The Fuse

WATCH China / Competition / Power Episode One: China’s Hybrid Economic Model

June 06, 2024

In only half a century, Beijing has become the second largest economy in the world, integrating into the global economy largely on its own terms and under conditions that enabled the People’s Republic of China to dominate key industries, from telecommunications to critical minerals manufacturing and refining to aluminum smelting.

The world is finally waking up to the reality that the Chinese Communist Party has created a unique economic system that prioritizes power over profit, and that for the past decades, the West has fallen behind because Beijing has been playing by its own rules.

Watch this panel of experts discuss how this state of play evolved, what’s at stake, and where we can go from here.

The discussion kicked off with 50 years of Chinese history in 15 minutes. Rick Switzer, formerly at the U.S. Department of State, laid the groundwork for understanding how—and why—the Chinese Communist Party (CCP) built the aggressively anti-competitive economic system that we contend with today.

“Adding China to the WTO was probably the greatest economic blunder the U.S. has ever made,” Switzer said, noting that Beijing has been using the system against itself, gaining access to the global economy while remaining firmly in control at home.

“They don’t always meet their targets but on a long time horizon, their industrial policy is undefeated,” Switzer said.

Myth: China has adapted a form of capitalism

China has created a unique economic system, directed from Beijing, that pursues power over profit. Liza Tobin, Senior Director for Economy at the Special Competitive Studies Project, calls it “brute force economics.”

“Profit maximization is the operating principle that we assume. But the CCP is maximizing for power,” Tobin said. “Military, technological, cultural, social, and economic [power]; they make that clear.”

To accomplish that, Beijing can—and has—put the entire power of the State behind strategic enterprises, something no other country can do.

“There was a process of needing to rethink and shatter a series of myths about China that have been serving us terribly,” said David Feith with the Center for a New American Security and formerly with the State Department.

A key myth is “that China’s central system wouldn’t serve it over the time. We needed to learn not to over-apply the soviet experience to China,” Feith said. Beijing’s aim has been to turn China into SUPER-OPEC for the 21st century by controlling the inputs of the modern economy all on its own. “China was consistently outpacing our expectations,” he said.

Beijing continues to warp and bend global markets to its strategic aims through massive amounts of lending—think of its Belt and Road initiative.

Adam Frost, former EXIM Bank Senior Vice President of the China and Transformational Exports Program, says we must ignore the myth “Peak China,” the idea that Beijing has somehow hit the top of its ability to manipulate global markets.

“People are saying Belt and Road financing is drying up, and that any inefficient market will be resolved over time,” he said. “Information on China is hard to come by, but China is by far the world’s largest overseas lender. At best estimates, it commits $80 billion a year to support PRC firms competing for 3rd party market share.”

The dirty truth about clean tech from China

The concern over climate change—and the urgency to do something about it—has led some to argue that we need China’s know-how, and that we should buy their solar panels, inexpensive EVs, batteries, etc.

But that’s just defeating the purpose, Switzer said.

“The goods we’re buying from China are the most polluted in the world and we’re laundering their coal,” he said.

“I’ve been to the settling ponds in Inner Mongolia. I’ve seen how they process and manufacture these things. China added more coal-fired power in the past 24 months than the United States has total,” noted Switzer. “Because their entire industrial economy is built on this notion of accumulating nation power, things like soil pollution are state secrets.”

Switzer added, “Tying yourself to the most polluting industrial base on the planet, which has no interest in reducing their coal-fired power” fundamentally undermines environmental goals.

A unifying challenge

But China’s dominance of these supply chains is bigger than any one issue we face, and policymakers across the political spectrum must grasp the gravity of it.

“The Green Revolution, AI Revolution, or the Economic Revolution… or the Geopolitical Revolution, no matter which one you care about there is value to maintaining some control and some choice,” Tobin said. “If we’ve learned anything from the past five years, from COVID, Russia/Ukraine, from the generative AI boom, it’s that there is economic value and national security value to maintaining some control over where those things are made.”

And we should care about them all, because as far as supply chains are concerned, they are all intertwined.

“You have to look at these things as value chains. If you only look at the final product you miss the big picture,” Feith said, noting that the materials that go into manufacturing EVs are also key to high tech computing technologies, defense systems, satellites, telecommunications, and many other things fundamental to our economic and national security.

What’s to be done?

“It doesn’t work when we try and out-China China. We don’t win by being more like them. We need to be more like us. Tax policies and incentive structures to nurture a market-based economy. And we don’t need to compete for influence, we need to compete for customers,” said Frost. “We don’t want to lose who we are in this process.”

A big piece of the puzzle is for the U.S., its allies, and its partners to coordinate better, raising barriers to trade with China while lowering barriers for trade among market economies.

“We don’t even have the language to describe what’s happening and what we need to do to create new paradigms and frameworks,” said Frost, referring to the realignment of global economics. But one thing is clear: the U.S. and its partners need to lead in reshaping the 21st century economy, or China will continue to in our absence.

Stay tuned for episode 2 of this series: China’s Industrial Policy and Impact on Key Industries