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Trade Barrier

Why trade won't bring democracy to China

ON FEBRUARY 25, business professor and writer Li Shaomin left his home in Hong Kong to visit friend in the mainland of Shenzhen. His wife and nine-year-old daughter haven't heard from him since. That's because, for four months now, Li has been rotting in a Chinese prison, where he stands accused of spying for Taiwan. Never mind that Li is an American citizen. And never mind that the theme of his writings, published in subversive organs like the U.S.-China Business Council's China Business Review, is optimism about China's investment climate. Li, it turns out, proved too optimistic for his own good. In addition to rewarding foreign investors, he believed that China's economic growth would create, as he put it in a 1999 article, a "rule-based governance system." But, as Li has since discovered, China's leaders have other plans.

Will American officials ever make the same discovery? Like Li, Washington's most influential commentators, politicians, and China hands claim we can rely on the market to transform China. According to this new orthodoxy, what counts is not China's political choices but rather its economic orientation, particularly its degree of integration into the global economy. The cliche has had a narcotic effect on President Bush, who, nearly every time he's asked about China, suggests that trade will accomplish the broader aims of American policy.

Bush hasn't revived Bill Clinton's recklessly ahistorical claim that the United States can build "peace through trade, investment, and commerce." He has, however, latched onto another of his predecessor's high-minded rationales for selling Big Macs to Beijing--namely, that commerce will act, in Clinton's words, as "a force for change in China, exposing China to our ideas and our ideals." In this telling, capitalism isn't merely a necessary precondition for democracy in China. It's a sufficient one. Or, as Bush puts it, "Trade freely with China, and time is on our side." As Congress prepares to vote for the last time on renewing China's normal trading relations (Beijing's impending entry into the Word Trade Organization will put an end to the annual ritual), you'll be hearing the argument a lot: To promote democracy, the United States needn't apply more political pressure to China. All we need to do is more business there.

Alas, the historical record isn't quite so clean. Tolerant cultural traditions, British colonization, a strong civil society, international pressure, American military occupation and political influence--these are just a few of the explanations scholars credit as the source of freedom in various parts of the word. And even when economic conditions do hasten the arrival of democracy, it's not always obvious which ones. After all, if economic factors can be said to account for democracy's most dramatic advance--the implosion of the Soviet Union and its Communist satellites--surely the most important factor was economic collapse.

And if not every democracy emerged through capitalism, it's also true that not every capitalist economy has produced a democratic government. One hundred years ago in Germany and Japan, 30 years ago in countries such as Argentina and Brazil, and today in places like Singapore and Malaysia, capitalist development has buttressed, rather than undermined, authoritarian regimes. And these models are beginning to look a lot more like contemporary China than the more optimistic cases cited by Beijing's American enthusiasts. In none of these cautionary examples did the free market do the three things businessmen say it always does: weaken the coercive power of the state, create a democratically minded middle class, or expose the populace to liberal ideals from abroad. It isn't doing them in China either.

One of the most important ways capitalism should foster democracy is by diminishing the power of the state. Or, as Milton Friedman put it in Capitalism and Freedom, "It]he kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other." In his own way, Bush makes the same point about China: "I believe a whiff of freedom in the marketplace will cause there to be more demand for democracy." But the theory isn't working so well in the People's Republic, whose brand of capitalism isn't quite what Adam Smith had in mind.

China's market system derives, instead, from a pathological model of economic development. Reeling from the economic devastation of the Mao era, Deng Xiaoping and his fellow party leaders in the late 1970s set China on a course toward "market socialism." The idea was essentially the same one that guided the New Economic Policy in Soviet Russia 50 years before: a mix of economic liberalization and political repression, which would boost China's economy without weakening the Communist Party. And so, while leaving the party in control of China's political life, Deng junked many of the economy's command mechanisms--granting state-owned enterprises more autonomy, opening the country to limited investment, and replacing aging commissars with a semiprofessional bureaucracy. The recipe worked well: China has racked up astronomical growth rates ever since. And democracy seems as far away as ever

The reason isn't simply that government repression keeps economic freedom from yielding political freedom. It's that China's brand of economic reform contains ingredients that hinder--and were consciously devised to hinder--political reform. The most obvious is that, just as the state retains a monopoly on the levers of coercion, it also remains perched atop the commanding heights of China's economy. True, China has been gradually divesting itself of state-owned enterprises, and the process should quicken once China enters the World Trade Organization (WTO). But Beijing's leaders have said they will continue to support China's most competitive and critical industries. Taking a cue from authoritarian South Korea during the 1980s, China's leaders have proposed sponsoring industrial conglomerates in crucial sectors of the economy, transformed industrial ministries into "general associations," merged failing state-owned firms with more successful ones, and established organizations to, as Chinese economist Xue Muqiao has put it, "serve as a bridge between the state and the enterprises."

