China must break out of its regional free-trade isolation
China should have seen it coming. Its piggyback ride on the last wave of globalised trade led to its spectacular economic rise. But its success was based on an asymmetric strategy: exploit free trade for its exports, while practising mercantilism against key trading partners. Normally that would invite retaliation, but China had its timing right and it was lucky. Not any more!
It likes to complain now about a concerted US-led attempt to contain it economically and geopolitically. An op-ed in this newspaper by He Yafei, a senior official under the State Council, complains how China is being excluded from major regional free-trade agreements led by the US. Quite simply, the pendulum has swung the other way. There is no use in feigning moral indignation like a wronged damsel. In international politics and trade, we are all whores.
For years before the 2007-08 financial crisis, the West was in the grip of a neo-liberal ideology that gloried in free global trade. More importantly, as the mercantilist host-exporter, China had a willing borrower-buyer in the US.
China was happy to invest and export by keeping down the yuan and controlling capital flows. The US was happy to borrow like mad and to be the recipient of Chinese goods and funds. China achieved high domestic investment rates and full employment. The US enjoyed high consumption and economic growth by borrowing at low rates. However, the US economy crashed under all the debt; its subprime mortgage collapse triggered the global crisis.
What we increasingly see, as He complains, is not multilateral free trade, but US-led restricted trades with allies without China. Three major trade deals, for example, are being negotiated by the United States without China. That is to be expected. The free ride is over.
How China will break out of its increasing isolation by US design will test all its ingenuity. President Xi Jinping has been thrown into a whole new ball game, and whether he achieves a breakout will ultimately determine whether he is judged a success or a failure. But all foreign (trade) policy starts at home. Mercantilism served the interests of the powerful and protected state-owned enterprises. Xi knows they have to be reformed to liberalise the economy, but does he have the will?