Core to economic theory is the idea that people respond predictably to incentives. We assume that rational, self-interested individuals engage in action based on their subjective evaluation of the relative costs and benefits associated with a given course of action. Demand curves slope downward. These axioms are likely to appear on Day 1 of most Principles of Economics courses, as they form the basis for how economists think about human behavior. While we know well that the butcher, the baker, and the brewer are motivated by such considerations, a key insight of Ryan Yonk and Ethan Yang in The China Dilemma is that Deng Xiaoping, Xi Jinping, and rank-and-file members of the Chinese Communist Party (CCP) likewise respond to incentives.

In China, the CCP is an authoritarian regime offering little by way of political rights and civil liberties to citizens. Yonk and Yang argue that within this institutional context the CCP grows its power in two basic ways: Increasing control and providing benefits to citizens. Chinese citizens, like everyone else, have basic desires for opportunity, economic growth, and a predictable environment in which to live their lives. Ruling a population well over one billion, CCP actions should be interpreted as stemming from domestic considerations (aimed at growing and maintaining power) over against being aimed at the outside world.

To those initiated in the ways of public choice, these may not appear to be novel insights. The economic way of thinking is applicable in the non-market setting just as much as the market setting. However, one finds that analysis that carefully thinks through the incentives facing the relevant actors is often jettisoned when dealing with China. For instance, I gave a public talk last spring on the Political Economy of China’s Belt and Road Initiative, and during the Q&A one audience member asked a question that began in the following manner: “When China invades Taiwan. . . .” While it’s indeed possible that the CCP engages in such action, this particular individual sees invasion as a foregone conclusion. I responded by asking when this would occur, and in jest, if he wanted to bet on it. To this end, Yonk and Yang do well in outlining a few wrongheaded ways to think about China and, more specifically, the actions of the CCP.

One such approach is of the Sensationalist variety, which takes up a hyper-romanticized view of the existential threat that China represents to the world. It boils down to a struggle of Good versus Evil, Freedom versus Coercion, and which nation can more effectively spread Capitalism or Communism throughout the world. Yonk and Yang include a quip from a U.S. Senator at a political reception that smacks of this view: “Western businesses and financiers are selling the Chinese Communist Party the rope it will use to hang the United States” (p. 2). A recent Pew Research Center poll found that 81 percent of U.S. adults have an unfavorable opinion of China. Given this fact, it’s no surprise that this sort of rhetoric is common in the political marketplace.

Alternatively, we can look at the Realist approach from the International Relations community. While more scholarly rigorous, it falls prey to seeing states as singular actors, overemphasizing the role of foreign policy while overlooking the internal dynamics of states. Such thinking, in its strong emphasis on the balance of international power, is likely to conceive of the China–U.S. relationship as the sequel to the Cold War era relationship between the Soviet Union and the United States. In this view, China and the U.S. are inevitably headed towards a Thucydides Trap, a tendency towards war between an emerging power threatening to displace an incumbent-but-fading great power. No foul would be committed to share such views at a D.C. cocktail party, as this sort of thinking fits well within the U.S. cultural milieu.

However, Yonk and Yang argue that these approaches confuse more than they reveal. Take the notion that the China–U.S. relationship is the Cold War Part II. Unlike the Soviet–U.S. relationship, China and the U.S. have very strong economic ties. Total trade in 2023 between the two nations came in at just under $600 billion, and U.S. foreign direct investment (FDI) in China is north of $100 billion. To this end, the U.S. and China are more akin to rivals or competitors rather than fierce enemies seeking to extinguish one another through webs of intricate alliances and proxy wars. While conflict between the U.S. and China is of course possible, these factors have dramatically raised the costs of conflict relative to a scenario where deep economic integration was absent. Rather than thinking about CCP actions as maximizing Chinese hegemonic power, Yonk and Yang argue that careful public choice reasoning suggests that “the CCP should be viewed through the lens not of what is good for China, but rather what will allow the CCP to maintain power” (p. 23).

The issue of Taiwan provides another excellent example of the import of public choice reasoning when thinking about CCP behavior. Regaining Taiwan—seen as a breakaway province—is central to the CCP’s nationalistic political narrative. Accomplishing this would represent a conclusion to the Chinese Civil War. There’s little disagreement about both the strategic and symbolic importance of Taiwan in the eyes of Beijing. A simple Google search of “China Taiwan” headlines would have you believe that a Chinese invasion of Taiwan is imminent, if not already underway: “China likely to attack Taiwan within five years, panel told”; “U.S. Navy Seal unit that killed Osama bin Laden training to help Taiwan in case of China invasion”; “Chinese TV Shows How Taiwan Invasion Would Look”; “China Likely to Use Deception in Potential Taiwan Invasion: U.S. Report.”

