The trouble with containing China

The Cold War (1945-1991), was “cold” only in comparison to the Second World War. The “hotter” events like Vietnam and Korea racked up “only” about 4 million dead. The dissolution of the Soviet Union led to a phase of unipolar American dominance. That has ended, with China mounting a robust challenge with its “wolf-warrior” diplomacy and the vastly ambitious One Belt One Road initiative and String of Pearls.

The new alliance between Australia, the UK and the US, is designed to contain The People’s Republic. It is analogous to the standoff between the North Atlantic Treaty Organisation and the Warsaw Pact. But it will be vastly different in details.

The Soviet Union made a huge policy blunder, which turned into its Achilles’ Heel. It had a great technical education system (as did several of its East European satellites) and a large, accomplished scientific and technical workforce. This enabled it to compete with the US in high-priority areas, such as the space race and in the development of military hardware.

But the USSR never allowed its science and technology mavens to monetise their capabilities. This left it trailing far behind in fields like electronics, genetics, and all the other myriad areas where advances in science and technology have been driven by a desire to make money.

The USSR and its satellites were poor, and stayed poor. The USSR had a tiny manufacturing base, outside of its military-industrial complex. In the last decade before it fell apart, it was driven into penury as it tried to keep pace with expensive weapons development programmes like the Strategic Defence Initiative (aka “Stars Wars”).

China, in contrast, has actively encouraged the monetisation of science and technology capability. Over 80 per cent of its R&D expenditure comes from corporate sources, and it has a huge number of home-grown, high-tech, mega-billion businesses.

China has the world’s biggest, most diversified manufacturing base. It is a monopoly or near-monopoly player in many sectors, and a leader in cutting-edge research in genetics, aerospace, consumer electronics, supercomputing, etc. Its GDP has risen organically as those capacities have developed and been monetised. Just as it has encouraged entrepreneurs to tap every overseas market, it has also encouraged its best and brightest to study abroad to ensure it stayed abreast of developments in every field.

An ancillary Soviet policy, which also contributed to the loss of the Cold War, was isolationism. The Iron Curtain was designed to prevent citizens of one-party states being “contaminated” by exposure to more liberal political systems. There was no question of someone in East Germany or the Soviet Union visiting Paris, or New York, for pleasure. Nor was it easy to travel to the USSR and its satellites.

But enough information leaked through the Iron Curtain to ensure Soviet citizens knew they endured poor living standards and suffered under a repressive one-party regime. They suffered material envy into the bargain because they couldn’t even aspire to improve living standards.

The Bamboo Curtain is not physical. China tackles “contamination” in other ways. It has its Great Firewall. It has vast teams of approved influencers on its domestically-controlled social media platforms.

In 2019, over 140 million Chinese passengers boarded overseas flights (excluding Hong Kong). That is a lot of engagement with the world outside the “Middle Republic”. China’s citizens are well aware of the material prosperity of First World countries.  But they are also encouraged to be aspirational consumers, and they’ve enjoyed rapid improvement in living standards.

China cannot be driven into penury by an arms race. Maybe enough information will eventually filter past the Great Firewall to create a constituency for political reform. Perhaps, real estate bubbles like Evergrande will lead to an implosion in a massively-leveraged economy.

If the PRC does undergo catastrophic political change, the global economic costs will also be high.  We’ve already had a taste of what could happen to supply chains when China went into lockdown for one quarter last year. If the PRC thrives, there’s a problem. If it collapses, there’s also a problem. In geopolitical terms, the PRC is like the proverbial Delhi Ka Laddoo, which induces suffering in both, those who consume it and those who don’t.