The valley and the delta

Trump and Xi have evidence at home that openness Works

They both need to study it
 
IT USED to be much easier to spot the difference between the presidents of America and China. One would argue for free markets and economic liberalism, the other for centralised control. One would endorse democracy and the rule of law, the other freedom from outside interference. As Donald Trump geared up to meet Xi Jinping for the first time this week, in a summit in Florida that was due to start after The Economist went to press, those differences have narrowed (and in some areas, such as climate change, the positions have flipped).

This is partly a matter of style. Both Mr Trump and Mr Xi adhere to a personalised, “strongman” view of leadership. The American president is literally a brand; the Chinese are being encouraged to pledge personal fealty to Mr Xi. But it is also a question of substance. Both men claim to be supporters of free trade but subscribe to a doctrine of economic nationalism.

Chinese regulators use tariffs, antitrust laws and state media to target foreign firms; officials shovel subsidies at national champions; uncompetitive state-owned enterprises refuse to die.

For his part, Mr Trump vows to get tough on Chinese imports and threatens blanket tariffs. He sees the world as a series of zero-sum games, in which countries with trade deficits lose and those with surpluses win.

Both leaders are suspicious of openness. Under Mr Xi, China is one of the most closed big societies on Earth. The Great Firewall censors the internet. Capital controls are designed to stop money flowing out. Investment restrictions impede the path of money coming in. America is built on different precepts entirely. But Mr Trump has isolationist instincts. He wants jobs, supply chains and technologies to be located within America. He sees migration as a threat to be managed, not an opportunity to be encouraged—this week he began to tighten up the processes for work visas. He, too, likes walls.

Principles for reform design
 
Such attitudes serve neither country well. For evidence of the merits of openness, both leaders need only look to the most dynamic parts of their economies. Silicon Valley is envied around the world for its agglomeration of talent, capital and ideas. It is also a hymn to cosmopolitanism.

According to a study in 2016, immigrants founded or co-founded more than half of America’s unicorns—privately owned startups valued at more than $1bn. More than a third of the valley’s population is foreign-born, compared with a national average of 13%.

But inside China, too, the case for openness has powerful backing. Exhibit A is the Pearl river delta (PRD), a megalopolis in southern China that comprises nine cities in Guangdong, as well as Hong Kong and Macau. As this week’s special report lays out, the PRD has been the beating heart of the China miracle. Thanks to the liberal economic reforms introduced into the PRD by Deng Xiaoping from 1980 onwards, a sliver of land with less than 1% of the mainland’s territory and 5% of its population produces 10% of its GDP.

The PRD owes much of its success to the fact that it is overwhelmingly private: of more than 100 centrally controlled SOEs in China, only four are in this region. But its transformation also owes much to an embrace of foreign ideas and investment. The sleepy town of Shenzhen was designated a special economic zone in 1980; foreigners were actively encouraged to put money in. Shenzhen is now the Silicon Valley of global hardware startups, attracting investment from around the world; the delta accounts for a fifth of China’s foreign direct investment. There is little corruption or red tape involved in exporting goods or importing components; local officials toast foreign businessmen rather than try to shake them down. Hong Kong’s democracy is being stifled by the mainland government, but its economy is a conduit for global expertise and capital: mainland companies make up around half of the market capitalisation of the Hong Kong stock exchange.

There is no equivalence between the American and Chinese economies. Capital, people and ideas still flow freely into and out of America; China’s relationships with the outside world are semi-permeable at best. But where once it was obvious that the leaders of America and China would embody these differences, now neither truly believes in openness. Mar-a-Lago may be where Mr Xi and Mr Trump meet, but they should not forget the lessons of the valley and the delta.

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