I’m no stranger to a Devil’s bargain. I’ve participated in several such arrangements. On both sides.

I’ve sold my soul (or the secular equivalent) and bought the souls of others. When I was a buyer I didn’t fancy myself a devil (let alone the Devil). Neither, I imagine, did the people on the other side of the deal when I was a seller.

There’s a fair market price for everything, including principles, standards, values and souls. That price varies with circumstance, and you can generally gauge a person’s commitment to virtue (or penchant for naivety if you view morality as a contrivance) by how sensitive the price is to adverse developments. Someone who demands a high price even under the most onerous of personal conditions is righteous (or credulous). Someone who’s always a willing seller at a bargain price is ignoble (or a realist).

The implicit notion that the buyer in such a bargain always gets a good deal in the end isn’t borne out by reality. Very often, the Devil regrets the arrangement. “I held up my end of the deal, and all I got was this lousy soul. And a lot of trouble besides.”

“As this century unfolds and people look back on this day, they will conclude that we took a decisive step in shaping a global economic and commercial system,” then US trade representative Robert Zoellick said, on November 11, 2001. Zoellick’s remarks came as China joined the WTO during formal proceedings in Doha after more than a decade of wrangling. Membership negotiations were completed two months previous. On September 17, Mike Moore, WTO Director-General at the time, described a “defining moment in the history of the multilateral trading system.”

Both Zoellick and Moore were correct. China’s accession did indeed constitute a “defining moment” in history and a “decisive step in shaping” the global economy. Fast forward two decades and China’s WTO membership is generally viewed as one of, if not the, defining macroeconomic events in modern world history.

As far as transformative epochs go, it didn’t take long for this particular revolution to come full circle. Less than two decades after the WTO Ministerial Conference in Qatar, the seismic shifts set in motion by Beijing’s WTO entry crescendoed in a trade war premised on the notion that virtually all of blue-collar America’s problems could be laid at China’s feet. It took 15 years for China to negotiate its way into the WTO. 17 years after entry, allegations of unfair trade practices made Beijing the scapegoat for a US socioeconomic crisis four decades in the making.

It’d be hopelessly flippant to say there’s no shortage of literature documenting the impact of China’s WTO entry. It’s not an exaggeration to suggest that someone, somewhere is every day writing something new on the subject, although “new” is probably a misnomer in this context. The Western narrative, with some exceptions, says letting China into the club was a costly error, at best. You don’t have to look very far (or very hard) to find examples of US lawmakers, political entrepreneurs, think tanks, capital, labor, scholars, charlatans, experts, idiots and everyone in-between, describing the event as a policy mistake of epic (existential, even) proportions.

It’s not my intention to break new ground. It’s not clear there’s much new ground to break here, and in many respects, I’m just restating the obvious. But given the recent worsening of China’s economic woes, it’s important to understand what’s at stake and what animates the policy discussion in D.C. and Beijing. With China at an economic crossroads and the US hastily erecting obstacles along paths China might traverse to overtake America in key growth industries like A.I. and supercomputing, we should contextualize US investment restrictions and export controls not only by way of national security, but via the ill will China accumulated through alleged trade abuses over the past two decades.

To let many observers tell it, the US struck a Faustian bargain with China: Cheap imports and a ready market for American farm products in exchange for millions of lost jobs and the desolation of countless communities built around those jobs. China, meanwhile, leveraged its WTO membership to lift its population out of poverty and rival the US for global economic supremacy.

China’s economy is more than 10 times larger than it was in 2001. Its share of global GDP grew from under 4% in 2000 to nearly 18% today. Over the same period, America’s share dwindled from 30% to around 25%.

Those aren’t inherently “bad” outcomes. Indeed, we tend to take it as gospel that more growth is always better, irrespective of the tradeoffs. Just ask Mother Nature, who’s suffered immeasurably for our obsession with growing the proverbial pie. That was the subject of July’s monthly letter.

One happy consequence of China’s explosive growth was an almost miraculous reduction in economic precarity. In 1980, nearly everyone in China (more than nine in 10 Chinese) lived in extreme poverty. As of 1990, that share was still tragically high, at almost three quarters.

As the figure shows, extreme poverty in China virtually disappeared over the past two decades, falling from 46% when the country entered to the WTO to less than 1% today. For all intents and purposes, extreme poverty in China is eradicated.

Assuming it’s possible to argue there’s a downside to lifting billions out of extreme poverty, that argument in the context of China’s economic rise revolves around the notion that more than anything else, poverty reduction underpins the Party’s grip on power. In that sense, China’s populace struck their own Devil’s bargain: Total subordination in exchange for an ever rising standard of living.

To the extent the US and China’s many trade partners around the world helped lift billions out of poverty, the tragically ironic side effect was the condemnation of the same populace to perpetual political oppression by a regime whose claim on legitimacy grew alongside China’s economic clout.

