China knows how to buy off enemies

By MICHAEL SCHUMAN / BLOOMBERG

THOUGH China is playing coy for now, it’s likely to buy large quantities of American goods as part of any final trade deal with the US in order to narrow the long-running imbalance between the two countries. The propriety of demanding such purchases is highly questionable. Punishing China with tariffs on its exports until it awards bigger orders to American companies and farmers is effectively extortion.

The Chinese, though, have faced this sort of blackmail many times over their history. And the way they’ve chosen to handle it holds lessons for the US today. The biggest: Be careful what you wish for.

The history goes all the way back to 200 BC, during the earliest years of China’s imperial age. The newly formed Han Dynasty (206 BC-AD 220) was threatened by the Xiongnu, who had forged a powerful confederation of tribes on the northern steppe. The founding Han emperor marched with an army to defend his empire, only to discover he was badly outmatched.

Held under siege by the militarily superior nomads in the dead of winter, the emperor barely escaped with his life and what little remained of his frostbitten force.

In the wake of the humiliating defeat, the Han court decided, in essence, to pay off the Xiongnu. The Han agreed in a peace treaty to hand over large amounts of silk, grain and other goodies annually; in return the Xiongnu promised not to maul the Chinese empire. With their talent for colourful euphemisms, the Chinese described the exchange not as bribery but as “peace through kinship relations”.

The policy was controversial. Some Chinese officials argued it just made practical sense. The Han were not strong enough to beat the Xiongnu on the battlefield and the amount of money involved, though a mind-blowing windfall for the steppe nomads, was a bargain for the rich dynasty.

Some argued further that the arrangement would eventually weaken the Xiongnu, by making them dependent on Chinese wealth.

Others, however, condemned the strategy as appeasement. Though the treaties ostensibly treated both parties as equal, the Chinese were in reality in an inferior position, paying a form of tribute. The situation was the reverse of the proper world order, in which the Chinese emperor’s rightful place was on top. One Han statesman described the arrangement as “a person hanging upside down”.

Worse still, the Xiongnu were never satisfied. They persistently demanded larger payoffs, while continuing to raid Chinese territory anyway.

The Chinese lost patience. In the 130s BC, the strengthened Han Dynasty, under a more militant emperor, shifted from “peaceful” relations to war, later eliminating the Xiongnu as a major threat to China’s security.

The parallel with today should be clear. Once again, a Chinese government, confronted by a foreign foe, intends to use some of its ample wealth to preempt more dire outcomes. The amount of money involved is not significant to the Chinese; they have to import their soybeans and natural gas from somebody, so it might as well be the US. Meanwhile, among the barbarians — in this case, the Americans — the sum is being heralded as a veritable treasure, with US President Donald Trump repeatedly boasting about the expected bonanza for US farmers.

Beijing will almost certainly try to use the lure of these billions to wriggle out of more meaningful concessions.

Chinese negotiators appear to be resisting the more critical reforms originally demanded by US negotiators, such as scaling back China’s market-distorting industrial policies. If anything, the purchases could leave the US in a weaker position by making American farmers and energy companies more reliant on Chinese customers.

If it works, buying soybeans will also buy China time to strengthen itself, just as it did during the old dynasties. The Chinese are perfectly willing to sacrifice a bit of money (and pride) today if it means they can become stronger in the future.

All the while, the Trump team is fostering ill-will among China’s leaders by pressing for bigger purchases. Thus, the recent Chinese condition that the US be “realistic” in its requests. The bitter taste left by humiliating “tribute” payments might come back to haunt the US, by offering Beijing yet another reason to hold a grudge against Washington.

The US would be better served forgoing the payoffs and focusing on its original complaints: The torrent of subsidies the Chinese state lavishes on favoured companies and the regulatory hurdles holding back foreign companies in China. Stripping away such unfair practices would give US companies more freedom to do business in China and likely narrow the US trade deficit on their own. There’s no reason to think extortion will work any better now than in the past. — Bloomberg


This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.