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Nov 18 Bethany Allen on How China Abuses its Economic Might Yascha Mounk and Bethany Allen discuss the historical trajectory of the modern Chinese economy.
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Bethany Allen is the China reporter at Axios and the author of Beijing Rules: How China Weaponized Its Economy to Confront the World.
In this week’s conversation, Yascha Mounk and Bethany Allen discuss how China’s unique “party-state capitalism” can act both as a boon to and a drag on its economic growth; how China uses its economic power to enforce conformity and limit free speech around the globe; and what the future might hold for Taiwan.
The transcript and conversation have been condensed and lightly edited for clarity.
Yascha Mounk: You've been reporting on East Asia for a long time, you spent a long time in China, you're now based in Taipei. How has China tried to sort of rewrite the rules by which the world operates and make its influence felt as its economic power has been growing over the course of the last decades?
Bethany Allen: The Chinese government has made its economy into its primary form of power projection over the past 25 years, and I expect for the Chinese economy to remain China's top source of power around the world for numerous years to come. And the key concept I write about in my new book is called “authoritarian economic statecraft,” and what I mean by that are the actually quite innovative, very targeted controls on access to the Chinese economy, its markets, its capital, and its investments in order to shape the behavior and decision-making of governments, multilateral institutions, individuals and companies to bring them more in line with the Chinese Communist Party's core interests.
Mounk: I'm sure that everyone listening will know that the country has gone from a country with a huge percentage of its population in severe poverty to an economic powerhouse (arguably the biggest economy in the world, by some metrics) and a country that sustains a huge affluent middle class. The model of the economy is not clear, though. The country claims to be communist, it's clear that in many senses, it is using a market economy (in some ways, a quite competitive and brutal market economy). And yet, the state and the Communist Party in particular play a really important role in structuring this economy. So how should we actually think about the basic nature of the Chinese economy?
Allen: It's definitely not communist. And it's not really socialist, either. What the Chinese economy has been since the 1990s is a version of state capitalism, where there's major industries and enterprises that the Chinese government owns or has control over, including major kinds of assets like minerals and the railroads and such. But there has been a very big and very vibrant market economy and private sector in other sectors of the economy. But what we've seen in the past 10 years, especially under Xi Jinping, is a model that some scholars are now calling “party-state capitalism.” And I really like that term. This is not communist-style central planning; this isn’t some committee in Beijing deciding how many widgets some factory in Xinjiang province is going to make. It means that the party has options, from 10,000-foot-level controls down to the decisions of individual companies; a lot of the time the party doesn't control what they do. But it can if it wants to. And what we've seen over the past 10 years is that the party has really made these controls much more laser focused, has made more of them and has extended them into more levels of the economy. And so some examples of that would be insisting that private companies have Chinese Communist Party cells embedded in them, and in the company leadership, and having the United Front Work Department (which is a Bureau of the Chinese Communist Party) be more involved in private enterprise, and also making examples out of companies. There's this phrase in Chinese: to “kill the chicken to scare the monkey.” And so other companies take a very, very wide swath around certain kinds of behavior.
The party, when it needs to, at sort of crucial moments, can come in and direct parts of the economy in one way or the other, either for some economic restructuring or for domestic political reasons. And a good example of that would be Xi Jinping’s crackdown on this very vibrant tech sector, which he felt was perhaps getting too powerful. And so he was able to come in through China's regulatory agencies and other ways and break apart some companies and tame that sector.
Mounk: I'm trying to understand the advantages and disadvantages of this. When I was briefly in Shanghai earlier this year, I met an economist there who teaches at Fudan University, and whose argument is that China has been able to grow so rapidly and is more economically efficient because it has a third coordination mechanism; that. whereas in Western market economies, you have ways to coordinate the contract, by the mechanisms of demand and supply, but that's it. And in China, you have the sort of third coordination mechanism through the Communist Party and the Chinese state. And that allows you to somehow be more efficient or to pursue social goals better. And you can see how a benevolent and competent state might intervene at certain points and say, “This company is getting too big, let's just smash it.” It might say, “There's something here that, perhaps by the existing laws, is legal for this company to do, but it's obviously causing huge social harm. Let's step in and stop the company from doing that.” But of course, for every time they get it right, they might also get it wrong. And for every time that it fights back against the company because it genuinely is causing social ill, it'll be tempted to do so for reasons of maintaining political control.
