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How Trade with
China Threatens
Western Institutions
The Economic Roots
of a Political Crisis
robe rt gm e i n e r
How Trade with China Threatens Western
Institutions
 Robert Gmeiner

How Trade
with China Threatens
Western Institutions
The Economic Roots of a Political Crisis
Robert Gmeiner
Methodist University
Fayetteville, NC, USA

ISBN 978-3-030-74708-4 ISBN 978-3-030-74709-1 (eBook)

https://doi.org/10.1007/978-3-030-74709-1

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
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retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
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This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
For Carmel, who was endlessly patient and supportive through the countless
hours I spent writing this book.
 Preface

China’s perception among Western countries has changed much in recent

years. China itself, however, has been remarkably consistent in its goals
and aims. Views in the West have begun to change as China has become
more assertive. China’s assertiveness is more of a reflection of its growth
and newfound stature than any change of policy or attitudes of its leaders.
It was once commonly believed that trade between China and the West
would help China liberalize. Few major Western leaders seem to believe
that anymore, although there is no clear consensus on what should be
done. This book makes the case that, instead of causing China to adopt
the West’s model, trade has caused Chinese influence to grow in the West
to the detriment of deeply held Western ideals of free markets, freedom of
expression, property rights, and democratic political institutions. In addi-
tion to chronicling the rise of Chinese influence in the West, this book
explains the reasons why it has happened, which are inextricably linked to
the welfare gains from trade.

Fayetteville, USA Robert Gmeiner

vii
 Contents

1 Introduction 1
References 6
2 China’s Economy and Success Without Freedom 7
From Starvation to Superpower: Evolution of China’s
Overall Economic Approach 7
Decentralization of State Economic Control 8
Economic Incentives and Outcomes under Decentralized
Planning 9
The Sino-Soviet Split: A Harbinger of China’s Intentions 10
Illusory Reforms Under Deng Xiaoping 11
Socialism Without Soviet Characteristics 12
Rapprochement with the United States 13
Freedom? Just Economic Incentives and Political
Repression 14
Incomplete Nature of Reforms 16
The Tiananmen Square Massacre and a New Era
of Repression 19
Naivete of the West—Trade and Political Freedom 20
The Current Economic Landscape of China 22
State Planning—Still an Integral Part of China’s
Economy 25
What Do “Property Rights” Entail in China? 26
Foreign Direct Investment—One Part of the Growth Strategy 28

ix
x CONTENTS

Currency and Banking 31

Debt and Asset Bubbles 35
Intellectual Property, Innovation, and Technological
Advance 36
Mercantilism with Chinese Characteristics 36
The Chinese Approach to Intellectual Property 38
A Traditionalist and Socialist Aversion to IPRs 38
IPR Enforcement—A Persistent Challenge 39
Development of IP Law in China 41
The Belt and Road 44
What Is Not to Like About China’s Economic Model? 45
References 48
3 The American Economy and Institutions with Sino-US
Trade 55
Intellectual Property Rights and Other Economic Institutions 55
Comparative Advantage Differences 59
America—Still a Manufacturing Powerhouse 61
The United States Is Still a Leading Manufacturer 61
Output and Employment—A Major Divergence 62
American Monetary Policy: Creating and Exacerbating
Problems 63
Asset Bubbles and Supply-Side Deflationary Pressures 64
Monetary Expansion—A “Cure” That Becomes a Problem 66
Currency Devaluation—Not Just a Chinese Issue 67
China’s Currency Manipulation—A Response
to America’s 67
Direct Domestic Harm of Easy Money 68
Macroeconomic Economic Accounts 68
Whence the Capital Surplus? Imprudent Domestic Policies
or Good Investment Climate 69
A Net Debtor that Earns Net Income 71
Chinese Investment in Foreign Assets 72
The Avoidable Current Account Deficit—A Symptom,
Not a Problem 73
Bilateral Balance with China 73
Trade Balance in Intellectual Property—A Declining
Surplus 74
American Vulnerabilities 75
 CONTENTS xi

