Taliban making steady gains toward global legitimacy

The Taliban's quest for legitimacy is gaining momentum after Pakistan upgraded diplomatic ties last month, promoting its charge d'affaires in Kabul to the rank of ambassador and accepting the Taliban's counterpart in Islamabad.
At the time, Pakistan's Deputy Prime Minister and Foreign Minister Ishaq Dar said the Pakistan-Afghanistan relationship was on a 'positive trajectory' and that the move was a positive step towards 'enhanced engagement' in the areas of trade, security and counterterrorism.
This is a big win for the Taliban, particularly after its relationship with Islamabad broke down over terror attacks on Pakistani soil by the Taliban-affiliated militant group Tehrik-e Taliban Pakistan (TTP).
The situation had reached crisis levels when Pakistan carried out airstrikes on alleged terror camps in Afghanistan last year, killing 46 people and sparking border skirmishes between Taliban and Pakistani soldiers.
Pakistan's recognition is the latest in a series of diplomatic victories for the Taliban. China was the first country to seek closer ties, sending its ambassador to Kabul in 2023 before accepting the credentials of a Taliban envoy in Beijing. At the time, Chinese officials said the Taliban should not be excluded from the international community.
Today, China is the Taliban's closest partner. China recently hosted a trilateral meeting with Taliban and Pakistani officials in Beijing that successfully cooled tensions between the Taliban and Pakistan.
Beijing also announced it would extend the China-Pakistan Economic Corridor to Afghanistan, representing a potential Belt and Road Initiative-fuelled trade boon for the Taliban.
Taliban envoys occupy embassies in every Central Asian country barring Tajikistan, and the United Arab Emirates has also sent an ambassador to Afghanistan.
More recently, the Taliban has welcomed Indonesia's chargé d'affaires in Kabul and Iran has accepted the appointment of the Taliban's new Consul General in Mashad. Russia also plans to send an ambassador after removing the Taliban from a list of designated terror organizations.
Further afield, Japan hosted a high-level Taliban delegation in February, the first visit to the country by any Afghan government. For a regime accustomed to international isolation, engaging with the likes of Japan and Indonesia is seen as a key route towards international legitimacy.
India, too, is bidding to engage with the Taliban. There are reports that Indian Prime Minister Narendra Modi will soon accept a Taliban ambassador in New Delhi. That comes after Indian and Taliban foreign ministers met in Dubai in January. India clearly thinks this is the time to recognize the Taliban before the country is dominated by rivals Pakistan and China.
Even the United States, which battled Taliban insurgents for nearly two decades in the name of the War on Terror, has shown signs of softening on the regime.
For example, Washington removed millions of dollars worth of bounties for senior Taliban leaders in March, including for Interior Minister Sirajuddin Haqqani, to secure the release of George Glezmann, an American tourist detained by the Taliban in December 2022.
Despite this, the Taliban still faces stubborn obstacles to achieving full legitimacy. Most significantly, the regime continues to be denied Afghanistan's seat at the United Nations; it has been barred from taking the seat four times since 2021.
Many countries still refuse to recognize the regime due to its abysmal treatment of women – called 'gender apartheid' by the UN experts – and its close links to internationally designated terrorist groups.
History shows winning legitimacy is rarely a linear process and is often a game of diplomatic patience. The People's Republic of China spent years in isolation before it was recognized by the West as the legitimate government of China, taking its place on the UN Security Council in 1971 and recognized by Washington only in 1979.
This was a decision based on pragmatism – an acknowledgment the PRC was not going anywhere and that engaging with Beijing was then aligned with Western strategic interests.
Similarly, while China, India and the US have at one time or another all demanded the Taliban respect women's rights and root out terrorism, these unmet demands have not stopped them and others engaging with the regime by opening embassies, exchanging envoys and making deals.
There is a pragmatic view emerging that the Taliban is probably here to stay and that it is better to engage with the regime rather than further isolate Afghanistan.
The West seems to believe it can negotiate with so-called Taliban 'reformers' to improve the situation for women and girls, while China, Russia and Iran see the regime as a key ally against the deadly Islamic State in Khorasan (ISK), which has carried out attacks in Russia and Iran and threatened Chinese interests in the region.
But the Taliban's words and actions show this approach is not working. The Taliban continues to roll out punitive edicts oppressing women and made it clear its position is fused with its harsh interpretation of Islam and is thus non-negotiable.
And the West's decision to engage is no doubt seen by the regime as a sign of weakness, validating its stance and emboldening it to take further hardline positions and policies.
Indeed, with reports supreme leader Haibatullah Akhundzad has strengthened his power base and marginalized Taliban moderates, reforms look increasingly unlikely.
The Taliban has also wholly failed to defeat ISK, seen by the group's brazen assassination of Taliban powerbroker Khalil Ur-Rahman Haqqani last year, terror attacks on civilians in Russia, Iran and Turkey, and threats to do the same against India.
There is also certain evidence ISK has successfully infiltrated the regime's intelligence agencies and attracted disillusioned Taliban soldiers to its ranks. At the same time, The Taliban is believed to be backing Al Qaeda and TTP, likewise failing on its vow to keep Afghanistan terror-free.
The regime's inability to divest from terrorism makes the region less safe, a reality experienced by China, Russia, Iran, Pakistan and India since the Taliban returned to power.
Legitimizing and emboldening the Taliban, therefore, comes with significant security risks that may ultimately outweigh the potential diplomatic benefits of engagement.
Nonetheless, the Taliban is winning the battle of legitimacy despite these failings, helped by Afghanistan's strategic position between Central and South Asia and China's willingness to fill the vacuum left by the US after its fateful 2021 withdrawal.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

