October 2019

October 2019

What companies are for (from the Economist 2019)

Competition, not corporatism, is the answer to capitalism’s problems

ACROSS THE West, capitalism is not working as well as it should. Jobs are plentiful, but growth is sluggish, inequality is too high and the environment is suffering. You might hope that governments would enact reforms to deal with this, but politics in many places is gridlocked or unstable. Who, then, is going to ride to the rescue? A growing number of people think the answer is to call on big business to help fix economic and social problems. Even America’s famously ruthless bosses agree. This week more than 180 of them, including the chiefs of Walmart and JPMorgan Chase, overturned three decades of orthodoxy to pledge that their firms’ purpose was no longer to serve their owners alone, but customers, staff, suppliers and communities, too.

The CEOs’ motives are partly tactical. They hope to pre-empt attacks on big business from the left of the Democratic Party. But the shift is also part of an upheaval in attitudes towards business happening on both sides of the Atlantic. Younger staff want to work for firms that take a stand on the moral and political questions of the day. Politicians of various hues want firms to bring jobs and investment home.

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However well-meaning, this new form of collective capitalism will end up doing more harm than good. It risks entrenching a class of unaccountable CEOs who lack legitimacy. And it is a threat to long-term prosperity, which is the basic condition for capitalism to succeed.

Ever since businesses were granted limited liability in Britain and France in the 19th century, there have been arguments about what society can expect in return. In the 1950s and 1960s America and Europe experimented with managerial capitalism, in which giant firms worked with the government and unions and offered workers job security and perks. But after the stagnation of the 1970s shareholder value took hold, as firms sought to maximise the wealth of their owners and, in theory, thereby maximised efficiency. Unions declined, and shareholder value conquered America, then Europe and Japan, where it is still gaining ground. Judged by profits, it has triumphed: in America they have risen from 5% of GDP in 1989 to 8% now.

It is this framework that is under assault. Part of the attack is about a perceived decline in business ethics, from bankers demanding bonuses and bail-outs both at the same time, to the sale of billions of opioid pills to addicts. But the main complaint is that shareholder value produces bad economic outcomes. Publicly listed firms are accused of a list of sins, from obsessing about short-term earnings to neglecting investment, exploiting staff, depressing wages and failing to pay for the catastrophic externalities they create, in particular pollution.

Not all these criticisms are accurate. Investment in America is in line with historical levels relative to GDP, and higher than in the 1960s. The time-horizon of America’s stockmarket is as long as it has ever been, judged by the share of its value derived from long-term profits. Jam-tomorrow firms like Amazon and Netflix are all the rage. But some of the criticism rings true. Workers’ share of the value firms create has indeed fallen. Consumers often get a lousy deal and social mobility has sunk.

Regardless, the popular and intellectual backlash against shareholder value is already altering corporate decision-making. Bosses are endorsing social causes that are popular with customers and staff. Firms are deploying capital for reasons other than efficiency: Microsoft is financing $500m of new housing in Seattle. President Donald Trump boasts of jawboning bosses on where to build factories. Some politicians hope to go further. Elizabeth Warren, a Democratic contender for the White House, wants firms to be federally chartered so that, if they abuse the interests of staff, customers or communities, their licences can be revoked. All this portends a system in which big business sets and pursues broad social goals, not its narrow self-interest.

That sounds nice, but collective capitalism suffers from two pitfalls: a lack of accountability and a lack of dynamism. Consider accountability first. It is not clear how CEOs should know what “society” wants from their companies. The chances are that politicians, campaigning groups and the CEOs themselves will decide—and that ordinary people will not have a voice. Over the past 20 years industry and finance have become dominated by large firms, so a small number of unrepresentative business leaders will end up with immense power to set goals for society that range far beyond the immediate interests of their company.

The second problem is dynamism. Collective capitalism leans away from change. In a dynamic system firms have to forsake at least some stakeholders: a number need to shrink in order to reallocate capital and workers from obsolete industries to new ones. If, say, climate change is to be tackled, oil firms will face huge job cuts. Fans of the corporate giants of the managerial era in the 1960s often forget that AT&T ripped off consumers and that General Motors made out-of-date, unsafe cars. Both firms embodied social values that, even at the time, were uptight. They were sheltered partly because they performed broader social goals, whether jobs-for-life, world-class science or supporting the fabric of Detroit.

The way to make capitalism work better for all is not to limit accountability and dynamism, but to enhance them both. This requires that the purpose of companies should be set by their owners, not executives or campaigners. Some may obsess about short-term targets and quarterly results but that is usually because they are badly run. Some may select charitable objectives, and good luck to them. But most owners and firms will opt to maximise long-term value, as that is good business.

It also requires firms to adapt to society’s changing preferences. If consumers want fair-trade coffee, they should get it. If university graduates shun unethical companies, employers will have to shape up. A good way of making firms more responsive and accountable would be to broaden ownership. The proportion of American households with exposure to the stockmarket (directly or through funds) is only 50%, and holdings are heavily skewed towards the rich. The tax system ought to encourage more share ownership. The ultimate beneficiaries of pension schemes and investment funds should be able to vote in company elections; this power ought not to be outsourced to a few barons in the asset-management industry.

