How America Can Prepare for the China Threat

by | Dec 23, 2020 | Blog Articles, China

Every child is taught that there are wolves in the woods, but that preparation can keep them at bay. Today, America is faced with new challenges both from within and outside our borders.  One of the biggest threats is the rise of China and her growing alliances with powers hostile to the US, including Iran, Russia and Turkey. 

We can see this growing hostility in the form of foreign interference in our elections, in disinformation campaigns designed to amplify social divisions and hatred based on race or class, in the dramatic recent increase in state-sponsored cyberattacks against our government and corporations, by the exploitation of weaknesses in our infrastructure revealed in the pandemic, and in increased military aggression designed to pressure the US and her allies.  All of this is challenging the US position in ways unimaginable at the turn of the century. 

How should we respond to these wolves gathering beyond the trees? National preparation looks like creating redundancies, diversity, and flexibility in our supply chains, ensuring food security and healthcare continuity, replenishing both strategic national and household reserves, and hardening critical infrastructures such as telecommunications and energy resources.

Preparation looks like deleveraging the balance sheets of our municipalities, corporations, and households, and increasing loss-absorbing capital buffers for our financial institutions. It looks like fixing some of the flaws in the US-influenced global financial infrastructure, making these systems less unfavorable to other countries so that switching costs become prohibitive. 

Preparation also means finding common ground to unite as Americans.  This must include addressing the growing wealth gap, and grievances of racial injustice and treatment of the poor. Otherwise we allow our enemies to exploit them to weaken the fabric of our society and the country itself.

One of the things that make America great is our free market system, which has included open and transparent governance, accounting, and access to capital, which has had the benefit of attracting both foreign capital and human talent. 

We greatly value our First Amendment rights of freedom of speech, freedom of the press, and the right to assemble peacefully and address our grievances to the government. Over the years this has translated to one of the most vibrant, productive, and creative university systems in the world. We benefit from talented professors and students from over a hundred nations. Academic collaboration with other nations has led to massive advances in science, technology, and other fields that have helped alleviate poverty and improve the health and livelihoods of billions around the world. 

This must not change, but we need to be realistic and a bit more cautious about China’s ambitions and the threat the Chinese Communist Party (CCP) poses to us. This will require a reworking of how academic intellectual property is shared and how private corporations allow technology transfer. While America has lost a lot of intellectual property to China through outright theft, a substantial portion has been sold or transferred by our companies in the pursuit of profits and the hope of future access to Chinese markets, and this needs to stop.

As the authors of Why Nations Fail point out, one of the main differences between economic institutions in the West and those in China or Russia – that have the illusion of similarity based on external appearance –  is the degree to which they are either inclusive or exclusive. Inclusive economic institutions provide built-in mechanisms for checks and balances as a result of a diverse group of stakeholders, each of which has some form of a claim upon the integrity of the firm. This provides a strong directional signal that tends towards transparency, accountability, and sustainability over time.

On the other hand, extractive economic institutions exist primarily for the benefit of the elite that controls them. They generally fail to have the same kinds of checks and balances that would exist in an inclusive economic institution in the West. 

As an investor in South Africa over the past decade, I saw firsthand under the Presidency of Jacob Zuma the horrible toll that this process of “state capture” extracted on an otherwise successful economy. Over a long enough period of time, these forces can drain a nation of its strength and wealth (as we’ve recently seen in Venezuela, North Korea, and Zimbabwe) if not stopped. 

The good and long-suffering people of South Africa finally stood up and voted Zuma out of office. South Africa is a young democracy that nonetheless had strong enough institutions, such as an independent judiciary, a vocal free press and a competent national Treasury that was able to resist many of the more serious attempts at the seizure of economic assets.

We can see that this process of stage capture by the elite happening in Russia and China today, unconstrained by any such democratic forces. Rather than the ideological tools of Communism which were deployed in the past, today the same elite class uses the appearance of western-style corporations as the facade to hide their actions. The difference for those nations is that the economic assets of the state have always been in the hands of a small ruling elite at the expense of the nation’s people. Over the long run, this process leaves the state in a fragile position because at some point the population will organize, resist and potentially overthrow the powers of the elite. This is clearly the biggest fear that governments in China, Russia, and Iran face.  America can exploit this weakness.

There are certain things that the US government, companies, and individuals should be doing differently in this environment.

  • As individuals, we should increase our awareness of the tactics being used by China and other governments to undermine and destabilize US interests and our democracy. For example, learn to recognize when social media is a propaganda tool.
  • The US needs to build alliances that are better able to push back on state-sponsored intimidation and coercion. Response protocols should be coordinated and agreed in advance for specific types of threats. 
  • The US government needs to be willing to defend our alliance partners’ interests by coordinating responses in a visibly aligned matter in resistance to CCP pressure.
  • The US government should be willing to take up its private companies’ defense and support when coercive foreign attacks come, so as to not leave these companies stranded in isolation. 
  • The US should better capitalize on existing intelligence information sharing networks, and significantly expand their use in the economic (rather than just in military or diplomatic) realms. 
  • US companies should recalibrate their relationships with Chinese businesses, explicitly taking into consideration the geopolitical and geo-economic implications of their partnerships.
  • US companies need to conduct better due diligence on the firms and people with whom they consider partnering. Supply chains need to be vetted and commercial agreements or partnership transactions (JVs, mergers, or the like) need to be more carefully attuned to US interests.
  • Companies need to be more “long-term greedy” and fully appreciate that trading away their sustainable competitive advantage through the loss of intellectual property for the sake of short-term gain is a losing proposition, not just for them, but for the nation as a whole. 

 

Our season of blissful ignorance is over. But it’s not too late to wake up, shake off our inertia, and prepare. This will not be easy, especially given the temptations of the size of the Chinese market, but is critical to staunch the outward flow of the lifeblood of our economy.

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