South China Morning Post

7 hours ago

• South China Morning Post

India will never restore Indus water treaty with Pakistan, Shah says

India will never restore the Indus Waters Treaty with Islamabad, and the water flowing to Pakistan will be diverted for internal use, Home Minister Amit Shah said in an interview on Saturday. India put into 'abeyance' its participation in the 1960 treaty, which governs the usage of the Indus river system, after 26 civilians in Indian Kashmir were killed in what Delhi described as an act of terror. The treaty had guaranteed water access for 80 per cent of Pakistan's farms through three rivers originating in India. Pakistan has denied involvement in the incident, but the accord remains dormant despite a ceasefire agreed upon by the two nuclear-armed neighbours last month following their worst fighting in decades. 'No, it will never be restored,' Shah said. 'We will take water that was flowing to Pakistan to Rajasthan by constructing a canal. Pakistan will be starved of water that it has been getting unjustifiably,' Shah said, referring to the northwestern Indian state.

Asia Times

9 hours ago

• Asia Times

Western democracies are actually pretty good at war

'They are a peaceable people but an earnest people, and they will fight, too.' — William T. Sherman I am not a military analyst or expert. Usually, I look at the world through the lens of economics, which I actually have some training in. But if you want to get a good holistic picture of the world, you need to understand at least a little bit about war and conflict. I think most pundits intuitively understand this, which is why you see them weighing in on things like the usefulness of military aid to Ukraine, or the cost-effectiveness of the F-35, or the need to establish military deterrence against China. And so I do the same, while being careful to remember that I'm not any kind of expert in the field. One of the most persistent and annoying tropes I see, in discussions about war, is the idea that autocracies are inherently tough and martial, and that democracies — especially Western democracies — are irresolute, decadent, flaccid, and generally not very good at fighting. You see this when rightists praise Russian military ads where soldiers do a bunch of push-ups, and decry the state of America's 'they/them army' in comparison. You can see it when leftists declare that America loses every war it fights (which is obviously false). The idea is ingrained in our deep history — Thucydides lamented that 'a democracy is incapable of empire', and plenty of modern people will cite autocratic Sparta's victory over democratic Athens in the Peloponnesian War.1 In fact, if you just looked at the results of the last two decades, you might be forgiven for buying the authoritarian hype. America was pushed out of Afghanistan, and its proxies quickly collapsed under the Taliban assault. Most people also say the US lost the Iraq War.2 Democratic Armenia quickly lost a war to autocratic Azerbaijan in 2020, Israel broke its teeth on Hezbollah in 2006, Russia smashed Georgia easily in 2008, and Russia easily took Crimea from Ukraine in 2014. Since the turn of the century, military victories for Western democracies have been few and far between. But over the past three years, the tide seems to have turned once more. Ukraine, astonishing the entire world, fought mighty Russia — a country four times its size and with far higher GDP per capita — to a standstill. In 2024, Israel smashed Hezbollah within just a few weeks; the Iranian-backed militia retreated from the border and its authority is now being replaced by the elected Lebanese government. And now there's the war between Israel and Iran. The war just started; all of us are still just monitoring the situation. It seems hard to think that Israel can prevail in a protracted confrontation with a nation with nine times its population and more than three times its GDP (PPP).3 But as of right now, the tiny David is smacking around the big Goliath. Israel quickly established air supremacy over much of Iran itself, despite the huge distances between the countries, using a mix of traditional aircraft and drones: Just four days into its ferocious air campaign, Israel appears to have gained a decisive edge in its escalating conflict with Iran: aerial supremacy over Iran…The Israeli military said Monday that it can now fly over the country's capital, Tehran, without facing major resistance after crippling Iran's air defenses in recent strikes, enabling Israel to hit an expanding range of targets with relative ease…Such control over Iran's skies, military analysts say, is not just a tactical advantage—it's a strategic turning point…Israel has carried out one of the most intense and far-reaching air operations in its history, targeting nuclear sites, missile launchers, airports, and senior figures in Iran's Revolutionary Guard Corps… For Israel to claim this over Iran just days after the strikes began is an impressive military accomplishment, says Michael Knights, the Bernstein Senior Fellow at The Washington Institute who specializes in Middle Eastern security. 