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China's new status quo

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This post is part of the US China policy debate thread. To read other posts in this debate, click here.

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2 February 2010 15:09


This post is part of the US China policy debate thread. To read other posts in this debate, click here.

I liked Graeme's description of China as a 'status quo-tidal' power and agree that China has plenty of reasons for liking the status quo when it comes to the international economy: after all, the current system has proved to be a great environment for facilitating the kind of rapid catch-up growth that has allowed China's economy to grow at an average annual rate approaching 10% since 1980.*

Yet such is China's size that its economic rise is nevertheless undermining that same status quo. Take the two examples of international trade and international investment.

As a major trading power, China has done rather well out of the current global trading system. China's arrival as a key trading power was sealed with its accession to the WTO at the end of 2001, and WTO-monitored and enforced checks on protectionism have helped allow China to grow market share from less than 1% of world merchandise exports in 1980 to a little over 4% by 2001, and to almost 9% by 2008 (and probably into double-digits by the end of last year). 

The problem is that this success has also created some significant strains. 

China's rapid growth is one reason rich countries have lost enthusiasm for further trade liberalisation, and why other developing countries have been cautious about locking in additional tariff cuts under the Doha process. China's quasi-mercantilist policy of maintaining an undervalued exchange rate has been an extremely successful development strategy. But it has imposed significant costs on the world, including by gradually eroding other countries' support for an open trading regime.

International investment offers a similar story. Once again, China has been a clear beneficiary of the existing, relatively liberal, policy environment, with huge inflows of foreign direct investment making a substantial contribution to the restructuring of the Chinese economy. But now that China is starting to become a significant source of FDI, and not just a recipient, rich countries are having second thoughts about the rules of the international investment game, to the extent of tightening controls – or at least oversight – on some capital inflows. 

Sure, some of this negative reaction can be put down to nothing more than rich country hypocrisy – one rule for you, another for me. But there is more to it than that. In particular, the high degree of state control embedded in Chinese capital outflows means that many recipient countries are understandably nervous about treating them in the same way as foreign investment by private sector players.

There's also a geopolitical element: it's not just a coincidence that the rest of the world decided to get nervous about Sovereign Wealth Funds (SWFs) once Beijing (and Moscow) announced that they were forming their own. Until then, SWFs had been a largely unremarked feature of the international financial landscape.**

So while China has certainly been a big winner from the existing international economic order, one consequence of its victory is a continuing reshaping of that order. And that's only the part of the story that involves other countries' reactions to the rise of China. 

Let's assume China continues on its economic ascent without a radical change in its current model (a big assumption, admittedly, but arguably no bigger than assuming something different). Given the quite different national economic regimes adopted by Washington and Beijing, it then seems quite reasonable to expect that an international economic status quo that is increasingly influenced by the Chinese economic model is going to end up looking different from one that has been centred on the strengths of the US model. 

We might get an international economic order that has a larger role for direct government intervention, a larger role for state-controlled economic actors, and a lower tolerance for unfettered markets than the one we have grown used to.

*One important area where Bejing is less than happy with the status quo is the central role of the US dollar.

**Large changes in the actual and forecast rate of growth of SWFs were also important factors in the increased attention paid to SWFs at this time.

Photo by Flickr user Wolfgang Staudt, used under a Creative Commons license.

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