But that's where any similarities with South Korea end. Unlike South Korea, the Philippines, and Taiwan, which evolved from authoritarianism (and did so, significantly, as de facto protectorates of the United States), China even today has no effective system of property rights--a signature trait that distinguishes its Communist regime from traditional authoritarian ones. The absence of a private-property regime in China means that, at the end of the day, the state controls nearly the entire edifice on which China's "free" markets rest. It also means that China's brand of capitalism blurs, rather than clarifies, the distinction between the public and the private realms on which political liberty depends. Nor is that the only requisite for democracy that China's markets lack. As the imprisonment of Li Shaomin and thousands of other political prisoners attests, capitalism in the PRC still operates within the confines of an arbitrary legal order and a party-controlled court system. "China is still a lawless environment/' says University of Pennsylvania sinologist Arthur Waldron. "Whether in terms of individual rights or the rights of entrepreneurs, interests are protected not by institutions but by special relationships with those in power."

BEFORE HE WAS arrested, Li diagnosed this condition as "relation-based capitalism." What he meant was that relations with government officials, not property rights or the rule of law, underpin the Chinese market. Because the political foundations of China's economy remain the exclusive property of the state, China's entrepreneurs operate with a few degrees of separation, but without true autonomy, from the government. Hence, capital, licenses, and contracts flow to those with connections to officials and to their friends and relatives, who, in turn, maintain close relations with, and remain beholden to, the regime. Their firms operate, in the words of Hong Kong-based China specialist David Zweig, "[l]ike barnacles on ships, ... drawling] their sustenance from their parastatal relationships with the ministries from which they were spun off."

Helping to keep all these distortions in place are Deng's functionaries, who now constitute the world's largest bureaucracy and still control the everyday levers of the Chinese economy. Today, they function as the engines and administrators of a market increasingly driven by skimming off the top. The foreign-trade sector offers particularly easy pickings. In 1995, for instance, the World Bank found that while China's nominal tariff rate was 32 percent, only a 6 percent rate was officially collected. Presumably, much of the difference went into the pockets of Chinese officials. And even though WTO accession will reduce opportunities for rent-seeking from inflated trade tariffs, China's bureaucracy will be able to continue siphoning funds from distorted interest rates, the foreign exchange markets, and virtually any business transaction that requires its involvement--which is to say, nearly every business transaction. Nor is the problem merely the corrupting influence these bureaucrats wield over China's markets. The larger problem is that, whereas in the United States the private sector wields enormous influence over the political class, in China the reverse is true.

FOR PRECISELY THIS reason, Washington's celebrations of the democratic potential of the new Chinese "middle class" may be premature. "Entrepreneurs, once condemned as 'counterrevolutionaries,' are now the instruments of reform .... [T]his middle class will eventually demand broad acceptance of democratic values;' House Majority Whip Tom DeLay insisted last year. Reading from the same script, President Bush declares that trade with China will "help an entrepreneurial class and a freedom-loving class grow and burgeon and become viable." Neither DeLay nor Bush, needless to say, invented the theory that middle classes have nothing to lose but their chains. In the first serious attempt to subject the ties between economic and political liberalization to empirical scrutiny, Seymour Martin Lipset published a study in 1959, Some Social Requisites of Democracy, which found that economic development led to, among other things, higher levels of income equality, education, and, most important, the emergence of a socially moderate middle class--all factors that promote democratization. More recent studies have found that rising incomes also tend to correlate with participation in voluntary organizations and other institutions of "civil society;' which further weakens the coercive power of the state.

