Deng Xiaoping billboard, based on a photo from Wikimedia Commons user Caiguanhao
In 1979 poor harvests and miserable planning left the USSR extremely short of wheat and corn. The problem had been growing over several years, and the Soviets increasingly addressed the issue by using their limited amount of hard currency to import grain from the US, Canada, Europe and South America. For many, this was looked at as a hopeful sign. The need for imports was forcing the Soviets to participate in world markets and opening up new inroads for diplomacy. It was the crack in the door, the camel's nose under the tent that would allow capitalism to wash away the inefficient central government.
However, despite the very real threat of severe shortages in some areas of the Soviet Union, in January of 1980 President Carter used executive authority to restrict sales of US wheat, soybeans, and other agricultural goods to the USSR. The move was unpopular with US farmers, who saw the president's move as directly taking money from their pockets. It wasn't popular with farm state legislators of either party. It wasn't popular among other world leaders, who continued their sales to the Soviets and filled the gap caused by the missing US grain.
Unilaterally chopping off a vital component of the food supply may seem an odd move for a president whose foreign policy is perhaps best remembered for a staunch insistence on human rights, but in 1979 the Soviets were in the middle of their invasion of Afghanistan. Carter could not see how the US could respond militarily, but he was determined that the response would be more than a diplomatic wag of the finger. His conclusion was that US trade was strengthening the Soviets and allowing them to concentrate on their military invasion. Trading with the Soviets was tantamount to arming them.
Opposition was fierce and bipartisan. George McGovern appeared before a Senate hearing to declare that the fall in grain prices meant that the US was being asked suffer more than the Soviets. The grain embargo fueled hatred of Carter in many farm states, and helped seal his loss that November. In his campaign for the White House, Ronald Reagan made the overturning of the embargo one of his key policies. Soon after he took office Reagan kept his promise to repeal most parts of the embargo, though it would be three years before a new agreement was negotiated and the US was once again supplying a large part of Soviet grain. The USSR was happy. Farmers were happy.
But Reagan wasn't quite so happy. Despite ending the embargo, he wrote in his diary on 4 Feb 1981:
Cabinet discussion of grain embargo. I've always felt it hurt our farmers worse than it hurt Soviets. ... We need to take a new look at whole matter of strategy. Trade was supposed to make Soviets moderate, instead it has allowed them to build armaments instead of consumer products.Despite Reagan's mulling, US policy more and more revolved around the idea that expanding economic ties and the insertion of market-based economies, would disrupt centrally-planned economies and weaken the autocratic governments who ran them.
A new agreement with the Soviets came in 1983, and in 1984 Reagan became just the second US president to visit communist China. While his meeting failed to resolve issues around the continued independence of Taiwan, China enthusiasts were heartened by the strengthening flow of capital between the two nations. The connection between free trade and freedom was drawn more strongly every day. China might be reclusive, it might be too powerful to be susceptible to military threats, but that didn't matter. Once Chinese citizens got their mitts on Big Macs and their keesters behind the wheel of a Chevy, the communist government would pop like a soap bubble.
But the man Reagan had come to meet had other ideas.
Deng Xiaoping had made the long march with Mao, played a key role in the defeat of the Chinese nationalists under Chiang Kai-shek, and been a leader in the Chinese communist movement from a time when Mao was just another member. Still, his background was more varied and far more cosmopolitan than most of the Chinese leaders he had displaced.
Deng had been educated in France and the USSR. Unlike Mao, whose insistence on unworkable small scale furnaces to produce steel was one of the great failures of the Great Leap Forward, Deng had actually worked in a steel plant in Europe and understood enough of the process to reform the program when Mao was forced to step back following the disastrous Leap. Unlike the Gang of Four who had taken control during the Mao-inspired Cultural Revolution, Deng understood the importance of education. He didn't distrust intellectuals. He didn't base his ideas of the economy on wishful thinking.
The result of Deng's favoring of pragmatic strategies over strict adherence to dogma had been that he twice was forced from power, but once he outmaneuvered and unseated the Gang of Four, Deng moved quickly to consolidate his position in the Chinese government. By 1976, even though Mao's hand-chosen successor Hua Guofeng was nominally still leading the country, Deng was pushing open the door to foreign investment in China. He bought airplanes for Boeing and manufacturing equipment from a laundry list of western companies. In 1978, Coca Cola announced their commitment to build a plant in China. The closed kingdom was open for business.
Reagan's visit to China might have been the US president's first encounter with Chinese leadership, but it wasn't Deng's first visit with a president. As he was pulling together the cords of his coalition, Deng made visits to many nations, including dropping in on Jimmy Carter and visiting many US cities. By 1980, Deng was in position to institute sweeping reforms, and those reforms swept in capitalism, waves of manufacturing investments, and an economic growth rate that's become the envy of the world.
It's very tempting to write "the end" at that point in the story. Sure, China hasn't yet seen that tidal wave of democracy that will inevitably follow free trade, but it's coming. A Sino Spring could be just around the corner; another Tiananmen Square where this time the tanks refuse to roll.
But there's another way to read Deng's actions – one that's not nearly so flattering to those who believe that free trade is an either a harbinger of political freedom or an unstoppable force.