Institutions in Models of International Trade 76

Economic Surplus from Many Different Institutions 78
Spillovers of the Economic Value of Institutions 79
Excludability of Institutional Value 80
Institutional Interaction Between the United States
and China 81
Trade Policy and Macroeconomic Accounts 82
The Structure of American Trade Policymaking 84
The United States Trade Representative 84
Relationship Between the USTR and Industry 85
Special 301 Report 88
Committee on Foreign Investment in the United States 90
Other Policymaking Entities 91
The Structure of Chinese Trade Policymaking 92
Comparison of US and Chinese Policymaking Structures 93
References 94
4 Specific Problems in the US-China Trade Relationship 99
Intellectual Property 99
Intellectual Property Theft—Quantifying the Problem 100
The Economics of Intellectual Property: Reasons
for a Dispute 103
Intellectual Property and Trade 105
Specifics of IP Misappropriation—Theft, Infringement,
and Extortion 105
Disguising Extortion: Joint Venture Requirements 106
Economic Espionage 108
Academia—The Source of Unsuspecting Threats 110
Talent Acquisition Programs 111
Civil-Military Integration 115
Global Advance of China’s Domestic Repression 123
Noncommercial Motives of Theft 123
Exporting Surveillance and Repression 129
Conclusion 131
References 132
5 Institutional Free Riding 141
The Source of Advantages for Countries and Firms 141
Institutions: The Root of Economic Advantage 143
xii CONTENTS

“Unfair Competition” or Natural Comparative

Advantage? 144
Institutional Differences and Nonexcludability 146
Institutional Free Riding 147
Prior Research on Trade, Institutions, and Free Riding 148
Overview of Institutional Free Riding 150
Free Riding: What It Is and What It Is Not 151
History and Examples 152
Harmless and Beneficial Free Riding 154
Multinationals: They Belong to No Single Country 154
Opportunistic Institutions 155
Feasibility of and Susceptibility to Institutional Free Riding 156
Domestic Know-How 157
Ability to Entice Acquiescence 157
Why Do Firms Acquiesce to Foreign Free Riding? 158
The Prisoner’s Dilemma 159
Market Size and Desirability for Investment 160
The Role of Trade Policy 161
Institutional Free Riding and Innovation 162
Innovation in the United States and the West 165
Economic Incentives for Continued Innovation 166
Chinese Acquisition of Innovative Firms 167
Innovation in China 169
Institutional Free Riding and Production 172
Market Structure 172
Effects on Output 173
Institutional Degeneration 174
References 175
6 Institutional Change in the West 181
Institutional Change and Pressure from China 181
Espionage Against Government and Business 183
State and Local Governments 185
The Chinese Diaspora 189
Repressed Minorities 189
Extraordinary Renditions 191
Chinese Global Soft Power 193
Political Influence in the West 194
Military Power and Territorial Expansion 195
 CONTENTS xiii

Potential Claims to the West 197

China’s Economic Threats Are not Idle 199
Belt and Road Colonialism 200
Chinese Censorship in Western Countries 201
Censorship of Foreign Corporations 202
Chinese Students in the West 204
Censorship of Academia 206
Censorship of Media 211
Censorship of Western Governments 212
Censorship of Religion 213
Pollution and the Censorship of Information 216
References 218
7 Confronting the Threat 231
Domestic Policy Options 233
A Coalition of Diverse Interests 234
Monetary Policy 235
Ease the Regulatory Burden 236
Restrict Trade with China 239
Security Reasons 239
Other Export Controls 241
Strategic Advantage 243
Constrain the Subnational Governments 243
Limits on Foreign Investment 244
Boycotts and Embargoes 246
Academia 247
Internet 249
Reform American Patent Law 250
Protect Western Institutions at Home 252
Conspiracy Against Rights 253
Strengthen Poorer Communities 253
Multilateral Approaches 254
Hong Kong: A Lost Opportunity 255
International Treaties and Organizations 261
Pivot to the Asia-Pacific Region 262
A NATO for the Asia-Pacific? 263
xiv CONTENTS

Military Superiority and Alliances 264

Trade Liberalization and the Trans-Pacific Partnership 266
Alternatives to the Belt and Road Initiative 269
Caution and Unintended Consequences 270
References 270
8 Conclusion 277
The Choice Confronting the West 277
Why Did This Choice Come About? 278
The Urgency of Decision 279
Consequences 280