So, how efficient is this system? In what ways does it provide advantages and in what ways does it provide disadvantages which may help to explain some of the current challenges of the Chinese economy?
Allen: If I were to describe the effects of China's party-state capitalism, I'm not sure efficiency is the word that I would use. Because, yes, as you said, for every intervention that's done well, there could be one that's done poorly. There's also a big space for corruption, factions, and people with more power than others. That can sway government or party decision-making as well: it may be that the company that's not getting investigated just has friends in higher places.
I'm not really sure that that element of it is efficient. Economically speaking, I don't think that Xi Jinping is responsible for China's economic miracle—that had all basically already happened by the time he came into power. And there was a lot more political freedom, socially, politically and economically before Xi Jinping. So I think to answer the question about China's economic miracle, I think we would have to look to the ‘90s and the 2000s, when I'm not really sure that you could really call it a model of party-state capitalism.
I don't think that the Chinese model is particularly efficient. I think it's just very large. If you look at the GDP per capita of China, it's nowhere near Europe or the US. What we have seen, though, is that the Chinese government was able to get out of the way enough, which I think is an achievement of a government. I've heard some people say that the CCP can't take credit for China's economic miracle, for its amazing economic growth, because all that it did was just stop interfering in people's lives in the ‘90s and stop interfering in the economy and just let people do what they want. But that's, I think, just totally wrong. That's not how free markets are built. Free markets are built by government action, they don't just appear out of nowhere. And I would give the party a lot of credit for that. I don't think it's particularly efficient. But I do think they've just created a lot of money, which when you have 1.4 billion people, you end up with a huge economy. If the CCP had done exactly what it had done, and had exactly the same enormous growth rates, but sat over a country of 100 million people, we would not be having these conversations. But it is just sort of a function of their enormous population that it seems so astonishing. I've been seeing a bunch of these op-eds over the past couple of months—“What's the fundamental problem with China's economy right now? It's political.” No, it's not. I think that that is just knee-jerk American neoliberalism needing it to be that, but I just don't think that's the case. Economies grow through massive growing pains, and there's no economy in the world that's ever escaped that. It doesn't matter what your political model is. So, what's the cause of this? It's two things: China's development model that worked for decades before running out of steam—
Mounk: —what is their development model, and how is it running out of steam?
Allen: Their development model was basically manufacturing and export: on the one hand China-as-the-factory-of-the-world and then, basically since the Great Recession, infrastructure building. The Chinese government in 2008 had this enormous and ongoing stimulus, where it had really preferential lending rates for developers and local governments. It was like an infrastructure-powered GDP growth to insulate China's economy from the financial recession and then to keep on powering this economic growth. And that continued for years and years. And there were predictions for years that this created a huge real estate bubble, that this couldn't last. But it lasted far longer than anybody expected. But, finally, that bubble seems to be bursting. These are normal problems. I don't think any of this is a function of too much government intervention, because if the government hadn't intervened, then the slowdown would have happened sooner. It's far more complicated than that.
Mounk: Now, another way of putting this is that most countries end up being stuck in the middle income trap. And one of the big questions about China was whether it was somehow able, at some point, to evade that middle income trap. And one of the reasons why people thought that it was going to be able to do that are these fantasies about how efficient China is.
Allen: I think the opposite is true. First of all, I don't think that China is going to be stuck in the middle income trap. And second, I think the reason that it's not going to be stuck in the middle income trap is because the Chinese government intervenes in the economy and in a healthful and long-term way.
Xi Jinping had more or less nothing to do with the Chinese economy getting to the size that it is, but he is going to have a lot to do with getting the Chinese economy out of what would have been a middle income trap. That’s what he’s been focusing on, basically, for the past 10 years. Your job as the head of a developing nation that doesn't want to get stuck in the middle income trap is to transition it into some sort of higher level of economic production, right? You have to have new sources to fuel the economy. And so what Xi Jinping has done for the past 10 years are subsidies and industrial policy that, up until maybe two or three years ago, were basically four letter words for classical economics, and basically everyone in America: it's inefficient, it's bad, it reduces innovation, in the long run, it will reduce competitiveness.