'It's exceptional to get this level of freedom. I'm quite surprised that they've managed it,' he says[.] Israel has destroyed Iran's best fighter jets on the ground. Iran has been reduced to firing off ballistic missiles into Israeli cities in retaliation. But the strikes, while visually impressive, have not been very deadly (the Israelis all have bomb shelters). And the Israelis are managing to quickly degrade Iran's missile capabilities: Iran is firing fewer missiles at Israel each day after Israel secured dominance over Iranian skies, enabling it to destroy launchers and take out missiles before they even leave the ground…Israel said on Sunday that it had created an air corridor to Tehran. By Monday, it said its air force had complete control over the skies of Tehran…This aerial control is proving crucial. Iran fired some 200 missiles in four barrages in its first round of attacks against Israel on Friday and Saturday. But between Tuesday and Wednesday, Iran fired 60 missiles at Israel over eight different waves of strikes, at times sending fewer than a dozen at a time…Israel's aircraft and other security forces have destroyed 120 missile launchers[.] Israel hasn't yet decapitated the Iranian regime, but it's killing lots of key figures. This is a pretty stunningly bad performance for Iran — a country that is sometimes touted as a key member of a new Axis with Russia and China — against a country with the population and land area of New Jersey. Israel isn't quite Western — more than half of its population is descended from Middle Easterners — and its Prime Minister Benjamin Netanyahu has shown some authoritarian tendencies. Nor is Israel a particularly liberal state, at least as far as its treatment of the Palestinians goes. But it's a heck of a lot closer to being a 'Western democracy' than Iran is. Rumors of the weakness and decay of the West, and of the inferiority of democracies in the face of autocratic power, seem to have been at least somewhat exaggerated. What's going on? In fact, the first two decades of the 21st century may have been an aberration; democracies actually do tend to win wars more often than they lose. A quick glance at history will disabuse any neutral observer of the notion that Western-style democracies are militarily weak. Consider how France held off attacks by all of Europe for decades after its revolution, or how the Anglo-American side won both World Wars, or how Israel beat a bunch of its neighbors in a series of wars, etc. Hitler and Mussolini both loudly proclaimed that democracies were weak and decadent, yet it was they who ended up in history's graveyard. In fact, there's pretty robust evidence that democracies — at least, as we currently identify them — tend to win wars more often than autocracies do. Dobransky (2014) finds that 'democracies win the large majority (84%) of wars that they are involved in.' Reiter and Stam (2014) find the same: Analyzing all interstate wars from 1816 to 1982 with a multivariate probit model, we find that democratic initiators are significantly more likely to win wars; democratic targets are also more likely to win, though the relationship is not as strong. Mathematically, this must mean that democracies tend to defeat autocracies when the two fight, because if two autocracies or two democracies fight each other, a win for one nets out to a loss for the other. Political scientists have any number of theories to explain why this happens. One obvious possibility is that democratic countries fight fewer wars in the first place, and only tend to fight when they have a good chance of winning. This is David Lake's theory, which he calls the 'powerful pacifists' theory. Reiter and Stam, who have a book called 'Democracies at War', agree with Lake that autocracies tend to start riskier wars than democracies do. But they have very different reasons for thinking this. Lake thinks dictators tend to start wars for resources because running a dictatorship is very costly. Reiter and Stam, on the other hand, think that dictators start wars because they're more secure in their power, and thus are less afraid of the negative consequences from a war going badly. Honestly, I'm not very convinced by either of these explanations. Yes, there are some wars over economic resources — Saddam Hussein invading Iran to try to capture its oil fields in 1980 comes to mind. But I don't think most wars are mostly over treasure in the modern age. The World Wars were mostly over ideology and perceived threats rather than imperial conquests. Putin didn't invade Ukraine for money, and money has nothing to do with why Iran has been sending proxies to attack Israel for decades. Even when wars do have an economic component, the benefit of winning rarely justifies the cost of fighting in the first place — witness America's inability to extract significant value from the oil fields of Iraq. Likewise, I think it's unlikely that dictators are less afraid of losing wars. Yes, they may be better positioned to cling to power in the event of a loss, while democratic leaders will be promptly voted out of office. But the lower probability of an autocrat being tossed out of power comes with a much greater severity . A US president who loses a war might be voted out of office; when Mussolini lost a war, he ended up hanging from a gas station, riddled with bullets. So honestly, I'd be more cautious if I were a dictator. I think