How China Can Hurt the U.S. Economy

To mark the two-year anniversary of Ones and Tooze, the podcast we co-host, we dedicated this week’s episode to listener questions—specifically, questions devoted to China. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts.

Cameron Abadi: The first question comes by way of Anthony Tello. He asks: “If China were to go on the offensive economically, what are some of the things that they might do? There was once this big worry about a dollar crisis precipitated by Chinese sell-offs of U.S. debt. Is that still a risk? Is the Biden administration playing into possibly economically offensive China? And what are some of the ways that they can inflict damage on the U.S. economy, the way we damaged Huawei?”

LISTEN HERE: For the entire conversation, and episodes in the weeks ahead on this subject and others, follow Ones and Tooze wherever you get your podcasts.

Adam Tooze: Yeah, this is a great question and great to have the throwback to the sort of economic war, financial war fantasy of the early 2000s, because that was indeed a powerful idea. As China rose in the world economy, it acquired more and more claims on U.S. assets. And so there was always this fear, once they hit the trillion-dollar mark or something like that, that China would lose patience with America’s financial imbalances, the so-called twin deficits—the government deficit, fiscal deficit—and the trade imbalance, and at some point would start pressurizing the U.S., either as a kind of deliberately aggressive political strategy or simply to kind of impose economic rectitude on the U.S. And that was kind of the fear that then began to unwind in 2007-2008 because the dollar was falling. And it never transpired. The Chinese reshuffled their portfolio and moved it into safer U.S. assets but continued piling assets up. They reached a peak in the 2012-2014 period, and we haven’t seen a collapse since, or any aggressive action on their part. And, you know, I think there’s good reasons for them not pulling that trigger because they would lose in the process. It’s very unclear whether in such a situation there wouldn’t actually be buyers for the stuff they were selling. It’s not clear really that it works very well as an economic weapon.

And that’s the issue I think with all sorts of economic weapons, that you often hurt yourself in the process of using them. As the U.S. will also discover in due course, if you push decoupling too far, in the end, the consequences are harsh. So one thing [they] can stop is the export, slow down, impose licenses on the export of resources that the Chinese control, like gallium, things like that. So the Chinese do have a very significant position in rare-earth processing, and they could exploit that.

But I think everyone understands that the big prize here, if we’re staying in the kind of corporate sector, is Apple. I mean, Apple is the most valuable company the world has ever seen. And it is massively dependent on China, both as a market, but even more importantly, as a site for production. I saw the news going across the screen yesterday that the Chinese have now asked officials—so people working in the public sector as civil servants—to refrain from buying Apple iPhones because they have decided to treat them as a security risk. And I would have thought that’s a pretty clear warning shot that everyone really understands that this is probably the neuralgic firm, whether they would go to a full set of sanctions against Apple. I mean, that would really be a truly dramatic intervention and would rupture all other corporate relations with China, because if Apple isn’t holy, then no one is.

CA: The next question is an email from Wright Bryan. He points out that China seems to have left communism long ago, despite the enduring party name. Socialism with Chinese characteristics seems more akin to the fascism of Nazi Germany or Mussolini’s Italy than it does to a communist state. Private property exists, private enterprises exist, state-owned enterprises exist, the military is involved in industry beyond arms, nationalism and xenophobia are front and center. So is China actually closer to being a fascist government these days than a communist one?

AT: Yeah, I mean, I think about this quite a lot. I find this question really provocative and really sort of challenging and interesting because I want to negate it so vigorously. But figuring out why and on what basis is actually kind of tricky, because I think it’s tempting to say at a formal level that it’s true, that there is a parallel in that the Chinese regime now, I think, bases its legitimacy above all on nationalism. I think that’s undeniable. I think it’s also undeniable that it has to a considerable extent abandoned communism, for sure, like the idea of collective ownership of the majority of assets, and is now in a mixed-economy mode. So there are elements of state ownership, of social democracy, and of just outright capitalism, and that’s reminiscent of the interwar regimes. It’s certainly authoritarian. It likes military display.

But when we get to military display, I think we have to begin qualifying, because we get a lot of coverage of China that focuses on military display and the regime. [President] Xi [Jinping], in particular, seems to be rather keen on identifying himself with the soldiers. But if you look at the underlying numbers, you need to be prepared for a surprise, because on the SIPRI numbers, which is the Stockholm International Peace Research Institute, which are widely accepted, defense spending as a share of Chinese GDP comes in at 1.7 percent, and for the U.S. it comes in at just under 3 percent. So the U.S. appears to be not quite twice as militarized as China. So now let’s allow for some undercounting and everything else. I think it’s very difficult to see any configuration of numbers in which China is more militarist than the United States. So we kind of end up in this sort of blurry realm of comparison. China is definitely repressive. Xinjiang, I think, you can even talk in terms of measures that meet the qualification of a kind of cultural genocide. And so ultimately, I end up thinking that, yes, you can kind of tick a list of boxes here.