But middle classes aren't always socially moderate, and they don't always oppose the state. Under certain conditions, late modernizing economies breed middle classes that actively oppose political change. In each of these cases, a strong state, not the market, dictates the terms of economic modernization. And, in each case, an emerging entrepreneurial class too weak to govern on its own allies itself-economically and, more importantly, politically--with a reactionary government and against threats to the established order. In his now-classic study Social Origins of Dictatorship and Democracy, sociologist Barrington Moore famously revealed that, in these "revolutions from above," capitalist transformations weakened rather than strengthened liberalism. In the case of nineteenth-century Japan, Moore writes that the aim of those in power was to "preserve as much as possible of the advantages the ruling class had enjoyed under the ancien regime, cutting away just enough ... to preserve the state, since they would otherwise lose everything." Japan's rulers could do this only with the aid of a commercial class, which eagerly complied, exchanging its political aspirations for profits. On this point, at least, Marx and Engels had things right. Describing the 1848 revolution in Germany, they traced its failure partly to the fact that, at the end of the day, entrepreneurs threw their support not behind the liberal insurrectionists but behind the state that was the source of their enrichment.

MUCH THE SAME process is unfolding in China, where economic and political power remain deeply entwined. In fact, China's case is even more worrisome than its historical antecedents. In Germany and Japan, after all, an entrepreneurial class predated the state's modernization efforts, enjoyed property rights, and, as a result, possessed at least some autonomous identity. In China, which killed off its commercial class in the 1950s, the state had to create a new one. Thus China's emerging bourgeoisie consists overwhelmingly of state officials, their friends and business partners, and--to the extent they climbed the economic ladder independently--entrepreneurs who rely on connections with the official bureaucracy for their livelihoods. "It is improbable, to say the least," historian Maurice Meisner writes in The Deng Xiaoping Era: An Inquiry Into the Fate of Chinese Socialism, "that a bourgeoisie whose economic fortunes are so dependent on the political fortunes of the Communist state is likely to mount a serious challenge to the authority of that state.., the members of China's new bourgeoisie emerge more as agents of the state than as potential antagonists."

A steady diet of chauvinistic nationalism hasn't helped. In the aftermath of the Tiananmen Square massacre, party leaders launched a "patriotism" campaign, a sentiment they defined as "loving the state" as well as the Communist Party. As the Shanghai-based scholar and party apologist Xiao Gongqin explains, "IT]he overriding issue of China's modernization is how, under new historical circumstances, to find new resources of legitimacy so as to achieve social and moral integration in the process of social transition." To Xiao and others like him, the answer is nationalism. And, as anyone who turned on a television during the recent EP-3 episode may have noticed, it's working. Indeed, independent opinion polling conducted by the Public Opinion Research Institute of People's University (in association with Western researchers, who published their findings in 1997), indicate greater public support for China's Communist regime than similar surveys found a decade earlier. And, contrary to what development theory might suggest, the new nationalism appears to have infected the middle class--particularly university students and intellectuals--more acutely than it has China's workers and farmers. "The [closeness of the] relationship between the party and intellectuals is as bad as in the Cultural Revolution;' a former official in the party's propaganda arm noted in 1997. Even many of China's exiled dissidents have fallen under its spell.

IN ADDITION TO being independent of the regime and predisposed toward liberal values, China's commercial class is supposed to be busily erecting an independent civil society. But, just as China's Communist system restricts private property, it prohibits independent churches and labor unions, truly autonomous social organizations, and any other civic institutions that might plausibly compete with the state. Indeed, China's leaders seem to have read Robert Putnam's Bowling Alone and the rest of the civil-society canon--and decided to do exactly the reverse of what the literature recommends. "Peasants will establish peasants' organizations as well, then China will become another Poland;' senior party official Yao Yilin reportedly warned during the Tiananmen protests. To make sure this fear never comes true, China's leaders have dealt with any hint of an emerging civil society in one of two ways: repression or co-optation. Some forbidden organizations--such as Falun Gong, the Roman Catholic Church, independent labor unions, and organizations associated with the 1989 democracy movement--find their members routinely imprisoned and tortured. Others, such as the Association of Urban Unemployed, are merely monitored and harassed. And as for the officially sanctioned organizations that impress so many Western observers, they mostly constitute a Potemkin facade. "[A]lmost every ostensibly independent organization--institutes, foundations, consultancies--is linked into the party-state network," says Columbia University sinologist Andrew Nathan. Hence, Beijing's Ministry of Civil Affairs monitors even sports clubs and business associations and requires all such groups to register with the government.

