How six ‘China shocks’ reshaped the global economic landscape

From China joining the WTO to Apple choosing the mainland to make its iPhones, the past 50 years have seen a series of Chinese moves that change the global status quo
They reflect a Chinese intention to join and participate profitably in the global economy

David Dodwell

Published: 4:30pm, 15 Apr 2022

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The past month has seen the publication of two vastly differing examinations of how China’s emergence is altering and challenging the balance of global economic and political power, China’s motivations and how we should respond.

The first book, The United States vs China: the Quest for Global Economic Leadership, is by Fred Bergsten, founder of Washington-based trade policy think tank the Peterson Institute. He argues that China is too large and too dynamic to be suppressed and that countries should not try to contain China but instead focus on “conditional competitive cooperation”.

The second, Getting China Wrong by Princeton political scientist Aaron Friedberg, sees China as an irreconcilable enemy. He says the United States and its allies “must mobilise their societies for a protracted rivalry with China”, including partial disengagement, intensified military preparation and “an active challenge to Beijing’s ideological narratives”.

The books sit at the heart of arguments and disagreements about deglobalisation and decoupling, as well as over whether China should be regarded as an enemy. They rest on analysis of the “China shock” to the US economy in particular, and the global economy in general, and on diametrically contrasted ideas about what this shock was.

For me, the apparently widely held notion that bringing China into the World Trade Organization in 2001 was a naive, mistaken decision is wrong. The “China shock” was not a singular event, either.

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China has delivered a series of shocks since the death of Mao Zedong in 1976 – some negative, some positive. With almost half a century passed since the first of China’s shocks, it is mistaken to act in ways that threaten to make an enemy out of a country that is overridingly obsessed with economic growth.

If China’s economic model creates challenges, then the main lesson must surely be to look to the shortcomings of competing models. On this, I am with Bergsten, who calls for “a comprehensive programme of domestic economic and social reforms that restore a sustainable political foundation for [the US] to exercise responsible global economic leadership again”.

If China’s model is proving unnervingly successful, the solution is to root out the flaws in other models and make them more fit for purpose. It was not the Luddites who ended up on the right side of history when threatened by mechanisation of the textile industry.

But back to those “China shocks” which have profoundly and irreversibly reshaped the global economy. First, and perhaps most important, was the strategic determination of China’s post-Mao leadership around Deng Xiaoping to challenge the bipolar world order. This had put the poor, resource-rich nations of the “global south” in the service of the small group of Western nations that contained most of the world’s wealthy consumers.

The Chinese delegation celebrate the signing of the protocol for China’s accession to the World Trade Organization in Doha, Qatar, on November 11, 2001. Photo: Xinhua

China’s success in using its huge population and market power to create a large, new consumer economy that can counterbalance the size and strength of the consumer economies of the West was arguably the first “China shock”. India is the only other economy worldwide with the potential to do the same, but so far it is China alone that has been able to deliver such a profound shock to the global economy.

The second China shock was the pragmatism that persuaded Deng to open the windows and let in the flies by inviting thousands of Hong Kong-based capitalists and manufacturers to shift operations into the Pearl River Delta. Within a decade of Mao’s death, there were upwards of 15,000 export manufacturers based in Hong Kong’s hinterland employing at least 10 million people.

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That same pragmatism underpinned the third shock, which successfully mobilised the more than 40 million overseas Chinese, or huaqiao, spread across the world to invest and manufacture on the mainland. These not only gave China extraordinary access to funds and skills but also laid the foundations for the diversified supply chains which today weave China into the global trade system.

The fourth shock can arguably be credited to Apple and its decision via Taiwan’s Foxconn to locate low-value-added assembly of its iPhones across China. As a brief 2010 case study by the Asian Development Bank on iPhone manufacturing in China showed, China found itself at the heart of a multibillion-dollar supply chain but capturing a bare 7 per cent of the nominal export value of that trade. The case showed in fine detail how immiserating it was for Chinese assembly workers to be locked in a supply chain that left all the high-value-adding parts of the supply chain firmly rooted in the US, Germany, Japan and South Korea.

From that point forward, Beijing began raising minimum wages, outsourcing low-value-adding assembly to other countries across Asia and edging up the value chain with the aim of capturing more value-added roles. This created the fifth “shock”, which is the beginning of the end of China’s deflationary gift to the world economy – a 20-year period during which low-cost manufacturing in China kept consumer prices down and inflation at bay.

A further important China “shock” was the recognition that progress depended on building strong infrastructure. This not only enhanced China’s own competitiveness but spawned a recognition – embodied in the Belt and Road Initiative and in institutions such as the Asian Infrastructure Investment Bank – that it could only build strong trade links with other developing economies if they also had better physical infrastructure.

None of these shocks suggest nefarious intent or the actions of an enemy. Rather, they show a Chinese intention to join and participate profitably in the global economy. Unfortunately, those who subscribe to the “Washington consensus” see the “China shock” differently.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view