there's a much more obvious reason why democracies choose their wars more carefully. In general, the people who actually have to go fight a war tend to like war less than the leaders who simply order their armies forward from the safety of their bunkers. So democracies, where the people are more in control, tend to be pacifist; they only tend to fight either when they have a good chance of winning, or when their back is to the wall and they can't afford to lose. When they are finally moved to fight, the stakes tend to be high, the people tend to be united and motivated, and the cause tends to be one that draws in lots of allies. Economic factors probably play a role too. Lake thinks democracies have more economic resources to devote to war, because he believes they tend to spend more money on building up their economies, while autocracies tend to be extractive.4 This makes sense sometimes — think of how America outproduced the Axis in World War 2. On the margin, I think it makes a difference, but I'm skeptical of how much it can explain overall, because population size often differs so much between combatants that per capita GDP differences become less important. Consider Israel versus Iran — at PPP, Iran's economy is much larger, because it's a much larger country, even though it's poorer. There's another economic factor at work, which is technological advancement; having a higher per capita GDP generally means having better technology, which can be used for weaponry. Israel has a smaller economy than Iran, but because it has a richer, more technologically advanced economy, it can do a lot fancier stuff — with drones, aircraft, missile defense, precision weaponry, hacking, digital intelligence gathering, and so on. As for whether democracy actually makes a country richer and more technologically advanced, that's a topic of ongoing debate. Some people think democracy is good for growth; others think that as countries get richer, their citizenry starts to demand a transition to democracy. Other people think it's a historical accident. But whatever it is, democracies do statistically tend to be richer than autocracies, and being rich helps in war. Actually, you don't always need to be richer in order to have superior technology. Ukraine is much poorer than Russia on a per capita basis, but it has a lot of great computer programmers and engineers — it has repeatedly innovated in drone warfare during the current war, forcing Russia to scramble to keep up. Reiter and Stam also argue that the way dictatorships make decisions is not very conducive to effective war-fighting. In an op-ed written shortly after the start of the Ukraine war, they explain: [L]ike most dictators, Putin probably has some concerns about being overthrown by his own military. Dictators guard against this potential threat by centralizing military command authority and reducing the ability of lower-level commanders to take the initiative in battle… These moves may reduce an army's ability to seize power in a crisis — but also undercut the military's ability to defeat foreign foes…Putin's army today demonstrates the calcification and rigidity of a dictatorship. He appears unwilling to delegate decision-making autonomy to lower-level commanders, reducing military effectiveness… [D]ictators often surround themselves with yes-men and political cronies, who deceive or remain silent rather than tell the unvarnished truth…In contrast, democratic leaders are more likely to have the benefit of robust debate inside and outside government…Every indication is that the Russian president is isolated and getting poor information…Putin's generals and intelligence chief reportedly refused to tell him the truth before the war: that years of Russian military reform had not made substantial progress, instead producing a 'Potemkin military.' That makes lots of sense. To this I'd add the simple fact that if your country happens to have a dictator, he's probably simply more politically capable of micromanaging — and mismanaging — the military, whether or not he's doing it because he's afraid of a coup. So I'd say the three main hypotheses for why democracies tend to win more wars are: Democracies fight less, so they tend to only fight more winnable wars Democracies have better economies and technology Autocracies have structural tendencies toward military mismanagement and poor information flow Most of these make sense in explaining Ukraine's success in holding off Russia. Ukraine didn't want to fight this war, or any war; they only fought because their backs were to the wall and the survival of their nation was at stake. They have proven to be technologically innovative and resourceful, even with their much smaller economy. And their decision-making has been consistently better and quicker than that of the plodding Russians. These factors also help explain Israel's success against Iran. Israel does fight a lot of wars, but that's because it has a lot of enemies who attack it a lot; other than their slow colonization of the West Bank, Israel has no imperial designs. Iran, in contrast, is constantly meddling in conflicts all around it, supporting proxy armies in Yemen, Libya, Syria, Iraq, and Gaza. With Israel, Iran picked on someone who was able to stand up and