How Deng Xiaoping Solved China’s Trade Problem | Samo Burja

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A SEA change in Western perception of China has occurred in the last ten years. It’s no longer just the quiet workhorse of the world economy. Instead, China is now recognized as the primary global competitor to the United States and its allies. As nato Secretary General Jens Stoltenberg recently observed, China is “coming closer in cyberspace, we see them in the Arctic, in Africa, we see them investing in our critical infrastructure.” Long gone are the days when “Made in China” was a common punchline.

Western elites know that they have been caught off-guard. Suddenly, they must understand China, but find themselves with more questions than answers—and answers are not so easy to come by. The Chinese Internet is not just obscured by a linguistic barrier, but intentionally firewalled. Only the most intrepid travelers can make it to China’s most sensitive regions like Xinjiang. The Chinese Communist Party (CCP) remains opaque as ever. China arguably understands the West better than the West understands China.

However, the contemporary world is not the only place where one can find answers. Chinese civilization remains one of the oldest civilizations we know of. Contemporary China may be intellectually inaccessible, but its history is not. To understand the present and future of a country or institution, we must first understand its past. In trying to understand how China’s history determines its present and future, we find ourselves in the same position as the man responsible for the country’s contemporary success: Deng Xiaoping.

Xi Jinping may be president today, but he inherited the institutional and ideological structures built by Deng Xiaoping during the latter’s leadership of China in the 1980s. Those structures laid the foundation for Beijing’s current position of power and were not accidental—rather, they were deeply informed by Chinese history and deliberately designed to both ensure the survival of the CCP and advance China’s geopolitical position in the world. There are two further important facts here. First, Deng was successful. Second, he was successful because he understood and solved a key constraint of political economy: how do you manage trade to grow your economy without surrendering the sovereignty of your country?

China’s historical experience with the political limits of trade did not begin in the twenty-first century. It did not begin during the Cold War or even with the arrival of the European colonial powers of the nineteenth century. During the Ming dynasty of the sixteenth century, China was already learning how to carefully manage trade to its benefit with a relatively forgotten Asian power: the Mongols.

ALTAN KHAN was a powerful Mongol ruler in the sixteenth century. Unlike the stereotype of the bloodthirsty steppe warlord, Altan was instead a capable statesman. For example, wishing to secure his legitimacy as leader of all the Mongols, he set up a meeting with the Third Dalai Lama, Sonam Gyatso, that re-established Mongol relations with Tibet after a two-hundred-year gap and led subsequently to the mass conversion of the Mongols to Tibetan Buddhism. The title “Dalai Lama” itself derives from Mongolian and was in fact first bestowed on Sonam Gyatso—and his successors—by Altan. Mongolia remains a stronghold of Tibetan Buddhism to this day.

The khan was also a great admirer of Chinese culture and society. He founded a new city not far from Beijing called Köke Khota and modeled it on Chinese civilization. He also aimed to improve Mongolian food security during the winter through trade with China and persuade the Chinese of his rulership of all the Mongols. Capable statesmen usually learn from the examples of successful societies, but this imitation doesn’t automatically win the friendship of the exemplar country, as Altan quickly learned.

The ruling Ming dynasty of China was disinclined towards Altan’s grand designs, and instead enforced a blockade. The Ming recognized that trade would drive population growth among the Mongols, and that if Mongol numbers were to sufficiently increase, China would become completely incapable of repelling their attacks. Though China would have benefited from trade with the Mongols, the Mongols would have benefited more, thereby threatening Chinese security. That the khan and his army reached Beijing in 1550 shows the balance of power was already precarious. In 1571, the khan invaded again, forcing a treaty and trade agreement that lasted about a year until the Chinese reneged.

Altan Khan died a decade afterward, having successfully consolidated his rule over the Mongols and persuaded the Chinese of it. But rather than presiding over an expanding Mongol empire that would overpower China, as had happened famously hundreds of years earlier, the Ming dynasty successfully forced Altan into a vassal relationship by restricting trade. He accepted the title of “Prince Who Conforms to Righteousness” from the Ming court in tribute. His descendants served China, fighting off yet further Mongol tribes from Köke Khota, renamed Guihua in the Chinese fashion.

Today, the same city is the capital of China’s Inner Mongolia Autonomous Region. A statue of a seated, open-handed Altan Khan looks down on one of the city’s main squares, a stark and perhaps telling contrast to the famous and enormous statue of Genghis Khan, armed and seated on a horse, that overlooks the steppe in neighboring Mongolia.

