Effects of the Trade War: Three Questions with Yasheng Huang

Yasheng Huang is the Epoch Foundation Professor of International Management and Faculty Director of Action Learning at the MIT Sloan School of Management. At MIT Sloan, Huang founded and directs the China Lab and India Lab. He has served as a consultant at the World Bank, Asian Development Bank, OECD and is the author of Capitalism with Chinese Characteristics

During a short visit to attend the inaugural UC San Diego Forum on US-China Relations, Professor Huang sat down with Jack Zhang for China Focus to do a short interview as part of our “Three Questions” series. 

This interview is lightly edited for length and clarity.

How has capitalism with Chinese characteristics changed from the period covered by your 2008 book to the new policies under Xi Jinping? 

First, I should note that I’m revising the book for a new edition. There have been many changes as the book came out right at the time of the Global Financial Crisis and the financial crisis obviously had a big impact on the evolution of Chinese economics since 2008. I will characterize that evolution along two lines. One is that an element of economic populism—using the role of the state to make transfers to address issues like income inequality—that is a change from the 1990s. The financial crisis accelerated this agenda, begun under Hu-Wen, and with an even bigger emphasis under Xi Jinping. The other change—this one more a trajectory change rather than a directional change—is a fairly substantial acceleration of state capitalism. State capitalism didn’t begin with the financial crisis but has found a stronger footing. 

Between 2008 and 2012, before Xi, you can say it was a state capitalism or crony capitalism, where the state was very tolerant of corruption. A revised version of that under Xi Jinping is now attacking that crony aspect of Chinese state capitalism. Along with that comes consequences. Crony capitalism, with all its problems, kind of worked in delivering investment driven growth. So, if you attack that system, you are undermining that growth, and we see a deceleration of economic growth. What is Xi Jinping going to do? I have no idea, but my bet is that it’ll be more of a resurrection of crony capitalism rather than moving away from state capitalism. I don’t see any fundamental reforms to the system. 

What are the prospects for a return to opening and reform and could the trade war be an impetus for economic changes in China? What do you make of the narrative that because of the trade war, liberal voices within China are getting more alienated? 

I think the trade war could but I don’t know if it will. There are no serious internal debates about these economic issues and the voices of reform advocates are not really there now. What’s left is Donald Trump. The trade war became an agent of change by default because so many voices of dissent were silenced within the country. 

My view of the trade war is that the Chinese are now more entrenched against Trump than before and no longer think they can negotiate with the guy. The currency devaluation is a pretty strong signal to me that they don’t think they can get a deal from Trump or are unwilling to make concessions. The bargaining power is shifting in favor of the Chinese government if you look at the indicators of recession and the political calendar in the US. This means the trade war would have failed to be an agent of change. 

The trade war indeed has alienated liberal voices within China. I think Trump’s maximum pressure tactics have been hugely counterproductive for long term reforms and changes in China. Liberals in China are losing legitimacy because of Trump, and that would be worth it if the trade war could engineer structural changes, but I am not optimistic given what I have said. The Chinese detect weakness in Trump’s position, why would they concede to him now? They are pretty strong politically and could ride out the short-term economic problems and hope for a more reasonable president next year. 

Turning to the United States, could you share your thoughts about the role of Chinese Americans, particularly, researchers and students that are now a front in this larger conflict between the US and China?  Could you comment a bit on the MIT President’s open letter on discrimination against Chinese students and scholars? 

I think we are caught in between and it’s a very unpleasant situation. It’s a serious question of what American society thinks about Chinese Americans and how they think about themselves. When the two countries were getting along, we were in the best position to benefit from that. Now that they don’t, it forces people to pick a side and that is extremely unpleasant. My own ideological leaning is towards the US side but on the other hand I want China to develop economically. I don’t want the two countries to spiral into trade wars, currency wars, or real wars, that would be horrible for everybody. And even if you do ideologically side with the US, there’s the question about whether Trump is dealing with China the right way. And I don’t think so—I think he has been a disaster. Chinese realities are complicated and you can’t just use bullying tactics without risking long-term consequences. 

Regarding the letter, a group of Chinese American professors went to see the President of MIT and we had a conversation with him about these issues. He was extraordinarily supportive and very much in agreement with our views. So, we were lucky and happy to have his support—on these issues his position really matters. As you can see once he issued his statement, a number of universities and journals also issued similar statements. I think it is worth reflecting on what is it that makes American unique and great. It is civil rights, the freedom of speech, principles of equality— these are precisely the reasons I would choose the United States if I had to pick a side in an ideological fight between the US and China. Precisely because this country believes in these values, we can’t write off a whole cohort of people because of a difficult relationship with China. 

We need to get this fundamental thing right, which is that a university represents an open research environment. Everything we do will be published eventually, if we are lucky. So, in the end, it’s all open stuff, and that fact is lost on government agencies. I feel worried about the situation, but feel enormously encouraged by the support of university presidents, not only of MIT but also Stanford, Berkeley, Yale and a whole host of university presidents who have issued statements supporting Chinese students and scholars. I think McCarthyism is always a danger but with the intellectual community standing up, hopefully the scope will be contained.

(image: melting pot)

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Jack Zhang

Jiakun Jack Zhang is Assistant Professor of Political Science at the University of Kansas (KU). He received his Ph.D. from the Department of Political Science at UC San Diego. His dissertation examines when and why economically interdependent countries use military versus economic coercion in foreign policy disputes. In 2018-2019, he was a postdoctoral research fellow in the Niehaus Center for Globalization and Governance at Princeton University. Jack holds a bachelor's degree in political science and a certificate in East Asian studies from Duke University, where he served as the Editor-in-Chief of Duke East Asia Nexus and was a co-founder of the Duke-UNC China Leadership Summit. At UC San Diego, he served as the senior advisor to the 21st Century China Center’s China Focus Blog. Prior to coming to UC San Diego, Jack worked as a China researcher for the Eurasia Group in Washington, DC. Follow him on Twitter @HanFeiTzu.

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