China’s new shock
A few months ago, the Chinese authorities contacted some of the largest foreign companies operating in the country and asked them to appoint a representative for a small closed-door meeting to discuss China’s new economic strategy. The meeting was to be with a senior official at an undisclosed time and place. According to two people with direct knowledge, who insisted on anonymity, the companies were asked that the representatives be exclusively ethnic Chinese. By content and form, the anecdote is a good example of the determination with which China seeks to give its economy a more clearly national character, with the development of its own technologies and energy sources and the assignment of greater importance to domestic consumption than to foreign demand.
Chinese President Xi Jinping’s new strategy focuses on the concept of “dual circulation”. Behind this technicality is an idea that can change the world economic order. Instead of operating as a single economy linked to the world through trade and investment, China plans to separate its economy into two spheres. The former will remain in contact with the rest of the world (external circulation), but it will give prominence to the second (internal circulation), based on local demand, capital and ideas.
The purpose of dual circulation is to increase China’s autonomy. After a period of development based on exports, the authorities want to diversify supply chains to access technologies and knowledge without pressure from the United States. In doing so, China will seek to increase its dependence on it from other countries, in such a way as to turn those foreign economic ties into global political power.
The adoption of the dual circulation strategy raises the specter of a new shock the China, whose effect will be much greater than the first, which shook Western economies after the Asian country’s entry into the World Trade Organization in 2001. Beyond the immense wealth that such income produced and the millions of Chinese it drew from poverty, too created losers in places like him rust belt of the United States and the industrial districts of the United Kingdom, and that created the conditions for the British referendum on Brexit and for the electoral victory of former US President Donald Trump in 2016.
It took a long time for the political class in the West to understand the shock of China, because it was committed to a strategy of reciprocal linking in which Western consumers would enjoy cheap imports from China and Western companies would take advantage of that country’s economic growth by accessing its huge market. It was thought that this dynamic would put pressure on China to allow greater social and market opening, but the assumption was not met.
The effect of the new shock China over the West will be very different this time. Above all, the dual circulation strategy will affect other economic and social sectors. The danger is not for traditional industries, since with this strategy China seeks to achieve dominance in advanced sectors and compete with financial companies and law firms in the City of London, with automotive companies in Baden-Württemberg, with biotechnology companies in Sweden.
Specifically, the plan that Xi presented in 2015, Made in China 2025, puts the accent on sectors such as artificial intelligence, semiconductors, batteries and electric vehicles, and aims to increase the national content of key technology components to 40% in 2020 and 70% in 2025. The goal is to use state subsidies and Export and data controls for Chinese companies to replace foreign ones (or for foreign companies to become more Chinese). If Xi’s plan succeeds, the new shock China may take as many high-paying jobs in technology and services as the former did in heavy industry and textiles.
But it won’t end there. Today’s main geopolitical battle is not so much about enforcing global rules, but about being the one to dictate them. If before the West struggled to get China to conform to its trade, financial and intellectual property rules, now China is trying to create and enforce its own rules. There are already or were representatives of China at the head of the International Telecommunications Union (ITU), the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC); and more and more Chinese companies are trying to define the future of technology. Huawei already has more than 100,000 active patents, particularly in 5G technology, where it competes for international standard setting with Western companies such as Ericsson and Nokia.
Furthermore, competitive tensions are no longer contained within the framework of a bilateral relationship between China and the West. With the New Silk Road initiative, China established a network of economic ties with more than 100 countries, and it will not hesitate to use it to export Chinese norms, along with its model of state capitalism and state subsidies. Soon Western companies will find in other markets (if not already) the same difficulties to compete that they have today in China.
A consequence of the new shock China is that new rules on data, standards and research and development will force major Western companies to acquire Chinese characteristics in order to continue operating in the country. As a person who analyzes the private sector from a privileged position pointed out to me: “The idea of China is that if companies like Daimler or Volkswagen want to work in China, they will have to bring services, R&D and new products there. Beijing hopes that dual circulation will turn them into Chinese companies. “
Needless to say, the new shock China demands different answers from the previous one. Rather than trying to transform China or enter its market, the West’s priority must be to transform itself, in particular by developing investment and industrial policies that encourage innovation and protect its intellectual properties. And for your champions economic institutions have access to economies of scale, Western countries must institute shared standards on privacy, data protection, emission taxes and other issues. Ideally, this cooperation will formalize trade agreements, investment packages, credits and regulations that facilitate the access of non-Chinese technologies and schemes to the global economy.
Europeans, for their part, will have to implement internal reforms that protect them from economic coercion in a world of selective globalization and aggressive instrumentalization of interdependence. There is much talk about the restriction of political freedoms in Hong Kong and the repression of the Uighur minority in Xinjiang, but the shock that is coming is much greater. Western leaders cannot be caught again at a changed pace.
Mark Leonard is co-founder and director of the European Council on Foreign Relations.
Translation of Esteban Flamini.
© Project Syndicate, 2021 www.project-syndicate.org