While invasion is a possible outcome, the present equilibrium of threaten-but-do-not-invade is at least as likely, if not more so, when considering the incentives facing the relevant CCP actors. While a successful invasion of Taiwan would yield significant strategic benefits (deepwater ports) and symbolic benefits (making good on CCP promises, increasing party legitimacy) to the CCP, there’s considerable reason to suggest the marginal costs of this course of action exceed the marginal benefits. Yonk and Yang note that General Douglas MacArthur once described Taiwan as “an unsinkable aircraft carrier and submarine base given its prime location” (p. 163). The geographic constraints (few landing zones, treacherous oceans, harsh mountains) are considerable, not to mention the formidable ally Taiwan has in the U.S. The economic constraints facing the CCP are equally daunting. Given China’s reliance on foreign commerce, western economic sanctions in response to an invasion could be crippling. On top of this, Taiwanese companies have a substantial presence in mainland China. Foxconn, a Taiwanese technology manufacturing firm, employs well over a million Chinese workers. Yonk and Yang write of this, “If a war broke out, Taipei alone could render millions of China’s citizens jobless overnight. Beijing understands this reality” (p. 165).

To reiterate, none of this is to say the probability of a Chinese invasion of Taiwan is zero. As non-military specialists, it’s possible that Yonk and Yang may be underrating the threat of such an action. That said, conditional upon stability and control being top ongoing priorities of the CCP, the risk of a failed invasion presents a potentially catastrophic and destabilizing risk for CCP decision-makers in the quest to retain political power in China. With this in view, the present equilibrium appears more and more stable, as “the incentives to kick the can down the road, as the CCP has done for decades, are substantial” (p.164). In this sense, a strong nationalistic narrative (coupled with mock invasions and grey zone tactics like Chinese fighter jets entering Taiwanese airspace) may serve as a substitute for action.

Apart from foreign policy matters, Yonk and Yang likewise demonstrate that public choice reasoning yields important insights regarding domestic policy changes within China. Take the market-oriented reforms of the 1980s under Deng Xiaoping, for instance. These reforms included, among other things, a sweeping de-collectivization of agriculture, the removal of price controls, and new openness to foreign commerce. The private sector in China began its march forward, and famously, these reforms marked the beginning of what would become the Chinese growth miracle. Of these reforms, Deng famously quipped, “It doesn't matter whether a cat is black or white, as long as it catches mice.” It’s pleasant to imagine these reforms being the output of a conversion experience on the part of Deng Xiaoping and key politburo members after an Adam Smith book colloquium. More realistically, CCP decision-makers realized that low economic growth produces social unrest, and social unrest presents a threat to CCP stability and control.

At the time of these reforms, liberal theorists in the international relations community argued that economic engagement with China would eventually yield the adoption of liberal democracy. Increasing living standards would result in citizens worrying less about where their next meal would come from and more about political rights and civil liberties, the argument goes. Yonk and Yang point out that such a view underrates the self-interested and rational power-maximizing tendencies of political actors within the CCP. Of this episode, they write, “Following engagement, it is clear that Beijing merely leveraged the economic resources and political clout from liberalization to bolster its authoritarian rule” (pp. 30–31).

The China Dilemma presents a counterapproach to the prevailing approaches to China. It does so by deploying public choice reasoning to understand the actions of CCP actors. This yields a number of key insights. For one, choosing the pragmatic route over the strictly ideological route is a consistent feature of CCP actions over the last few decades. This approach has terrific explanatory power, answering questions such as: Why crack down on Jack Ma and other tech tycoons at the expense of billions of dollars of economic activity? (Answer: Maximize political power and stability.) Why constantly threaten to invade Taiwan and stoke nationalistic flames within the domestic populace along these lines? (Answer: Maximize political power and stability.) In line with Capitalist Peace Theory, economic engagement has no doubt raised the costs of war for China by creating strong incentives for cooperation through trade and commerce. But public choice theory “reconciles the merits of engagement and economic growth” (p. 30) with the realities of power-maximizing CCP decision-making. To the extent economic liberalization occurs, it isn’t due to the CCP’s embrace of the internal merits of this approach relative to others, but rather that it bolsters the CCP’s authoritarian rule.