But what the Chinese government has done is choose certain industries that it believes will be key industries to the future of the global economy, like solar power, electric vehicles, and the things that you need for electric vehicles, like certain minerals to build special batteries. And for a decade, the Chinese government has given massive subsidies to its solar panel manufacturing industry, electric vehicle industry, and created massive inefficiencies, especially in the electric vehicle industry: all these startups flush with cash, plenty of them basically frauds, just getting all this free money. The Chinese EV industry was powered by such amazing, incredible assistance—the Chinese government essentially first created a sort of supported market for EV vehicles in China. But now, as of this year, the domestic EV market in China has begun to function. There are affordable cars that work well enough, and so many of them, that Chinese consumers have actually started to make market-based decisions to buy these. And it's projected that in 2023 EVs will be 25% of all car purchases in China. And that's without any kind of consumer-end subsidy. And EV makers have started exporting all their cars everywhere.
They basically brute-forced their way into true economic competitiveness and true dominance: China is going to be the new Japan when it comes to exporting cars around the world in about five years. And so I give this as an example. And you even take this and repeat it across maybe four or five other major industries in China, to say that this is what Xi Jinping has been doing as his plan to get China out of the middle income trap, and I do think he will be successful.
Mounk: I guess when you look at the Chinese economy, there's a kind of complicated mixed story, right? On the one hand, you enable the country to be competitive, or to be a world leader in really important industries in a way that was not true of most places that got stuck in the middle income trap. On the other hand, there seem to be these structural features of the Chinese economy that a lot of economists are worrying about, right? The fact, for example, that the country seems to be saving more than it's consuming in ways that create a problem for internal demand. You have a problem that you alluded to earlier in terms of the centrality of infrastructure and, more broadly, housing in the Chinese economy, which is a model that now seems to be running up against its limits. And then you have an interesting phenomenon of very high youth unemployment. I was very struck when I was speaking to this economist from Fudan University that he was saying his own students were having trouble finding jobs. These are economics students at one of the best universities in the country. And then, fourthly, one of the very obvious ways in which China is neither communist or socialist is that it still hasn't really rolled out a welfare state. For most citizens there’s elements of one. It's improving relative to the past. But in a striking way, some of the basic forms of a social safety net that you can take for granted even in the United States continue to be absent in China.
I think your argument is very persuasive that China is going to be able to be a leader in some of these industries. But to what extent will it be able to deal with these other structural challenges that still remain, and where perhaps some of the political incentives might make it hard to do that?
Allen: Xi Jinping—I don't know if he would have been able to do some of this if he hadn't consolidated power early in his first term, because he did have to push through a lot of this. Now, what is this going to look like? I mean, this is not a perfect analogy, but think about the US: when did the domestic manufacturing boom end in the US in certain sectors? I'm not very good on US history, but when was the end of this sort of post-war utopian period with the good union jobs and factory towns?
Mounk: I guess I would say the 1970s.
Allen: Yeah. And has the US economy continued to grow since the 1970s? Oh, yes. Now we have Silicon Valley. We were already by far the most powerful economy in the world in the ‘50s, ‘60s, and ‘70s, and we are still. We've still had enormous growth. But what did happen, was whole sectors, whole towns, whole swaths of people got left behind. So wealth kind of changed hands, if you will: some parts of the economy died and other parts really took off. And I think that's what we're going to see in China: it’s not that the whole thing is going to stop chugging along, it's that parts of it are gonna get left behind and other parts are going to just experience amazing growth.
Mounk: How then is China using its economic might and the influence that the Communist Party has over the economy, to incentivize countries around the world and businesses around the world to play by its rules?
Allen: Speaking very, very simply, what China has done is create a kind of a sanctions regime, not US-style sanctions, but a sort of a different kind based on access to its economy. What they communicated very, very clearly for about the past 26 years, is that if companies or governments, multilateral institutions, or certain individuals cross certain red lines in their speech or behavior, they are taking a very big risk, that the risk of getting shut out of China is high: every CEO of every company in the world that has interest in the Chinese market knows that if they tweet a photo of themselves with the Dalai Lama, they're going to lose millions, if not billions of dollars, instantly. It's really quite incredible how consistently the Chinese government has broadcast this message and the number of examples that have been made of companies and governments.
