Nixon Went to China

Just 18 months before resigning the Presidency in disgrace, Richard Nixon went to China.  He called his February 1972 meeting with Mao Zedong and Zhou Enlai “a journey for peace” and “the week that changed the world.”  The trip was widely praised at the time by Americans of all political persuasions.  Those on the right saw it as a first step in driving a wedge into what was still called “the Communist bloc.” Those on the left saw it as a long-overdue first step in officially recognizing the political reality of the Peoples Republic of China.  Nixon’s journey to China has had such resonance down the years that President Obama, in his Nobel Prize acceptance speech, declared, “It surely helped set China on a path where millions of its citizens have been lifted from poverty, and connected to open societies.” 

 

In retrospect, two things, little commented on at the time, stand out.  The first is that trade and commerce between the two nations were barely discussed.  The second is the question of why the United States—the world’s greatest military power and with an economy and standard of living that could barely be imagined by most Chinese—should have virtually begged its way into China.  Money and power now form the most critical connections between the two nations, yet in the first dialogues of the modern era, money was not mentioned and power was turned on its head.  In the decades since, none of the United States’ economic interrelationships has become more important than the one with China.  But the power relationship has not changed.

 

Giving the centrality of the world’s most populous nation, it’s interesting how relatively few American’s are familiar with modern Chinese history.*   When the Manchu Dynasty finally completed its 70-year crumble just before the First World War, it was briefly succeeded by a republic led by the charismatic revolutionary, Dr Sun Yat-sen.  But, China, too large, too fragmented, and too backward for effective central governance, quickly dissolved into a chaotic period of regional warlordism.   The internecine fighting continued in different guises until 1949.  “Warlord” seems to us an archaic term, smacking of more of mounted Mongol warriors than modern armies.  Instead, we call factional leaders like Chiang Kai-Shek and Mao Zedong “Generalissimo” and “The Great Helmsman.”  These men adopted political slogans and ideologies to justify their attempts to seize and retain power, but in reality, they were warlords.

 

Chiang was Sun’s protégé.  He became leader of the Kuomintang, or Nationalist Party, following Sun’s death in 1925.  Mao was a founding member of the Chinese Communist Party (CCP) in 1921.  He rose to supreme power in the mid-30s during the two factions’ long struggle.  The struggle would have been shorter and probably won by the Nationalists were it not for the Japanese.  Imperial Japan occupied Manchuria in northeast China in 1931.  Over the next ten years, its armies ravaged much of eastern China, driving Chiang’s nominal government to Chongqing, 700 miles west of Shanghai.  The Communists, meanwhile, retreated to Yan’an in the remote northwest where they bided their time and husbanded their strength.  Following Japan’s defeat in 1945, the exhausted Kuomintang was in no position to rule China effectively or fight another war.  Chiang was forced to attempt both, failed, and was driven to the island of Taiwan when the Communists declared victory in the fall of 1949.

 

It’s a mistake to think of the CCP as being composed of communists.  From Mao onward, they were and are no more literally communists than the players on the Chicago professional football team are literally bears.  The early Kuomintang was a nationalist party of professional- and middle-class revolutionaries, and the early CCP was a nationalist party of lower-class and poor revolutionaries.  They called themselves communists because in the 1920’s communism, for a revolutionary, was hip.  They were not Marxists or urban proletarians or intellectuals—they were the just the nationalist revolutionaries who weren’t the Kuomintang. 

 

Until his death in 1976, Mao ruled the CCP and the country of China with one supreme goal: to keep himself in power.  He orchestrated a series of zigzag policies that killed tens of millions of ordinary Chinese; Mao, in fact, killed far more people in his country than Stalin or Hitler did in theirs.  The worst episode was the Great Leap Forward, which began in 1958 and was an attempt to radically increase agricultural and industrial production.  It was an utter failure that directly caused the death by famine of at least 30 million Chinese.  The Cultural Revolution, which Mao instigated in 1966, killed fewer but was, if anything, more destructive of the fabric of society, and it lasted longer.  The Chinese economy, which had just begun to recover, crashed again.  The Cultural Revolution was ongoing when Nixon and National Security Advisor, Henry Kissinger, went to China.  That’s why Kissinger advised the Chinese not to bother putting anything about trade in the final communiqué since it would be “infinitesimal in terms of our total economy.”

 

After some inevitable infighting, Deng Xiaoping succeeded Mao as China’s supreme leader.  It was Deng who ordered the Peoples Liberation Army (PLA) to fire on pro-democracy demonstrators in Beijing in June 1989.  The demonstrations had been going on for more than a month.  Contrary to what is generally recalled today, they were not limited to Tiananmen Square in Beijing or to students.  At their height, demonstrations occurred in 181 cities and involved millions of people from all levels of urban society.  When the PLA struck on the night of June 3, they killed more ordinary citizens than students.  While numbers are uncertain, the general consensus is that a few thousand were killed and few thousand more were injured.  At a time when communist governments across Eastern Europe were tottering and about to fall, the CCP held on because it was willing to indiscriminately murder its own people, while—when push came to shove—Russians, Poles, Czechs, and Romanians were not.  It did so because the maintenance of power is the government’s only principle and goal.

