China will be the big loser of de-globalization

Russia’s unprovoked war against Ukraine has accelerated the division of the world into two blocs, one comprising the global democracies and the other its autocracies. This, in turn, exposed the risks inherent in economic interdependence between countries with opposing ideologies and security interests. And while the coming process of de-globalization will make everyone worse off, China stands to lose the most.

Of course, China was heading for at least partial decoupling with the United States long before Russia invaded Ukraine. And he has sought to ensure that this process takes place on his terms, reducing his dependence on American markets and technology. To this end, China unveiled its so-called dual circulation strategy in 2020, which aims to foster domestic demand and technological self-sufficiency.

And yet, last year, China was still the world’s largest exporter, shipping $3.3 trillion worth of goods to the rest of the world, with the United States its top export market. In fact, overall trade with the United States grew by more than 20% in 2021, with total Chinese trade hitting a new high. Trade with the European Union also increased, reaching $828 billion, even as disagreements over human rights torpedoed a contentious investment deal between the EU and China.

This agreement was born out of the belief that Europe would maintain its strategic neutrality in the Sino-American Cold War, in order to reap the economic benefits of engagement with China. But if human rights concerns were enough to convince the European Parliament not to ratify the deal, Russia’s war on Ukraine – which China has tacitly supported and which has brought the United States and the EU – seems likely to lead the EU towards a broader economic decoupling with China.

Western democracies or their autocratic adversaries cannot be blamed for prioritizing security over economic well-being. But they must be prepared for the economic consequences. And a middle-income autocracy like China will bear a far greater cost than wealthy democracies like the United States and its European allies.

For starters, China will suffer from reduced access to key Western markets. In 2021, China’s merchandise exports to the US, EU and Japan – accounting for 38% of total exports – amounted to nearly US$1.3 trillion. If China’s access to these three markets is halved over the next decade – a likely scenario – the country will need other markets to absorb around 20% of its exports, worth around $600 billion (based on 2021 data).

Here, Beijing seems to have no good options. China’s dual circulation strategy indicates that even its leaders do not expect other overseas markets to pick up the slack left by the United States and its allies. But China’s apparent belief that domestic demand can make up for that loss also seems far-fetched.

High debt, a rapidly aging population and an imploding real estate sector will continue to dampen GDP growth, while high income inequality, soaring housing prices and inadequate social protections will limit consumer demand. The closure of factories producing goods for export and the associated job losses will further compound these challenges. Much of China’s infrastructure, especially energy and transportation networks, will be underutilized or even become redundant.

In addition to facing declining export markets, China will lose access to the technologies it needs to build a knowledge economy. US sanctions have already crippled telecoms giant Huawei and prevented semiconductor maker SMIC from getting its hands on the most advanced technologies. If the US persuades the EU and Japan to revive the Coordinating Committee for Multilateral Export Controls (CoCom) to stifle technology flows to China – a prospect made more likely by the war in Ukraine – China will have little chance of winning the technology race with the US.

The third key cost of deglobalisation for China is more difficult to measure, but it may well turn out to be the highest: the loss of the efficiencies of vigorous competition. Products made and sold in China are of much higher quality today than they were two decades ago, largely because Chinese companies have to compete with their Western rivals. But if they are isolated from the competition, they will not be pressured to produce better quality products at lower cost. This will hinder innovation and hurt consumers.

All of these costs could be bearable if economic decoupling made China safer. And, on the face of it, that might appear to be the case, with China reducing its vulnerability to the kinds of economic and financial weapons the West has deployed against Russia. But as China’s economic power declines, so too does its standing on the world stage, as well as the status of the Communist Party at home.

Seven decades ago, Mao Zedong embraced economic autonomy and foreign policy militancy, which turned China into an impoverished pariah state. This story should be a stern warning to President Xi Jinping: if he allows Russia, China’s “limitless” strategic partner, to divide the world with its war against Ukraine, China will pay the price. heaviest price.

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