The China challenge | Financial Times


The biggest question in geoeconomics this year will be how the US and the EU develop their stances towards China. President-elect Joe Biden will need to shape a policy that accommodates growing and bipartisan US worries about China’s influence, while leaving Donald Trump’s brand of pugilism behind. The EU continues to juggle its recognition of China as a “systemic rival” requiring both “strategic autonomy” and working with allies, together with a desire to engage Beijing in rules-based economic exchange.

The EU’s investment agreement with China, agreed in principle at the end of last year, shows not only that these different political goals are a challenge to balance, but that they are also hard to communicate clearly. The Twitter exchange between trade expert Iana Dreyer and my colleague Alan Beattie is a good example of how differently well-informed observers judge the deal to contribute to the EU’s objectives. Sabine Weyand, the EU’s top civil servant for trade, has publicly endorsed Dreyer’s defence of the deal and given her own succinct argument for how signing the investment deal does further the EU’s goals.

Free Lunch is, for now, suspending judgment on the deal; we would very much like to see the full text published. But this and other ways the EU and the US relate to China will be one of the topics we will follow this year. In the meantime, let us share some analysis from last year that provides a useful basis to judge policy developments.

EU-China and US-China relations are obviously much broader than just economic. But the economic aspects are important in their own right and, what is more, they profoundly shape the politics. And Chinese economic policy is changing. To get one’s head around the change, a good place to start is my former colleague James Crabtree’s very accessible account of the new doctrine of “dual circulation”, promulgated by China’s autocrat Xi Jinping. The “dual” here refers to the international and domestic legs of economic growth, respectively, and the doctrine reflects an increased emphasis on the domestic side.

There are at least three dimensions of how Beijing’s new policy elevates the domestic. The first is to rely more on domestic demand, even including consumption demand, relative to external (export) demand. That has long been a sensible step, all the more so when China has put the pandemic behind it sooner than advanced countries, whose ability to fuel demand growth remains fragile. The second is more indigenous technological development, a trend whose successes and limits are already illustrated by 5G technology, where Huawei has stolen a march on western companies yet remains reliant on specialised chips produced in advanced economies. The third is heavier political control over this technological development and over the economy generally.

The doctrine is a defensive turn, in Crabtree’s reading, “a darkly pessimistic economic strategy, fit for a new Cold War” where China risks being cut off by the other global economic blocs. But it is a defensive strategy with offensive consequences on the foreign side. All the three shifts involved in the dual circulation doctrine have international implications, some more subtle than others.

For a sense of how Chinese thinkers see dual circulation, read the excellent Jingshan report published by the China Finance 40 Forum. Titled “Release China’s New Advantage of the Super-Large Market”, it makes very clear how developing the domestic economy is expected to bring global advantages because it creates incentives for technological progress, attracts capital and encourages pick-up of Chinese technology abroad.

The focus on domestic technological development is also linked to an interest in promoting the use of Chinese technology abroad. Beijing’s intense interest in international standard-setting often goes under the radar because of its highly technical nature. Yet as a Heinrich-Böll-Stiftung report from last year shows, it is an important element of the geoeconomics of China’s growth. It highlights a Chinese approach to using demanding technical standards at home as a way to force technological upgrading. It also points out that encouraging the use of Chinese standards in its Belt and Road infrastructure project can lock host countries into dependence on Chinese suppliers and generally help grow a Sinocentric network of economic relations. (Interestingly, the Jingshan report specifically mentions the spread of Chinese mobile payment technology.)

Finally, there is a sinister side to the intensification of political control of economic activity. At home, it has come to a head in, for example, the government’s crackdown on tycoon Jack Ma, who has disappeared from public view. But increased politicisation of the economy has a counterpart in international economic relations, too. In a report for the National Endowment for Democracy last year, Martin Hala describes the use of “corrosive capital” by Chinese state-directed companies abroad — a mix of commercial incentives and outright bribery to create a network of relations between companies, think-tanks and government officials promoting Chinese interests in other countries’ political debate and policymaking.

Deriving global economic heft from the size of the domestic market is, of course, something both the US and the EU have done. China is, however, more conscious and strategic about it: the US could take its influence for granted in the postwar era, and the EU has, to a large extent, enjoyed the “Brussels effect” without having to fight for it. China’s geoeconomic strategy means that both other blocs must update their stance. How they do so will do much to determine the global economy’s shape in the years to come.

Other readables

  • In my FT column this week, I argue that if Joe Biden really wants to emulate Franklin Roosevelt, he cannot content himself with “merely” rescuing the economy and ending the pandemic — he must use his short window of opportunity to enact policies that fundamentally reshape how the US economy works.

  • Bank of England rate-setting committee member Silvana Tenreyro wants to talk about negative interest rates. In a new speech, she argued that the evidence showed they were an effective tool to stimulate the economy.

  • Peter Orszag, Robert Rubin and Joseph Stiglitz have published a joint contribution to the debate about the future of fiscal policy, arguing that deep long-term uncertainty about the economy requires more automatic adjustments to budgets, leaving policymakers to make discretionary decisions where they are really needed.

Numbers news


- Advertisement -

Leave A Reply

Your email address will not be published.