule of the Chinese Communist Party over the economy, active government intervention in it, the creation and application of industrial policies, and the dominant status of state-owned enterprises.

However, while socialism and a planned economy naturally go well together, socialism and a market economy are bound to collide. As John K. Fairbank, an American scholar of China, explained in his book “The United States and China,” Chinese businessmen prefer having permission to catch rats rather than manufacture rattraps. Indeed, under a socialist market system government, officials of all levels have unlimited power to allocate social and economic resources, which encourages merchants to adopt its unique way of thinking. The noted contemporary Chinese economist Wu Jinglian, who described China’s economy as half controlled and half free, stated in an interview that the two aspects lack coordination in the reform process.

According to Wu, today’s Chinese society has developed in a way that prevents reform from becoming realized. Political reforms have slowed and the administrative power to repress legitimate enterprise and interfere in its workings has gotten worse, provoking the widespread pursuit of private income.

The characteristics of market socialism are also apparent in China’s foreign trade strategy. Thus, the New Silk Road is completely subsidized by the government. Made in China 2025* is an important element of the “Chinese Dream,”** and Beijing tends to respond with political economy answers to American questions about its markets.

The trade friction between the U.S. and China is the result of their respective particularities and their concepts of a market economy. China will not abandon the socialism in its market model, and the large Western economies will continue to demand that it accept international practices. As these two economic systems and their thinking are incompatible, they will never achieve mutual understanding and reach an agreement, so the conflict will go on.

*Editor’s note: Made in China 2025 is a Chinese strategic plan promulgated in 2015 to move China toward producing higher-value products and services.

**Editor’s note: The “Chinese Dream” is a term promoted by Xi Jinping to describe a set of personal and national Chinese ethos and ideals.