But the mistake, I think, is to think essentially from a liberal Western point of view and to kind of score our antagonists and opponents in terms of a list of criteria that is largely defined in negative terms. Free? Yes, no. State ownership? Yes, no. Rather than thinking in terms of their own logic. And as soon as you think in terms of China’s own logic, its own history, its own developmental path, then the comparison just becomes sort of absurd, right? Because the [Chinese Communist Party] CCP is bona fide the proud inheritor and heir of the military and the regime that participated in the struggle against the Axis, right? If you speak to Chinese people, the average educated Chinese is much better informed about the military history of World War II than your average notionally well-educated Westerner.

So, you know, as a form of opprobrium and opprobrious discourse, liberalism can label its opponents in this way. But one should recognize that for what it is. It’s fighting talk. It’s less analytically illuminating or historically illuminating than it is perhaps useful as a form of, yeah, opprobrious talk.

CA: The next question is an email from listener Elizabeth Fertik. She cites an earlier episode of ours that we recorded and asks why we assume that the rise of China will continue in the long term. She points to the story of rapid growth followed by slowdown or reverse that has been seen before in the Soviet Union in the ’60s, Brazil in the ’70s, and Japan in the ’80s. It looks like the same story for China. So are we assuming too easily that China will continue to rise?

AT: The question of which bits of history are relevant for projecting China’s likely future course is on everyone’s mind right now. And yes, if you go for a kind of structural-analogies approach to reading the situation, it’s absolutely undeniable. As Elizabeth says, there are huge structural similarities. The key thing here is a vast excess of investment, which in the early stages of Chinese development was hugely appropriate and generated a genuine transformation of the livelihoods of 1.4 billion people. It’s absolutely for real, but at some point you reach diminishing returns. And at that point, an investment share in GDP of somewhere between 40 percent and 60 percent at its absolutely most extreme moment is just too much. The debt overhang gets more and more considerable. You become vulnerable to various types of shock. And growth overall will tend to slow down. And so you could say China’s in that situation, and that’s not an outlook from which you would project a continuation of long-run growth rates.

I think there are two things to say in response to that. China is in the middle-income position and not in Japan’s position. Japan had a higher level of measured GDP per capita than the United States when it began to stagnate. Just notably richer, more affluent than anywhere else in the world. And from that level, they stagnated. China is nowhere near in that position. It has a middle-income GDP per capita. Huge, therefore, unexploited developmental possibilities. It’s way off the curve of potential. Now, middle-income countries do tend to get stuck at that level. It’s not uncommon, notably in Latin America. Brazil is a good instance to get stuck at that level.

But that then brings us to the second caveat of this middle point I want to make, which is that everything depends on policy. The Chinese can see the problem that we can diagnose, and they’ve said over and over again that they understand it. And the question is whether there is a coalition within the CCP that wants to organize a reversal of their existing policy mix and shift to a new growth model. It’s an open question. Is it possible? Presumably.

So those would be the two points. And the third is simply even if China doesn’t grow very much faster than the United States in the future, nothing has destabilized the outlook of the American policy elite more than China just being where it currently is. It doesn’t actually need to grow any faster.

CA: So our final question in this section on China comes from Blaine Wishart. He asks: “Given the Biden-Sullivan policy preventing China from getting additional 21st-century technology, what can China do to prevent an ever-widening U.S. technological lead?”

AT: Well, I think what the Chinese are going to do is what they are doing. And I think before we jump to conclusions about a widening technological lead, I think we should put that in quotes, to be honest. It’s not obvious that that’s actually what’s happening right now. After all, the American policies are based on the presumption that that lead was, in fact, narrowing, and it was therefore essential to act in the really rather remarkably aggressive way they are. I mean, if you speak to the people in the White House, they’re defensive about what they’ve had to do. And they justify it in terms of the sense of crisis.

And I think the risk is, if you approach this from a national security point of view, that the Chinese will do exactly what they are doing, which is massively doubling down on their investment, hugely prioritizing the microelectronic area as an area of investment and training and so on, and the Chinese have pretty deep pockets. And the other thing that we know that we are essentially forcing them to do is to find workarounds. And I remember when we did the Nvidia segment a couple of months ago now, I learned a lot doing that, and I was very impressed by the argument that said, “Well, if you cut off access to hardware, they’re just going to get smarter on the algorithmic side.” And so in a sense, we’re deliberately incentivizing the Chinese to find what, in the end, presumably is the more promising route, which is not the endless pursuit of tinier processors on chips, but smarter logic. So it’s a real race, and I don’t know whether the outcome is easy to predict.