Shadow Government

Why China Is Shooting Itself in the Foot by Cracking Down on Foreign Companies

The Washington Post‘s thoughtful editorial over the weekend observes that Western business and commerce with China is not leading to political liberalization. That has been the great hope of Washington’s policy of engagement with China, which Richard Nixon began decades ago. Indeed, China has not only has crushed political dissent, it has now embarked on ...

STR/AFP/Getty Images
STR/AFP/Getty Images

The Washington Post‘s thoughtful editorial over the weekend observes that Western business and commerce with China is not leading to political liberalization. That has been the great hope of Washington’s policy of engagement with China, which Richard Nixon began decades ago. Indeed, China has not only has crushed political dissent, it has now embarked on a campaign of rolling back economic liberty.

Here is an excerpt from the editorial:

In late July, investigators raided Microsoft offices in four Chinese cities. In August, China fined 12 Japanese auto-parts manufacturers roughly $200 million for alleged price-fixing. In September, the price-fixing police slapped Volkswagen and Chrysler with a combined $46 million in fines. Chip-maker Qualcomm, Mercedes-Benz and Jaguar Land Rover also are reportedly under investigation. All of this comes on top of China’s ongoing clampdown on the Internet, which has recently intensified to the point of hindering routine document sharing via Google and other non-Chinese firms.

China is using (abusing) its anti-monopoly laws to make the environment very difficult for foreign businessmen to compete. This squeeze on foreign commerce is part of a larger trend in China’s political-economic situation.

President Xi Jinping’s campaign against corruption is also a campaign to centralize power. He is targeting political rivals such as ex-security chief Zhou Yongkang, who was friendly with onetime insider Bo Xilai. In the process, Xi has found an opportunity to go after Western firms in order to help favored domestic firms,

The underlying psychological dynamic driving Xi’s crackdown on corruption, foreign business, journalists, Uighurs, and dissidents is a familiar combination of Chinese Communist Party (CCP) confidence and insecurity. Xi is a strongman who seems to have gained the backing of important party factions and party elders to accrue more power. He has more resources to play with than past CCP strongmen (Mao Zedong and Deng Xiaoping, for instance). The People’s Republic is richer, has a larger military, more diplomatic clout and a more sophisticated internal police state than ever before.

However, lying just underneath this confidence is the CCP’s deep, structural insecurity. Here is why:

To begin with, China’s leaders are worried about their real and perceived imperium — Tibet, Xinjiang, Hong Kong, and Taiwan. Tibet will always be a problem from the Party’s perspective, as it inspires a religious following beyond CCP control. Xinjiang is becoming more of a concern. The CCP repression of Islam in that region has fostered radicalism. With the resurgence of global jihad, Uighurs and others are making their way back to Xinjiang after years of fighting in Syria and other places.

Then there is Hong Kong. For the Western world it represents the flourishing that occurs when economic freedom and the rule of law take root Chinese society. The society becomes a center for global commerce and the citizens want more political freedom.

For the CCP, the structure of liberty that is the basis of Hong Kong’s success is just another threat. Hong Kongers demanded what they were promised — more political rights, specifically the right to elect their own executive leader. The CCP is showing that it will not countenance any form of universal suffrage, despite their promises to allow for direct election of the Hong Chief executive. Chinese citizens demanding political rights is a dagger pointed at the heart of the CCP.

Finally, there is Taiwan, part of China’s imagined imperium. It is slipping away. Even a conciliatory Taiwanese leader, Ma Ying-jeou, is not willing to discuss the political future of Taiwan with the CCP. The next Taiwanese election is in 2016. New voters will have been born in 1996. They have no emotional attachment to mainland China, and certainly no warm feelings toward the CCP. There is almost no chance, especially after watching China abrogate its commitments to Hong Kong, that the people of Taiwan will agree to any political arrangement with the CCP.

China is the only consequential power in the Asia-Pacific that is not a democracy. Besides Russia, it is the only great power that is non-democratic. It is very awkward and even disconcerting for the CCP to exist in a democratic capitalist world. The CCP will always feel under threat from "outside forces" and "cultural imperialism" as long as it engages with the world This is not a stable state of affairs: an insecure CCP ruling a strong state, feeling threatened by the dominance of the democratic world.

This is the larger context for the business crackdown that the Post describes. In the end, Xi can have his crackdown or he can have economic prosperity. He cannot have both. China is now too much a part of what many call the "third wave of globalization": The revolution in international shipping and the fragmentation of production have changed the ways in which global production is done. For now China is just a one stop on the global manufacturing train, very much dependent on inputs, knowledge, and skills from other countries. As Ed Steinfeld has written, China has outsourced the institutional structure needed to prosper in this fashion. It has imported Western ideas and institutions, as well as Western-trained technocrats to govern this economic structure.

Moreover, China has in effect outsourced its monetary policy to the United States through its reliance on a pegged exchange rate. Finally, because of its environmental degradation, China is becoming more dependent on foreigners for natural resources, from crops to oil and gas. The larger point is that China is far more dependent on the U.S. and its allies than vice versa. The U.S. and the EU can take the lead in reminding the CCP of these facts. Washington should continually assess the balance of leverage between China and the United States. Currently, it will find it to be very favorable.

The Washington Post editorial’s main point is correct. The process of liberalization in China is not a naturally occurring phenomenon. It will take much jaw-jawing and pressure when necessary for liberty to really take root in China. Here is what policymakers should remember should they fear repercussions of a tougher line on China. Yes, China is big enough to survive worsening economic relations with the West — it just will not thrive. And that could be the death knell of the CCP.

Daniel Blumenthal is the director of Asian studies at the American Enterprise Institute.

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