punch it in the nose. Israel also has superior technology, better command and control, and a more unified, engaged populace. But there's one other important hypothesis for why democracies have tended to win wars — help from the United States. For about as long as democracy has been around, the US was the world's mightiest economic and technological power, capable of sending game-changing weaponry anywhere in the world. That didn't always guarantee victory, obviously — America's proxies in Vietnam and Afghanistan were so weak that they collapsed even with US supplies. And no country will be successful in war unless it makes plenty of weapons itself — as Ukraine and Israel both do. But it's undeniable that American assistance has been at least somewhat important for both Ukraine and Israel in their current conflicts. And that's a big problem right now. Because the US is no longer the world's leading economic power — at least, not by any metric that would matter in a war. And whatever remains of its technological leadership is quickly vanishing. For the first time since the Industrial Revolution, it's an autocracy — China — that commands the greatest resources. Even if the US hadn't allowed its defense-industrial base to wither, China would still manufacture as much as America and all of its democratic allies combined: Source: UN Industrial Development Organization As for technology, there are still a few areas where America is ahead, such as leading-edge computer chips and aircraft engines. But in most areas of manufacturing and software, China has caught up or almost caught up, including in AI. And in some crucial areas, like batteries and magnets, America has voluntarily forfeited and isn't even in the race. That means that if China does choose to fight America, one big traditional advantage of democracies — economic and technological supremacy — won't exist. Instead, a best-case scenario is that it would be more like World War I before the entry of the US, where Britain, France and Russia found themselves evenly matched against a somewhat autocratic but technologically and economically advanced Germany. Nor is China likely to rush clumsily into war the way Putin did. In the 20th century, China did get involved in some reckless, stupid wars — in Korea in 1950 and Vietnam in 1979, neither of which it won. But since then, China has shown extreme caution. Its leaders definitely seem determined to build up overwhelming power before taking Taiwan or other territories in Asia. If the U.S. has to fight China, it will be at a time and place of their choosing, not ours — and they will likely have most of their people unified behind the effort. This doesn't mean the democracies would have no advantage against China. The structural problems of autocracies — poor information flow, overcentralization of power, paranoid infighting — all seem present, as Xi Jinping completes his transformation of Deng Xiaoping's bureaucratic, technocratic system into something closer to a traditional dictatorship. Xi has already made a ton of mistakes, many of them related to micromanagement — Zero Covid, Belt and Road, the crackdown on IT in 2021, the real estate bust, 'wolf warrior' diplomacy, and so on. It's likely he would micromanage a war as well. Meanwhile, Xi has been purging his top military officers, many of whom he himself appointed, at a stupendous rate, for reasons unknown. So if China does fight America, it will have some of the same sorts of disadvantages that Russia has with Putin. But it's far from clear whether these would be enough to overcome China's massive manufacturing advantage. Democracy is a lot tougher than people give it credit for, but it's not magic. 1 Though note that Sparta itself was promptly defeated by Thebes, which had transitioned to democratic rule several years earlier. 2 This is clearly false. The US didn't just overthrow Saddam with ease; it also defeated Sunni and Shia militias alike, and then defeated ISIS. The regime that the US set up in Saddam's wake is still in control in Iraq, and is still friendly to the US By every conceivable past and present definition of what it means to 'win' a war, the US won the Iraq War. However, the victory didn't benefit the US strategically — it diminished America's geopolitical standing and broke the global norm of non-aggression that the US had championed since World War 2, paving the way for Russia's invasion of Ukraine. So the Iraq War is a demonstration of the fact that victory in war isn't always worth fighting the war in the first place. In contrast, the Afghanistan War was a loss for the US, but Al Qaeda was effectively destroyed, Osama bin Laden and all other 9/11 planners were captured or killed, and the Taliban were neutralized as a strategic threat. 3 PPP is probably better than market exchange rates when comparing economies for military purposes, since most military goods — especially soldiers' salaries and provisions — are produced domestically rather than acquired on world markets. This is especially true for Iran, which is under international sanctions. 4 This is a key implication of Selectorate Theory, which is popular among political scientists. This article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Become a Noahopinion subscriber here.

