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Foreign Affairs
The Myth Behind China’s Miracle
By George J. Gilboy
George J. Gilboy is a senior manager at a major multinational firm in Beijing, where he has been working since 1995, and a research affiliate at the Center for International Studies at the Massachusetts Institute of Technology.
The Phantom Menace
China’s sudden rise as a global trading power has been greeted with a curious mixture of both admiration and fear. Irrational exuberance about the country's economic future has prompted investors to gobble up shares of Chinese firms with little understanding of how these companies actually operate. Meanwhile, overestimates of China's achievements and potential are fueling fears that the country will inevitably tilt global trade and technology balances in its favor, ultimately becoming an economic, technological, and military threat to the United States. These reactions, however, are equally mistaken: they overlook both important weaknesses in China’s economic “miracle” and the strategic benefits the United States is reaping from the particular way in which China has joined the global economy. Such misjudgments could drive Washington to adopt protectionist policies that would reverse recent improvements in U.S.–China relations, further alienate Washington from its allies, and diminish U.S. influence in Asia.
In fact, the United States and China are developing precisely the type of economic relationship that U.S. strategy has long sought to create. China now has a stake in the liberal, rules–based global economic system that the United States worked to establish over the past half–century. Beijing has opened its economy to foreign direct investment (FDI), welcomed large–scale imports, and joined the World Trade Organization (WTO), spurring prosperity and liberalization within China and across the region.
China’s own choices along the road to global economic integration have reinforced trends that favor the continued industrial and technological preeminence of the United States and other advanced industrialized democracies. In its forced march to the market, Beijing has let political and social reforms lag behind, with at least two critical—and unexpected—consequences. First, to forestall the rise of a politically independent private sector, the Chinese government has implemented economic reforms that strongly favor state–owned enterprises (SOEs), granting them preferential access to capital, technology, and markets. But reforms have also favored foreign investment, which has allowed foreign firms to claim the lion’s share of China’s industrial exports and secure strong positions in its domestic markets. As a result, Chinese industry is left with inefficient but still–powerful SOEs, increasingly dominant foreign firms, and a private sector as yet unable to compete with either on equal terms.
Second, the business risks inherent in China’s unreformed political system have bred a response among many Chinese managers—an “industrial strategic culture”—that encourages them to seek short–term profits, local autonomy, and excessive diversification. With a few exceptions, Chinese firms focus on developing privileged relations with officials in the Chinese Communist Party (CCP) hierarchy, spurn horizontal association and broad networking with each other, and forgo investment in long–term technology development and diffusion. Chinese firms continue to rely heavily on imported foreign technology and components—severely limiting the country’s ability to wield technological or trading power for unilateral gains.
China, in other words, has joined the global economy on terms that reinforce its dependence on foreign technology and investment and restrict its ability to become an industrial and technological . . .