Just to trace the history of this briefly, I'll go back to 1997, to an example that I think many of us are familiar with by now, which is when there were two films from Hollywood that cast Tibet in a very sympathetic light, as the victim of Chinese military aggression: Seven Years in Tibet with Brad Pitt and Kundun, by Martin Scorsese, for Disney. Both of those production studios, Columbia Tristar and Disney, were then immediately shut out of the Chinese market. And that was like an earthquake across Hollywood. And in the past 26 years, there has been not one major Hollywood film that has crossed CCP red lines at all. And that's especially extraordinary considering that in 1997, the Chinese economy was about one-tenth the size of the US, nothing like the economic juggernaut that it is now.
That was such a powerful measure that for the next 26 years and counting, the Chinese Communist Party neutered America's most powerful instrument, soft power. And it wasn't even because of actual money to be gained at that time. It was merely on the promise of future riches. And that is something that the CCP has continued to build on with great consistency, and increasing scope and scale and with greater frequency and across a growing number of topics, a growing number of red lines, if you will; such that, as of today, it is like a global sanctions regime that is highly effective against anyone, anything or any country that is trying to make money in China.
Mounk: What's remarkable about this, in part, is its one-way nature, right? I presume that there's all kinds of Chinese movies that portray Americans as the bad guys or do things that American audiences would find offensive. But of course, America does not, therefore, ban the product of whichever conglomerate owns the production studio that made those movies.
One idea I had is to have better protections in general for free speech of employees of companies, but in particular, to bind those companies. So in the same way in which you deal with corruption: if you work in certain markets, people are going to demand bribes. But if you bribe them, this is a crime under US law, and your executives might go to jail, and so you’d better not do it. I wonder whether there's ways of binding companies so that you cannot fire employees for, in their private capacity, criticizing states around the world, including China. So that might be a little way of binding the hands of companies. And that might help make sure that, at some point, China either has to ban all of these Western companies, which presumably it doesn't want to do, and can't do, or it has to tolerate that kind of free speech.
If you're concerned as I am about a culture of free speech in the West, about how we actually retain our ability to do things like critically portray Chinese ruling influence in Tibet, or in Xinjiang for that matter, is there anything that free societies can do without sacrificing their own principles to stand up to what you're describing as a most effective sanctions regime?
Allen: I like the way that you think and I'm very glad that you're thinking about laws and regulations on companies, because I think that that is the way to go. A big chunk of my book is a critique of neoliberalism, or whatever you want to call it, this global embrace of a too-lightly regulated capitalism (in my view). And that kind of thinking has really stunted our ability to respond to the CCP's use of economic coercion in this way, because our sort of knee-jerk response is “Oh, that's not something governments can do. We can't do anything about that.” And it limits us to civil society responses, such as naming and shaming companies, which does not work. When it comes to China, that does not work, because the incentive for them to continue to self-censor, amidst even a US domestic media firestorm, is so great.
Mounk: It would take an enormous domestic consumer rebellion to rival that, right?
Allen: Yeah, or US domestic consumer boycotts. And Americans are just not going to care about Uighurs, Tibet, the South China Sea, Taiwan or Hong Kong. Even when it touches more closely on, you know, actual American lives, like the pandemic and the narrative around the origins of the pandemic—it's never going to be something that really brings Americans out onto the streets like this.
On the Chinese side, there's such targeted, asymmetric pressure on companies; it's not just the money that they feel they could be losing. So yes, I think that the way to go about this is to view companies as responding logically to the structure of the market, which is simply the way that the US has conditioned companies to act: what people are taught in business schools and just the way that we run things is: make profits wherever you can without breaking the law. And what we have failed to do is to pass laws to protect companies from making immoral decisions in this sphere. If we want to change their behavior, we have to change the incentive structure.