Asia Times

12 hours ago

• Asia Times

China's industrial policy has an unprofitability problem

Analyzing American economic policy isn't that interesting these days, except perhaps as a grim spectacle. So I've been thinking a little about Chinese economic policy. China's leaders leave much to be desired, but to their credit, they still think economic policy is about strengthening their nation, enriching their people and improving their technology instead of pursuing domestic culture wars by other means. Anyway, China has a lot of policy initiatives right now — cleaning up the fallout from the real estate bust, retaliating against America's tariffs, improving their health care system, and so on. But their most important policy — and the one everyone talks about here in the US — is their big industrial policy push. If you want to understand Chinese industrial policy, I recommend starting with Barry Naughton's free book, 'The Rise of China's Industrial Policy: 1978 to 2020.' The basic story is that until the mid-to-late 2000s, China didn't have a national industrial policy as such. It had a bunch of local governments trying to build up specific industries, usually by attracting investment from multinational companies. And it had a central government that tried to make it easy for local governments to do that, using macro policies like making sure coal was cheap, holding down the value of the Chinese currency in order to stimulate exports and so on. But it was not until the end of Hu Jintao's term in office — and really, not until Xi Jinping came to power — that China developed a national industrial policy, in which the government tries to promote specific industries using tools like subsidies and cheap bank loans. If you want a good primer on just how big those loans and subsidies are, and which industries they're going to, I recommend CSIS' 2022 report, 'Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective.' It's a lot. Here are the authors' estimates from 2019: Source: CSIS In some respects, this policy was successful. For example, it moved China up the value chain — instead of doing simple low-value assembly for foreign manufacturers as in the 2000s, China in the 2010s learned to make many of the higher-value components that go into things like computers, phones and cars, as well as many of the tools that create those goods. This had the added security benefit of making China less dependent on foreign rivals for key manufacturing inputs. China has doubled down on its centralized, big-spending industrial policy since then. In 2021-22, China suffered a huge real estate bust, crippling a sector that had accounted for almost one-third of the country's GDP. China's leaders responded by doubling down on manufacturing, encouraging banks — essentially all of which are either state-owned or state-controlled — to shift their lending from real estate to industry. In 2023, you saw charts like this: Source: Shanghai Macro via Bert Hofman Along with this industrial policy, you saw a massive surge of Chinese-manufactured exports flowing out to the rest of the world. The most recent export surge has been labeled the 'Second China Shock', but in fact, the trend was already headed in that direction well before the pandemic: Source: CSIS China's competitive success in manufacturing industry after industry has been nothing short of spectacular. In just a couple of years, China went from a footnote in the global car industry to the world's leading auto exporter: Source: Visual Capitalist Obviously, this export surge is the most important way that people in countries like the US experience the results of China's industrial policy. So most commentary on the policy has focused on exports, trade balances and so on. But it's important to remember that most of what China is producing in this epic manufacturing surge is not being exported. For example, take cars. Even though China is now the world's top car exporter, most of the cars it makes are sold within China: Source: Brad Setser China's auto industry is actually unusually domestically focused, compared to other auto powerhouses like Germany, South Korea, and Japan: Source: Bloomberg via Noahopinion In fact, this pattern holds across the whole economy. For an industrialized country, China is unusually insular — its exports