Index 283
 Abbreviations

AIA Leahy-Smith America Invents Act of 2011

AmCham American Chamber of Commerce (in a Foreign
Country)
ASD Australian Signals Directorate
ASEAN Association of Southeast Asian Nations
ASPI Australian Strategic Policy Institute
BRI Belt and Road Initiative (China)
CAFC Court of Appeals of the Federal Circuit (United States)
CCP Chinese Communist Party
CFIUS Committee on Foreign Investment in the United States
CMC Central Military Commission (China)
CMI Civil-Military Integration (China)
CPI Consumer Price Index
CPPCC Chinese People’s Political Consultative Conference
CSAIL Computer Science and Artificial Intelligence Laboratory
(Massachusetts Institute of Technology)
CSSA Chinese Students and Scholars Association
DoD U.S. Department of Defense
DOJ U.S. Department of Justice
EFW Economic Freedom of the World Index
EU European Union
FBI U.S. Federal Bureau of Investigation
FCC U.S. Federal Communications Commission
FDI Foreign Direct Investment
FROCA Federation of Returned Overseas Chinese Associations
(China)

xv
xvi ABBREVIATIONS

GDP Gross Domestic Product

IJOP Integrated Joint Operations Platform (China)
IP Intellectual Property
IPR Intellectual Property Rights
IPRWC IPR Working Conference (China)
MIT Massachusetts Institute of Technology
MITI Ministry of International Trade and Industry (Japan)
MOFCOM Ministry of Commerce (China)
MOFTEC Ministry of Foreign Trade and Economic Cooperation
(China)
MOU Memorandum of Understanding
NATO North Atlantic Treaty Organization
NBA National Basketball Association
NDRC National Development and Reform Commission
(China)
NIPA National Intellectual Property Administration (China)
OCAO Overseas Chinese Affairs Office (China)
OECD Organization for Economic Cooperation and Develop-
ment
PBOC People’s Bank of China (China)
PLA People’s Liberation Army (China)
PTAB Patent Trial and Appeal Board (United States)
Quad Quadrilateral Security Dialogue
R&D Research and Development
SAFE State Administration for Foreign Exchange (China)
SAR Special Administrative Region (SAR)
SASAC State-Owned Assets Supervision and Administration
Committee (China)
SIPO State Intellectual Property Office (China)
SOE State-Owned Enterprise
SPC State Planning Commission (China)
THAAD Terminal High Altitude Area Defense (United States)
TPP Trans-Pacific Partnership
TRIPS Agreement on Trade-Related Aspects of Intellectual
Property
UFWD/United Front United Front Work Department (China)
UNCLOS United Nations Convention on the Law of the Sea
USPTO United States Patent and Trademark Office
USTR Office of the United States Trade Representative (U.S.)
WIPO World Intellectual Property Organization
WIV Wuhan Institute of Virology
WTO World Trade Organization
 CHAPTER 1

Introduction

Now that China is a major trading nation with the world’s second-
largest economy, most if not all of the world must confront the reality
that China’s actions affect the global economy and that of many indi-
vidual countries. This necessitates economic and political decisions by
firms and governments. These decisions are made with a view toward
economic gain, political expediency, and moral philosophy. This book
highlights the ramifications of trade between China and the West that go
far beyond economic welfare gains and specifically focuses on institutions.
Succinctly, institutions are arrangements and structures that undergird
culture and society. In the West, institutions include the free market, rule
of law, freedom of expression, property rights, constitutionally limited
government, and many others.
When rapprochement began between China and the West, it was
thought that China could become a valuable counterweight to the Soviet
Union that might eventually become a free and prosperous country.
Since that time, the Soviet Union has collapsed under the weight of
economic stagnation and China has become increasingly powerful on the
global stage and repressive at home. As economic links grew between
China and the United States and other Western countries, many hoped
that China would embrace the successful Western order and liberalize
its economy and political system. Shortly after the collapse of the Soviet
Union, democratic and capitalist countries led by the United States almost

