China, Trade and Power: Why the West’s Economic Engagement Has Failed

From a Western point of view, the policy of economic engagement with China has failed. A rapid rise in living standards in China has helped validate the Communist Party’s policies and legitimize the regime. How did Western, market-orientated, property-owning, liberal democracies go from being in a position of complete global hegemony in the early 1990s to the current crisis of confidence?

Few people could tell you what happened on 11 December 2001, yet China’s accession to the World Trade Organization (WTO) will define the geopolitics of the twenty-first century. What were Western leaders thinking at the time?

This book tells the story of the most successful trading nation of the early twenty-first century. It looks at how the Chinese Communist Party has retained and cemented its monopoly of political power – producing undreamt of riches for the political elite. It is the most extraordinary economic success story of our time and it has reshaped the geopolitics not just of Asia but of the world. As China has come to dominate global manufacturing, its power and influence has grown. This economic power is being translated into political power and the West now has a global rival that is politically antithetical to liberal values.
Meanwhile, economic liberalism has lost its moral foundation, in part because economic outcomes are not perceived to be the result of fair competition. The weaknesses of the West’s democratic model are being laid bare as a lack of wage growth coupled with a policy of inflation targeting by Western central banks has led to falling real incomes for the many, and rising asset prices that have benefited the few.

In order to have a fighting chance of protecting the freedoms of liberal democracies, it is of the utmost importance that we understand how the policy of indulgent engagement with China has affected Western society in recent years. Only then will the West be able to change direction for the better, and row back from the harmful consequences of China’s accession to the WTO.

Stewart Paterson co-founded Riley Paterson Investment Management in Singapore in April 2007. Prior to this, he was Managing Director and Chief Asian Equity Strategist at Credit Suisse AG in Hong Kong, and before that he was managing director and head of emerging market strategy at CLSA. He has spent twenty years living and working in Asia. He began his career in 1991 as a fund manager at Hill Samuel in London, managing Japanese equities. He holds an MA (Hons.) degree in economics from the University of Aberdeen.

What people are saying about the book

“China’s financial revolution has not just changed the world economy forever, it has changed global politics forever. If you want to understand how that happened and the consequences should it continue, you need to read Stewart Paterson’s excellent new book.”

— Russell Napier, author of Anatomy of The Bear: Lessons from Wall Street’s Four Great Bottoms.

“Normally I am wary of books which attribute a complex series of geopolitical upheavals to a single event. In this case, I find Stewart Paterson’s explanation entirely convincing.”

— Rory Sutherland, Vice Chairman, Ogilvy

“If something cannot go on forever, it will stop. As Stewart Paterson details in China, Trade and Power, the Western world was arguably historically naive, and at worst certain interests were explicitly complicit, in not seeking to push back against Chinese mercantilist business practices and to hold Beijing more tightly to account to its WTO promises and obligations. One may not like the messenger but the Trump message is not entirely wrong even if his proximate analysis and his methods of prosecution are open to question.

Paterson quotes former US Assistant Secretary of Defense, Joseph Nye Jr., as saying: “If we treated China as an enemy, we were guaranteeing a future enemy. If we treated China as a friend, we kept open the possibility of a more benign future.” And in the immediate aftermath of the collapse of the Soviet Union and the ending of the Cold War, this seemed not an unreasonable position to take. Nevertheless, Nye was no starry-eyed dreamer for he also posited at the time that: “Containment is likely to be irreversible while engagement can be reversed if China changes for the worse.” Unfortunately, it seems to have done so.

Countries have no permanent allies, only permanent interests. While Paterson has plenty of opprobrium for all parties, one really cannot blame China for pushing at an open door. However, given the West’s earlier experiences with the state-sponsored, military–industrial policies of Bismarckian Germany and Meiji Japan, and the subsequent post-World War II industrialisation models of Japan, Korea and Taiwan, it should not have come as a huge surprise that Beijing would seek to kick-start its own development using similar playbooks.

The natural state of capitalism is falling prices. The natural state of state-sponsored “capitalism” is faster falling prices. And the natural state of state-sponsored “capitalism” by a determined behemoth seeking to reverse, as it sees it, two centuries of humiliation at foreign hands is even faster falling prices. Not to mention also, expansionary territorial ambitions to restore the Middle Kingdom to its rightful place at the apex of the regional and world order.

As Paterson lucidly argues, the West signally failed both to demonstrate even a cursory understanding of Chinese history and to push back earlier at Chinese practices. However, it has compounded these misjudgements with serially misguided monetary policies which have disproportionately benefited the rich, boosted indebtedness and inequality, and hence exacerbated tensions between labour and capital. Marx must be smiling.”

— Simon Ogus, CEO DSG Asia Limited, Hong Kong

“This is an important book, with a clear and lucid message, that politicians and policymakers in the West should pay close attention to. China’s accession to the WTO was the West’s strategy of engagement aimed at economic, and eventually political, change in China. It has failed, instead breeding populism and inequality in the West. How we handle this challenge will shape our kids’ future.”

— Diana Choyleva, chief economist at Enodo Economics

“After joining the WTO in 2001, China’s mercantilist policies led to the loss of millions of Western manufacturing jobs. Furthermore, the disinflationary impact of Chinese imports prompted the Federal Reserve’s disastrous easy money policy. Anyone wishing to understand the rise of modern populism and the origins of Trump’s trade wars should read Stewart Paterson’s tour de force China, Trade and Power.”

— Edward Chancellor, author of Devil Take the Hindmost: A History of Financial Speculation