IN THE fall of 1860, the Forbidden City in Beijing—China’s imperial headquarters for centuries—was occupied by British and French troops. It was the end of the four-year-long Second Opium War that began over the illegal British export of opium to China. The British representative, Lord Elgin, proposed burning down the Forbidden City, but was persuaded instead merely to burn down the Summer Palaces of the Chinese emperors, as this would not jeopardize the signing of the imminent peace treaty.

That treaty stipulated a Chinese surrender, legalization of the opium trade, the establishment of religious freedom for Christians in China, the opening of the port of Tianjin—today known as China’s Manhattan—to foreign trade, the right of Britain to ship Chinese indentured servants to the Americas, the cessions of Hong Kong to Britain and of parts of Manchuria to Russia, and, just for good measure, a massive financial indemnity paid to Britain and France by China. With a decimated army and an occupied capital, the ruling Qing dynasty of China had little choice but to sign. Three centuries after the founding of Köke Khota, colonial European powers had succeeded where Altan Khan had failed.

Unlike the Mongols, the European colonial strategy began, rather than culminated, with the opening of trade. After establishing a measure of open trade, the European powers would follow up with military or political protection of economic interests and individuals in the country, eventually concluding with subservience or annexation.

This strategy worked for the European powers and not the Mongols because of one other key difference: while the landlocked Mongols depended on China for economic growth, the Europeans did not. Europe’s colonial powers had an entire globe with which to trade. When China blockaded the Mongols, the Mongols were forced to accept their vassal status despite military retaliation. When China embargoed European powers, they might not have retaliated immediately, but they did eventually, and with far more resources. Imperial China used an old strategy against a new player and lost the gambit. Though the Ming strategy failed, it may well have prevented China from being conquered outright like India was.

The British succeeded in conquering and ruling India, an Asian civilization of comparable size and age to China, using the same playbook. In India, the European presence began with merchant trading posts. Merchants from rival nations harassed each other, and in 1746, a French fleet occupied the city of Madras (now Chennai) and its British East India Company trading post. In response, the British sent more troops and became more active in local disputes. In 1757, Robert Clive, a former East India Company clerk who joined the military after escaping French captivity at Madras, led the British in the Battle of Plassey, where they deposed the ruler of Bengal and installed a puppet regime.

China had a similar history of European colonialism. The Portuguese were the first Europeans to gain a foothold, trading through the port of Macao in the sixteenth century. All other European trade was officially confined by the Chinese government to Canton—now Guangzhou—until conflict over the illegal British export of opium led to the Opium Wars, which ended in 1860 to China’s great disadvantage with the aforementioned treaty. Over the next fifty years, China suffered a litany of further losses to nearly every global power, from Japan to the United States, culminating in another occupation of Beijing in 1901 by an alliance of eight foreign powers at the finale of the Boxer War. Imperial China, as an entity, ceased to exist shortly thereafter—the last emperor was overthrown a decade later.

Try to imagine the mood of U.S. elites if the institution of the American presidency was abolished after Washington, DC was militarily occupied by invading armies from Russia, China, Mexico, and a few other foreign countries besides. To add insult to injury, Los Angeles is annexed to Russia to be their premier overseas trading post. Can one even fathom the phrase, “The Last American President?”

DENG STUDIED this history, and was determined to ensure that the new China would not suffer the same fate as its predecessor. The period from the beginning of the Opium Wars to the founding of the People’s Republic of China in 1949 has been dubbed the “Century of Humiliation” in China and forms a central part of the country’s historical narrative, in which the CCP is the restorer and guardian of Chinese independence. These degradations, according to the CCP, will only be redeemed by China’s return to hegemonic status and its previous territorial extent—including Taiwan.

It was not simply a desire for revanchism, however, that allowed Deng Xiaoping to reform China successfully. Rather, as a student of contemporary capitalism, Deng closely observed Singapore’s development, which showed that a culturally Chinese society had the prerequisite social technologies to productively use markets. Secondly, he knew that China could open up its markets to rapidly spur economic growth. Finally, and most importantly, he understood that with the right trade approach, informed by China’s history with the Mongols and European colonial powers, China could do so while maintaining sovereignty and keeping out American political influence. Deng’s gambit worked, even though it contradicted the conventional wisdom of Western economics.

Economists today would likely argue that the Ming policy towards Altan Khan was irrational because open trade would have been mutually beneficial. In fact, the Ming emperor’s refusal was a denial strategy, and it illustrates a political constraint on trade: a relative advantage is often more important than an absolute one. Keeping a relative advantage over your security rivals is necessary because security is a precondition for trade and economic growth. If the emperor had allowed the Mongols to outgrow China by trading with them, he would have done himself no favors.