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2021
R. Gmeiner, How Trade with China Threatens Western Institutions,
https://doi.org/10.1007/978-3-030-74709-1_1
2 R. GMEINER

completely dominated the world economy and its geopolitical order. It

seemed reasonable that trade and openness would allow other countries
to taste the prosperity and success of the West and that China would
inevitably realize the superiority of its system.
The tacit assumption in this line of thinking was that Western institu-
tions would spread along with trade and openness. It was complemented
by the notion that economic and political freedom naturally go together
with economic freedom being a starting point for eventual political liber-
alization. This view was advanced by Friedman (1962) and shared by
many prominent Western politicians after the end of the Cold War, espe-
cially concerning China. Friedman’s work was authored in the same year
that James Buchanan and Gordon Tullock published The Calculus of
Consent (1962), which became a seminal early work in public choice
theory. Buchanan and Tullock correctly pointed out that politicians act
rationally in response to incentives just like market participants, and that
special interests can exert outsized influence opposing the public interest.
These interests can be foreign or domestic, and international trade always
introduces foreign pressures into the political system. Before Friedman,
Schumpeter (1942) argued that capitalism held the seeds of its own
destruction because it would nourish an intellectual class that opposed
it. This may be the case, but the view taken in this book is that global
capitalism may carry the seeds of the destruction or erosion of free and
democratic institutions by introducing illiberal foreign influence.
There are elements of truth in what Friedman wrote, but China’s expe-
rience raises questions. It is tenuous to call China a counterexample to
Friedman’s hypothesis because China lacks both economic and political
freedom, although it has achieved economic growth. Rapid economic
growth without economic freedom counters much modern economic
thought. The reasons why it has worked are outlined in Chapter 2 of
this book. The remainder of the book focuses on the dangers that the
success of China’s approach poses for the West. Capitalism in the West
has not collapsed because of an intellectual class as Schumpeter predicted
(although many of them do oppose capitalism), but it has degenerated
because of populism and corporate rent seeking. Buchanan and Tullock
offered less in the way of predictions than observations and a theory
to explain their observations, leaving little to challenge and much room
for further thought. Their insights explain well why China’s leaders have
pursued the policies they have, why those policies have produced substan-
tial economic growth, and why Western countries have supported them
 1 INTRODUCTION 3

through trade. Despite rhetorical Western opposition to China’s repres-

sive regime, trade with the West has facilitated much of the growth that
has legitimized China’s government.
China has shown that economic growth and economic freedom need
not go together, and that economic growth need not lead to political
liberalization. Trade with China has not brought freedom to China, but it
has brought illiberal influences to the West. This book looks at the reasons
for this and develops a contrary view, namely that trade with China can
lead to institutional degeneration and loss of freedom in the West. There
is no imminent risk that the United States and other Western countries
will fall prey to Chinese oppression, but trade with China can facilitate
China’s own repression, strengthen its hand globally, and lead to slow
erosion of freedom in the West.
When China began opening up to the world, it was still an industrial
backwater with little influence on the global stage, so there was no a
priori reason to think that its own institutional structure would eventu-
ally challenge the West’s. International trade has contributed to economic
development in China and material prosperity for both China and its
trading partners, but the idea that China will liberalize politically seems
far-fetched. Instead, its influence seems to be spreading in its near abroad
and on the global stage more generally. The story of China’s “opening
up” to the world is a continuing narrative of using any and all means,
ideological or not, to achieve economic growth, establish global power,
and maintain Communist Party dominance. As China’s global influence
has grown at the expense of the West’s, many countries have hesitated to
take a strong line on China for fear of losing gains from trade. Insofar
as China poses a threat to the liberal order among developed, wealthy
countries, continuing this trade only let the threat grow.
Economic literature on international trade recognizes the benefits of
trade so plainly that support of free trade is one of the issues on which
very diverse economists are most united. The mutual gains from trade
between China and the West are equally plain—Westerners (and people
all over the world) can now buy cheaper products from China, living stan-
dards in China have risen dramatically, and there is now an export market
in China for many Western products. In this context, it is worth asking
why China has not embraced a liberal democratic system like those of
the West, which are more appealing to many people than oppression. To
go further, one could question whether this liberal system is the key to
Western success and prosperity, which it may not be. These questions are
4 R. GMEINER

