Post COVID-19 Global Economic Order to be Marked by Chinese Influence

Global economic affairs during the post-COVID-19 period is going to witness major changes. China will continue to enhance its economic, scientific and technological capabilities which the world will have to admit and acknowledge. The European economies may become more insulated in order to protect themselves from the aggression of Chinese investors and the whimsies of a US President, who has a transactional approach even in sensitive foreign policy matters.

The current decade has witnessed the emergence of the discussion on the return of industrial policy, which is the antithesis of neoliberalism, in the midst of growing concerns on unemployment and sustainable development. In 2018, 18 Members of the EU (Friends of Industry) issued a joint statement calling for the adoption of an industrial policy. This was followed by a Franco-German Manifesto for a European Industrial Policy Fit for the 21st Century in 2019 which stated that “a strong industry is at the heart of sustainable and inclusive growth”. There is also a discussion within the US gaining momentum in favour of an industrial policy. Two key officers during the Obama administration recently wrote in the Foreign Policy that “advocating industrial policy was once considered embarrassing-now it should be considered something close to obvious”.

Crisis faced by the advanced countries in handling the pandemic brings the welfare state firmly back into the matters of public policy.  Advanced countries which have been facing the issues of rising unemployment and inequality will find COVID-19 and fear of Chinese aggression (Sinophobia) as a convenient excuse for a re-think on neo-liberal economic policies. It will be a major challenge for global economic institutions to continue to remain relevant in the new environment. And the new environment will be considerably influenced by the Chinese, both in the positive and negative sense of the term.

Why China will matter?

Since the global financial crisis of 2008-2009, China has emerged as the most significant economy of the world in many respects. In a decade, the Chinese economy has reached $13.6 trillion (using exchange rates), which is about two-thirds of the world’s largest economy, the US. But, using the purchasing power parity (PPP) indicator that takes into consideration relative prices in China and US, the World Bank data shows that  China’s GDP matched that of US in 2015 and surpassed that of US by PPP$ 870 billion in 2018. During the last five years ending in 2019, when the highest annual rate of growth of GDP witnessed by any G-7 country was only 2.5 per cent the lowest rate for China was 6 per cent.  

Recent years also witnessed China securing top position in international trade in goods and services. Since 2017, China has become the leading trading country in merchandise goods. And during the period between 2008 and 2018, China improved its position from 7th largest trading country in commercial services to the second-largest, just below the US. In both the cases – goods and services, imports grew faster than exports implying that it was increasingly providing market access than seeking market. In commercial services, while the increase in exports was 83 per cent, growth in imports was more than 200 per cent during the same period. In fact, its exports (of goods and services) to GDP ratio declined from 33 per cent to 20 per cent between 2008 and 2018. This means that economic growth in China is increasingly becoming driven by domestic consumption. The growing Chinese market will continue to be significant for the economic growth of many countries.

In the area of technology as well, the world can no longer ignore the capabilities that China has achieved. Out of the 10 COVID-19 vaccines which are into the human trial phase, six are from China. Vaccine developed by Cansino, a Chinese firm, is the only vaccine that is fully into phase II clinical trials. Studies have shown that rising temperature will lead to the release of dormant bacteria and viruses trapped for hundreds and thousands of years in glaciers and permafrost. There are reports indicating that release of such microorganisms infecting animals and human beings. In the context of climate change, we need to gear up for the potential emergence of new infectious diseases. This calls for enhanced global cooperation for finding solutions and the contribution by China towards that end would be quite significant. The confidence gained by China in biopharmaceutical innovations is manifested from the fact that the proposed data exclusivity regulation of China has a 12-year period of exclusivity for biopharmaceutical innovations. This matches with the data exclusivity regulation of the US, which has the longest period of data exclusivity for biopharmaceuticals.

China is also set to replace the US as the largest spending country in R&D. The Science and Engineering Indicators 2018 report of National Science Foundation, US, shows that China’s domestic expenditure on R&D in PPP$ has exceeded that of the entire EU countries and reached close to that of US by 2015. While US spending was PPP$497 billion (26 per cent global share) China spent PPP$409 billion (21 per cent global share). During the two-year period from 2013, US spending on R&D grew at 9 per cent while that of China at more than 20 per cent. 

In terms of number of patents granted, which is the most widely used outcome indicator of R&D expenditure,  by patent offices in domestic countries and foreign countries to the residents shows that China tops the list with 377305 patents in 2018, which is 31 per cent more than that of US. A decade before, in 2009, this number of China was just 43 per cent of that of the US.

Given the economic and science & technology prowess of China, it will be difficult for countries to completely delink their economies from China. This will be so especially for many developing countries, especially African countries. In 2017, China was the largest trading partner and source of finance for Africa. About four-fifth of China’s outward FDI (OFDI) is destined for developing countries in Africa, Asia, and Latin America. During the first half of this decade, between 2010 and 2015, the OFDI stock of China in Least Developed Countries (LDCs) tripled to reach $31 billion, making it the largest source of FDI in LDCs.

