US and China go from growing the pie to fighting over slices

Imagine there are two types of policymakers in the world: those who are looking to increase the size of the global economic pie and those who are focused on fighting for their own share of it.

For most of the past few decades, pie-expanding economists were the major force pushing reforms in China and shaping US-China relations. That's no longer the case. China's recent Communist Party Congress saw a generation of pro-market officials pushed out—and a former president who gave them room to operate literally ushered offstage. In the US, meanwhile, it's now pie-protecting national security hawks calling the shots. For China's development, and for relations between the world's two largest economies, these shifts have profound consequences.

The leadership group unveiled by President Xi Jinping last month looks vastly different from those who helped helm the economy in decades past. Premier Li Keqiang, who has both economics training and long experience steering macro policy, has been replaced as Xi's No. 2 by Shanghai party boss Li Qiang, who has mostly provincial experience and a thin résumé on national economic matters. Other economic reformers are also headed for retirement, and there's no next generation to replace them among the allies Xi has promoted.

That's a long way from the situation more than a decade ago under then-President Hu Jintao—whose abrupt and seemingly involuntary exit at last month's meeting has become the defining image of the transition. Back when he was in charge, Hu allowed his second-in-command, Premier Wen Jiabao, to manage day-to-day affairs. And smart technocrats were empowered to experiment with reforms to the economy and financial system.

Nowadays, the kind of collective leadership that Hu represented has been eclipsed, along with the single-minded focus on development that he enabled. In its place, China looks set to be guided by strongman rule, adherence to the party line, and an emphasis on national security that neither Xi's predecessors nor would-be successors are able to challenge.

Economic management under Hu was, of course, far from perfect. Too much stimulus in the wake of the 2008 global financial crisis left an overhang of debt and excess capacity that continues to weigh on China's prospects. Corruption, too, was endemic—and Xi's fight against it was ultimately one of the major tools he used to consolidate power. But even with these flaws, Hu's economy worked: China enjoyed rapid growth and low inflation, the central bank delivered on significant reforms such as liberalizing the foreign exchange system and world-class companies such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. emerged.

The decline in influence for the economists is clear to see in the changing of the guard over the decades. In the 1990s, powerful Premier Zhu Rongji executed an aggressive pro-market agenda, ultimately taking China into the World Trade Organization and closing thousands of ailing state-owned enterprises. In the 2000s, one of his followers, Zhou Xiaochuan, led the central bank, pursuing a narrower but still impressive set of reforms on exchange and interest rates. The third generation, Guo Shuqing and Yi Gang, now run the show at the People's Bank of China. But their names aren't on the list for the new central committee for the party, strongly suggesting that they will retire in 2023. Also on the way out is another prominent economist, Liu He, an important public face on the international stage for Chinese policy and a catalyst of reform in the early years of Xi's tenure.

It's not clear what's driving the decline. Maybe it's Xi's aversion to market economics. Maybe it's because openness and engagement advocated by economists don't make sense in a more hostile world. Maybe it's just the natural end of a technocratic dynasty. Whatever the reason, the influence of pro-market thinking in China's governance, already vanishing fast, will fade further.

There are parallels, albeit inexact, to this changing of the guard in the US, where the influence of economists is fading. In the 1990s, heavyweights such as Alan Greenspan, Robert Rubin and Larry Summers played an expansive role in Washington. Partly as a result, the focus of the US-China relationship was on expanding the size of the pie by welcoming the emergent powerhouse into global markets. To the extent that national security was part of the discussion, experts confidently proclaimed that closer trade ties would result in China aligning with US values.

Missing from that analysis were two considerations. First, distribution: Who would benefit from the expanding pie? It turns out the answer was mainly China, with exports to the US supercharging growth. Big US corporations also gained, with a sugar high of rising profits as production shifted to low-cost Chinese factories and a new market of 1.4 billion consumers providing fertile ground for increased sales. American workers? Not so much. Many lost out as jobs were shipped overseas and wages stagnated.

Second, how powerful are economic ties in catalyzing a shift in values? As it happens, not very. China's leaders proved adept at assimilating what worked on propelling rapid growth. They proved equally skilled at excluding anything that looked like Western democracy. "When you open a window," China's former paramount leader Deng Xiaoping famously said, "both air and flies come in." Deng's followers turned out to be good at benefiting from the fresh air—and killing the flies.

No surprise, then, that the economists are no longer dictating policy. There's nothing pie-expanding about the tariffs on hundreds of billions of dollars of goods introduced by President Donald Trump and retained by his successor, Joe Biden. If the US still believes that technological revolution will be a democratizing force in China, it's not evident in the recent decision to block access to the most advanced semiconductors.

How should we think about the ouster of economists? In the US, perhaps it's no bad thing. The prophets that welcomed China into global markets were right that it would be good for growth. They were blind to the profound consequences when the benefits of that growth were unequally shared and naïve in their assumptions about the supposed link between economic openness and political reform. Economists should have a seat at the geopolitical table; they shouldn't run the table.

In China, the exit of the economists is clearly a negative. From entry into the WTO and the reform of the state-owned enterprises to liberalization of interest and foreign exchange rates, pro-market economists have played a vital role. If their voice is no longer heard, the prospects for further reform are dimmed, and the challenge of dealing with major problems such as the current property slump is magnified.

Meanwhile, with economists replaced at the negotiating table by security hawks, the chances of the US and China sitting down to eat pie together have diminished sharply, no matter how you slice it.

Imagine there are two types of policymakers in the world: those who are looking to increase the size of the global economic pie and those who are focused on fighting for their own share of it.

For most of the past few decades, pie-expanding economists were the major force pushing reforms in China and shaping US-China relations. That's no longer the case. China's recent Communist Party Congress saw a generation of pro-market officials pushed out—and a former president who gave them room to operate literally ushered offstage. In the US, meanwhile, it's now pie-protecting national security hawks calling the shots. For China's development, and for relations between the world's two largest economies, these shifts have profound consequences.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.