By He Yafei Source: China-US Focus Published: 2019-11-7
The world today faces profound changes unseen in a century, including in its economy.
First of all, the rapid development of multi-polarization and economic globalization over the past several decades has brought about major changes in the balance of economic power. These changes are characterized by the rise of new powers in the East and the fall of old ones in the West, with the overall strength of developing countries and emerging economies rising considerably.
According to the World Bank, the global share of China’s GDP in 2018 was 15.9 percent, while the United States accounted for 23.88 percent. This means that China has reached 60 percent of U.S. GDP, the red line America has set for its challengers. Although GDP does not tell everything, it is indeed a hard indicator. Thanks to globalization and their own hard work, China and other developing countries have become an important part of the global production chain, and they are forming the world’s big market and a community of economic interest.
Globalization is irreversible, though it may vary in form. The formation of global production chains, the self-regulation of producers and the desire of consumers to pursue better products all make it possible for globalization to continue to grow. Trade frictions between China and the United States — or between any other two countries — will trigger adjustments in global trade flows, and the bilateral trade flow will become the trade flow for three or more parties.
China is the largest trading partner of nearly 130 countries and regions. This is an international trade network that should not be underestimated. China needs the world, and the world needs China. McKinsey & Company recently reported that China’s dependence on the world has declined over the past 20 years, and the world’s dependence on China has been rising.
China is already a country that relies mainly on domestic demand to develop. In the global financial crisis that began in 2008, China’s net exports accounted for 9 percent of its GDP. Now that proportion is only 1 percent, and it will continue to decrease as China’s domestic industrial chain improves.
Second, because of the decline of the U.S.-led Western growth model and the success of other models, world economic development paths and growth models have increasingly diversified. The capitalist system represented by the U.S. and other Western free economies is full of loopholes. In this system, capitalists are greedy, the gap between rich and poor is widening and all these countries and societies are experiencing institutional crises in every aspect. This has smashed the American-led international order and global governance system, which are being forced to adjustment.
Third, the accelerated development of the new scientific and technological revolution has brought about great changes in human economic activities and lifestyles, as well as in the forms of competition between countries. The Fourth Industrial Revolution is in the ascendant, a variety of major disruptive technologies have emerged, the transformation of scientific achievements is accelerating and the forms of industrial organization and industrial chains are more monopolistic.
Major world powers have increased investment in R&D in artificial intelligence, biotechnology, big data and the internet of things. Science and technology capabilities have become an important measure of a country’s composite national strength and have been elevated to become the major factors for competition and cooperation between major powers. But mutual benefit should remain the main purpose. For example, chips are a bottleneck in China’s IT industry, but China is the main chip consumer in the world. Chip companies in the United States and other countries cannot do without China in the downstream industrial chain for chips. Take Micron Technology, for instance. It sells 50 percent of its chips in China. Adding Apple’s sales in the Chinese market, the U.S. sells more than 60 percent of its chips in China. This market structure actually has a certain foundation for achieving stability and mutual benefit.
Fourth, affected by cyclical adjustments, the economic transformation of major economies, the impact of new technological revolutions and restructuring of production chains, the world economy is facing increasing downward pressure. Although the global financial crisis has passed, major powers’ excessive reliance on monetary easing has added to financial risks, and the likely recurrence of a financial crisis is a Sword of Damocles hanging over these countries.
Today, the populism and nationalism prevailing in the United States and other Western countries have fueled protectionism. These countries put themselves first. Trade frictions and even trade wars are on the rise. The global free trade system based on rules and with the World Trade Organization at the core is in danger of collapsing.
Faced with risky and turbulent changes in the world economy, the Chinese government has issued a strong signal, repeatedly stressing that China will push for further opening-up, and the breadth and depth of its openness will attract the world’s attention.
To this end, China must do the following:
1. Continue to manage its own affairs well.
It needs to uphold the leadership of the Communist Party of China, maintain political stability and social harmony, steadily promote economic transformation and development, and strike a balance between market efficiency and social equity. All this is the foundation upon which China will realize national rejuvenation and contribute to the prosperity of the world.
2. Dare to be good at struggle and cooperation and expand areas where the interests of China and other powers, especially the United States, converge.
It is important for China to properly handle its rising competition with the U.S. through cooperation. The United States believes that the imbalance between the economic structures of the two countries has created a huge crack in economic relations, making economic issues geopolitical. It also regards China’s massive investment in emerging industries and new technologies, including artificial intelligence, robotics, advanced manufacturing and biotechnology, as strategic competition and even strategic threats.
Under the influence of this kind of thinking, Sino-U.S. trade frictions, economic competition and so-called growth model competition will continue to exist. This, coupled with the lack of mutual trust, makes it hard to make the uncertainty associated with Sino-U.S. economic and trade relations go away in the short term.
What is the impact of U.S. tariff increases on China’s economy? Increased tariffs mean increased export costs, or the appreciation of the yuan. Although Japan and Germany once suffered in this respect, China’s economy is so huge that it has many other ways to hedge against increased tariffs. The powerful role of China’s domestic economic policies, and the integrity, stability and internal power of China’s economic system are unique features of China’s economy. Its per-capita GDP is less than $10,000, while that of the United States is more than $60,000. The gap indicates potential, though this potential cannot be fully tapped without certain conditions and hard work. In addition, China’s being the largest trading partner of more than 130 countries and regions provides an important adjusting and buffering network.
The decisive factor in economic competition between China and the United States lies in the internal policies of the U.S. Affected by multiple factors, such as ongoing populism, the approaching 2020 election and the impeachment process underway against President Donald Trump, Sino-U.S. economic relations have become more difficult and complex. China needs to prepare for that.
3. Persist in providing the global public goods the world’s countries need to develop economically.
China, as an economic and political power, needs to help develop a global governance system in the new era of globalization that will stabilize the world economy.
In response to global governance, China has proposed a number of new ideas and new approaches that are positive both to itself and to the world: increasing connectivity through the Belt and Road Initiative, strengthening collective security through cooperation, establishing a network of global partnerships to strengthen the cohesiveness and framework of cooperation and, on the basis of a global community of shared interests, working to build a human community with a shared future.
Although the United States and other countries have set many obstacles in the way of these global governance ideas and approaches based on their own narrow geopolitical considerations, the experience of recent years has proved that China’s ideas and approaches are indeed mutually beneficial, have involved many countries and are already reaping an early harvest.
The author is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.