Holding the Dragon by the Tail


    US China policy is at a crossroads.  While a straight ahead approach takes us further down the road of misguided functionalism, a turn to the left leads towards protectionism and one to the right towards militarism and confrontation.  None of these choices is either appealing to the majority nor conducive to our collective good.  What must rather be sought is a new road, which may in fact be a turn off which we missed along the way and therefore may require us to go seemingly backward in order to progress.


     The hope of free market democracies has been that the foundations of political liberty in China could be laid through the soft power of market forces.  These foundations are the individual's freedom of action within the price system under the guidance of a legitimate, transparent, and egalitarian legal system.  This hope was founded upon the belief that these foundations were a necessary precursor to market trust and investment.  What this hopeful outlook failed to adequately consider was the impacts of market cost benefit calculations and economies of scale.


     Cost benefit calculations apply equally to individuals and markets, as well as governments.  The cost benefit calculus of individuals operating within the price system, the collective of these individuals making up the market, represents the genius, as well as the genesis, of the free market philosophy.  Creative destruction occurs when a collection of these individuals, for a multitude and incommensurable number of reasons, incorrectly "play" the market.  Such "incorrect plays" are bound to be more numerous when the observable potential for gain is very high due to market scale and the associated risk is nebulous and offset by government action.  With a market force of 1.3 billion individuals, China's observable potential for economic gain is quite high.  Additionally, the associated risks of operating within the Chinese system are, in many cases, less clear yet clearly offset by our government's encouragement of such behavior.  The long term consequences of such market behavior are "irrational exuberance" followed by a burst of the market bubble as the nature of the playing field becomes more evident.  In the case of China, the nature of the playing field has been and continues to be a state controlled market which exists for statist rather than market ends, the former of which are incompatible with individual freedom.  The allure of large profits in the world's largest single market, coupled with the political policy of appeasement in the short term for long term change, has altered the market cost benefit calculus.


     Political actions have been taken due to a cost benefit calculus of their own.  In regards to China, the appearance of reform has been adopted in order to benefit from the accrual of power available through economic development.  As the West views such development as a precursor to and facilitator of political reform, China gains the advantage of appearing to progress towards a word-view consistent with the West while concurrently increasing its means to resist western coercion.  Its gamble is that appeals to nationalism will pre-empt the resort to individual action which economic freedoms enable.  Such a gamble may be misplaced and da luan may yet occur in China as a result of the rapid yet unevenly distributed economic progress which they are making.  In regards to the West, it is just such an occurrence which is feared by use of heavy handed tactics.  A stable China is desired, but one which is substantially transformed from their current historic and Communist color.  The cost benefit equation of the West, impacted by such fears, has failed to consider the total cost to our way of life of an economy of such scale which exists for and is controlled by the state for state purposes in a state where individual human rights are a distant priority, if a consideration at all. 


     Were China to accept the declaration of basic human rights, it is conceivable that, in the long run, functionalism's hope might be fulfilled as well as international free market competition maintained.  As they have not and do not, the impact of individual rights and freedoms, and social actions to guarantee them with their consequent impacts on commodity prices, will not occur in China.  China's competitive market advantage, in fact, depends upon their restrictions on individual freedoms and the resultant international market benefits which such restraints achieve.  A free population demands protection from unsafe working conditions. They demand a minimum wage sufficient for them to procure the basic necessities of a good life.  They demand an equitable distribution of income and opportunity.  Such demands, and the government's attempts to meet them, inevitably raise the costs of production.  As the Chinese society is not democratic, however, such counter-availing forces to competition are not available, and it is in China's short term interests to keep this competitive market advantage as they pour the proceeds of such advantage into military spending.


     Although we should not be duped into liberal dysplasia in our reactions with China's markets neither should we be prodded into pugilism in our relations with their government.  Protectionism is antithetical to competition, the sine qua non of the free market system, but competition must be based upon a truly free market where market forces determine the outcome within the marketplace and democratic forces determine the outcome within the polity.  We must realize that a truly level playing field will never exist until the two of these forces are conjoined, as although democracy can exist without free markets, free markets cannot truly fully develop without democracy and the individual freedoms which permit the achievement of a population's diverse passions. This was the basis for the policy of engagement and enlargement of free market democracies, such policy realizing that both are necessary and mutually dependant in the attainment of both political and economic freedom and prosperity.  It is foolish to press for one without also pressing for the other, although the relative emphasis on each should recognize the necessity of democratic reform, the harm to this reform process which radical structural reforms can cause, and the unique environmental factors of each area which must be considered in order to achieve a proper balance between the two.  As such, a return to the US insistence on progress in democratic reform in China is necessary, along with expansion of accessibility to their markets and liberal economic policies.  In taking such a course, we must also recognize the real difficulties which China faces in terms of stability and coherence as a nation, and clearly articulate these, our actions, and our concessions at addressing them to the American people who are paying the price for China's admission to the free Market system. 


     This is the turn off which we missed in the past. In the misguided hope of functionalism, we failed to realize the necessary connection of free markets with democracy and emphasized the first to the exclusion of the latter.  In so doing, we have invited the uneven playing field which we now find ourselves on, with a potential opponent who is gaining advantage by the year in terms of relative coercive power without changing one iota in its commitment to individual human rights, which commitment is a necessary precursor to the long term proper functioning of the free market system.  We have been continuing on a faulty course for some time.  It's time now, not to set course and speed, but to reevaluate our ability to do so from our current position and, quite possibly, to reverse course in order to get back on course.  In the final analysis, it matters not how long you have been on the road, but rather how far you have gone in reaching your destination.