THE SAME KIND of misreading often characterizes celebrations of rural China's "village committees;' whose democratic potential the engagement lobby routinely touts. Business Week discerns in them evidence "of the grass-roots democracy beginning to take hold in China." But that's not quite right. China's leaders restrict committee elections to the countryside and, even there, to the most local level. Nor, having been legally sanctioned 14 years ago, do they constitute a recent development. More important, China's leaders don't see the elections the way their American interpreters do. In proposing them, says Jude Howell, co-author of In Search of Civil Society: Market Reform and Social Change in Contemporary China, party elites argued that elected village leaders "would find it easier to implement central government policy and in particular persuade villagers to deliver grain and taxes and abide by family planning policy. Village self-governance would thus foster social stability and order and facilitate the implementation of national policy. By recruiting newly elected popular and entrepreneurial village leaders, the Party could strengthen its roots at the grassroots level and bolster its legitimacy in the eyes of rural residents." Which is exactly what it has done. In races for village committee chairs, the Ministry of Civil Affairs allows only two candidates to stand for office, and until recently many townships nominated only one. Local party secretaries and officials often push their favored choice, and most committee members are also members of the Communist Party, to which they remain accountable. Should a nonparty member be elected, he must accept the guidance of the Communist Party, which, in any case, immediately sets about recruiting him. As for those rare committee members who challenge local party officials, their success may be gleaned from the fate of elected committee members from a village in Shandong province who in 1999 accused a local party secretary of corruption. All were promptly arrested.

Still, the very fact that China's leaders feel compelled to bolster their legitimacy in the countryside is telling. Last month Beijing took the unusual step of releasing a report, "Studies of Contradictions Within the People Under New Conditions;' which detailed a catalogue of "collective protests and group incidents." What the report makes clear is that Beijing's leaders think China's growing pool of overtaxed farmers and unemployed workers, more than its newly moneyed elites, could become a threat to the regime. Fortunately for the authorities, with no political opposition to channel labor unrest into a coherent movement, protests tend to be narrow in purpose and poorly coordinated. And the wheels of repression have already begun to grind, with Beijing launching a "strike hard" campaign to quell any trouble. In any case, what these formerly state-employed workers have been demonstrating for is not less communism, but more--a return to the salad days of central planning.

WHICH BRINGS US to the final tenet of the engagement lobby: that commerce exposes China to the ideals of its trading partners, particularly those of the United States. As House Majority Leader Dick Armey has put it, "Freedom to trade is the great subversive and liberating force in human history." Or, as Clinton National Security Adviser Sandy Berger burbled in 1997, "The fellow travelers of the new global economy-computers and modems, faxes and photocopiers, increased contacts and binding contracts--carry with them the seeds of change." But the Chinese disagree. To begin with, they don't import much. And economists predict that won't change dramatically once they've joined the WTO, since China's leaders have committed themselves to the kind of export-oriented, mercantilist growth model that South Korea, Japan, and Taiwan pursued in decades past. Last year, for instance, China exported $100 billion in goods and services to the United States and only imported $16 billion worth. Hence, for every six modems it sent to America, Sandy Berger sent back only one.

To be sure, that one modem may carry with it seeds of change. Bush, for instance, says, "If the Internet were to take hold in China, freedom's genie will be out of the bottle." Alas, through links to Chinese service providers, Beijing tightly controls all access to the Web. And Western investors in China's information networks have eagerly pitched in. One Chinese Internet portal, bankrolled by Intel and Goldman Sachs, greets users with a helpful reminder to avoid "topics which damage the reputation of the state" and warns that it will be "obliged to report you to the Public Security Bureau" if you don't. But Goldman Sachs needn't worry. If anything, China's recent experience lends credence to the pessimistic theories of an earlier era, which held that nations shape the uses of technology rather than the other way around. Thus Beijing blocks access to damaging "topics' and to Western news sources like The New York Times, The Washington Post, and this magazine. It also monitors e-mail exchanges and has arrested Internet users who have tried to elude state restrictions. And, in ways that would make Joseph Goebbels blush, the government uses websites--and, of course, television, newspapers, and radio--to dominate the circuits with its own propaganda. "Much as many people might like to think the Internet is part of a bottom-up explosion of individualism in China, it is not," writes Peter Lovelock, a Hong Kong-based academic who studies the Internet's effect in the PRC. Instead, it provides "an extraordinarily beneficial tool in the administration of China: And that tool was on vivid display during the EP-3 crisis, when China blocked access to Western news sources and censored chat rooms.