Accountability works only if there is competition. This lowers prices, boosts productivity and ensures that firms cannot long sustain abnormally high profits. Moreover it encourages companies to anticipate the changing preferences of customers, workers and regulators—for fear that a rival will get there first.

Unfortunately, since the 1990s, consolidation has left two-thirds of industries in America more concentrated. The digital economy, meanwhile, seems to tend towards monopoly. Were profits at historically normal levels, and private-sector workers to get the benefit, wages would be 6% higher. If you cast your eye down the list of the 180 American signatories this week, many are in industries that are oligopolies, including credit cards, cable TV, drug retailing and airlines, which overcharge consumers and have abysmal reputations for customer service. Unsurprisingly, none is keen on lowering barriers to entry.

Of course a healthy, competitive economy requires an effective government—to enforce antitrust rules, to stamp out today’s excessive lobbying and cronyism, to tackle climate change. That well-functioning polity does not exist today, but empowering the bosses of big businesses to act as an expedient substitute is not the answer. The Western world needs innovation, widely spread ownership and diverse firms that adapt fast to society’s needs. That is the really enlightened kind of capitalism.

June 2019

JUNE 2019

Agriculture and Climate Change

 
Agriculture image

Robin Tunnicliffe has farmed for almost 20 years, growing a wide range of organic vegetables for local restaurants and farmer’s markets. She remembers that “when I first started farming, my mentor gave me a list of planting dates.” This essential farmer-to-farmer teaching gave her confidence thanks to its hard-won wisdom, and she recalls thinking “Good! Now I know what I’m doing!” But she soon found that the lessons of tradition and experience were expiring, thanks in part to climate change.

Tunnicliffe began to notice that the changing climate was throwing reliable, longstanding patterns and expectations out the window. She notes that unpredictable seasonal weather now means “the map has been wiped clean a little bit,” and says: “I mentor a lot of new growers. I wish I could give them that list of planting dates that I got. But I can’t do that.”

Farmers know all too well that agriculture is highly dependent on weather. Modern methods, techniques, and technologies have made today’s crop and livestock farms increasingly productive, but agricultural success still depends on getting just the right amount of rain and just the right amount of heat at just the right time of year.

  • The planting, maturing, and harvesting of crops all depend on consistent seasonal patterns.
  • Livestock depend on feed, water, and a tolerable range of heat and humidity for healthy, productive growth.
  • Climate helps determine which pests and diseases will spread, and so how much time, effort, and money farmers must spend on herbicides, insecticides, and other defences.
  • Beyond the harvest, patterns of temperature and weather affect the entire supply chain of storage and transportation that brings food from the field to the dinner plate.

From the largest farm to the smallest market garden, from planting to eating, and at every stage in the cycle of production –from choosing seed to transporting livestock – agriculture and agri-business thoroughly depend on climate. And the climate is changing.

Farming in a hotter climate

Seasonal temperatures are very important to farming. The length of the growing season, typical average temperatures, and the timing and severity of hot and cold spells all work together to determine what crops can be grown. Climate models show that Canada’s cold season will shrink, leaving a longer growing season. But with that possibly good news comes a huge increase in high temperature events and changes in precipitation patterns – especially the increasing likelihood of flooding and drought in the same year – which will require farmers to make significant changes.

The Climate Atlas map of very hot days shows large increases in heat coming to many of Canada’s agricultural regions, including the Okanagan Valley, the Prairies, southern Ontario, and the Maritimes.

Roy McLaren has a long lifetime of farming experience – he’s farmed in southern Manitoba for over 70 years – and looks at these projections with concern. “That is pretty bad,” he says. “With that kind of heat,” McLaren concedes, “we’d have to change our farming methods. We’d have to adopt new crops.”

Temperature changes don’t just affect crops. Hot temperatures also reduce weight gain and milk production in cattle. Heat can even be deadly: in 2002, for example, heat waves in Quebec killed half a million poultry, despite the use of modern shelter and ventilation systems [1], and during 2010-2012 hundreds of dairy cattle died in Ontario because of extreme heat [2].

Farming and changes in precipitation

Water supply and water management are fundamental to farming. McLaren is plain-spoken on the topic: “Without water, you don’t have anything. I don’t care where you farm.”

Climate models show that Canada’s agricultural regions will likely see drier summers from coast to coast, but increased winter and spring precipitation. This means that farmers may have to deal with both too much water during the seeding season and too little water during the growing season, all in the same year. Projections also show that although much of southern Canada will be drier overall in the summer, it could also face an increase in short-lived but very intense rainfall events.

august-april delta precip_1.jpg

The projected change in monthly precipitation for April and August (for the “high carbon” climate scenario) shows that much of southern Canada is expected to become much wetter during the spring, but drier during the summer. These maps show the percent difference in total monthly precipitation between the 2051-2080 and 1976-2005 time periods.