China is likely to remain as a key player to solutions to global problems. Nearly half of global investments in renewable energy is taking place in China. In the recently concluded 73rd World Health Assembly, while the Chinese President committed that any vaccine successfully developed by China would be a global public good, implying that the intellectual property rights over it would not be a roadblock for other countries is using the vaccine, the US which is also major player into the race for a vaccine was not able to make such a commitment. Nevertheless, China will find major challenges in replacing the US as the most powerful economy of the world.

Challenges for China in altering the global economic status quo

Although there are both internal and external factors constraining the aspirations of China, the internal factors are predominant. China is fast becoming an ageing society. The share of population less than 15 years of age in working-age pollution (15-64 years) is steadily declining in China over the last 25 years. It has declined from 40 per cent in 1995 to 25 per cent in 2018. This decline is much faster than that of even many advanced countries. In the case of the US, the fall in this share was from 34 to 28 per cent during the same period. This implies that the availability of labourers is going to be a major issue in China in future. Unlike the Western counties, where the political system is transparent and accountable and which are more open of different cultures, China may not be in a position to address the issue through immigration.

The opaqueness that China maintains in terms of the origin of COVID-19 virus and its resistance to global demand for an international enquiry into the origin of the virus has led to a gradual shift in the attitude of many European countries towards China. Even when the US had imposed sanctions against Huawei, before the outbreak of COVID-19, some countries of the Europe went ahead with granting contracts to this company for the implementation of 5-G network in their countries. Lack of cooperation from China for an international enquiry and the pressure of US have now made some countries to review their approach on Huawei. For example, UK had resisted the pressure of the US and permitted Huawei to supply 35 per cent of its 5-G infrastructure in January this year. However, recently the National Cyber Security Centre of UK has initiated a fresh review of Huawei which most likely will result in more restriction on technology and equipment of the company.

Another factor that has dented the image of China as a responsible and mature global leader is the ruthlessness of its officials and enterprises. There seems to be a marked difference in the attitude of the Chinese after 2008-09. Kishore Mahbubani in his recent book (The Chinese Challenge to American Primacy: Has China Won?) narrates the experience of a British diplomat who said that it was only in China where he was told “what you have to remember is that you come from a weak and declining nation”. Similar is its attitude towards foreign businesses in China. The fact that US President did not face any significant opposition from the US business lobby, which has invested heavily in China, in the wake of his trade war with China indicates the resentment of US business towards China.

Ruthless behaviour of Chinese enterprises to increase their stake or take control of foreign enterprises during the COVID-19 crisis has kindled anti-China feeling among many countries and has evoked sharp responses. Australia, Germany and India have tightened their FDI regulations to guard their enterprises from Chinese aggression during the current crisis. Other countries are increasingly becoming suspicious of investments from China, even by the private enterprises, as political interferences in the operations of such investments cannot be ruled out.  It will be extremely difficult for China to overcome this stigma given the nature of the political system of China.

Growing suspicion on the intentions of China is resulting in the formation of alternative groups of like-minded countries which will reduce reliance on China for market access, value chains, investment and technology. US is pushing the establishment of a network of trusted allies – Economic Prosperity Network, involving Australia, Japan, India, New Zealand, South Korea and Vietnam with an objective of deepening ties and moving supply chains away from China. UK is reportedly planning the formation of a 10 country group, called as D-10 (10 Democracies), including all the G-7 countries together with Australia, South Korea and India for the creation of alternative suppliers of 5-G equipment and technologies to reduce reliance on China.

Although China has made tremendous advancements in the science and technology front, it will be very difficult to gain an edge over the US. China will not be in a position to compete with the US in terms of taking advantage of innovations in other countries through FDI and venture capital financing. The FDI Markets data of Financial Times on greenfield FDI on R&D (R&D and design, development & testing) during the period between 2003 and 2018 shows that the US, as a source country, has a global share of 41 per cent while China has only 4 per cent, which is slightly more than India’s share of 3.3 per cent. Similarly, out of the top 25 investors in Unicorns (in terms of number of unicorns invested) in the Hurun Global Unicorn List 2019, 15 are form US. China follows the US with six investors. In future, it is likely that Chinese investments in foreign technology firms and start-ups will see a decline.

Challenges ahead for multilateral institutions

Multilateral and plurilateral institutions governing cross-border trade and investment relations is likely to face a turbulent time ahead. The growing tendency of the US to withdraw from the multilateral institutions such as WTO is creating a leadership vacuum. This will significantly influence the multilateral negotiations. China, which is keen to fill this vacuum and assume the role of global champion of globalisation, is set to face a setback. Many countries were willing to accept a lead role that China could play in international economic relations. But China’s handling of COVID-19 crisis has made them very suspicious of intensions of that country. They will increasingly endeavour to use legitimate policy measures to protect their economies from undesirable foreign competition. Wherever, they find constraints in the use of legitimate measures, countries may resort to national security exemptions. This will in effect make the most favoured nation (MFN) clause in international trade and investment instruments redundant. We will have to wait and see how the multilateral institutions adapt to the new situation and continue to play a critical role in the global governance of economic relations.

(Another version of this blog is published by Policy Circle on 10 June 2020).

Leave a Reply

Your email address will not be published.