American politicians describe foreign direct investment, too, as a potent agent of democratization. But, in this ease, they're not even paraphrasing political science literature they haven't read, because the literature makes no such claim. In fact, a 1983 study by the University of North Carolina's Kenneth Bollen found that levels of foreign trade concentration and penetration by multinational corporations have no significant effect on the correlation between economic development and democracy. In China's case, it's easy to understand why. Beijing requires foreign investors in many industries to cooperate in joint ventures with Chinese partners, most of whom enjoy close ties to the government. These firms remain insulated mainly in three coastal enclaves and in "special economic zones" set apart from the larger Chinese economy. Moreover, they export a majority of their goods--which is to say, they send most of their "seeds of change" abroad. At the same time, their capital largely substitutes for domestic capital (foreign-owned firms generate half of all Chinese exports), providing a much-needed blood transfusion for China's rulers, who use it to accumulate reserves of hard currency, meet social welfare obligations, and otherwise strengthen their rule. Nor is it clear that U.S. companies even want China to change. If anything, growing levels of U.S. investment have created an American interest in maintaining China's status quo. Hence, far from criticizing China's rulers, Western captains of industry routinely parade through Beijing singing the praises of the Communist regime (and often inveighing against its detractors), while they admonish America's leaders to take no action that might upset the exquisite sensibilities of China's politburo. Business first, democracy later.

BUT ULTIMATELY THE best measure of whether economic ties to the West have contributed to democratization may be gleaned from China's human rights record. Colin Powell insists, "Trade with China is not only good economic policy; it is good human rights policy." Yet, rather than improve that record, the rapid expansion of China's trade ties to the outside world over the past decade has coincided with a worsening of political repression at home. Beijing launched its latest crackdown on dissent in 1999, and it continues to this day. The government has tortured, "reeducated through labor;' and otherwise persecuted thousands of people for crimes no greater than practicing breathing exercises, peacefully championing reforms, and exercising freedom of expression, association, or worship. It has arrested ChineseAmerican scholars like Li Shaomin on trumped-up charges, closed down newspapers, and intimidated and threatened dissidents. Nor is it true that linking trade and human rights will necessarily prove counterproductive. When Congress approved trade sanctions against Beijing in the aftermath of Tiananmen, Chinas leaders responded by releasing more than 800 political prisoners, lifting martial law in Beijing, entering into talks with the United States, and even debating among themselves the proper role of human rights. As soon as American pressure eased, so did China's reciprocal gestures.

TURNING A BLIND eye to Beijing's depredations may make economic sense. But to pretend we can democratize China by means of economics is, finally, a self-serving conceit. Democracy is a political choice, an act of will. Someone, not something, must create it. Often that someone is a single leader--a Mikhail Gorbachev, a King Juan Carlos, or a Vadav Havel. But such a man won't be found in Chinas current leadership. Other times, the pressure for democracy comes from a political opposition--the African National Congress in South Africa, Solidarity in Poland, or the marchers in Tiananmen Square. But there are no more marchers in Tiananmen Square.

Pressure for democratization, however, can also come from abroad. And usually it comes from the United States or from nowhere at all. During the 1980s America applied diplomatic and economic pressure to repressive regimes from Poland to South Africa; intervened to prevent military coups in the Philippines, Peru, El Salvador, Honduras, and Bolivia; and loudly enshrined human rights and democracy in official policy. The United States played a pivotal and direct role in democratizing even countries like South Korea and Taiwan, which many China-engagers now tout as evidence that the market alone creates political freedom. Appropriately enough, the decade closed with democracy activists erecting a facsimile of the Statue of Liberty in Tiananmen Square.

The commercialist view of China, by contrast, rests on no historical foundation; it is a libertarian fantasy. "The linkage between development and rights is too loose, the threshold too high, the time frame too long, and the results too uncertain to make economic engagement a substitute for direct policy intervention," writes Columbia's Nathan. Yet make it a substitute is precisely what the United States has done. And, far from creating democracy, this subordination of political principle has created the justified impression of American hypocrisy and, worse, given U.S. policymakers an excuse to do nothing.

Maybe the claim that we can bring liberty to China by chasing its markets will prove valid in the long run. But exactly how long is the long run? A political scientist at Stanford University says it ends in 2015, when, he predicts, China will be transformed into a democracy. Others say China will democratize before that. Still others say it may take a half-century or more. The answer matters. After all, while capitalist Germany and Japan eventually became democracies, it wasn't capitalism that democratized them, and it certainly wasn't worth the wait. In Chinas case, too, no one really knows what might happen as we wait for politics to catch up with economics. With the exception, perhaps, of Li Shaomin, who tested the link between economic and political liberalization in China for himself. He's still in jail.

This article originally ran in the July 9, 2001 issue of the magazine.