It's unrealistic for us to put CEOs on some kind of moral pedestal and say, “Well, of course you should lose $100 million so that people can tweet things.” We don't hold ourselves to that standard. So what we need to do is to pass laws regulating company behavior, but it's better not to look at that as regulating company behavior. Rather, it's elevating Chinese pressure on companies to a government-to-government level. When it's government to company level, that is not a contest of equals. But if the US government passes a law that pushes back against this, that is a contest of equals. We cannot pass a law requiring company employees to tweet in support of the Hong Kong protests. What can we do? Well, we could sanction several of the top Chinese companies that are most complicit in creating the architecture of censorship inside of China—Baidu, Tencent, etc—and what that would do, among other things, is create a halo of deterrence around the idea of complying with foreign government censorship. And if you're all familiar with sanctions and how that affects business decisions, it creates something called a “halo of deterrence”: companies will take a very wide berth around certain behavior.
Mounk: And that's important because it ties the hands of companies, right? A company asks you for a bribe, you say, “Sorry—Foreign Corrupt Practices Act. If I do that, I go to jail. No can do.” In the same way, if China demands of a CEO that they fire a particular employee who said something on Twitter, in order to have access to the market, you say, “I can't do that. No other CEO in America can do that. And by the way, we have coordinated with our European partners and they're not allowed to do that either. My hands are tied.”
Allen: Yes, exactly. I really hate the idea that regulation is bad for companies. These are pro-company ideas. Because this would empower companies when these unreasonable demands are made of them. They can go to whatever Chinese government authority is making this demand and say, “Hey, look, we would love to comply with this, we totally would. But look, here's the law.” That is what we want here. It is not reasonable to expect companies to become martyrs for something when no one else is doing it. It's not reasonable. And I also think that opt-in codes of conduct are nonsense. Overwhelmingly, that's not going to work. This is what governments are for, this is what regulations are for—at a very deep level to protect the fundamentals of our democracy and our freedoms.
What needs to happen is there needs to be better multilateral cooperation and structures in place. And there's a lot of different ideas now about different ways to go about doing this. One type of idea is you can call it an economic NATO or an economic mutual defense treaty or something like this, where you have countries that get together, and they have something, somewhere, in writing that says, “If one of us is the target of Chinese government economic coercion, here are the measures that we will take to support each other.” And that can be emergency assistance to the sectors that are affected, or it can be punitive measures against China. While extremely difficult to put together, especially in our current politics, having that would be great for when these things happen, but it would also be a powerful deterrent to China. And every time China does this, it has some kind of economic class, because they are able to somehow communicate to their companies and their sectors, hey, you know, don't export there, don't do this, and that has costs inside of China.
South Korea's economy is far, far smaller than China's and if you were just to take one economy versus the other, China is obviously going to win. But if you look very carefully, you can find certain individual products where this Chinese sector or supply chain is actually 95% dependent on this one product from South Korea—Victor Cha at CSIS has done that research across democracies, including New Zealand, Australia and the US and lots of small countries and come up with a list of these items to say, look, the next time the Chinese government does this, where they do secondary sanctions on Lithuania for improving their unofficial ties with Taiwan, these like-minded countries can get together and say “OK, we're gonna pull this one thing where 95% of this one tiny supply chain is dependent on this one product—we're gonna shut it down. And you can get seven or eight countries to do that.
Mounk: One important topic has come up a couple of ways in an oblique manner now, which is Taiwan. Clearly, a lot of this fight is about Taiwan indirectly and there's a big set of questions about whether and how the Communist Party will try to realize its ambitions of gaining control over Taiwan in the next decade. There's speculation about everything, including a military invasion. My understanding is that you believe that something like an economic blockade would be more likely. What do you think of the other scenarios here? What does the next 10 or 15 years hold for Taiwan?
Allen: I'm not optimistic about the future of Taiwan, unfortunately. There's an enormous amount of talk about a military invasion scenario. As I've said before, I think we have far too great of an emphasis on that. I don't think that China needs to invade to take Taiwan. And I don't think that they will do that. I think it's quite unlikely, because I don't think they need to.
