China and the Fairy Tale of Change Through Trade

What if globalisation not only brought growth and prosperity, but also made international relations more peaceful? What if economic interdependence promoted not just corporate profits, but also democracy, freedom and the rule of law? What if mutual dependencies allowed national interests to merge into common goals?

Does this all sound too good to be true? Well, that is because it is. Nevertheless, Western politics has clung to the fairy tale of ‘change through trade’ for far too long, and the case study of China in particular shows the consequences.

Trade Boosts Peace?

The hope that economic ties will make the world a more peaceful place is not a new one. However, this argument failed as early as the First World War, when European industrial and trading powers took up arms against each other despite the unprecedented globalisation of that time. After the Second World War, economic instruments naturally occupied pride of place in the global toolbox of the US. However, isolation and containment would bring the Soviet Union to its knees, not trade incentives.

Because the ability to innovate and the strength of the market economy made such a decisive contribution to the triumph of the democratic West, at the end of the Cold War the idea that the free market was the door-opener to political freedom gained widespread currency. And, with the new surge of globalisation after the disintegration of the Eastern Bloc, the West dreamed of the ‘end of history’ and the end of geopolitics at the same time.

Transformative Economics

Trust in the transformative power of economic forces was fuelled by various factors. One view was that global trade is an engine of prosperity and that nobody would be jeopardising shared profits. In a globalised world, the argument went, states should work closer and closer together, if only out of self-interest. And international institutions offer the stable framework for this to happen.

Another argument reached the same conclusion by emphasising the connection between economic and political liberalism. Simply put: where economic freedom takes root, political freedom blossoms. Even dictatorships come under pressure to adapt and move away from arbitrary policies, if only because of the rules of the world economy, since they too must protect intellectual property and respect property rights. And meanwhile, entrepreneurship and prosperity promote the growth of a confident middle class.

In Germany in particular, trust in the political benefits of trade relations has a long tradition and is not just a legacy of social-liberal Ostpolitik, which relied on ‘change through rapprochement’ with former East Germany. The economic and trading power of Germany has also dictated the country’s natural predilection for economic instruments in foreign policy – even more so when they come across as friendly incentives, rather than the imposition of harsh and imperative demands.

The same applies to the EU, which, with the attractiveness of its market, has set out to reshape its political neighbourhood. And so it was that the promise of economic participation (flanked by political dialogue and institutional integration) came to shape the Western approach to the world, and appeared to offer sure-fire success even in Washington after the Cold War, under the all-encompassing catchphrase of ‘engagement’.

Western Dreams

Yet Western policy towards China serves as a key illustration of the fairy-tale nature of this concept of change through trade. China opened up in the late 1970s. Political liberalisation was not a US precondition for cooperation at the time; what counted was that the link with China promised the US a strategic advantage over Moscow.

But the idea that economic forces would spark reforms soon became a leitmotif in the US approach. After the crackdown on the Chinese democratic movement in 1989, human rights activists and the US Congress demanded harsh sanctions. US President George H W Bush, on the other hand, argued that openness and trade would promote peaceful change and the transformation of China’s system.

During the 1992 election campaign, Bill Clinton accused Bush of ‘coddling tyrants’ and promised that, if elected, he would link trade policy to improvements in China’s human rights record. Yet it wasn't long before Clinton gave in and presented trade as the real silver bullet for political change.

This was also the line of the Europeans. Business representatives often like to sell the promotion of their commercial interests as a driver of reform and as a benefit to society, so it is tempting to dismiss their promotion of ‘engagement’ with China as just a fig leaf to justify the expansion of economic relations with the Communist Party dictatorship.

But such a view underestimates the confidence that Western politicians genuinely felt about the idea that freedom and democracy were on an inevitable upward march, and that dictatorships were obsolete and heading into oblivion.

It is worth recalling that even the Chinese leadership feared such an outcome. Nevertheless, Chinese leaders saw no alternative to further economic opening and globalisation in cooperation with the US and the West in general, in their quest for the modernisation of the country. China integrated itself into the international order dominated by the West, took part in dialogues on human rights and the rule of law, and communicated a zeal for reform to the outside world. At home, however, the leadership did everything in its power to nip any political liberalisation in the bud.

An End to Illusions

The end of these illusions came with the tightening of the surveillance state, the mobilisation of nationalism as a driver of legitimacy for the government, the nurturing of anti-Americanism, the co-opting of new elites by the Party, the digitisation of its dictatorship and the expansion of its propaganda apparatus.

However, the regime's greatest pillar was its incredible economic growth. To put it bluntly, the hunger for consumption and the economic interests of the West proved to be the best allies of the Communist Party. Today, the People's Republic is the second largest economy in the world. And while it is highly networked economically, its internal repression and external self-confidence are constantly reaching new levels.

The conclusion is obvious. It was a mistake to believe that the globalised world would be a more harmonious one. For globalisation does not resolve international conflicts of interest. On the contrary: ‘turbo-charged’ globalisation was only possible because there was no geopolitical fault line in the 1990s and the ‘noughties’; when fault lines reappeared, globalisation went into retreat.

Nor, as a rule, does free trade promote democracy. Increases in prosperity can stabilise dictatorships, while the frustration of those losing out from globalisation patterns creates its own explosive backlashes which can endanger democracies.

The same applies to the idea of exercising a benevolent influence on other countries through trade. The claim that economic interdependence reduces differences in political interests and systems, strengthens willingness to compromise internationally or turns hostile states into benevolent partners is a proposition which still needs to be tested. For it is just as plausible that today's shared economic gains could still produce tomorrow's strategic rivals.

Failed Engagement

A core problem with the engagement policy has always been the lack of achievable goals and commitments. If one limits oneself merely to concepts such as ‘maintaining the dialogue’ or ‘not letting the thread of the conversation be torn asunder’, hopes are often trumped by realities.

The pleasant but misleading notion of pursuing a long-term plan can lead to indolence and the selling-out of one's own interests. It has long been clear that the People's Republic is not developing into a market economy, nor is it opening up politically; instead it wants to make the world safe for its own party dictatorship. Even so, until recently, Beijing hardly needed to fear any consequences of its actions, largely because Western leaders still entertained the idea that they were doing something.

Meanwhile, another form of change through trade has long since become a reality: China, with its economic power, is demonstrating an ability to undermine democracies. It demands political compliance; lures countries with loans, investments or infrastructure projects; and punishes trading partners and penalises European parliamentarians and research institutions if they dare criticise Beijing’s policies.

It is clear that a new China policy is needed. But the West's timidity and disagreement to date over defending democratic values and interests is just as much a kowtow to Beijing as the weaving and ducking practiced by Western commercial organisations that do not want to know about human rights violations in places such as Xinjiang.

Beijing is aiming for politically neutral economic cooperation that benefits everyone, without interfering in other countries’ internal affairs. It is to be hoped that the West does not succumb to this illusion. The systemic confrontation with a state capitalist single-party dictatorship cannot be won in this way. And the fairy tale of change through trade really does need to come to an end.

This article is a translated reprint of the author's piece 'Das Märchen vom Wandel durch Handel', first published in Switzerland’s Neue Zürcher Zeitung (NZZ) on 15 June 2021. Translation by RUSI.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

Have an idea for a Commentary you’d like to write for us? Send a short pitch to commentaries@rusi.org and we’ll get back to you if it fits into our research interests. Full guidelines for contributors can be found here.