That’s the general line of reasoning critics use to argue that China’s alarming totalitarian turn under Xi Jinping can be traced to the country’s WTO accession. When expressed in strict, straight-line terms, the veracity of that assessment is in some respects debatable, but the overarching point (i.e., that the regime derives a meaningful portion of its legitimacy from an economic success story that dates back roughly two decades) is difficult to dispute.

The impact of China’s economic rise on the US is well-documented, although it’s important for Americans to avoid adopting a revisionist history of the country’s factory heyday. Yes, manufacturing jobs as a share of total employment have dwindled steadily for decades, but outside of the post-War period, they never accounted for more than a third of employment. Modern America was never a nation comprised mainly of welders and steelworkers. More to the point, blue-collar disenchantment in the US didn’t begin with China’s economic renaissance, and the existential crisis facing some working-class white males in the country is a complex phenomenon that can’t be blamed on any one factor or external antagonist.

Still, certain aspects of the US-China trade relationship as it developed over the last two decades undoubtedly exacerbated middle-class angst in the developed world and particularly in the US. In 2020, the Economic Policy Institute estimated that America’s trade deficit with Beijing cost the US 3.7 million jobs from the time China entered the WTO through 2018.

“Jobs [were] lost in every US state and congressional district” the EPI asserted, calling the interdependence of the two nations’ economic cycles “destructive.”

You can, of course, cite innumerable studies claiming to quantify the deleterious impact of trade with China on the US labor market. Some studies are more convincing than others, but the narrative resonates with many downtrodden US voters, and their accumulated reservoir of rage capital was the oxygen for Donald Trump’s fiery 2016 campaign. Trump relied heavily on scapegoating China for working class deprivation in the US, and it worked. (Never mind the role of profits-first shareholder capitalism, which flourished in the golden years of Trump’s empire.)

There’s bipartisan agreement in Washington around the necessity of de-risking (if not de-coupling) from China and the sense of urgency increased drastically following the pandemic. The steady drumbeat of “China threat” messaging from US politicians on both sides of the aisle succeeded in creating a palpable sense of fear among the electorate.

The latest Gallup polling showed more than eight in 10 Americans viewed Xi’s China unfavorably. As the figure makes clear, public opinion in the US shifted dramatically in 2018, and the trends are intact.

The tendency for US lawmakers and administration officials to couch the de-risking push in terms of national security is to some extent a red herring. Besides protecting national security, one implicit goal (it was explicit during Trump’s tenure in the Oval Office) is to reclaim what was allegedly lost to China economically over the past 20 years. The two goals (protecting national security and reclaiming purportedly illegitimate economic gains) are subsumed under an umbrella agenda typically described in nebulous terms with idealistic and nationalistic overtones.

Economic and technological competition between the US and China is emblematic of a broader struggle between democracies and autocracies. The outcome is existential, both for the world and for America: Either the 21st century will be “won” by democracy (with the happy consequence of preserving US hegemony, restoring American prestige and recovering lost American dignity) or it’ll be won by autocracies (with unknown, but presumably dire, consequences). That’s the narrative.

There are two ways for the US to go about fighting the battle, one active, one more passive. The active approach entails tariffs, investment restrictions, export controls and, failing all that, outright sanctions. That’s the approach the US took under Trump and also under Biden so far. The problems are myriad, but one risk over time is that try as America might to justify its actions, punitive measures can appear capricious and vindictive — as if the US is extracting economic reparations from China by force. The optics around such efforts are suboptimal, particularly when paired with an increasingly inward-looking domestic agenda defined on the economic front by protectionism and industrial policy. China can complain that the US is engaged in hypocrisy and some of America’s allies might be inclined to agree.

A passive approach, by contrast, might entail enacting some common sense restrictions aimed at curtailing exports and investment with clear links to national security, but otherwise leaving Xi to sink his own ship. If more domestic political oppression was an ironic, unintended consequence (from the perspective of the outside world) of China’s WTO-enabled economic miracle, irony atop irony is the extent to which various manifestations of that oppression now threaten to undo that miracle.

Over the past three years, Xi’s turn for uncompromising authoritarianism led directly to increasingly poor economic outcomes. The Party’s draconian approach to COVID lockdowns looked like (and was) a success story early on, but became an anachronism over time. The rest of the world (or nations with the financial wherewithal anyway) inoculated themselves with the best vaccines and moved on. Xi could’ve approved and distributed Western mRNA vaccines anytime he wanted. But he didn’t. The cost of sticking with strict lockdowns to control outbreaks went well beyond the economy. By November of last year, Xi found himself staring at a restive populace. Over the same three-year period, his heavy-handed approach to addressing property sector excesses precipitated a rolling crisis which continues to pose a serious threat to the economy, and his efforts to rein in big-tech looked disproportionate and overboard to outside observers.

