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  • Writer's pictureThe San Juan Daily Star

How do we manage China’s decline?



Several years ago, Harvard political scientist Graham Allison coined the term “Thucydides’ trap.” It was based on the ancient historian’s observation that the real cause of the Peloponnesian War “was the rise of Athens and the fear that this instilled in Sparta.” Allison saw the pattern of tensions — and frequent wars — between rising and ruling powers repeating itself throughout history, most recently, he believes, with the challenge that a rising China poses to American hegemony.


It’s an intriguing thesis, but in China’s case it has a glaring flaw: The main challenge we will face from the People’s Republic in the coming decade stems not from its rise but from its decline — something that has been obvious for years and has become undeniable in the past year with the country’s real estate market crash.


Western policymakers need to reorient their thinking around this fact. How? With five don’ts and two dos.


First, don’t think of China’s misfortunes as our good fortune.


A China that can buy less from the world — whether in the form of handbags from Italy, copper from Zambia or grain from the United States — will inevitably constrain global growth. For U.S. chipmaker Qualcomm, 64% of its sales last year came from China; for German automaker Mercedes-Benz, 37% of its retail car sales were made there. In 2021, Boeing forecast that China will account for about 1 in 5 of its wide-body plane deliveries over the next two decades. A truism that bears repeating is that there is only one economy: the global economy.


Second, don’t assume the crisis will be short-lived.


Optimists think the crisis won’t affect Western countries too badly because their exports to China account for a small share of their output. But the potential scale of the crisis is staggering. Real estate and its related sectors account for nearly 30% of China’s gross domestic product, according to a 2020 paper by economists Ken Rogoff and Yuanchen Yang. It is heavily financed by the country’s notoriously opaque $2.9 trillion trust industry, which also appears to be tottering. And even if China averts a full-scale crisis, long-term growth will be sharply constrained by a working-age population that will fall by nearly a quarter by 2050.


Third, don’t assume competent economic management.


Last month, Donald Trump described the rule of China’s president, Xi Jinping, as “smart, brilliant, everything perfect.” The truth is closer to the opposite. As a young man, according to a peer from his youth, Xi was “considered of only average intelligence,” earned a three-year degree in “applied Marxism” and rode out the Cultural Revolution and its aftermath by becoming “redder than red.” His tenure as supreme leader has been marked by a shift to greater state control of the economy, the intensified harassment of foreign businesses and a campaign of terror against independent-minded business leaders. One result has been ever-increasing capital flight, despite heavy-handed capital controls. China’s richest people have also left the country in increasing numbers during Xi’s tenure — a good indication of where they think their opportunities do and do not lie.


Fourth, don’t take domestic tranquility as a given.


Xi’s government’s recent decision to suppress data on youth unemployment — just north of 21% in June, double what it was four years ago — is part of a pattern of crude obfuscation that mainly diminishes investor confidence. But the struggles of the young are almost always a potent source of upheaval, as they were in 1989 on the eve of the Tiananmen Square protests. Never mind Thucydides’ trap; the real China story may lie in a version of what’s sometimes called Tocqueville’s paradox: the idea that revolutions happen when rising expectations are frustrated by abruptly worsening social and economic conditions.


Fifth, don’t suppose that a declining power is a less dangerous one.


In many ways, it’s more dangerous. Rising powers can afford to bide their time, but declining ones will be tempted to take their chances. President Joe Biden was off the cuff but on the mark this month when he said of China’s leaders that “when bad folks have problems, they do bad things.” In other words, as China’s economic fortunes sink, the risks to Taiwan grow.


Sixth, do stick to four red lines.


American policymakers need to be unbending and uncowed when it comes to our core interests in our relationship: freedom of navigation, particularly in the South China Sea; the security of Taiwan and other Indo-Pacific allies; the protection of U.S. intellectual property and national security; and the safety of U.S. citizens (both in China and in the United States) and residents of Chinese ancestry. Helping Ukraine defeat Russia is also a part of an overall China strategy, in that it sends a signal of Western political resolve and military capability that will make Beijing think twice about a military adventure across the Taiwan Strait.


Seventh, do pursue a policy of detente.


We should not seek a new cold war with China. We cannot afford a hot one. The best response to China’s economic woes is American economic magnanimity. That could start with the removal of the Trump administration tariffs that have done as much to hurt American companies and consumers as they have the Chinese.


Whether that will change the fundamental pattern of Beijing’s bad behavior is far from certain. But as China slides toward crisis, it behooves us to try.

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