as a percent of its GDP are higher than the US, but much lower than France, the UK, Germany, or South Korea: Source: World Bank Most of China's enormous manufacturing subsidies are not actually for export manufacturing; they're for domestic manufacturing. The rest of the world is just getting a little bit of spillover from whatever Chinese companies can't manage to sell domestically — except for a country as huge as China, a 'little spillover' can seem like a massive flood to everyone else. And here lies the rub. Essentially, China is huge and most of its trading partners are pretty small. There's a limited amount of Chinese cars, semiconductors, electronics, robots, machine tools, ships, solar panels, and batteries they can buy. And on top of that, some of China's biggest trading partners are levying tariffs against it. For most Chinese manufacturers, export markets are simply not going to replace the domestic market. And this means that Chinese manufacturers will be forced to compete against each other for a domestic market whose size is relatively fixed, at least in the short term. That competition will eat away at their profit margins. In fact, this is already happening. Vicious price wars have broken out in the Chinese auto industry, and even the country's top carmakers are under extreme pressure: Chinese carmakers' price war is putting the industry's balance sheet under strain…Current liabilities exceeded current assets at more than a third of publicly listed car manufacturers at the end of last year…China's leading carmakers are being forced to…fight for market share amid heavy [price] discounting… The dominant electric-vehicle maker BYD is deepest in negative territory with its working capital, followed by rivals Geely, Nio, Seres and state-backed BAIC and JAC, while the total net current assets of 16 major listed Chinese carmakers [saw] a 62 per cent decline from…the first half of 2021… 'Given the current downward trend, China's auto industry is expected to enter an industry-wide elimination phase . . . in 2026 at the latest,' [an analyst] warned. 'During the process, some companies will die of liquidity crises.'… BYD recently came under pressure to defend its financial numbers and business practices after Wei Jianjun, chair of rival Great Wall Motor, called for a comprehensive audit of all major domestic carmakers…'An Evergrande exists in [China's] auto sector at the moment — it just hasn't blown up,' he told local media, raising the spectre of the industry following the property sector into a spiralling debt crisis. How can these mighty world-conquering automakers be skating on the edge of bankruptcy when the government is pouring so many subsidies and cheap loans into the auto industry? The answer is simple: China's government is paying its car companies to compete each other to death. The Chinese government pays a ton of different car companies to make more cars. Chinese banks, at the government's behest, give cheap loans to a bunch of different car companies to make more cars. So they all make more cars — more than Chinese consumers want to buy. So they try to sell some of the extra cars overseas, but foreigners only buy a modest amount of them. Now what? Unsold cars pile up, prices are cut and cut again, and all the car companies — even the best ones, like BYD — see their profit margins fall and fall. It's not just autos, either — similar things are happening in solar, steel, and a bunch of other industries. Manufacturing profit margins are plunging across China's entire economy: Source: Bloomberg via Noahopinion A Chinese buzzword for this sort of excessive competition is 'involution.' Why is this bad, though? Who cares about profit, anyway? After all, China's workers are getting jobs, and China's consumers are getting a ton of cheap cars and other manufactured stuff. So what if rich BYD shareholders and corporate executives take a loss? Well, in fact, there are several problems. The first is macroeconomic. Price wars across much of the economy create deflation. In fact, China is already experiencing deflation: China's consumer prices fell for a fourth consecutive month in May…with price wars in the auto sector adding to downward pressure…The consumer price index fell 0.1% from a year earlier…CPI slipped into negative territory in February, falling 