Canada’s prairie provinces have recently experienced the consequences of such seasonal shifts in precipitation: in 2016 a hot, dry spring caused widespread drought. This extended dry weather was followed by torrential rains in the late summer that caused flooding in many areas, from northern Alberta to eastern Manitoba. And in 2017, southern Saskatchewan experienced the driest July in over 130 years of record-keeping. For farmers in the region the heat and dryness was especially damaging because it followed a rainy spring that had been so wet that they’d been unable to properly seed their fields [3].

In addition to the increased threat of drought and flooding, wet springs and autumns may make it challenging for farmers to take advantage of the longer growing season promised by rising temperatures. Early or late rain can simply make the land too wet to support farm machinery, and can hinder important seeding, maturing, or drying phases of many crops.

Adaptation

Farmers are used to planning for uncertainty, but climate change is bringing new extremes, seasonal shifts, and increased variability that are likely to push the boundaries of our climate beyond anything they are used to managing.

Some aspects of climate change look promising for farming: longer frost-free seasons, increases in growing degree days, and even increased atmospheric CO2 can, in theory, lead to better crop yields and productivity. However, as Natural Resources Canada warns: “An increase in climate variability and the frequency of extreme events would adversely affect the agricultural industry. A single extreme event (later frost, extended drought, excess rainfall during harvest period) can eliminate any benefits from improved ‘average’ conditions” [1].

Some of the existing tools the farming sector uses to handle climate risks (such as crop insurance or sprinkler irrigation) mostly rely on poor conditions being unusual and intermittent. But short-term and one-off crisis management strategies aren’t sustainable responses to the enduring effects of climate change.

The Food and Agriculture Organization of the United Nations cites research that identifies six major classes of agricultural climate adaptation [4]:

  • seasonal changes and sowing dates;
  • different varieties or species;
  • water supply and irrigation systems;
  • inputs (fertilizer, tillage methods, grain drying, other field operations);
  • new crop varieties; and
  • fire risk management.

Tunnicliffe reflects on her farm’s adaptation to climate change and notes that “our strategy now is just being more resilient.” She is experimenting with new varieties of produce, over-planting in expectation of higher losses, and breeding plants that are adapted to local conditions. “Your best strategy is diversity” she says, so that “a crop failure isn’t a disaster.” Asked to define resilience, she laughs and says “many layers of backup!”

Mitigation

Agriculture has an important part to play in reducing the severity of climate change.

Modern agriculture – like most modern industry – relies on high-carbon energy. Farming generates about 8% of Canada’s greenhouse gas emissions [5]. These greenhouse gases come from a variety of sources. Diesel- and gas-powered machinery is used to till fields, plant seeds, apply fertilizers, harvest crops and transport the food to market. Manufacturing nitrogen fertilizer uses large quantities of natural gas, and when this fertilizer is applied to fields it produces nitrous oxide, a greenhouse gas that is 300 times more potent than carbon dioxide. Industrial-scale livestock operations can release large volumes of both nitrogen and methane (another powerful greenhouse gas).

The agricultural sector has begun to look at inventive ways to reduce these emissions and to pursue land-use practices that can help mitigate climate change. Strategies range widely, and include different crop cultivation and rotation strategies, using conservation tillage, transitioning to lower-carbon fuel sources, improving fertilizers and fertilizer application approaches, improving soil carbon sequestration, and using gas-capture systems for livestock and manure. There are many opportunities in this sector for technical innovation that can help ensure both climate mitigation and economic benefits.

Of course, the agricultural sector cannot singlehandedly mitigate climate change. Mitigation is ultimately a society-wide problem, and climate solutions and possibilities developed in any one sector will benefit everyone.

The vulnerability of farming to climate change could threaten food security for millions upon millions of people [6]. This essential yet threatened sector means that agricultural producers have a unique opportunity to demonstrate climate leadership. Agricultural adaptation and mitigation are necessary to create a sustainable future for Canada’s farms, and the rest of society has a fundamental role to play in supporting the development of the resilient agricultural systems so necessary to us all.

May 2019

May 2019 

China: The Land That Failed to Fail

The pull of the past: Aerospace workers wearing Long March-style uniforms.

The West was sure the Chinese approach would not work. It just had to wait. It’s still waiting.

In the uncertain years after Mao’s death, long before China became an industrial juggernaut, before the Communist Party went on a winning streak that would reshape the world, a group of economics students gathered at a mountain retreat outside Shanghai. There, in the bamboo forests of Moganshan, the young scholars grappled with a pressing question: How could China catch up with the West?

It was the autumn of 1984, and on the other side of the world, Ronald Reagan was promising “morning again in America.” China, meanwhile, was just recovering from decades of political and economic turmoil. There had been progress in the countryside, but more than three-quarters of the population still lived in extreme poverty. The state decided where everyone worked, what every factory made and how much everything cost.

The students and researchers attending the Academic Symposium of Middle-Aged and Young Economists wanted to unleash market forces but worried about crashing the economy — and alarming the party bureaucrats and ideologues who controlled it.

