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Even as Xi Jinping’s China continues with its aggressive external posturing, exerting pressure on a range of neighbouring countries, China’s trade with the rest of the world is soaring. According to data recently published by China’s foreign trade authorities, bilateral trade between China and the United States was up by close to 25 per cent in the first three quarters of 2021 over the same period last year. With the European Union it was up by over 20 per cent and with India bilateral trade was up by as much as 29.7 per cent.
The China-India bilateral trade is in fact set to touch an all-time high of $100 billion by the end of 2021. It was already upwards of $90 billion at the end of September 2021, rising above the peaks touched before the serious armed clashes erupted along the Himalayan borders. In Berlin and Tokyo, newly elected political leaders are being urged by local business leaders to ensure that political relations with China do not deteriorate to the point that would seriously hurt business interests. In August this year, 30 US business groups, including the US Chamber of Commerce and the American Farm Bureau Federation, urged President Joe Biden to resume discussions with China on normal trade relations. They complained that President Donald Trump’s tariffs had raised the US cost of production, making their exports out of the United States more costly.
The German and Japanese auto majors have told their politicians that there are as yet no readily available alternative markets to China for their vehicle exports, but they are all focused on the need to find them. An important factor driving this “de-risk” strategy is China’s own development of electric vehicles. Diesel and petrol consuming German and Japanese cars will have to increasingly compete with China’s electric vehicles as climate change pressures widen the market for the latter.
Countries have also found their dependence on China in pharmaceutical and electronics products difficult to reduce in the short term. Japan, South Korea and Taiwan have all launched what have variously been termed as their “southern” policies, seeking to export more to Southeast Asian and South Asian markets and increase their investment in these countries, reducing their exposure to China.
In short, even as China’s geopolitical relations with many countries around the world deteriorate, the geo-economics of interdependence between China and the world is asserting itself. Since last September, when President Donald Trump urged US business to “decouple” from China, America’s friends and allies have all been considering ways in which to do so. The term “decoupling” entered the international economics lexicon as the focus widened beyond just trade to include supply chain diversification and the relocation of manufacturing bases out of China.
A year later, business, finance and trade from around the world, including the United States, Japan, the European Union, Britain and India are discovering that “decoupling” was the wrong concept. China’s economy is just too big and far too integrated with the world economy for other major economies to simply “decouple”. China is the world’s biggest trading nation and the biggest trade partner of most countries around the world. It was also India’s biggest trade partner till recently. What is, however, certainly happening is that most economies that found themselves excessively dependent on China are “de-risking” through “diversification”. External affairs minister Subrahmanyam Jaishankar told Nikkei’s Future of Asia conference earlier this year that the diversification of supply chains away from China was a good “derisk” strategy. A multipolar world, he said, requires multiple engines of growth and so global firms should “derisk” from China, and invest in India. Rather than Mr Trump’s “decouple” call, it is Mr Jaishankar’s “derisk” advice that is finding takers in multinational boardrooms around the world.
While export-dependent economies, especially in the EU and East Asia, will take some time to derisk, diversify and decouple, China’s own domestic economic policies and problems are also forcing them to do so. President Xi’s “dual circulation” plan, as part of China’s 14th Five Year Plan (2021-25), the bursting of the real estate bubble and an economic slowdown have combined to put global firms on alert.
The dual circulation plan aims to encourage domestic demand and greater self-sufficiency within China, while ensuring that foreign companies in China focus on the global rather than the local market. It is China’s own version of “atmanirbharata” that is a response both to a slowdown of economic growth and to an increasingly hostile global economic environment. While the world economy will not, indeed cannot, decouple from China it will henceforth most certainly diversify and derisk. That is the price China will pay for President Xi’s aggressive posturing and its non-transparent domestic policies.
What if China changes course? Even as a range of democracies around the world prepare to take on China, they should all be prepared for a change of course if China decides to soften up. At least one reason this possibility cannot be ruled out is China’s recent decision to apply for membership of an Asia-Pacific trade bloc, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), after having launched another major regional trade alliance, the Regional Comprehensive Partnership (RCEP) agreement.
China surprised the 11-member free trade group, that includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, with its application that came quick on the heels of the surprise announcement by the United States, Britain and Australia to form a military alliance dubbed AUKUS. It remains to be seen how the CPTPP member countries will respond to China’s application. For its part China will have to undertake several reforms and policy changes to secure entry into CPTPP.
While many analysts believe that China would not be able to implement policies required to qualify for CPTPP membership, no one familiar with China’s past record at economic management should be surprised if it does indeed do things that would enable it entry into CPTPP. Whatever the future might hold for China’s economy and polity, the world has certainly become more wary of China’s rise and power and so will continue to diversify and derisk, even if not decouple.