Why China has more to lose from decoupling than the US
- While Beijing may not have started the disengagement process, it is committed to seeing it through, with huge efforts to achieve self-reliance
- But China’s rise is inseparable from globalisation, and given the economic challenges the country is already facing, many of its efforts seem certain to fail
For more than three decades, the global economy was defined by unbridled integration and unprecedented interdependence. Neither political spats nor localised wars could slow the globalisation train. Markets were markets, business was business, and multinational firms became more multinational. Not any more.
The People’s Republic would not be where it is today without globalisation. International trade, investment, and capital-market access drove economic growth, while knowledge transfer – aided by engagement among students, scientists and scholars – enabled technological levelling up.
Ties with the outside world also forced China to introduce a legal system capable of establishing and enforcing contract and intellectual property law. And the expansion of China’s economic might enabled the country increasingly to project power abroad.
But, in recent years, the openness that underpinned globalisation – the “rising tide that lifted all boats” – has given way to a geopolitically focused, zero-sum mindset. International commerce and finance have increasingly been shaped by national-security considerations.
Export controls, the blacklisting of companies and restrictions on market access in sensitive sectors, such as certain cutting-edge technologies, have become commonplace.
Other countries have also increased their scrutiny of Chinese investment and restricted certain types of commercial exchanges with China. Sanctions over China’s human rights abuses in Xinjiang and Hong Kong have been introduced as well.
China might not have initiated the disengagement process, but it seems committed to seeing it through. In refusing to condemn Russia’s war on Ukraine, its leaders made clear that, in their view, the US – and the West more broadly – is in terminal decline, and now is the time to challenge the existing world order.
The extent to which this is attainable is impossible to know precisely. But China’s efforts to achieve self-reliance will certainly not succeed across the board. As The Economist reported in February, China is struggling the most in areas where supply chains are longer and more complex, such as mRNA vaccines, agrochemicals, computer operating systems and payments systems.
But China’s bid for self-reliance might not only fail; it could backfire. As The Economist report also pointed out, when Chinese companies are cut off from foreign competition and expertise, their capabilities are stunted.
As disengagement progresses, many critical sectors – such as the internet – are likely to split into two distinct blocs, each with its own rules and standards. The divide in digital standards, data management and usage provisions, and network equipment and telecommunications services, will grow. Market access restrictions and new approval and licensing requirements will proliferate.
China’s economic “miracle” seems well past its peak. Annual economic growth could well drop to 2-3 per cent in the coming years, meaning that the official goal of doubling per capita income and GDP between 2020 and 2035 would not be realised.
Moreover, prices for commodities – especially those that are key to China’s housing and construction sector – will decline. While the higher costs of newer, more regional supply chains will generate inflationary pressures, weaker Chinese demand and a cheaper renminbi will reduce them.
Though the renminbi will enjoy a status on par with the Japanese yen, the British pound and the Canadian dollar, it will not come close to displacing the US dollar.