very reasonable given China’s continued growth and the fact that its insti-
tutions and global worldview now challenge the once-dominant liberal
Western hegemony.
Institutions undoubtedly determine a country’s trading position
because things such as the rule of law, sound monetary policy, property
rights, and ease of starting a business all affect incentives for economic
activity. Countries with these good institutional characteristics can have a
comparative advantage in producing goods and services that rely on them
(Nunn and Trefler 2014). It was once easy to think that institutional
structures common in the West were the basis for economic prosperity.
They undoubtedly facilitate the West’s prosperity, but China has shown
that although they may be a sufficient condition, they are not a neces-
sary condition. China’s novel contribution was to plainly demonstrate
that incentives for economic production and activity are what matter for
growth and development, and that these incentives can exist without the
market-oriented institutions of the West. China has created incentives for
economic activity without using Western institutional structures.
Scholarship on international trade has not looked extensively at
economic institutions and the ways in which international trade in
goods and services influences the political pressures that shape institu-
tions, although there is some mention. Likewise, economic research on
economic and political institutions has paid little, but not zero, atten-
tion to the role of international trade. The focus on static, or even
dynamic, welfare gains without looking at economic institutions and the
mutual effects of trade and institutions on each other obscures the insti-
tutional harm that can result from trading with countries that lack good
institutions. Institutional quality is not always reflected in the quantified
welfare gains from trade. This book explains why trade with China is
harmful to Western institutions and why it is difficult or impossible for the
West to have unfettered trade with China without suffering institutional
degeneration.
Economic gains from trade always exist; that is a point that has been
repeatedly demonstrated both theoretically and empirically. This book
makes no attempt to dispute that point, but instead looks at the harm that
this trade can inflict on free and inclusive institutions. This harm results
in large measure because of the economic gains from trade, not in spite of
them. Even if Western countries can avoid this harm, continued Chinese
economic growth that is facilitated by trade with the West leads to a
 1 INTRODUCTION 5

growing Chinese sphere of influence, bringing others within its repressive

reach, as discussed in Chapters 4 and 6.
China is a unique country because it has economic characteristics
(outlined in Chapter 2) that make it more of a threat to Western insti-
tutions than other repressive countries. Chapters 2 and 3 are a prelude
to this book’s theoretical arguments and are vital for understanding the
danger to American and Western institutions that results from trade with
China. These two chapters lay out the institutional characteristics of the
China and the United States, respectively. China’s characteristics could
make it a strong force for liberty and pluralism if its government had those
priorities. China’s economic characteristics are what causes its influence
to spread, and this is only problematic because of the specific institu-
tions its leaders have embraced. There is no reason why trade with China
must be detrimental; it is only so because its institutional and economic
characteristics combine in a way that threatens Western innovation and
pluralistic values. In reading Chapters 2 and 3, it is essential to remember
that China as a country is distinct from its government. China’s govern-
ment is controlled by the Chinese Communist Party (CCP) and has an
agenda that is antithetical to Western values. All of the harmful things
that its government does are by choice; China’s people have a tremendous
potential for good just like the people of any other country. Nothing in
this book should be taken as a disparagement of the Chinese people or
their culture. As is common practice, this book often uses “China” as a
metonym for its government, but this is always clear from the context.
Chapter 4 follows with a discussion of specific problems in the US-
China trading relationship, showing the specific harm that trade with
China causes. In many cases, this harm differs from what is heard in Amer-
ican political rhetoric; it involves a loss of both freedom and innovative
advantage in the United States and other Western countries and growing
dominance of China in its near abroad and elsewhere.
This discussion is followed by Chapter 5, which presents a theory of
“international free riding on institutions,” or “institutional free riding.”
This theory stands apart from the discussion of the institutional char-
acteristics of the United States and China, but it is an essential part of
the book. This chapter draws on the discussion of the preceding chapters
to present a mechanism by which trade with China causes institutional
degeneration in the West. This mechanism relies on economic ideas of
rivalry and excludability from public goods theory to show why an open
trading regime allows other countries, especially China, to “free ride” on
6 R. GMEINER

their economic surplus. This free riding is distinct from trade in goods and
services that is facilitated by comparative advantage that stems from inclu-
sive institutions. The institutions that make the United States and other
Western countries innovative and successful are the same institutions that
make international trade easy. This trade is accompanied by free riding
which leads to the degeneration of economic and political institutions.
Chapter 6 validates the theory from Chapter 5 that describes instances of
this institutional degeneration. Potential policy responses are outlined in
Chapter 7.

References
Buchanan, James M., and Gordon Tullock. 1962. The Calculus of Consent:
Logical Foundations of Constitutional Democracy. Ann Arbor, MI: University
of Michigan Press.
Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of
Chicago Press.
Nunn, Nathan, and Daniel Treffler. 2014. Domestic Institutions as a Source of
Comparative Advantage. Handbook of International Economics. 4: 263–315.
Schumpeter, Joseph A. 1942. Capitalism, Socialism, and Democracy. New York:
Harper and Brothers.
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