In an opinion piece for yesterday’s edition of The Australian, former Foreign Minister and New South Wales Premier Bob Carr warned against Australia getting involved in a conflict between Japan and China over disputed islands in the East China Sea. The underlying reason offered is one that is widely shared: that Australia’s (and Asia’s) economic prosperity is too heavily dependent on China.
As those in agreement might put it, it is a fool’s errand to fight the future — better to work with it.
Which brings us back to the one really successful thing China has done in positioning itself in the region: using the prospect of its potential power for current leverage and gain. The problem is that Beijing’s approach depends very much on sustaining the narrative that it holds the key to Asia’s future prosperity. And this claim depends on spreading the belief that China can escape the middle-income trap and enjoy an economic boom for decades to come.
That China is the ‘miracle’ economy seemed plausible when its GDP achieved above-trend growth of well over 10 per cent while the rest of the developed world struggled with the threat of recession from 2008 onward. We now know that the way it did so was to embark on the largest fixed-investment splurge in economic history, and is now bearing the costs of doing so. (This is an issue I and other authors have written about frequently over the past few years so it won’t feature in this article.)
But as Chinese growth slows even further in 2015 and official forecasts are likely to be revised further downward as the months roll on, Beijing’s capacity to use its status as ‘the future of Asia’ for current leverage will become more limited.
First, for those who believe that China is already the dominant economic power, consider a few facts.
It might be the world’s factory but export-manufacturing in China is dominated by foreign-owned and foreign-invested firms. This means that China is only the world’s preferred sub-contractor — a less exalted position. Over two-thirds of China’s trade is processing trade, with advanced economy consumption markets in North America, the European Union and even Japan more important than China when it comes to being a source of net demand, which is what trade and global manufacturing is ultimately dependent on.
When one considers that around three-quarters of China’s domestic market is made up of non-tradable goods, the actually net demand that China offers the world is far smaller than official numbers suggest.
Furthermore, Chinese foreign direct investment into the region is still dwarfed by that coming from America, Europe, Japan and even South Korea. China is not a major source for technology transfer into developing Asian economies, unlike these advanced economies. The American, Euro, Japanese and Singaporean currencies remain far more important as tradable currencies than the Chinese renmimbi. And China is an insignificant giver of foreign aid in the region.
Yet, just as in the nineteenth century, English spinning mills were convinced that their prosperity would be secured for decades if they could just convince every Chinese to buy one handkerchief, today’s China is now the great hope for an explosion of net demand in Asia and the world. Note the excitement generated in Australia when an intention to sign a Free Trade Agreement was announced last year. If only we can get every Chinese to eat one slice of Australian cheese each week, or have an Australian T-bone once a month. You get the idea.
This is why the slowing Chinese growth will matter to the country’s standing, and dilute Beijing’s capacity to impose its will on countries without a shot being fired. China has relied on the argument, made on its behalf, that anger Beijing and there will be economic costs in the future if not now. In Australia’s case, an FTA is indication that China is prepared to do business with us, presumably only if our future political and strategic policies do not get in the way of the economic relationship.
We are told that the Chinese consumer, particularly the emerging middle classes, will want what we can provide. But Australian products and produce will only reach Chinese markets if political relations with Beijing are strong. And if we need to ‘sacrifice’ relationships with powers such as Japan or even the United States, then that is what we ought to do.
China’s capacity to impose an economic price against trading partners with whom it has strained relations tends to be overstated, especially against advanced economies (from whom China needs technology and know-how) and commodity suppliers. Like most countries, China conducts trade and other economic interactions out of necessity, not choice. Exacting economic vengeance, even against small countries, also has unintended consequences such as raising the political risk assessments made by other firms and countries in the Chinese political economy — with deleterious consequences for China.
But the perception that China is becoming a more ‘normal’ economy subject to normal economic laws and limitations is also significant. The previous Fourth Generation of Leaders frequently and openly warned that China’s economic model was “unstable, unbalanced, uncoordinated and unsustainable” (in the words of then Premier Wen Jiabao) but was largely ignored or dismissed by outsiders as over-caution.
The evidence that Premier Wen was correct is building. But in response, President Xi Jinping has been keen to reassure the world that China will come through with flying colours. The current leader, the most ambitious and powerful since Deng Xiaoping, clearly understands the power of controlling the narrative of one’s future for current gain.
In 2015, the economic story is now far more contested. China is slowing and its economic problems are more than simply cyclical. The US seems to be roaring back, regaining manufacturing prominence and reinventing itself as a net energy exporter, while it still remains the world’s leader in innovation and technology by a considerable margin. There are now hopes and even expectation that Narendra Modi can finally help India realise its economic potential. Even Japan under Shinzo Abe cannot be written off.
‘The supreme art of war is to win without fighting,’ said Sun Tzu. Articles by scholars such as Arvind Subramanian titled ‘The Inevitable Superpower: Why China’s Dominance is a Sure Thing’ (Foreign Affairs, Sep/Oct 2011) does no end of good for Chinese standing and leverage. Subramanian’s article assumes that China will continue growing at recent rates for decades. As growth slows and economic reality is digested, such articles become less plausible. And when that happens, winning without fighting for China, so to speak, becomes less possible.