U.S. President Donald Trump with China’s President Xi Jinping during a bilateral meeting. (Photograph: AP/PTI)

Trump’s China Trade War Is A Battle For Soros’ Open Society

BloombergQuintOpinion

Regardless of whether, how, and when the United States and China resolve their commercial differences, the U.S.-China trade war is best understood as a battle in a broad, deep conflict – an Open Society War. None other than the thoughtful investor, George Soros, and his intellectual mentor, the renowned philosopher, Karl Popper, suggest this characterisation. Popper wrote The Open Society and Its Enemies in 1945, while at the University of Canterbury, New Zealand, and joined the London School of Economics, where Soros was his student. At the January 2019 World Economic Forum in Davos, Switzerland, it was Soros who delivered the most important speech. Applying Popper’s concept of an ‘open society’, Soros castigated the closed nature of Chinese governance, singling out President Xi Jinping and the abuse of large, data-rich information technology to spin a “web of totalitarian control the likes of which not even George Orwell could have imagined.”

Trump’s China Trade War Is A Battle For Soros’ Open Society

To be sure, there have been at least two other recent characterisations of the U.S.-China trade war: ‘Cold War’ and ‘Thucydides Trap’. Both are flawed. Throughout the Soviet-American Cold War, the two superpowers had very little trade and investment relations, and there was no nexus of supply chains dependent on them. Their fighting was ‘hot’, through proxies across Third World countries.

Today’s American and Chinese economies are intertwined.

Indeed, theirs is the most important bilateral economic relationship in the world on which many other countries depend. And, while the two powers flex their military muscles across the Nine Dash Line and the Formosa Straits, they have, thus far, avoided widespread agency-based conflicts.

Calling the trade war a ‘Thucydides Trap’ mistakenly casts the U.S. as in decline. America’s global economic and military reach remain unparalleled. Its conscious, bipartisan link of trade and national security policies shows it understands the sources of its power. America post-9/11 is not at all like Britain post-Second World War, nor is America ‘fearful’ of a rising China in the sense that democratic Ancient Athens was of oligarchic Sparta in the Peloponnesian War of the 5th Century B.C.

For all its self-inflicted wounds and undignified political leaders, America remains the beacon of hope because of its long-term commitment to freedom – to an open society. How many millennials would migrate to China over America if offered a choice free of job, family, or language constraints?

The Soros-Popper formulation is that underlying the trade fight is a conflict over openness in all aspects of human endeavor. To see why that’s correct, that what’s happening is an ‘Open Society War’, consider two questions:

1. In practice, do the four specific areas of dispute in America’s Section 301 case suggest the Chinese economy is ‘open’?
2. In theory, does governance in China bear the three hallmarks of an ‘open’ society?

The case for a negative answer to both questions is strong.

Donald Trump  and Xi Jinping  outside the Great Hall of the People in Beijing, China. (Photographer: Qilai Shen/Bloomberg)
Donald Trump and Xi Jinping outside the Great Hall of the People in Beijing, China. (Photographer: Qilai Shen/Bloomberg)

Also read: U.S.-China Trade War Timeline: What's Happened and What's Next

Is The Chinese Economy ‘Open’?

As to the first question, the core controversies raised by ‘Made in China 2025’ pertain to market access, subsidies, state-owned enterprises, and intellectual property rights.

Market access is ipso facto about openness. Explicit industrial policy-based market share targets impede, even annul, market-based outcomes. China’s pledge to boost purchases of soybeans only reinforce the reality of state control: state-owned enterprises are the buyers, the soybeans are for state reserves, and thus these purchases are immune from the 25 percent counter-retaliatory tariff that China imposes in the trade war. The Chinese pledge to close its trade surplus with America by 2024 neglects the truth that differential savings and investment rates cause bilateral trade imbalances.

The pledge also neglects the fact that Chinese tariff and non-tariff barriers, including joint venture expectations, and the government’s grip on the yuan, have embedded in the psyche of exporters around the world the sense that the Chinese market is difficult to crack open.

Subsidies are about whether central or sub-central government support to an enterprise or industry is lawful under World Trade Organization agreements. They also are about transparency. Finding out exactly what officials in Beijing and provincial capitals are, or are not, giving to Chinese firms mystifies competitors seeking a level playing field against those firms in the Chinese and other markets. That’s why the USTR repeatedly and pointedly bemoans the tardy, incomplete nature of Chinese notifications to the WTO.

State-owned enterprises raise the problem of whether they operate on commercial terms when they compete with private companies. They also require definition: what criteria identify whether a particular entity is state-owned or otherwise acts as a governmental body? Sunshine illuminates both issues.

  • Opening the books and records of SOEs would show whether they behave in response to arm’s length supply and demand pricing.
  • Seeing their ownership and control structure, and their authority and influence patterns show whether they are ‘public’ or ‘private’.
But, it’s overcast in China, as the uproar over Huawei’s relationship to the Chinese Communist Party suggests.
People hold signs and Chinese flags in support Meng Wanzhou, chief financial officer of Huawei Technologies, outside of a bail hearing at the Supreme Court in Vancouver, Canada, on Dec. 11, 2018. (Photographer: James MacDonald/Bloomberg)
People hold signs and Chinese flags in support Meng Wanzhou, chief financial officer of Huawei Technologies, outside of a bail hearing at the Supreme Court in Vancouver, Canada, on Dec. 11, 2018. (Photographer: James MacDonald/Bloomberg)

Respecting intellectual property rights is about openness, too. An IPR is granted only after competition among entrepreneurial inventors. The IPR is a reward for the winner and an incentive for the next round of competitors. Forcible technology transfers, whether through JV contracts or state-sponsored cyber-attacks, disrupts this process and its outcomes. IP misappropriation awards monopoly patent, trademark, and copyright privileges not on the basis of merit, but rather insider dealing, and incentivises unscrupulous, rent-seeking behavior under the guise of industrial policy. Here, again, Huawei is a case in point: is its technology a result and/or enabler of espionage?