Late one night, they reached a consensus: Factories should meet state quotas but sell anything extra they made at any price they chose. It was a clever, quietly radical proposal to undercut the planned economy — and it intrigued a young party official in the room who had no background in economics. “As they were discussing the problem, I didn’t say anything at all,” recalled Xu Jing’an, now 76 and retired. “I was thinking, how do we make this work?”

The Chinese economy has grown so fast for so long now that it is easy to forget how unlikely its metamorphosis into a global powerhouse was, how much of its ascent was improvised and born of desperation. The proposal that Mr. Xu took from the mountain retreat, soon adopted as government policy, was a pivotal early step in this astounding transformation.

China now leads the world in the number of homeowners, internet users, college graduates and, by some counts, billionaires. Extreme poverty has fallen to less than 1 percent. An isolated, impoverished backwater has evolved into the most significant rival to the United States since the fall of the Soviet Union.

China today might be unrecognizable to its Communist founders, but the past still holds a powerful allure. “Red tourism” is a big industry.

It is less worried now about catching up to the West. Instead, it wonders how to pull ahead.

The country leads the world in the number of internet users and college graduates. It is now working to land a person on the moon.

Gone are the days when the state decided where everyone worked and what every factory made.

The world thought it would change China, but China’s success has been so spectacular that it has changed the world.

An epochal contest is underway. With President Xi Jinping pushing a more assertive agenda overseas and tightening controls at home, the Trump administration has launched a trade war and is gearing up for what could be a new Cold War. Meanwhile, in Beijing the question these days is less how to catch up with the West than how to pull ahead — and how to do so in a new era of American hostility.

The pattern is familiar to historians, a rising power challenging an established one, with a familiar complication: For decades, the United States encouraged and aided China’s rise, working with its leaders and its people to build the most important economic partnership in the world, one that has lifted both nations.

During this time, eight American presidents assumed, or hoped, that China would eventually bend to what were considered the established rules of modernization: Prosperity would fuel popular demands for political freedom and bring China into the fold of democratic nations. Or the Chinese economy would falter under the weight of authoritarian rule and bureaucratic rot.

But neither happened. Instead, China’s Communist leaders have defied expectations again and again. They embraced capitalism even as they continued to call themselves Marxists. They used repression to maintain power but without stifling entrepreneurship or innovation. Surrounded by foes and rivals, they avoided war, with one brief exception, even as they fanned nationalist sentiment at home. And they presided over 40 years of uninterrupted growth, often with unorthodox policies the textbooks said would fail.

In late September, the People’s Republic of China marked a milestone, surpassing the Soviet Union in longevity. Days later, it celebrated a record 69 years of Communist rule. And China may be just hitting its stride — a new superpower with an economy on track to become not just the world’s largest but, quite soon, the largest by a wide margin.

The world thought it could change China, and in many ways it has. But China’s success has been so spectacular that it has just as often changed the world — and the American understanding of how the world works.

There is no simple explanation for how China’s leaders pulled this off. There was foresight and luck, skill and violent resolve, but perhaps most important was the fear — a sense of crisis among Mao’s successors that they never shook, and that intensified after the Tiananmen Square massacre and the collapse of the Soviet Union.

Even as they put the disasters of Mao’s rule behind them, China’s Communists studied and obsessed over the fate of their old ideological allies in Moscow, determined to learn from their mistakes. They drew two lessons: The party needed to embrace “reform” to survive — but “reform” must never include democratization.

China has veered between these competing impulses ever since, between opening up and clamping down, between experimenting with change and resisting it, always pulling back before going too far in either direction for fear of running aground.

Many people said that the party would fail, that this tension between openness and repression would be too much for a nation as big as China to sustain. But it may be precisely why China soared.

Whether it can continue to do so with the United States trying to stop it is another question entirely.

Apparatchiks Into Capitalists

None of the participants at the Moganshan conference could have predicted how China would take off, much less the roles they would play in the boom ahead. They had come of age in an era of tumult, almost entirely isolated from the rest of the world, with little to prepare them for the challenge they faced. To succeed, the party had to both reinvent its ideology and reprogram its best and brightest to carry it out.

Mr. Xu, for example, had graduated with a degree in journalism on the eve of Mao’s violent Cultural Revolution, during which millions of people were purged, persecuted and killed. He spent those years at a “cadre school” doing manual labor and teaching Marxism in an army unit. After Mao’s death, he was assigned to a state research institute tasked with fixing the economy. His first job was figuring out how to give factories more power to make decisions, a subject he knew almost nothing about. Yet he went on to a distinguished career as an economic policymaker, helping launch China’s first stock market in Shenzhen.

Among the other young participants in Moganshan were Zhou Xiaochuan, who would later lead China’s central bank for 15 years; Lou Jiwei, who ran China’s sovereign wealth fund and recently stepped down as finance minister; and an agricultural policy specialist named Wang Qishan, who rose higher than any of them.

