In his latest publication, Dawn’s Early Light: Taking Back Washington to Save America, Kevin Roberts from the Heritage Foundation asserts that “China believes it has a mandate to rule the world” and is leveraging trade balances to achieve this ambition.
Roberts points out that this strategy is not new. “As far back as the Roman Empire,” he notes, “the global demand for Chinese goods far outstripped what China sought from other nations… This trade imbalance has significantly influenced the global economy—archaeological digs have unearthed coins from various continents in China, yet no ancient Chinese coin has ever been found outside East Asia.”
He further explains, “China’s economic supremacy, its monopoly over coveted goods, and its meticulously managed trade policies have generated enormous wealth for its rulers, albeit not for the general populace.” Indeed, estimates by Angus Maddison reveal a decline in per capita GDP in China from 106% of Britain’s in 1000 to 71% in 1500 and plummeting to 28% by 1880.
However, the benefits of these trade surpluses did not shield China’s leaders from adversity. When Britain opted to forcibly open China to trade in 1839, the Qing dynasty realized that its accumulated treasures were no match for Queen Victoria’s naval might. Those coins might have been more effectively allocated toward armaments than buried in the ground for future archaeologists to ponder. The nation with the trade deficit ultimately emerged victorious, proving that “before 1839,” as Roberts remarks, “trade was in favor of the Chinese,” yet the ensuing consequences were disastrous: military defeat, political fragmentation, and a subsequent plunge into communism.
Roberts contends that China’s:
…traditional approach of amassing massive trade surpluses should not have been viable in today’s monetary landscape, as modern currency is not gold-backed (unlike the wealth of gold and silver that flowed to China under the Canton System). The surpluses generated by exporting more than imports should have led to a rise in the value of the yuan and a decline for its trade partners’ currencies. Over time, this would have rendered Chinese products more expensive and less appealing for outsourcing…
“Yet that never materialized,” he argues, “because China resorted to illegal currency devaluation, which harmed its citizens while ensuring that the CCP’s strategy of eroding Western manufacturing and reclaiming China’s position as a global economic powerhouse would succeed.”
Despite this strategy, the benefits appear limited. While GDP per capita in China has increased from a mere 7% of Britain’s in 1950 to 34% in 2018—levels not seen since around 1770—Roberts accurately notes that currency manipulation has led to decreased real incomes for its citizens. Moreover, the monetary expansion required to maintain the yuan’s exchange stability against the dollar has contributed to one of the largest property bubbles in history.
“Even a domestic spending and debt frenzy in China could not absorb all the trade imbalance,” Roberts observes, revealing that a U.S. trade deficit must be counterbalanced by a capital account surplus:
To sustain its export advantage, China employed a cunning tactic: it invested in the United States, purchasing American assets with U.S. dollars. This not only bolstered the dollar’s value (keeping Chinese products competitively priced) but also aimed at acquiring U.S. companies, real estate, and amassing trillions in U.S. government debt. Currently, the CCP holds a staggering $3 trillion in assets, many of which are American.
However, this accumulation may not be as advantageous as it appears. Possessing a considerable amount of depreciating U.S. government debt is not a position of strength. China cannot liquidate these holdings without jeopardizing their value—something the U.S. government seems to be doing quite effectively on its own. As for the U.S. assets, like farmland, they are not going anywhere—much like the properties that caused considerable distress for the Japanese in the 1980s.
While it is true that China’s government may be pursuing a trade surplus as a strategic policy to bolster its position against competitors like the United States, historical precedence suggests that the outlook for Beijing is grim. The Qing dynasty’s fate serves as a cautionary tale, as does the trajectory of the Communist Party itself.
John Phelan is an Economist at Center of the American Experiment.