 

This same single-mindedness had prompted Deng to initiate the turn to a capitalist economy in 1979.  His successors continued his formula of Special Economic Zones and the gradual elimination of state-owned industries until China’s economy today produces the third highest Gross Domestic Product in the world.  But the human cost is staggering.  China’s version of capitalism is the laissez-faire variety that stoked Karl Marx’s ferocious anger in 19^th century London, not the regulated capitalism of the US, let alone the welfare-state of the Eurozone. 

 

A good example is the privatized coal-mining industry.*  In China, “privatized” means “owned by entrepreneurs working hand-in-glove with local CCP officials.”  Thus, a protest against anything having to do with coal mining is viewed as an attack on the State and severely punished.  Besides, labor unions are prohibited in China, so workers in the privatized coal mines have no effective way to protest anyway.  Unfortunately for them, they have a lot to protest: falling pay, lack of health care and retirement benefits are just the beginning.  Worse are their appalling working conditions including long hours, high heat, perfunctory training, and rudimentary safety precautions.  Official government figures claim that 5,000 to 7,000 coalminers die in mining accidents annually.  The real numbers are 10,000 to 40,000 annually.  To put these fatalities in context, the Federal Mine Safety and Health Administration recently reported that exactly 18 US coal miners died in work-related accidents in 2009.  In China, miners’ families receive compensation ranging from $1,200 to $6,400, which operators find much cheaper than improving safety conditions.    

 

China’s economy is built on the idea of production for export by being a low-cost producer, which basically means the very non-Marxian practice of exploiting its workforce.  As a result of its economic policies, euphemistically called “socialism with Chinese characteristics,” China avoided the Asian financial crisis of 1998 and was only briefly hurt by the world financial crisis of 2008.  One of the inherent instabilities of capitalism is “under consumption,”± an idea that has often been cited as a cause of the Great Depression.  In essence, the idea is that capitalist countries periodically reach a point where “the rich” either cannot or will not absorb their economies’ full productive capacity.  Production falls off and those who are not rich are thrown out of work, ultimately leading to a downward spiral of recession or even depression.  China resolved the problem by expanding “the rich” to the entire rest of the world.  With such a huge market, “the rich,” theoretically at least, never run out of capacity to absorb the Chinese economy’s capacity to produce.  But China has added a new twist; “the rich” don’t need money to buy Chinese goods.  China is willing to finance the foreign rich more or less indefinitely.       

 

Here’s how it works.  China is the United States’ second-largest trading partner (after Canada), but most of the trade is one way.  They make it; we buy it.  The numbers in the tables below speak for themselves.  The first shows our top five trading partners in 2009 through October

                             October 2009   YTD

                             Total in        Total in

                             Billions        Billions

 Country Name                of USD         of USD

 Canada                      40.31           351.31

 China                       36.38           296.24

 Mexico                      30.03           247.54

 Japan                       13.72           118.76

 Federal Republic of Germany 11.00            93.15

 

The next table shows the top five countries with which we have a trade deficit, again through October:

 

                             October 2009    YTD

                             Deficit in     Deficit in

                             Millions      Millions

 Country Name                of USD          of USD

 China                       -22,663.37      -188,464.41

 Mexico                       -4,554.27       -37,171.69

 Japan                        -4,423.34       -34,727.64

 Federal Republic of Germany  -2,787.06       -21,814.76

 Canada                       -2,002.03       -15,759.95

 

Here’s how the financing works.  Total US Treasury debt outstanding is $7.2 trillion, and exactly half is held by foreign accounts.  China holds 35% of longer-term US Treasury Notes and Bonds, and 24% of short-term Bills.  In dollar terms, China holds $820 billion of US Treasuries plus another $420 billion of US Agency and mortgage-backed securities that are explicitly or implicitly guaranteed by the Treasury.  Japan, our next largest creditor, holds $1.032 trillion of similar debt.*

 

Politicians and economists often worry that China will stop buying or even start selling US securities.  This would be self-defeating for China, both financially and economically.  Financially, because US interest rates would immediately spike up causing serious depreciation in China’s remaining US Treasury holdings; economically, because China would lose its best customer.  For the foreseeable future, the US and China are joined at the hip.

 

Our partner, China, is a one-party state whose citizens do not enjoy freedom of speech, freedom of assembly, freedom of religion, or a free press.  They cannot vote, as there are no elections.  The judiciary is not independent, but rather most bow to the dictates of the CCP whether or not those dictates are in accordance with the law.  There is no trial by jury.  On Christmas Day, Liu Xiaobo, a literature professor who has publicly campaigned for political and human rights, was sentenced to 11 years in prison for “incitement to subvert state power.”  Mr Liu’s trial lasted two hours and his lawyers were given less than 20 minutes to state their case. 

 

In 1972 Richard Nixon went to China because he wanted to.  In 2010 we go to China because we have to.

 * For this review, I am chiefly indebted to Jonathan Fenby’s excellent Modern China: The Fall and Rise of a Great Power, 1850 to the Present New York, NY Harper Collins Publishers. 2008.

* See Pan, Phillip P. Out of Mao’s Shadow: The Struggle for the Soul of a New China New York NY Simon & Schuster. 2008. pp. 113-17.

± Initially developed in England by J.A. Hobson and refined by J.M. Keynes in the 1930s.

* Source: FTN Financial