Mr. Wang headed China’s first investment bank and helped steer the nation through the Asian financial crisis. As Beijing’s mayor, he hosted the 2008 Olympics. Then he oversaw the party’s recent high-stakes crackdown on corruption. Now he is China’s vice president, second in authority only to Xi Jinping, the party’s leader.

The careers of these men from Moganshan highlight an important aspect of China’s success: It turned its apparatchiks into capitalists.

Bureaucrats who were once obstacles to growth became engines of growth. Officials devoted to class warfare and price controls began chasing investment and promoting private enterprise. Every day now, the leader of a Chinese district, city or province makes a pitch like the one Yan Chaojun made at a business forum in September.

“Sanya,” Mr. Yan said, referring to the southern resort town he leads, “must be a good butler, nanny, driver and cleaning person for businesses, and welcome investment from foreign companies.”

It was a remarkable act of reinvention, one that eluded the Soviets. In both China and the Soviet Union, vast Stalinist bureaucracies had smothered economic growth, with officials who wielded unchecked power resisting change that threatened their privileges.

Mikhail Gorbachev, the last leader of the Soviet Union, tried to break the hold of these bureaucrats on the economy by opening up the political system. Decades later, Chinese officials still take classes on why that was a mistake. The party even produced a documentary series on the subject in 2006, distributing it on classified DVDs for officials at all levels to watch.

Afraid to open up politically but unwilling to stand still, the party found another way. It moved gradually and followed the pattern of the compromise at Moganshan, which left the planned economy intact while allowing a market economy to flourish and outgrow it.

Once an impoverished backwater, China is now the most significant rival to the United States. Wuhan, a former river town, has swelled into a metropolis of over 10 million.

A businessman stretched before a round of video golf at a hotel he built in Kunming.

Rising incomes have turned China into a nation of consumers.

In cities like Shanghai, Chinese schoolchildren outperform peers around the world.

Western economists doubted that innovation could take place under China’s rigid bureaucracy. They were proved wrong.

Party leaders called this go-slow, experimental approach “crossing the river by feeling the stones” — allowing farmers to grow and sell their own crops, for example, while retaining state ownership of the land; lifting investment restrictions in “special economic zones,” while leaving them in place in the rest of the country; or introducing privatization by selling only minority stakes in state firms at first.

“There was resistance,” Mr. Xu said. “Satisfying the reformers and the opposition was an art.”

American economists were skeptical. Market forces needed to be introduced quickly, they argued; otherwise, the bureaucracy would mobilize to block necessary changes. After a visit to China in 1988, the Nobel laureate Milton Friedman called the party’s strategy “an open invitation to corruption and inefficiency.”

But China had a strange advantage in battling bureaucratic resistance. The nation’s long economic boom followed one of the darkest chapters of its history, the Cultural Revolution, which decimated the party apparatus and left it in shambles. In effect, autocratic excess set the stage for Mao’s eventual successor, Deng Xiaoping, to lead the party in a radically more open direction.

That included sending generations of young party officials to the United States and elsewhere to study how modern economies worked. Sometimes they enrolled in universities, sometimes they found jobs, and sometimes they went on brief “study tours.” When they returned, the party promoted their careers and arranged for others to learn from them.

At the same time, the party invested in education, expanding access to schools and universities, and all but eliminating illiteracy. Many critics focus on the weaknesses of the Chinese system — the emphasis on tests and memorization, the political constraints, the discrimination against rural students. But mainland China now produces more graduates in science and engineering every year than the United States, Japan, South Korea and Taiwan combined.

In cities like Shanghai, Chinese schoolchildren outperform peers around the world. For many parents, though, even that is not enough. Because of new wealth, a traditional emphasis on education as a path to social mobility and the state’s hypercompetitive college entrance exam, most students also enroll in after-school tutoring programs — a market worth $125 billion, according to one study, or as much as half the government’s annual military budget.

Another explanation for the party’s transformation lies in bureaucratic mechanics. Analysts sometimes say that China embraced economic reform while resisting political reform. But in reality, the party made changes after Mao’s death that fell short of free elections or independent courts yet were nevertheless significant.

The party introduced term limits and mandatory retirement ages, for example, making it easier to flush out incompetent officials. And it revamped the internal report cards it used to evaluate local leaders for promotions and bonuses, focusing them almost exclusively on concrete economic targets.

These seemingly minor adjustments had an outsize impact, injecting a dose of accountability — and competition — into the political system, said Yuen Yuen Ang, a political scientist at the University of Michigan. “China created a unique hybrid,” she said, “an autocracy with democratic characteristics.”

As the economy flourished, officials with a single-minded focus on growth often ignored widespread pollution, violations of labor standards, and tainted food and medical supplies. They were rewarded with soaring tax revenues and opportunities to enrich their friends, their relatives and themselves. A wave of officials abandoned the state and went into business. Over time, the party elite amassed great wealth, which cemented its support for the privatization of much of the economy it once controlled.

The private sector now produces more than 60 percent of the nation’s economic output, employs over 80 percent of workers in cities and towns, and generates 90 percent of new jobs, a senior official said in a speech last year. As often as not, the bureaucrats stay out of the way.

