Cold War with China Not What the World Needs

Reading about China’s 20th Communist Party Congress that took place last month in Beijing, it’s good to think about what its message is to the Communist Party, to the people of China and to the world. As the world’s second-largest economy and one of the most populous, if not the most populous, countries in the world, it matters.

Media reports focused on how Xi Jinping took a much harder line in his speech to the Congress this time, and that’s hardly surprising. What the international media as well as some Western think-tanks seem to agree on is that China is going to be much more aggressive and muscular in both its economic policy as well as its foreign policy. Much more strategic as well.

From what I have read so far – and I haven’t had a chance to read Xi’s speech itself – it appears that his message to the Chinese Communist Party is that under the current circumstances of tough economic challenges – both domestic and global -and a hostile international environment, China will have to double down on hard work and discipline. To this extent, Xi Jinping has ensured that the Politburo has members who will toe the party line and acquiesce to the “Great Leader”.

The economic challenges and the hostile world environment that the Chinese President, Xi Jinping, paints, are not that difficult to understand. Most of us who read and follow international news, including economic news, know this to be reality. The world has taken an anti-China stance, largely led by America, ever since Trump began his trade war with China by raising tariffs. China reciprocated with similar tariff increases. The important thing to note here is that this was not merely a trade war. It had long ago escalated into an economic and technology war between the two superpowers.

Although President Trump was initially obsessed with America’s trade deficit with China, the regime’s attention soon turned to the China 2025 Industrial Policy plan.  It so incensed the US administration, that advised by anti-China hawks like Peter Navarro and others, they decided that it cannot be about tariffs alone, but China’s plan to boost research spending and investment in key strategic areas such as technology and defence, that needed to be countered.

What America says – even if it is Trump – its western allies will soon follow. Starting with Trump walking out of the TPP, to various bans on Huawei, other Chinese tech companies, barring Chinese firms from listing in the US, and a host of other non-tariff barriers, America started to turn the screws on China. To the extent that people like Mike Pompeo started playing the religion card, urging countries like Indonesia to ban or boycott Chinese business because of the treatment being meted out to Uighurs, when that particular US administration was as anti-Islam as they come.

Western allies, especially those in Europe, began to think along similar lines for reasons of their own. Many countries in Europe began to fear a “Chinese takeover”, and as I have written before, they are wrong in raising the drawbridge on China. Until recently, Europe was China’s biggest trading partner and has benefitted hugely from exporting to, and doing business with, the Middle Kingdom. However, when it comes to China investing in their economies, hackles are raised. The Economist has recently written about Europe following a French blueprint, for President Macron has called for greater “strategic autonomy”, and part of the plan seems to be to keep China out. At the height of the US-China trade war, my country India too took a hard line on China with Aatmanirbhar (Self-Reliance) policies. The fact is that the self-reliance was only with respect to China, not other countries.

China at the centre of global supply chains; Image of Shenzhen by Robert Bye on Unsplash

Biden’s US Chips Act as well as parts of the terribly misnamed Inflation Reduction Act, both of which offer massive subsidies to American businesses in areas such as semiconductors, defence, EVs and battery technology, 5G broadband, and clean technologies are clearly steps to take the eco-tech war with China up a notch or two. The latest ban on selling high-end semiconductors and components to China announced by the US administration last month is most certainly aimed at containing China and restricting its growth, and is not merely a protectionist measure as The Economist seems to think. The Economist is right, though, in pointing out that with China at the centre of global supply chains, and the largest market, America might be hurting its own businesses in pursuing such restrictive policies. I think America might be scoring an own goal, or more likely shooting itself in the foot.

In the meantime, America’s goods trade deficit with China stands at US $271.9 billion for Jan-Aug 2022, according to the US Census Bureau and one can expect this to rise, as the trade balance appears to worsen in the latter half of every year. When comparing this with the same period in 2021, the trade deficit has grown by 25.2%.  According to the USTR which has figures for 2020, US goods trade deficit with China was US $310.3 billion in 2020, down -9.9% over 2019, while its services trade surplus with China fell by as much as -37.3% over the same period. A lot of that can probably be explained by the Covid pandemic, and I would rather look at the figures before and after the pandemic, in order to gauge the real trade balance between the two countries.

Similarly, EU’s goods trade deficit with China between the same period Jan-Aug 2022 is at €259 billion, a growth of 85.2% over the same period in 2021 according to Eurostat. As I have written before, the EU is no longer China’s largest trading partner, ASEAN countries are, thanks to the shifting of production out of China to several southeast Asian countries such as Vietnam and Cambodia. India’s trade deficit with China has only risen in the past few years to US $75 billion for the first nine months of 2022, and it is now being reported that as part of our Make in India programme, if Chinese companies wish to invest more here, we would welcome it. This makes a mockery of our earlier anti-China self-reliance plan.

