The US, China and Japan: Grand Strategy

By George Friedman

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When Chinese President Xi Jinping came to power in China, he was seen as a decisive leader who could dominate Chinese institutions and guide China to a position of greatness. His enormous power was solidified with the removal of presidential term limits, while the anti-corruption purges initiated at his behest have reshaped the Communist Party.

From my point of view, however, the imposition of a dictatorship in China was a sign of concern and insecurity within the Communist Party’s Central Committee. Dictators do not usually arise to preside over success. They emerge in times of trouble, taking or being given powers that allow them to impose their will to deal decisively with a country’s problems. Why would the Central Committee allow the office of the president to change so profoundly if things were going well? “If it ain’t broke, don’t fix it,” as the saying goes. China may not have been broken yet, but it was in danger of breaking, and Xi’s appointment was a sign of weakness rather than strength.

China’s Economic Problems

A range of significant, if not yet existential, problems have emerged since Xi took office. The most important are economic. Since 2008, the Chinese economy has been struggling, and Xi’s first task was to try to stabilize it. There were many dimensions to China’s economic problems, but the core was that China was heavily dependent on exports. Many exporting countries may appear for a time to be powerful, surging into the global system with products priced to sell. The problem, however, is that they are utterly dependent on their customers and competitors to survive. In 2008, the appetite of China’s customers for exports dramatically contracted, and competitors arose who could undersell the Chinese.

Xi was bought in to deal with this problem, and he developed two strategies. The first was to increase domestic consumption. Much of China, however, is too poor to substitute for American and European demand, and attempts to finance domestic consumption led to a serious financial crisis. The second strategy was to shift from low-priced goods to high-tech items. Competing with Europe, the United States, Japan, South Korea and other well-established high-tech economies proved difficult. The weakness of China’s strategy caused the country to try to appear more powerful than it was. It launched the Belt and Road Initiative, which offered money to a host of countries for various infrastructure projects in an effort to assert itself as a global power. It has become far less significant than it was. Suspicion arose of China’s intentions, further hampering attempts to compete on high-tech projects, as the Huawei affair exemplifies.

More important, Xi was responsible for managing China’s relationship with its single-largest export customer, the United States. Under past U.S. administrations, the United States demanded that China open its economy to American goods and end currency manipulation, but previous Chinese presidents have managed to deflect such demands. The fact was, China couldn’t afford to open its economy, since its domestic market couldn’t support both Chinese production and foreign competition. And the need to maintain exports at high levels meant that China had to manage its currency in some way. Meetings with the United States were held, dinners consumed, toasts made and the Americans went home empty-handed.

Xi visited U.S. President Donald Trump soon after Trump took office and seemed to have left with the impression that prior strategies to manage the United States were sufficient. His assumption was wrong. The United States imposed tariffs to compel China to change its behavior, but China was in no position to do so. Still, the tariffs hurt China far more than reciprocal Chinese tariffs hurt the U.S. China derived 4 percent of its gross domestic product from exports to the U.S., while the U.S. derived only about 0.6 percent of its GDP from exports to China. 

Xi’s Failure

The management of U.S. trade relations was Xi’s responsibility. His failure in this regard was rooted in his strategy of portraying the Chinese military as a significant threat to the United States, in order to compensate for Chinese weakness in other areas. Chinese military strength isn’t insignificant, but the Chinese vastly overstated it. They believed this would compel the U.S. to back off, but such strategies have the reverse effect on the United States. It becomes intimidated, remembering prior instances when it underestimated its opponents. The result is that the U.S. tends to overestimate its opponents and, rather than seek accommodation, moves to dramatically increase its military power over enemies that are already no match. In space, at sea and elsewhere, the U.S. military overstated the Chinese threat. China found itself in an arms race its economy could not support, struggling to launch two aircraft carriers and hype them as a change in the balance of power.

The United States responded on multiple levels. It sailed aggressively in the South China Sea to demonstrate Chinese weakness. It developed deeper cooperation with Australia and Japan and even India and Vietnam to counter Chinese influence. It engaged in intense counterintelligence operations against Chinese nationals operating in the United States and raised hurdles to Chinese tech companies selling goods worldwide.

This was undoubtedly not what Xi expected. His goal was to position China as a massive Eurasian power, and yet, he found countries like Kazakhstan rejecting Chinese investment. He lost some of the control that China had previously enjoyed and left the Chinese economy weaker than it previously had been.

Then, the Hong Kong protests erupted. Initially, the central issue was a bill that would have allowed Hong Kong residents to be extradited to the mainland. China, of course, could put down the protests by force, but it hasn’t done so because it fears what a bloodbath would do to its fraying economic relations overseas. It clearly has sufficient intelligence on the demonstrators to be able to arrest leaders and disrupt the protests. But Xi has decided to let the demonstrations burn out. This was another miscalculation. The unrest has lasted far longer than many expected, and its main focus has shifted from an extradition bill to Hong Kong autonomy in general.

Now, there are severe questions about Xi’s competence. Certainly, many of the things that are going wrong on his watch could not be controlled or start far before he took office. But he was brought in as a virtual dictator to manage the country’s problems. Now, trade relations with the U.S. are in shambles, military initiatives have generated significant counters, showcase programs like BRI have evaporated, and Hong Kong is in revolt.

It is difficult to imagine that, given his performance, Xi’s position is as secure as it appears. Xi is enormously powerful still. He controls the People’s Liberation Army and the intelligence and security services. But in the end, the source of power in China is the Central Committee of the Communist Party of China. He could pit his forces against it, but that would plunge China into chaos and leave Xi perhaps less powerful than before. I have no evidence of an anti-Xi revolt, since such evidence would not be visible. But it is inconceivable to me that within the Central Committee, which made him the most powerful leader since Deng Xiaoping, there are no factions that see Xi as a failure. China is not a democracy, but it has a power structure that created Xi. That power structure also has the ability, in my opinion, to unmake him.

For this notional faction, the goal is to reach an agreement with the U.S. on trade that is reasonably favorable to China, end the Hong Kong demonstrations, and stop following contradictory strategies like hyping up China’s military might while trying to sell high-tech equipment to countries wary of China. In other words, they want Xi to solve the country’s pressing problems and stop creating new ones through posturing and trying to make China appear to be what it isn’t: a global power.

Dictators must be focused on their country’s main issues, and from the beginning, Xi has been scattershot. In many ways, this diffusion reflects the China’s condition, with serious achievements, vast ambitions and limited resources. I do not know what Xi’s future holds, but I do wonder how it will impact China’s.