“I basically don’t see them even once a year,” said James Ni, chairman and founder of Mlily, a mattress manufacturer in eastern China. “I’m creating jobs, generating tax revenue. Why should they bother me?”

In recent years, President Xi has sought to assert the party’s authority inside private firms. He has also bolstered state-owned enterprises with subsidies while preserving barriers to foreign competition. And he has endorsed demands that American companies surrender technology in exchange for market access.

In doing so, he is betting that the Chinese state has changed so much that it should play a leading role in the economy — that it can build and run “national champions” capable of outcompeting the United States for control of the high-tech industries of the future. But he has also provoked a backlash in Washington.

‘Opening Up’

In December, the Communist Party will celebrate the 40th anniversary of the “reform and opening up” policies that transformed China. The triumphant propaganda has already begun, with Mr. Xi putting himself front and center, as if taking a victory lap for the nation.

He is the party’s most powerful leader since Deng and the son of a senior official who served Deng, but even as he wraps himself in Deng’s legacy, Mr. Xi has set himself apart in an important way: Deng encouraged the party to seek help and expertise overseas, but Mr. Xi preaches self-reliance and warns of the threats posed by “hostile foreign forces.”

In other words, he appears to have less use for the “opening up” part of Deng’s slogan.

Of the many risks that the party took in its pursuit of growth, perhaps the biggest was letting in foreign investment, trade and ideas. It was an exceptional gamble by a country once as isolated as North Korea is today, and it paid off in an exceptional way: China tapped into a wave of globalization sweeping the world and emerged as the world’s factory. China’s embrace of the internet, within limits, helped make it a leader in technology. And foreign advice helped China reshape its banks, build a legal system and create modern corporations.

The party prefers a different narrative these days, presenting the economic boom as “grown out of the soil of China” and primarily the result of its leadership. But this obscures one of the great ironies of China’s rise — that Beijing’s former enemies helped make it possible.

President Xi Jinping has shown no sign of abandoning what he calls “the great rejuvenation of the Chinese nation.” The observation deck of the Shanghai Tower, the world’s second-tallest building.

A Communist Party Congress. Mr. Xi seems to believe that China has been so successful that the party can return to its authoritarian past.

China tapped into a wave of globalization and emerged as the world’s factory. Advertising for day laborers in Shenzhen.

A fashion design employee at a bridal wear exhibition in Beijing may have taken the opportunity for a break, but no one calls China a sleeping giant anymore.

Installing solar panels on a 47-story residential development. China succeeded by leaving a planned economy intact and allowing a market economy to flourish and outgrow it.

The United States and Japan, both routinely vilified by party propagandists, became major trading partners and were important sources of aid, investment and expertise. The real game changers, though, were people like Tony Lin, a factory manager who made his first trip to the mainland in 1988.

Mr. Lin was born and raised in Taiwan, the self-governing island where those who lost the Chinese civil war fled after the Communist Revolution. As a schoolboy, he was taught that mainland China was the enemy.

But in the late 1980s, the sneaker factory he managed in central Taiwan was having trouble finding workers, and its biggest customer, Nike, suggested moving some production to China. Mr. Lin set aside his fears and made the trip. What he found surprised him: a large and willing work force, and officials so eager for capital and know-how that they offered the use of a state factory free and a five-year break on taxes.

Mr. Lin spent the next decade shuttling to and from southern China, spending months at a time there and returning home only for short breaks to see his wife and children. He built and ran five sneaker factories, including Nike’s largest Chinese supplier.

“China’s policies were tremendous,” he recalled. “They were like a sponge absorbing water, money, technology, everything.”

Mr. Lin was part of a torrent of investment from ethnic Chinese enclaves in Hong Kong, Taiwan, Singapore and beyond that washed over China — and gave it a leg up on other developing countries. Without this diaspora, some economists argue, the mainland’s transformation might have stalled at the level of a country like Indonesia or Mexico.

The timing worked out for China, which opened up just as Taiwan was outgrowing its place in the global manufacturing chain. China benefited from Taiwan’s money, but also its managerial experience, technology and relationships with customers around the world. In effect, Taiwan jump-started capitalism in China and plugged it into the global economy.

Before long, the government in Taiwan began to worry about relying so much on its onetime enemy and tried to shift investment elsewhere. But the mainland was too cheap, too close and, with a common language and heritage, too familiar. Mr. Lin tried opening factories in Thailand, Vietnam and Indonesia but always came back to China.

Now Taiwan finds itself increasingly dependent on a much more powerful China, which is pushing ever harder for unification, and the island’s future is uncertain.

There are echoes of Taiwan’s predicament around the world, where many are having second thoughts about how they rushed to embrace Beijing with trade and investment.

The remorse may be strongest in the United States, which brought China into the World Trade Organization, became China’s largest customer and now accuses it of large-scale theft of technology — what one official called “the greatest transfer of wealth in history.”