As I can see, this is no longer about low-cost labour arbitrage, or trade tariffs or even intellectual property. It is a global attempt by the global north to try and contain and resist China and I fear that it is fast snowballing into a more general cold war with the country. The world would be making a huge mistake in attempting to isolate China or engage in a cold war with it, for China is not the Soviet Union of yore.

To understand the current anti-China stand, let us examine what is so different in the growth path that China is following now, since the 2008 financial crisis, say, and the first three decades of liberalization? The first three decades of China’s economic liberalization coincided with full-scale globalization across the world, where rich and poor countries benefitted from it in different ways, of course. And let us not forget most countries benefitted from China’s meteoric growth. They gained mostly on account of China’s vast domestic market, its insatiable appetite for commodities, and its low-cost skilled labour force.

As we all know by 2010 or so, China’s labour force was not so low-cost anymore, but their skill levels too improved vastly, especially in the tech and consumer electronics sector, that they were not so easily replaceable, as Tim Cook of Apple has himself said on many occasions. The huge domestic market exploded, including for high-tech goods, and luxury brands, because it was not merely a large market, but one with considerable purchasing power. However, thanks to all the growth in China, there was also increasing competition coming from local Chinese businesses and companies. This can be seen most in the tech industry as well as in automobiles, especially EVs. The Economist reports that Chinese EVs are big sellers overseas, not just in China. China has also made significant headway in 5G technology, leading the industry globally, as well as in AI, where it is reported to be a close second to America.

At the same time, China began to globalize its businesses, especially in large infrastructure projects such as power plants, ports and railways in poorer, developing countries in Africa as well as in South Asia. This dominance culminated in the grandiose One Belt One Road plan to connect all of Asia and Europe over land and sea. The world is right to be concerned that most of these large infrastructure projects come with Chinese financing that even with attractive terms, are onerous to repay and many poor countries get caught in a Chinese debt trap, increasing the country’s grip on them. If this is a legitimate concern, there ought to be a sensible way to resolve this specific problem at a multilateral level, whether WTO – of which China is a member – or any other. Instead of mixing it up with other issues, as Trump was wont to do, and not being able to deal with China’s rise, in a strategic manner.

For western economies to talk of strategic autonomy as far as China is concerned, is to frame the problem wrongly. It imagines a world where China is somehow dictating terms to the west, when it is the opposite that is true. The dangers are imaginary and exaggerated. America’s fears are especially blown out of proportion and it suggests a country that is paranoid, not one in command. Instead, to think strategically, one has to delineate problems clearly, and find ways to deal with each of them separately and with the long term in mind.

This is why I believe the world – especially Western powers – have been so inept at dealing with China and its rise. The solution, as I have written before, lies in engaging more with China, not less, and in trying to make them play a more responsible role as a global power. Unfortunately, when Biden came to power in America in 2020, the western world was so relieved to be free of Trump, that it immediately banded together to form a western coalition of democracies against China. The trade war that Trump began, that has become a larger eco-tech war between US and China in Biden’s time, is now developing ideological overtones. This smacks of trying to deliberately create an ideological divide, in a world characterized by greater economic interdependency in real terms.

China’s Zero-Covid policies aren’t helping; Image: Joshua Fernandez on Unsplash

And at a time when Russia is waging war in Ukraine and claiming sovereignty over it, this rumbling of a Cold War with China exacerbates the age-old problem of China and Russia voting as a bloc at the UN Security Council. Besides, if America thinks of itself as the country that created an international rules-based world order post WWII, it ought to create a new rules-based system for the current world order where it is no longer the only great power. So far, it is taking steps in the opposite direction.

It is another matter that the Chinese leadership is not doing anything to help improve the country’s position. As if the West’s bans on Chinese tech companies were not enough, Xi Jinping himself cracked down on Chinese tech companies, including successful ones like Alibaba. Their over-dependency on the real estate sector is a massive structural problem that is coming home to roost in the form of a meltdown in housing, with local governments still not able to raise their own taxes or finances. And finally, their zero-Covid policies have been the undoing of the Chinese economy in just the past year alone. Hopefully, the Chinese will take corrective measures and change course soon in the right direction, with the right policies.

That said, a lot of the policies to do with China turning inward and focusing on self-reliance, including giving up on the promise of free trade and globalized markets is in response to the policies of the West, especially America. And the western world must accept responsibility for its own economic war and isolation of China. Let us not forget that even with reduced holdings of dollar reserves, US $970 billion of China’s foreign reserves are in US treasuries. This is still the largest component of its foreign reserves and it makes China the second largest creditor to the US, with Japan now edging past as the biggest creditor.

China will not be so easy to ostracise or have a Cold War with. It is too large and important an economy in the new global order, and is systemically significant to too many countries around the world, from those in Latin America in the west to Australia, Japan and South Korea in the east. And asking countries to pick sides in this US-China war is a loser’s game that will take the entire world down with it. Time, the US demonstrated real statesmanship and ability to engage with an equal power.        

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s