Thu, Apr 21, 2022 page8

• Decoupling from West to hurt China

  • By Pei Minxin 裴敏欣
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  Russia’s unprovoked war against Ukraine has accelerated the division of the world into two blocs, one comprising the world’s democracies and the other its autocracies. This, in turn, has exposed the risks inherent in economic interdependence among countries with clashing ideologies and security interests. Although the coming deglobalization process would leave everyone worse off, China stands to lose the most.

  Of course, China was headed toward at least a partial decoupling with the US well before Russia invaded Ukraine. By reducing its dependence on US markets and technology, it has been seeking to ensure that this process happens on its terms. To that end, China in 2020 unveiled its so-called “dual-circulation strategy,” which aims to foster domestic demand and technological self-sufficiency.

  However, last year, China was still the world’s largest exporter, shipping US$3.3 trillion of goods to the rest of the world, with the US its leading export market. China’s overall trade with the US last year grew by more than 20 percent, as its total trade reached a new high. China’s trade with the EU also grew, reaching US$828 billion, even as disagreements over human rights torpedoed a controversial EU-China investment agreement.

  That agreement had been born of the belief that Europe would maintain strategic neutrality in US-China tensions to reap the economic benefits of engagement with China.

  However, if human rights concerns were enough to convince the European Parliament not to ratify the deal, Russia’s war against Ukraine — which China has tacitly supported, and which has pushed the US and the EU closer — seems likely to drive the EU toward a broader economic decoupling from China.

  One cannot blame Western democracies or their autocratic adversaries for prioritizing security over economic welfare, but they must brace for the economic consequences. A middle-income autocracy such as China would bear a far larger cost than rich democracies such as the US and its European allies.

  For starters, China would suffer from reduced access to major Western markets. Last year, Chinese merchandise exports to the US, the EU and Japan — accounting for 38 percent of total exports — amounted to nearly US$1.3 trillion.

  If China’s access to these three markets is halved over the next decade — a likely scenario — the country would need other markets to absorb about 20 percent of its exports, or about US$600 billion (based on trade data from last year).

  Here, China appears to have no good options. China’s dual-circulation strategy indicates that not even its leaders expect other external markets to pick up the slack left by the US and its allies, but China’s apparent belief that domestic demand can offset this loss also seems far-fetched.

  High debt, rapid population aging and an imploding real-estate sector would continue to hamper GDP growth in China, while sharp income inequality, soaring housing costs and inadequate social protections would constrain consumer demand. The closure of factories producing goods for export, and the associated job losses, would further exacerbate these challenges. A significant share of China’s infrastructure — especially energy and transportation networks — would be underused or even become redundant.

  Aside from facing shrinking export markets, China would lose access to the technologies it needs to build a knowledge economy. US sanctions have crippled telecom giant Huawei Technologies Co and prevented Semiconductor Manufacturing International Corp from getting its hands on the most advanced technologies.

  If the US persuades the EU and Japan to revive the Coordinating Committee for Multilateral Export Controls to choke off technology flows to China — a prospect made more likely by the Ukraine war — China would have little chance of winning the technology race with the US.

  The third key cost of deglobalization for China is harder to measure, but it might turn out to be the highest: the loss of efficiency gains from dynamic competition. Products made and sold in China are of a far higher quality today than they were two decades ago, largely because Chinese companies must compete with their Western rivals. If they are insulated from such pressure, they would not face pressure to produce higher-quality products at lower cost. This would hamper innovation and hurt consumers.

  All of these costs might be bearable if economic decoupling made China more secure. At first, it might seem to be doing just that, with China reducing its vulnerability to the kinds of economic and financial weapons that the West has deployed against Russia.

  However, as China’s economic might declines, so would its position on the global stage — and the Chinese Communist Party’s status at home.

  Seven decades ago, Mao Zedong (毛澤東) embraced economic self-reliance and foreign-policy militancy, which turned China into an impoverished pariah state. This history should be a stark warning to Chinese President Xi Jinping (習近平): If he allows Russia, China’s “no limits” strategic partner, to divide the world with its war on Ukraine, it is China that will pay the heaviest price.

  Pei Minxin, professor of government at Claremont McKenna College, is a non-resident senior fellow at the German Marshall Fund of the United States.

  Copyright: Project Syndicate
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