The most likely scenario is some kind of a blockade, and an economic blockade at the right moment. The number one most important thing is, actually, I would say, the US. So the CCP would need to choose the moment at a time when the US is not going is not going to be able to really commit to some kind of intervention. If a US president is in power, who, for example, has the kind of neo-isolationist strain that we're seeing in the Republican Party right now, like Vivek Ramaswamy—now, he's not going to become president anytime soon—but if someone like him were to become president, he clearly views Taiwan as disposable, basically, as soon as we don't need its chips anymore. If someone like that were president in the US, that would be basically a green light to China.
Mounk: It’s hard for me to assess from the outside: do you think that a Kuomintang president or DPP president is more likely to provoke this kind of geopolitical crisis over the course of the next 5 or 10 years?
Allen: That's a great question. And I don't know. But my general answer to this is that it doesn't really matter. I think that what has changed is that Xi Jinping has determined that he wants to bring Taiwan back to the mother country while he's in office, and I just don't think it really matters what Taiwan does or doesn't do. I think that the CCP has planned for any kind of outcome, of the election or otherwise. And I know that that sounds kind of defeatist. But Taiwan is a small island of 24 million with a kind of pathetic military and China is a country of 1.4 billion with the world's second most powerful military. And I just don't think that there's a lot that Taiwan can do, by itself. I think what matters more is what China does and what the US does.
Mounk: One of the important things about Taiwan is that it gives the lie to certain culturalist arguments that there's something in the Chinese culture or Chinese character that is incompatible with democracy, which is a claim that some defenders of autocracy in China and elsewhere are making. When you go to Taiwan—which is very much Han in ethnicity and very much Chinese in history and culture (though some of my friends might bristle at that statement)—you recognize that this is simply untrue, that Taiwan is as much able as any other country in the world to sustain an incredibly vibrant democracy and an incredibly free society.
If you think that China has basically determined to bring Taiwan under its control—and ultimately, whether Taiwan has a government of the Kuomintang or a government of DPP is not going to matter so much—what is it that outside forces, what is it that the United States, can do to deter China taking that action? Or do you think that that is not possible?
Allen: No. That is, the US absolutely can deter China from taking whatever measures that it wants to take Taiwan, and I think the only reason that Taiwan still exists is because of this strong deterrent from the US. Technically, we have a policy of strict strategic ambiguity: we don't say we would defend Taiwan in case of an attack—some people think that's a better deterrent, some think that's not a good enough deterrent—but the fact is that that is obviously a deterrent. And if our political situation continues to deteriorate into something more severe, I think it would reduce the credibility of our deterrence. But anyway, I think the single most important factor is US deterrence, and primarily military deterrence. So if there was some kind of an economic blockade—do we intervene, and perhaps start a war with a nuclear-armed superpower over a conflict in which zero people have died so far? That's a difficult thing to say. But it's not impossible to consider that we would do that.
Mounk: We've delved into different elements of the nature of the Chinese economy, China's relationship to the world and the looming conflict over Taiwan. What would it take for the West to do what would be best, which is to coexist and cooperate peacefully with China while preserving its own political values and its free societies as well as the independence of its allies?
Allen: I would say that so much of that is dependent on the agency of the CCP. The Obama administration continued on this path of engagement when all signs within the US intelligence agencies were pointing to an increasingly aggressive China. We stayed on that path for longer than we should have. And we came to realize what the Chinese government was actually doing and what their ambitions actually were very, very late. And I think that for things to change, the CCP has to change. And I don't know if they will. I really think democracies have done as much as they can to try to bring China into a world order that is imperfect but that we do value. Surely, there are still things that we can change to prevent things from getting worse. And I think that the Biden administration is doing a pretty good job, they're not pulling their punches, they're still trying to address these excesses that erode the rules-based order, such that it exists, while continuing to try to talk to Chinese officials and trying to be the adults in the room. And I think that that is good. I think that the best thing that the democracies or like-minded countries need to try now is working together, trying to push back against China, in a more united and cooperative way. Because it didn't have to be this way. I think if a different president had come in, besides Xi Jinping, it could have gone differently. But this is what happened. And in the face of weakness or naivete, his policy has been to just take as much as he can. The thing left to try now is to try speaking with strength, with power, with force (not military force), but to try to constrain China in that way. I know that that is not a very happy answer. I wish I had a better one.
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