Commentary | 13 March 2019

Can outside pressure shift Beijing?

Originally published in Nikkei Asian Review

Originally published in Nikkei Asian Review

When she was asked about the mounting U.S. pressure on China for trade concessions, Jin Keju, a prominent Chinese economist, did not for a moment complain about the Americans. Instead, she called their demands a "strategic gift" for Beijing.

The sort of things Washington is pushing for -- better protection for intellectual property and fairer trade practices -- are all good for China in the long run, said Professor Jin, who teaches at the London School of Economics.

"What President [Donald] Trump is asking China to do is good for China," she told the South China Morning Post recently. "And sometimes you need an external challenge to accelerate the process."

Anyone familiar with the decades-long trade tussles between the U.S. and Japan, which lasted from the 1950s until the mid-1990s, will immediately recognize Professor Jin's logic.

Indeed, the idea of foreigners making the Japanese do what many vested interests in Japan had long resisted became so familiar a theme in the talks between Washington and Tokyo that the phenomenon even got its own word, "gaiatsu," or outside pressure, a term which quickly passed into the geopolitical lexicon.

But will "gaiatsu" work with China? With the trade talks between Beijing and Washington at a critical phase, the question is both important and timely.

Robert Lighthizer, Trump's trade chief negotiator, warned on March 13 that the talks with China had intensified and probably entered their "final weeks." Speaking before a U.S. Senate committee, he indicated the outcome was hard to predict. "We"re either going to have a good result or a bad result before too long."

There is little doubt that many Chinese wish it would. Beijing's entry into the World Trade Organization in 2001 was, as it turned out, a "strategic gift" for China, to use Jin's words, although not everybody saw it as such as the time.

The WTO entry laid the groundwork for cleaning up much of the state sector, which included tens of millions of layoffs in China's rust belt and beyond, and an expansive recapitalization of the big state banks.

Many foreigners saw these initiatives in political as much as economic terms. They thought the Chinese were privatizing the state sector, something they reasoned would inevitably lead to greater democracy to manage a more entrepreneurial economy.

In fact, Beijing's reforms to the state sector made it by and large more resilient, focused and powerful, even as the private sector grew up rapidly around it. The big five state banks, with the help of foreign investment in their recapitalization, survived rather than collapsing under mountains of bad loans.

In other words, China leveraged foreign pressure but still made the reforms on its own terms. Far from getting weaker, the ruling Communist Party gained strength.

It is worth bearing such lessons in mind when looking at the current landscape of negotiations between the U.S. and China.

Jin is not alone in seeing advantage to Beijing in capitulating to some of Trump's demands. It is a message that is often conveyed in private by Chinese interlocutors these days to foreigners. Keep pressing, they say. We can't get things done without outsiders forcing us to.

On one level, such messages make perfect sense in the current environment in China, where Xi Jinping has tightened political control and frowned on any discussion of further market reforms.

In encouraging foreigners to speak out, these reformers are really asking Americans and Europeans and the like to weigh into a domestic debate about economic policy that they have so far been losing.

Such an invitation should be embraced. After all, one of the most difficult problems in dealing with China is identifying allies inside the country who work with you in the same cause.

For Chinese, openly siding with foreigners to open up your country can be perilous, as the ruling party originally built its legitimacy on driving out foreigners in the mid-20th century and then only allowing them to return on strictly conditional terms decades later.

But, to be clear, the invitation to foreigners to help the reform camp is limited, in this case to certain sectors and parts of the economy. Politically, it is quarantined as well.

Beijing's chief negotiator in the trade talks, and a man with President Xi's ear, Liu He, has made it clear that only certain issues are up for grabs in dealing with the White House.

At the outset he said Beijing could say yes to about 40% of Washington's demands, which amounts to greater access for farm and energy imports. They could negotiate on the next 30%, which covers how foreign companies can secure greater equity and control in car, banking and insurance joint ventures, and the like.

The final 30%, however, is off limits, even for Beijing's "gaiatsu" crowd, and that covers precisely the sorts of issues that Washington (albeit, not always Trump) is focused on.

The U.S. wants China to stop protecting its high-tech industries and subsidizing the state-owned and private companies it has singled out as local champions to march the country's economy up the value chain.

These policies, however, are non-negotiable for Chinese officials, as they worry that if they don't grab the commanding heights of technology for themselves, they will be forever exposed to industrial blackmail from the West.

Another reason why "gaiatsu" doesn't work with China as well as it might is that whereas Tokyo and Washington are, and long have been, strategically aligned, Beijing is a geopolitical rival of America's.

In a head-to-head contest with a power that China increasingly sees as a peer, Beijing won't give much ground to outside pressure. If the U.S. were able to join forces with Japan, the EU and much of Southeast Asia, the story might be different.

But with "America First," Trump's signature policy, such partnerships are on borrowed time.