China and Japan pursued isolation in the nineteenth century as a means of maintaining local political control against rising European colonial powers. Had modern economists been advising the Qing court, they might have argued that opening up trade with the European powers was a wise move: it would optimize for and create the greatest amount of economic growth. Instead, as soon as China succumbed to pressure for trade, the great powers of the era had an economic interest in subverting their sovereignty. The British, Dutch, or Americans did not want their sailors or merchants tried under Chinese law, which meant they would begin demanding extraterritorial jurisdiction. Over time, they sought control of more and more logistical and economic centers, such as Hong Kong, Tianjin, and Shanghai. Eventually, they occupied Beijing.

This illustrates a common pattern that free trade advocates don’t recognize—when states have an economic interest in organizations or resources in your country, then these states are incentivized to intervene in your economy. This eventually leads to an abrogation of sovereignty, if the economic interest is sufficiently large.

History shows that if a government has to choose between growth and sustaining itself, it is typically perfectly happy to forgo growth. In the present day, we can see that economic sanctions have denied growth and even impacted existing economic infrastructure in Russia, Iran, and—in the extreme—North Korea. Yet all three consistently prefer to sustain economic damage rather than give up geopolitical, security, or military advantages, such as Iran and North Korea’s nuclear programs, or Russia’s military interventions in its near abroad and the Middle East.

Modern scholars and decisionmakers in the West take the stability of political systems for granted and assign fundamental importance to the market rather than other social infrastructure, including the state itself. Markets do not precede states; rather, states create the conditions for markets to flourish by establishing and enforcing market norms. Those norms must be carefully set up both for internal markets and trade with external markets in order to prevent unpredictable consequences. With this in mind, Deng set out to fix China.

AFTER MAO’S death in 1976, his successor Hua Guofeng maintained a strictly Maoist line that was unpopular throughout China, but even more so within the CCP. Even before Mao’s death, people had begun to publicly denounce the Cultural Revolution. Fresh from his recently concluded exile, Deng gathered his allies, supported these criticisms, and soon pushed out Hua. With the Maoist approach self-discredited, Deng’s path forward was clear. Using the widespread disillusionment with Maoism, Deng carried out an institutional reform that enabled a tremendous drive for growth in China—a drive that has propelled it to its current position.

Deng had two key objectives in pursuing this growth: to ensure the survival of the CCP regime and to improve China’s geopolitical position. He succeeded with honors on both counts. The regime not only survived, but outlasted the USSR and is still going strong. Geopolitically, China reversed positions with the Soviet Union as the primary competitor to the United States. Now Russia serves as the junior partner to China in countering the West, rather than China serving as the junior partner to the Soviet Union.

Deng’s CCP was not overly concerned with whether the details of policy were following precise communist theory or not. Deng’s famous saying, “it doesn’t matter whether the cat is black or white, as long as it catches mice,” invites comparison to Kemal Atatürk’s argument that, since Islam is the true religion, anything that conforms to reason and the advancement of Turkey must be compatible with Islam. Another Deng era saying, “To get rich is glorious,” would seem to clash with conventional communist derision of bourgeois values. A charitable interpretation of this position is that as long as China remains under a communist government, whatever produces growth is ultimately communist, since this growth is deployed towards building communism.

In contrast to his ambivalence about adhering to communist theory, Deng was very concerned with whether the details of policy would weaken or strengthen Chinese sovereignty and power. Deng personally set out to make sure they would not. While President Richard Nixon’s 1972 visit to China is well-known, it is perhaps less important than Deng’s 1979 visit to America. This was the first major event of Deng’s rule: the visit concluded with the re-establishment of official diplomatic relations between the People’s Republic of China and the United States, and was the first visit of a Chinese head of state to America in nearly forty years.

Aside from meeting with President Jimmy Carter, Deng traveled across America. Over the course of his nine-day trip, Deng visited the headquarters of Coca-Cola, toured the factory floors of Ford, Boeing, and Baker Hughes, and visited NASA’s Manned Spaceflight Center in Texas, where he sat on top of the Lunar Rover. Attending a nearby rodeo, he donned a classic ten-gallon cowboy hat in a moment famously captured on camera. These were not merely routine photo-ops, but strategic technological and public relations moves that were vital to his developing strategy to revitalize China with American trade and industry.

