The last time the US tried to destroy China’s economy

Reading Shu Guang Zhang (2001). Economic Cold War: America’s Embargo against China and the Sino-Soviet Alliance 1949-1963.

Shu Guang Zhang is a US-based academic of Chinese origin – when he wrote the book, a specialist in US history at the University of Maryland. The book is from 2001, when US-China relations looked pretty different than they do now (and different from how they looked during the period he’s writing about). For those reasons it deserves special attention, because you can see how much of what is happening now with the ever-expanding (and perhaps ever-less-effective) US sanctions regime already happened before.

From 1839 until the Chinese revolution succeeded in 1949, China was colonized and partitioned. At that time, the US policy towards China was called the “Open Door”: whatever other imperialists forced China to accept, the US also wanted. There would be no favored imperialist in China.

In the Chinese civil war that pit the Guomindang (Nationalists) against the Communist Party of China, the US bet on the Guomindang against the Communists until the very end.

But when the Communists won the US didn’t see a viable military option against China. Instead, they would have to wield the “economic weapon”, which they hoped would work just as well. In the State Department’s 1948 Policy Planning Staff assessment, China would be “plagued” by an “implacable population pressure” dragging their standard of living downward. Even if they got Russian help, Russia would see them as “a vast poor house, responsibility for which is to be avoided.” They would be desperate for trade and therefore vulnerable to the economic weapon. China was headed rapidly for economic disaster, and would soon come begging to the US. And when they did, the US would say no. Lewis Clark from the US embassy to China wrote to Secretary of State Dean Acheson in 1949: “How fatal for us to permit ourselves to be enticed into assisting the Communists in their desperate need only to discover too late that they wanted our help solely during the interim and until they could get along without us.”

The US had already set up a system of export controls against the Soviet Union: since 1947, the goal was to use export control to deprive the USSR of advanced technology. The US created List 1A of goods with military potential and List 1B of goods with indirect military potential. Anyone trying to send these goods to Russia would need licenses from the Department of Commerce – and the US worked closely with its Western to make sure this embargo held.

Wouldn’t that just drive China and the USSR together? That didn’t worry the US all that much in 1949. Edmund Clubb, US consul-general in Beijing, said if China went to Russia they would quickly “learn how profitless was dealing with the USSR.” Sanctions would force the Chinese to “learn the hard way that they cannot get along without the West.” The US consul-general in Shanghai figured it would “suit our purposes” if the “catastrophic economic situation here would prove a costly drain on Soviet economy, and Chinese Nationalism should make it a thankless task.” Meanwhile the US could “sit with dignity on the sidelines, not necessarily needling Communists, but denying them many things they want badly.”

When China intervened in the US war on Korea in 1950, US officials felt they couldn’t trade with enemies lest the materials they sent be used to “kill our boys.” “The massive Chinese aggression”, they told the British, “confirmed our anxieties and removed our hopes.” In December the US put all trade under control: “we license no goods whatever for export to Communist China, we prohibit our ships and planes from calling at its ports... and we have frozen Communist Chinese assets within the United States.” Truman also set out to “enlist the cooperation and support of other nations” in taking “such measures as are feasible to prevent the flow to countries supporting Communist imperialist aggression of those materials, goods, funds and services which would serve materially to aid their ability to carry on such aggression.”

The CIA suggested a naval blockade and “a campaign of aerial and naval bombardment against selected ports, industrial capacity and storage bases” to “create unemployment and unrest, hinder industrial production and development, and create serious administrative problems”. These ideas were dismissed as infeasible. The US also realized it couldn’t impose a total embargo against China because it would put too much pressure on its allies. Negotiating the multilateral embargo against China proved difficult, with Britain – doing business through its Hong Kong colony (which only became part of China in 1997) – finding itself unable to leave so much money on the table. Worse, Britain feared, too much of this and China might take Hong Kong back even earlier! The result was a Hong Kong compromise, which rendered the whole sanctions regime rather leaky. What a predicament: sanctions needed to pressure China clashed with Britain’s need to make money through its Hong Kong colony and risked an early decolonization.

On the Chinese side, Mao and the Communists realized they would need to rely on Soviet help “for the interim” as they tried to build their own industrial base. The Soviets of course had immense worries of their own, and the result was a tense relationship in which resentments built over time. The story of these resentments and how they grew into the deadly Sino-Soviet split is told in Economic Cold War, as are the economic planning measures that China took in this period. To focus on the sanctions, I won’t summarize either of those right now, as interesting as both are.

Back to the sanctions: China had to develop trade routes and networks with the Soviet Bloc and any other countries that refused to join the US sanctions regime. China also had to try to recover the assets and trade goods that the US stole: imports China had already paid for in hard currency that weren’t going to come, goods China had already sent away for which the payments would never come. Because the dollar was already the currency of international transactions, China also had to resort to trade in barter. This, too, caused resentment since China didn’t feel the USSR was giving them good terms on barter deals. It did, however, start China’s long experience in how to do substantial trade with third countries without using the US dollar.

By 1953, the US made a special assessment that concluded that China had made “rapid progress in economic reconstruction” and that the sanctions “have not appreciably affected the Chinese Communist regime’s ability to consolidate its political position.” Worse, China was exploiting sanctions “in domestic propaganda as an additional indication of the implacable hostility of the West.” How dare they! US allies, including even UK, France, Canada, etc., were increasingly less keen on a total embargo. But in the face of this assessment, Secretary of State Dulles made the perverse strategic calculation that “the best way to get a separation between the Soviet Union and Communist China is to keep pressure on Communist China and make its way difficult so long as it is in partnership with Soviet Russia.” The logic is flawed: pressuring two countries is far more likely to drive them together than apart, which is what happened repeatedly in the course of US-China-Russia relations.

When the Sino-Soviet split finally did happen at the end of the 1950s, the US of course didn’t help, but the agency for the split can only be located in China and Russia – this wasn’t a split engineered or masterminded by the US, but an accumulation of difficult issues between the two countries. A momentous event, but I don’t think an inevitable one or one that the US can count on to repeat itself. The US was eventually able to take advantage of the split, much to the benefit if its imperialist plans! These years too are a story for another time, and not this newsletter. Instead, let’s draw some lessons.

Studying this last episode of US-led economic warfare on China, what can we learn about what’s happening now? A few notes suggest themselves.

• The US evaluated military and economic options and decided on the economic weapon because the military options seemed infeasible against China.

• The US had difficulties cajoling its allies into taking economic and financial losses for the sake of punishing China.

• China was able to develop and progress relying on its internal resources and on using trade methods that the US couldn’t reach (barter, trade with the Soviet Bloc, and the use of Hong Kong).

• The Russia-China relationship fell apart on its own steam, and has dynamics independent of US desires or actions.

Which of these seem to still hold today? Which of these are subtly (or not subtly) different today? Here are some differences between that time and this one:

• The US does not have the technological or economic advantages it had then.

• The US doesn’t appear to have a viable military option but it might do it anyway (it might be an illusion but US Cold War planners seemed to have a slightly higher sense of self-preservation? Is that an illusion on my part?)

• Russia and China seem to be getting along well - better perhaps even than they did in the early 1950s before the Sino-Soviet split!

That is it for now. I’ll be coming back to this book to talk about the split, the famine of 1958, and other things raised by it. Have a good weekend.