Many in Washington predicted that trade would bring political change. It did, but not in China. “Opening up” ended up strengthening the party’s hold on power rather than weakening it. The shock of China’s rise as an export colossus, however, was felt in factory towns around the world.

In the United States, economists say at least two million jobs disappeared as a result, many in districts that ended up voting for President Trump.

Selective Repression

Over lunch at a luxurious private club on the 50th floor of an apartment tower in central Beijing, one of China’s most successful real estate tycoons explained why he had left his job at a government research center after the crackdown on the student-led democracy movement in Tiananmen Square.

“It was very easy,” said Feng Lun, the chairman of Vantone Holdings, which manages a multibillion-dollar portfolio of properties around the world. “One day, I woke up and everyone had run away. So I ran, too.”

Until the soldiers opened fire, he said, he had planned to spend his entire career in the civil service. Instead, as the party was pushing out those who had sympathized with the students, he joined the exodus of officials who started over as entrepreneurs in the 1990s.

“At the time, if you held a meeting and told us to go into business, we wouldn’t have gone,” he recalled. “So this incident, it unintentionally planted seeds in the market economy.”

Such has been the seesaw pattern of the party’s success.

The pro-democracy movement in 1989 was the closest the party ever came to political liberalization after Mao’s death, and the crackdown that followed was the furthest it went in the other direction, toward repression and control. After the massacre, the economy stalled and retrenchment seemed certain. Yet three years later, Deng used a tour of southern China to wrestle the party back to “reform and opening up” once more.

Many who had left the government, like Mr. Feng, suddenly found themselves leading the nation’s transformation from the outside, as its first generation of private entrepreneurs.

Now Mr. Xi is steering the party toward repression again, tightening its grip on society, concentrating power in his own hands and setting himself up to rule for life by abolishing the presidential term limit. Will the party loosen up again, as it did a few years after Tiananmen, or is this a more permanent shift? If it is, what will it mean for the Chinese economic miracle?

The fear is that Mr. Xi is attempting to rewrite the recipe behind China’s rise, replacing selective repression with something more severe.

For decades, China has veered between openness and repression, including of the ethnic Uighur minority.

Since the Tiananmen movement, the government has been vigilant about crushing potential threats. Surveillance cameras in Beijing.

China’s high-speed rail network, the largest in the world, has changed the way its people move. In Hangzhou, passengers waited outside the railway station.

As China opened up, farmers were allowed to grow and sell their own crops, while the state retained ownership of the land. Greenhouses filled with bok choy and yellow cabbage abut investment properties and golf courses.

Under Mao, many educated Chinese were sent to “cadre schools,” where they did manual labor. In May, these real estate agency employees went for a morning run as part of a company team-building exercise.

The party has always been vigilant about crushing potential threats — a fledgling opposition party, a popular spiritual movement, even a dissident writer awarded the Nobel Peace Prize. But with some big exceptions, it has also generally retreated from people’s personal lives and given them enough freedom to keep the economy growing.

The internet is an example of how it has benefited by striking a balance. The party let the nation go online with barely an inkling of what that might mean, then reaped the economic benefits while controlling the spread of information that could hurt it.

In 2011, it confronted a crisis. After a high-speed train crash in eastern China, more than 30 million messages criticizing the party’s handling of the fatal accident flooded social media — faster than censors could screen them.

Panicked officials considered shutting down the most popular service, Weibo, the Chinese equivalent of Twitter, but the authorities were afraid of how the public would respond. In the end, they let Weibo stay open but invested much more in tightening controls and ordered companies to do the same.

The compromise worked. Now, many companies assign hundreds of employees to censorship duties — and China has become a giant on the global internet landscape.

“The cost of censorship is quite limited compared to the great value created by the internet,” said Chen Tong, an industry pioneer. “We still get the information we need for economic progress.”

A ‘New Era’

China is not the only country that has squared the demands of authoritarian rule with the needs of free markets. But it has done so for longer, at greater scale and with more convincing results than any other.

The question now is whether it can sustain this model with the United States as an adversary rather than a partner.

The trade war has only just begun. And it is not just a trade war. American warships and planes are challenging Chinese claims to disputed waters with increasing frequency even as China keeps ratcheting up military spending. And Washington is maneuvering to counter Beijing’s growing influence around the world, warning that a Chinese spending spree on global infrastructure comes with strings attached.

The two nations may yet reach some accommodation. But both left and right in America have portrayed China as the champion of an alternative global order, one that embraces autocratic values and undermines fair competition. It is a rare consensus for the United States, which is deeply divided about so much else, including how it has wielded power abroad in recent decades — and how it should do so now.

Mr. Xi, on the other hand, has shown no sign of abandoning what he calls “the great rejuvenation of the Chinese nation.” Some in his corner have been itching to take on the United States since the 2008 financial crisis and see the Trump administration’s policies as proof of what they have always suspected — that America is determined to keep China down.

At the same time, there is also widespread anxiety over the new acrimony, because the United States has long inspired admiration and envy in China, and because of a gnawing sense that the party’s formula for success may be faltering.