Deng visited America to see with his own two eyes the manufacturing technology that would soon be offshored and rebuilt in China. Moreover, the trip allowed him to present an image of China as non-threatening, friendly, and peaceful which would be key to opening up a country still viewed as a communist threat during the Cold War. Standing less than five feet tall and wearing an oversized cowboy hat, Deng was not quite the image of a communist tyrant that Americans might have feared.

In a 2018 lecture at Emory University, former President Carter credited Deng’s visit with having a “beneficial impact on the American public.” To quote Carter, “Very quickly, surprising to me, the American people began to look with favor on the treaty I had worked out with the People’s Republic of China.” The result of that treaty is history. The mayor of Seattle at the time of Deng’s visit summarized it thus: “In 1971 there was almost no trade between China and the United States. Instantly, almost with Deng’s visit, everything opened.”

Deng had persuaded the American people and president that China posed no threat to the United States, thus securing a broad and unprecedented level of free trade over the next few decades. But Deng suffered no illusions of sentimentality, which he knew that the practice of statesmanship did not rely on. He took special care to make sure that only American money and technology would enter China, not any Americans or American ideas. For example, when Carter asked Deng to allow the return of American missionaries to China as a favor in return for diplomatic recognition, Deng refused because “they acted superior to the Chinese and tried to change our culture.” Nevertheless, Carter made the deal. A decade later in 1989, Deng put down the pro-democracy Tiananmen Square protests with force.

Deng’s mindset remained unchanged and was visible in the contemporary 1992 negotiations with British prime minister Margaret Thatcher over the status of Hong Kong, then still under British sovereignty. Leading the talks, Deng insisted upon Chinese sovereignty of Hong Kong, arguing that otherwise “he would be no better than the traitors of the Qing dynasty who had first yielded Chinese soil to Britain under treaties which were illegal and invalid.” Thatcher rebuffed Deng and reasserted the legitimacy of the treaties resulting from the Opium Wars. In response, Deng spent the next round of talks toasting to “militant friendship” at a banquet hosted by North Korean Kim Il-Sung, snubbing the British delegation who remained in the same building. In 1997, Hong Kong returned to Chinese rule.

AS THE 1980s progressed, China grew quietly and patiently through access to the American markets, technology, and expertise that Deng had secured. After Jimmy Carter left office, America elected Ronald Reagan, who was evidently uninterested in reversing Carter and Deng’s deal and instead focused on the threat to American security from the Soviet Union. This was not a problem for China, which, despite being ideologically aligned, had decoupled from its alliance with the Soviet Union in the 1960s for geopolitical reasons.

American economic fears in the 1980s centered on rapidly-growing Japan, rather than China. This must have provided no end of satisfaction to China, as not only were they ignored, but the focus was on their regional competitor. Ironically, the only reason Japan was able to economically threaten the U.S. economy was because the United States had forcibly opened its economy to foreign trade twice, once in the nineteenth century thanks to Commodore Matthew C. Perry, and then again after the American invasion of Japan in World War II. Japanese business leaders zealously took up methods for economic efficiency originally developed by American engineers and consultants in the aftermath of the war.

Deng gambled that the West had won against the rest of the world with trade for so long that it had forgotten how powerful it could be if the situation was reversed. He gambled that the West was too ideologically blinded by the Cold War to view China as a security threat and too ideologically blinded by free-market ideology to realize that free trade with China was a losing bet. Much like sixteenth-century Mongolia could grow from trade with China to gain an absolute advantage, so China could do the same with America. But rather than keep China blockaded as the Ming Dynasty did to Altan Khan, the United States gladly opened up to China. All it took was some clever public relations work on the part of Deng.

The experience of the West, where wealth led to liberal democracy, is historically contingent and will not reoccur in China. More than at any point in contemporary history, China sees itself as a strong power. Once China’s GDP surpasses America’s, the CCP will effectively enjoy infinite legitimacy at home. It would take foreign military intervention to topple the regime to stop China from being authoritarian and communist. But unlike Japan, China cannot be invaded. Instead, now aware of China’s monumental presence on the world stage, Western elites might take a leaf from Deng Xiaoping and relearn how to exploit trade policy.

Samo Burja is the Founder and President of Bismarck Analysis, a consulting firm that investigates the political and institutional landscape of society. He is also a Research Fellow at the Long Now Foundation, where he studies how institutions can endure for centuries and millennia, and a Senior Research Fellow in Political Science at the Foresight Institute, where he advises how institutions can shape the future of technology.

Image: Wikimedia Commons