Protectionist U.S.? Free-Market China? Not So Fast.
As the new U.S. president kills the Trans-Pacific Partnership, China is repositioning itself, and may well come out ahead.
PARIS—History will remember two images that symbolize the start of 2017: on one side, Donald J. Trump raising his fist the day of his inauguration in Washington, D.C.; on the other side, Chinese leader Xi Jinping smiling, and cheered by global business leaders, in the Swiss ski resort of Davos.
Add to that, perhaps, the flourish of the pen with which Trump signed the death warrant of the hard-won Trans-Pacific Partnership, which might have hemmed in China, but now won’t.
It’s worth reminding those who might have forgotten that it’s in Beijing, not in Washington, that the last major Communist Party on earth is still in power, and that the World Economic Forum in Davos was initially founded to celebrate and promote U.S.-style globalized capitalism.
However, such images notwithstanding, roles haven’t been reversed. Not really.
Donald Trump remains fundamentally a capitalist, albeit the nationalist and protectionist type, while Xi Jinping, however benevolent he appeared at Davos—the first Chinese president to go there—has not exactly been turned into the champion of free-trade and liberal globalization beyond serving China’s short-term interests.
A bit of history: When Deng Xiaoping—the great post-Maoist Chinese leader—put China on the path of “reform and opening” almost four decades ago, it was pure pragmatism, an attempt to catch up after years of ideological folly. China had missed the previous industrial revolutions in Asia, that of Japan and later of the South Korean, Taiwanese, and Singaporean “dragons”; but it found itself well positioned for the next wave.
During the second half of the 1990s, and with even more energy following its entry into the World Trade Organization (WTO) in 2001, China became the “world factory”, i.e., the favorite destination of Foreign Direct Investment, a land of outsourcing and mass production for the rest of the world.
China found itself in the heart of the global economic engine not out of ideological “conversion,” but out of necessity to create jobs, pull part of its vast population from misery, and finance the largest exodus from rural to urban areas in history, with the need to build infrastructure on a huge scale. It also helped give renewed legitimacy to a Communist Party that had been seriously shaken in 1989.
In the process, exports became a key element of the Chinese economic model, reaching a record 36 percent of GDP in 2006, compared with less than 5 percent during Mao’s time and 12 percent in the United States.
Following the financial crisis of 2008-2009, which weakened all of China’s export markets—the U.S., the European Union and Japan—the share of exports in China’s GDP fell to 21 percent while Beijing was attempting to promote domestic consumption among the newly emerged middle class as an engine for growth.
The election of a protectionist president in the U.S. came too early for Xi Jinping’s China, half-way through a delicate transition to a new economic model. China’s two-figure growth of the first decade of the century has now turned to less than 7 percent in 2016, and the IMF predicts a “modest” 6.5 percent this year.
More than ever, China needs stability and confidence, particularly in a year when the Chinese Communist Party holds a Congress where Xi Jinping hopes to reinforce his grip on power and place his men in key positions for a second mandate at the helm of the world’s emerging superpower.
Donald Trump is depriving China of this international stability as he has made Beijing the favorite target—together with Mexico and to a lesser extent Germany—of his “America First” economic nationalism.
China has no other choice than to take the opposite stand and promote free trade, open borders, and broadcast its attractiveness to American-based transnational corporations that the new U.S. leader wants to keep at home. Xi pleased his Davos audience by comparing protectionism with “isolating yourself in a dark room. While wind and rain may be kept out, so will light and air.”
But if he reassured business leaders gathered in Davos by refusing Trump’s trade war rhetoric, Xi Jinping did not turn overnight—as many commentators quickly concluded—into the champion of liberal economic policies.
China remains a strictly controlled and regulated economy in which the state is and will remain the main actor, even if it allows a booming private sector. Foreign investors have realized that the full opening of the Chinese economy they were hoping for since China’s admission into the WTO in the early part of the 2000s hasn’t materialized, and sometimes has gone backward.
One has to read the yearly reports of the American and European Chambers of Commerce in China to realize that fair competition is not possible in all sectors, that “national preference” is the norm, and that China defends its national interest much more vigorously than its partners and competitors.
For that reason, China has yet to receive the status of “market economy” it was hoping for from the U.S. and the European Union, and in the current climate it is not about to get it.
The turn of events has forced China to adapt to a world threatened by trade wars, the return of protectionist policies, and to regional blocs.
Optimally, from China’s point of view, this pressure from the new international climate could accelerate the transformation of its economic model and make it more self-sufficient and more self-centered—which its continental size allows. At the same time, its clout with client-states in Asia, Africa and Latin America will grow as it turns away from unwelcoming western markets.
Xi Jinping showed in Davos a serenity that probably hides lots of worries due to the aggressiveness of the man with the clenched fist in Washington. The new game was not anticipated by Beijing’s strategists, but they still hold several cards that will allow them to come out stronger, and perhaps as outright winners.