0.7% from a year ago, and has continued to post year-on-year declines of 0.1% in March, April, and now May…Separately, deflation in the country's factory-gate or producer prices deepened, falling 3.3% from a year earlier in May[.] A lot of this is probably due to weak demand from the ongoing real estate bust, but price wars prompted by industrial policy will make it worse. Deflation will exacerbate the lingering problems from the real estate implosion. Debts are in nominal terms, meaning that when prices go down, those debts become harder to service. More of the debts go bad, and banks get weaker — all those bad loans on their books make them less willing to make new loans. Consumer debts get more onerous too, making consumers less willing to spend (and consumers, unlike banks, are not government-controlled). This effect is called debt deflation. On top of that, a massive wave of bankruptcies could cause a second bad-debt crisis on top of the one that's already happening from real estate. Wei Jianjun of Great Wall Motor has been warning of exactly this happening. In fact, we can already see Chinese banks beginning to slow the torrid pace of industrial loans they were dishing out a couple of years ago: Source: Bloomberg via Noahopinion All of this could extend China's growth slowdown for years. There are also microeconomic dangers from overcompetition. Competition could spur Chinese companies to just innovate harder. But if China's top manufacturers are constantly skating on the edge of bankruptcy, that means they'll have fewer resources to invest in long-term projects like technological innovation and new business models. Basically, prices are signals about what to build, and China's industrial policies are sending strong signals of 'build more stuff today' instead of 'build better stuff tomorrow.' There's also the danger that China's government won't allow the price wars to end. Ideally, you'd want these price wars to be temporary; eventually, you'd want weak producers to fail, allowing top producers to increase their profitability. This good outcome relies on the government eventually cutting subsidies and letting bad companies die. But letting bad companies die means a bunch of people get laid off. Bloomberg recently had a good report about the political pressures on the Chinese government to keep the subsidies flowing: Local leaders laden in debt are rolling out tax breaks and subsidies for companies, in a bid to stave off the double whammy of job and revenue losses…For China's top leaders, employment is an even more politically sensitive issue than economic growth, according to Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute's Center for China Analysis…Already there are signs the weakening labor market is becoming a touchy subject: One of China's largest online recruitment platforms Zhaopin Ltd. this year quietly stopped providing wage data it's compiled for at least a decade. Already, Bloomberg reports that economic protests are proliferating across the country; with the real estate crisis ongoing, the government will be under even more political pressure to keep manufacturing employment strong. This could mean keeping crappy companies on life support. These so-called 'zombie' companies, kept alive only by a never-ending flood of cheap credit, were a big part of why Japan's economy slowed down so much in the 1990s. So this is the scenario where China's industrial policy ends up backfiring. Subsidies and cheap bank loans dished out to high-quality and low-quality companies alike could flood the market with undesired product, spurring vicious cutthroat price wars, destroying profit margins, exacerbating deflation, and generally making the macroeconomic situation worse. And then China's government could double down by trying to protect employment, by never halting subsidies for companies that fail. Usually, when we think of the costs of industrial policy, the main thing we think about is waste, and there is certainly plenty of waste in China's current approach. But China's experience is illuminating a second problem with industrial policy — the risk of vicious price wars and deflation due to the subsidization of too many competing companies. This article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Become a Noahopinion subscriber here.