Also read: Trump Wants to Meet With Xi ‘Very Soon’ Over Trade War, Adviser Says

Is Chinese Society ‘Open’?

To address the second question, recall what Popper taught Soros and the world in The Open Society and Its Enemies and apply that teaching to China. Horrified by events in the 1930s, Popper was rare among scholars to critique and condemn both fascism and communism, and traced the origins of both to Plato, Hegel, and Marx.

First, it is a democracy. Democracy need not take a particular form, but the irreducible requirement is the government can be removed without bloodshed, at least at periodic intervals. “All that counts is whether the government can be removed without bloodshed,” Popper says. He never advocated violence, except as a last resort in two limited cases: against a tyranny that made non-violent reform impossible, but then only to establish democracy; or to save democracy from attack by an existential threat, as happened across Europe in the 1930s.

The CCP shows no sign of openness to multi-party elections or other peaceful forms of transitions of power, as occurs in Taiwan.
Pro-China protesters hold banners during a demonstration outside the Foreign Correspondents’ Club in Hong Kong,  on Aug. 14, 2018. (Photographer: Billy H.C. Kwok/Bloomberg)
Pro-China protesters hold banners during a demonstration outside the Foreign Correspondents’ Club in Hong Kong, on Aug. 14, 2018. (Photographer: Billy H.C. Kwok/Bloomberg)

To the contrary, changes to China’s Constitution instilled in October 2017 at the 19th National Congress of the Chinese Communist Party, under the rubric of ‘Xi Jinping Thought on Socialism with Chinese Characteristics in a New Era’, cement CCP control over all aspects of life. Five months after conferring the honor on Xi of mention in the Constitution, an honor only Mao Zedong and Deng Xiaoping have had, the National People’s Congress abolished presidential term limits. Steve Tsang, Director of the China Institute at the University of London School of Oriental and African Studies explains: “Xi sees no place for political experimentation or liberal values in China, and regards democratisation, civil society, and universal human rights as anathema.”

Second, “critical rationalism” prevails in an open society. Popper means criticism is tolerated, and errors are corrected. “[O]ne of the best senses of ‘reason’ and ‘reasonableness,’” he declares, is “openness to criticism.” The Chinese Communist Party rightly criticises internal corruption. Yet, the party errs insofar as prosecutions of wayward cadres are persecutions of dissident colleagues. From the Great Firewall to the 2010 WTO Appellate Body Report in the Audio Visual Products case, censorial CCP limits on tolerance abound. Note the importance of a liberal arts education, especially in the humanities, to foster ‘critical rationalism’.

Critical rationalism is lacking in China because of what Popper calls “crude monism.”

A closed society fails to differentiate man-made rules from natural law.

Right-versus-wrong conduct that rulers impose, and rules embedded in the human heart by a power higher than the CCP, are indistinguishable. With the CCP as the source and summit of law, China seems ‘crudely monistic’. This feature is the one on which Soros most focuses, declaring at Davos:

“I use ‘open society’ as shorthand for a society in which the rule of law prevails as opposed to rule by a single individual and where the role of the state is to protect human rights and individual freedom. In my personal view, an open society should pay special attention to those who suffer from discrimination or social exclusion and those who can’t defend themselves.”

George Soros,  speaks at  the World Economic Forum  in Davos, Switzerland, on Jan. 24, 2019. (Photographer: Simon Dawson/Bloomberg)
George Soros, speaks at the World Economic Forum in Davos, Switzerland, on Jan. 24, 2019. (Photographer: Simon Dawson/Bloomberg)

Also read: Soros Warns China Uses Algos to Find Threats to One-Party Rule

Experience backs his view: he’s a survivor of Nazi-occupied Hungary.

Finally, an open society is free of “historicism”. Popper knew Marx to be a determinist, meaning Marx believed history moves according to inexorable laws. For Marx, the law is materialism that drives class struggle between the bourgeoise and proletariat. The struggle is resolved, the exploitative drudgery capital imposes on labor ends, when class tensions burst into a revolution that reconfigures production. Historicism is a tenet of CCP ideology, proven correct by the 1949 Communist Revolution. Since then, history advances through utopian social engineering: from the 1966-76 Cultural Revolution and population control to obedience to Confucian values and adherence to industrial policy, the CCP constructs a stable, harmonious society.

The Chinese edifice is not economically egalitarian in the outcome, but it is one in which citizens believe, falsely, or not, they might get rich.

Popper’s open society and its friends like Soros reject historicism. Deterministic laws exclude the possibility of rational political intervention, of choice, and thus of individual accountability for decisions. Moreover, Popper warned that Marx’s “attempt to make heaven on earth invariably produces hell.” So, Popper favours the piecemeal social engineering typical in an open society. Change should occur incrementally to avoid excesses and allow for reversal if it is misguided.

Strange Bedfellows

No case is airtight. Reasonable minds can differ as to the ‘openness’ of China’s economy and society. History is the ultimate judge in the Open Society War.

But, already, the Section 301 case has made bedfellows of adversaries: Messrs. Soros and Trump.

The President accused The Financier of funding protests against his Supreme Court pick, Brett Kavanaugh.

The Financier called The President a “narcissist” who “considers himself all-powerful” and “is willing to destroy the world.”

Yet, America betrays its core liberal democratic principles if it does not insist on openness in trade relations with China, and jeopardizes its economic strength – and thus its national security – if it fails to obtain from China substantive, structural, and verifiable reform. That’s a historical choice in favour of an open society of which Popper’s student would be proud.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.