Prosperity has brought rising expectations in China; the public wants more than just economic growth. It wants cleaner air, safer food and medicine, better health care and schools, less corruption and greater equality. The party is struggling to deliver, and tweaks to the report cards it uses to measure the performance of officials hardly seem enough.

“The basic problem is, who is growth for?” said Mr. Xu, the retired official who wrote the Moganshan report. “We haven’t solved this problem.”

Growth has begun to slow, which may be better for the economy in the long term but could shake public confidence. The party is investing ever more in censorship to control discussion of the challenges the nation faces: widening inequality, dangerous debt levels, an aging population.

Mr. Xi himself has acknowledged that the party must adapt, declaring that the nation is entering a “new era” requiring new methods. But his prescription has largely been a throwback to repression, including vast internment campstargeting Muslim ethnic minorities. “Opening up” has been replaced by an outward push, with huge loans that critics describe as predatory and other efforts to gain influence — or interfere — in the politics of other countries. At home, experimentation is out while political orthodoxy and discipline are in.

In effect, Mr. Xi seems to believe that China has been so successful that the party can return to a more conventional authoritarian posture — and that to survive and surpass the United States it must.

Certainly, the momentum is still with the party. Over the past four decades, economic growth in China has been 10 times faster than in the United States, and it is still more than twice as fast. The party appears to enjoy broad public support, and many around the world are convinced that Mr. Trump’s America is in retreat while China’s moment is just beginning.

Then again, China has a way of defying expectations.

Philip P. Pan is The Times’s Asia Editor and author of “Out of Mao’s Shadow: The Struggle for the Soul of a New China.” He has lived in and reported on China for nearly two decades.

Jonathan Ansfield and Keith Bradsher contributed reporting from Beijing. Claire Fu, Zoe Mou and Iris Zhao contributed research from Beijing, and Carolyn Zhang from Shanghai.

Design: Matt Ruby, Rumsey Taylor, Quoctrung Bui Editing: Tess Felder, Eric Nagourney, David Schmidt Photo Editing: David Furst, Craig Allen, Meghan Petersen, Mikko Takkunen Illustrations: Sergio Peçanha

March 2019

March 2019

THE WTO

Everyone’s going to the WTO to complain these days.

Brazil is complaining about sugar.    The US is after how the Chinese calculate grain subsidies.    And yes,  Canada will be involved in a hearing this week about how India justifies government interference in our biggest specialty crop export market.   

China and India account for 36% of the world population and 18% of available farmland.   The 5% that live in North America have 11% of the farmland available worldwide.   This leaves North America with a 4:1 surplus of farmland to population compared to its counterparts in Asia.   One would expect the flow of staple agricultural goods from North America to Asia to be self-evident as both sides will have a strong need to ensure an unobstructed flow from one place to the next.     

Mike Tyson said, “everyone has a plan until you get punched in the mouth.”   When India faced droughts in 2015-2016 which rolled into China in 2017 the devastation changed everything.   North American lentil prices appreciated 225% during this period while income for 330 million people in India who work in agriculture was reduced to near zero.   It makes sense that the government is going to react in a way that puts a barrier between the world and its vulnerable population to prevent this from happening again.   Government-controlled stockpiles and duties to encourage local production are a natural reaction to such events.   Two years later North Americans are taking offense that India would take such a position which has resulted in reducing profits on this side of the Pacific to near zero.   

This week, like every week at the WTO, a bunch of suits will travel to Geneva with a basket of spreadsheets and legal documents to argue these injustices.   Each side will put forward an “America First” type argument and someone will win.  What does winning really mean?   This is not a zero-sum game.   Winning does not mean sending violators directly to jail or claiming one of their small islands in the Pacific as compensation.   

The process reminds me Robbin Williams comedy segment where he quips about British police officers trying to chase down criminals with only their baton:   “STOP, or I will say STOP again!”  In the end, the WTO cannot provide a timely remedy.   Years later, if the violating country does not comply the WTO will allow the damaged country to retaliate with sanctions of their own.   Of course,  the world being what it is will move on and the affected industries will adjust.  

Who is still talking about the USA imposing a 25% tariff on Canadian Steel and 10% on Canadian aluminum one year ago?  It is affecting 35000 people in Canada and 10 billion dollars in trade.   This is the reality of unfair trade.   Complain, adjust, and move on.  

Maybe there is not a better way of addressing trade issues.   Like the close button on an elevator,  the WTO provides us a feeling that we can at least “do something” to get this thing moving.  Maybe, at least, someone is writing it down.   I believe markets work.   They work really well where participants can trade within a sound/identifiable market structure and where there is no outside government interference on price.

What we really should be working on as market participants are improving our trading structures between countries so no one gets punched in the mouth and force governments to step in and make a mess of it all.   Then no one is pretending to solve problems by going to the WTO.  

It would be interesting to be part of a discussion where countries with symbiotic supply and demand needs are able to allow a market to move within a wide range but limit the extreme price movements that cause reactions that inevitably hurt real people on both sides.

Something to think about.

Have a great month.