It's true enough that Deng realized that the Chinese economy needed an influx of capital if it was to compete with the rising technological tide that was sweeping through the west. However, he had also worked in the west. It was his treatment in western factories, not some scribbling from either Marx or Mao, that inspired Deng to join the Communist movement. Deng saw the flaws in the Chinese system, but he wasn’t blind to the flaws in the western system.
For Deng, the whole idea of communism was never to achieve the hypothetical end-stage envisioned by Marx. His understanding was, as always, visceral and pragmatic. He saw a centralized government and tight economic controls as a means through which China could overcome the vast advantages of the west. He saw a way for his nation to rise to equality, if not prominence.
Even if it's the enterprise zones and the Coke factories that we remember, what Deng instituted between 1976 and his death in 1997 was not an abolition of central planning – it was better central planning. It was central planning backed up by solid analysis, careful study, and computer models. It was the replacement of Mao's cult of personality with a cult of competence. Deng's economic reform was not an abandonment of his long held beliefs in favor of an embrace of free market capitalism. It was an attack, an open exploitation of the weakness in the system.
He started with a gamble. Deng bet that, despite grand talk, what mattered most to western nations was the establishment of economic ties, not as a means to an end, but as an end in themselves. So long as he was willing to open the nation to trade, everything else would fall by the wayside. It was a gamble he won. The stark truth of this can be read in the western reaction to the massacre in Tiananmen Square. By 1989, just a decade after Deng shoved open the doors, the US was already so dependent on trade with China and so committed to the idea that the foundation of freedom was free trade, that the response to the Chinese crackdown was extremely muted. Sanctions against China were limited to military sales. Even a bill to allow Chinese students to remain in the US until China's human rights abuses ended was vetoed by President Bush. The first action of the US government wasn't to withdraw from China, but to work toward "improved relations."
That the west would tolerate any level of political suppression for access to China was only one of Deng's insights. It was what opened the door. Though his understanding of communism was different from that of Mao and other leaders, Deng still followed the labor theory of value. It was on that point that Deng launched his attack.
Going back to Adam Smith and David Ricardo, economists had recognized that the first value of any item was the value of the labor that it took to create it. In a capitalist system, the price also included the compensation awarded to those who controlled the means of production. So if factory workers were paid $100 to make a TV, but the sales price of that TV was $200, the factory owner pocketed the difference. Under capitalism, the price of an item no longer reflected just the labor cost, but both labor and the premium to the owners. Because of this difference between labor value and ultimate price, the goals of employers could be very different than the goals of employees. It was this disconnect between the value of goods and the reward to workers that Marx saw as the intrinsic exploitation of the capitalist system. It was in this difference that Deng saw opportunity.
At the time Deng opened China for business, western societies had enjoyed decades of economic growth. Even though there had been periods of recession and surges of inflation, overall economies had expanded rapidly. Incomes at the top had risen, but so had incomes at the middle, and the bottom. The value of items was not completely tied to the value of labor, but the value of labor was still a big enough component in the cost of goods that workers in America and elsewhere could afford to buy the things they made. Labor cost and goods costs were still tightly coupled.
Deng offered corporations a chance to break that connection. By moving the source of production to China, they could sharply reduce the cost of labor. At the time, labor's value was increased by years of training and skill acquisition and Chinese workers lacked the experience of American workers, but Deng's assault was well timed. Manufacturing was becoming increasingly automated, and the value of long periods of training diminishing. Besides, the number of available Chinese workers was such that manufacturers could sort and sift to find those who learned fast and were most productive.
Far more than at any point in the past, the cost of goods and the cost of labor was suddenly and irrevocably severed. The goals of manufacturing workers in the US were no longer a concern to employers, because those workers were now ex-employees. Even as prices fell, the reduced cost of labor made it possible for corporations to extract higher profit margins.
By opening China as a manufacturing hub for the west, Deng punched a hole in the tub. He destroyed the value of labor, convinced corporate management that they could separate their customer base from their worker base, and broke the back of western manufacturing. He decoupled labor value from product value and wrecked the system that had made the US and other western nations wealthy. The result was a flood of inexpensive goods flowing in, a flood of money pouring out, enormous disparity in incomes between those who owned the factories and those who used to man them, and a rapidly approaching point where even cheap isn't cheap enough.
It's become popular to view American workers in the decades after World War II as "highly paid." The truth is they were "rightly paid," with incomes that tracked well against the value of the products they produced. This was only possible because of the tight alignment between workers salaries and the price of goods.
Rather than organize an international revolt of workers, Deng generated a conspiracy of business leaders willing to devalue their work force. He showed CEOs that they could become fabulously wealthy if they only reduced their companies to nothing more than nameplates and outlets – brand names for China Inc. He showed them that they could profit from the destruction of their own system. What we took as economic victory was really an invitation to economic suicide, and corporations lined up to jump.
Deng and the leaders who followed him rightly judged that we would overlook any abuses for money. That we would not severe relationships no matter how radical their actions. That we would mouth platitudes about the connection between capitalism and democracy, long after we were fully aware that no such relationship existed.
And in punching a hole in the bottom of the western moneybag, he showed how China could scoop up the falling dollar and use it to purchase the world.