At the same time, Xi’s efforts to institute one-man rule and claim for himself more power than any Chinese leader since Mao intensified. The Party acquiesced, and their subservience showed up in mentions of Xi as the “core” and in incessant references to “Xi Jinping Thought.” Catchphrases like “common prosperity” became excuses for an exceedingly mercurial approach to regulation. And on and on.

It’s no coincidence that the Chinese economy continues to struggle in the face of such a domineering, omnipresent approach to managing China’s domestic affairs. Neither is it a coincidence that foreign investors are increasingly inclined to using words like “uninvestable” to describe the country. If China’s economic achievements over the past two decades sowed the seeds for a return to totalitarianism by handing the Party an irrefutable claim to honoring their end of a Devil’s bargain with a subservient populace, Xi’s growing despotism threatens to undermine that balance if it continues to stifle the economy.

Recall that the youth jobless rate in China hit record high after record high this year before Beijing finally stopped publishing the figures last month.

One argument says the US should simply sit back and let this process unfold. “Washington should think in terms of suction, not sanctions,” Adam Posen wrote for Foreign Affairs in August. “The more Beijing tries to stave off outflows of useful factors of economic production — for instance, by maintaining strict capital controls and limiting listings of companies in the US — the more it will deepen the sense of insecurity driving those outflows in the first place,” he went on, suggesting the autocratic playbook is doomed to fail eventually. “As seen repeatedly in Latin America and elsewhere, including during the final decline of the Soviet Union, such policies almost invariably spur more outflows of people and capital.”

August was a record month for overseas selling of Chinese equities through the trading links with Hong Kong. The exodus prompted irritable, but ultimately futile, protestations from some Mainland investors. One Shanghai-based fund manager derided overseas capital as “a bunch of aimless flies,” for example, in a post on Chinese social media.

In fact, it’s not “aimless” at all. Foreign capital might be fickle, and it’s certainly true that “hot money” can be the bane of emerging markets’ existence under certain circumstances, but the hard reality for China is that capital goes where it’s most welcome, and actions speak louder than words. Xi claims to want overseas investment, but the difference between word and deed in that regard is stark.

A measure of foreign direct investment in China fell to just $5 billion in Q2, the least in a quarter century.

There are a number of possible explanations, but a simple read is just that foreign investors are spooked, uninterested or both. Over the long run, that dynamic could weigh on exports. Around a third of China’s shipments abroad are attributable to foreign companies’ operations in the country.

So, could the US achieve both its national security and economic goals by simply waiting Xi out? Maybe. Assuming he continues down the road to despotism, and the economy doesn’t recover. But it’ll be key, according to Posen and others, that America doesn’t hurt its own cause by trying to fight fire with fire via its own brand of isolationism, confrontational trade policies and overwrought nationalism which might ultimately make capital (not to mention people) feel unwelcome in the US.

Minxin Pei, an opinion columnist for Bloomberg and a professor of government at Claremont McKenna College, recently noted that “Were the [Chinese] economy to enter into a long period of stagnation, [Xi] could always portray China as a victim of US economic warfare.” A less confrontational approach that relies not on restrictions, tariffs and sanctions, but rather on the self-defeating spiral of autocratic desperation, might mitigate that, even as the Party’s formidable propaganda machine would aggressively deflect blame.

One concern, obviously, is that Xi will eventually resort to war to revive the economy and whip the nation into a nationalist frenzy. As time goes on, I wonder if that’s actually a viable option. A Taiwan invasion would come at an enormous cost even if the US didn’t directly involve itself, and Xi would have to crack down hard on domestic dissent. Not all 1.4 billion Chinese would be excited about a military adventure that leaves scores dead, and if the response to December’s COVID protests was any indication, the Party is still very concerned about domestic discontent. If the US were to involve itself directly in a military conflict and the PLA lost, the Party’s prestige among the populace would suffer a grievous blow.

Note that Chinese assets would be shunned entirely by the international community if Xi invaded Taiwan. Treasury sanctions would proliferate and the “us or them” choice foisted upon neutral parties by Beijing and Washington would suddenly be no choice at all for most countries: No one save other pariah nations would choose an unprovoked aggressor state over the incumbent global hegemon, particularly when the incumbent issues the world’s reserve currency.

When China entered the WTO, all parties seemed to understand the gravity of the moment. Trepidation was pervasive. And there were misgivings aplenty, many of them grave. But recognizing the significance of a moment isn’t the same as mapping the prospective ramifications. Indeed, that’s usually an impossible task as it relates to epochal events.

Out of the many Devil’s bargains to which I’ve personally been a party, none ended without regrets on both sides, and it was hardly ever clear who the Devil was. As America’s most famous African American business mogul once put it, describing greed and vanity in the context of the two-sided Devil’s bargain at the core of the illicit drug trade, “The irony of selling drugs is sorta like abusing it / Guess there’s two sides to what substance abuse is.”

Two decades on from China’s WTO accession, all parties are now compelled to grapple with the many tragic ironies of the arrangement. Call it one more example of the 2020s forcing humanity to confront our species’ many demons.

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