[Saniya Nasir Javaid] Will the Chinese economic rise uproot the Liberal International Order?

This essay seeks to evaluate whether China’s rise to power is a distant threat to the liberal global economic order or will it become enmeshed in it as a responsible stakeholder. China, an emerging power, is challenging the traditional dominance of liberal model of capitalism, led by the United States (USA) in the governance of the global economy. China’s mode of capitalism is inherently at variance with the US free market capitalism and succeeding (Ikenberry, 2008).

It is crucial to study about China’s economic miracle, as it is the sole power that has not only managed to compete with USA’s economic progress in current times but is on the verge of winning the race. Not only because the two countries are nuclear powers but also because actions taken by either country have an impact on the entire global system and trade policies. With the change in the global trading environment, there might be a need for a shift in the policies previously adopted in the free world. This is critical for the two main players, but perhaps equally important for the rest of the world.

Saniya Nasir Javaid is originally from Pakistan and is currently completing a degree in International Relations and Development at the University of Sussex. Her main research interest is US relations with the world.

The essay argues that China will not uproot the Western-led economic system. It is, in fact, one of the key players of it. It will be argued that China has been working on opening doors to trade and making changes in trade policies to welcome globalisation. It is, in fact, the USA, which is shifting to a closed form of capitalism.

There are four sections of the essay. The first is on the official position of China. President Xi JinPing in his speech in Davos preached openness and inclusiveness and how the West and East should cooperate and work together. He opposed the adoption of protectionist policies. The second half of the section discusses Trump’s protectionist approach and resignation from the Trans-Pacific Partnership (TPP). Finally, the two sides have been explained through a historical context. Stronger economies have always preached openness and free markets whereas the relatively weaker have preferred to hide behind tariffs and other protectionist policies.

The second section discusses the export-reliant nature of China’s economy. If China did not trade openly it is likely to suffer significantly. The main source of income is from exports and for that they need free market systems. Secondly, China’s huge investments in Africa will be discussed. It has been working hard in establishing connections with the potentially rich & resourceful continent.

The following section argues that China is likely to redefine the contours of global trade but is not expected to uproot the whole liberal system. The One Belt One Road (OBOR) initiative will be discussed and used to substantiate and further support the argument of the essay.

Lastly, there will be an analysis of the evidence presented through the arguments of various academics and experts. In the end, it will be shown through concrete evidence that it is not accurate to think that it is a zero-sum game. The rise of China by default does not imply that the liberal order will be uprooted.

Section I

It can be argued that China is working towards a more open and liberal system of international trade. The chances are that it would result in a modified liberal international order rather than a diametric shift (Ikenberry, 2012).

In recent years, China’s official policy towards trade has shifted from a closed economy to a relatively open economy. It is evident in President Xi Jinping speech in Davos in January 2017 (Wearden & Elliot, 2017). China’s formal stance on trade policy is to trade extensively with different countries in a liberal free market.

President Xi Jinping has encouraged all states to promote free trade and reject protectionist policies of all sorts (Griffiths, 2017). He believes that despite all setbacks economic globalisation has encountered, it is not possible for any one country to deal with all challenges on its own. With growing interdependence, a sole country cannot be expected to solve issues single-handedly.

Furthermore, a communiqué was released by China and was signed by thirty world leaders in attendance at a forum for promoting OBOR in Beijing. It emphasized on the significance of free and inclusive trade. It rejected all form of protectionism and stressed the importance of working to build an open economy (Griffiths, 2017).

It has on the contrary, been President Donald Trump who has been voicing the need to employ protectionist policies to protect US trade (Allen, 2016). Trump is planning to hit China with trade penalties in 2018 as he toughens his ‘America first’ stance. Trump not only pulled out of US-led Trans-Pacific Partnership but also is claiming to renegotiate North American Free Trade Agreement (NAFTA) with Canada and Mexico (Griffiths, 2017). Moreover, it is threatening to impose high taxes or tariffs on imports in order to shield American jobs.

On the contrary, China has initiated the formation of Regional Comprehensive Economic Partnership (RCEP) for countering the influence of TPP. It is a proposed Free Trade Agreement (FTA) between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the states with which ASEAN has existing free trade agreements. China is, therefore, pursuing a strategy based on a relatively liberal framework contrary to Trump exiting from TPP and using a more protectionist approach.

The argument is further reinforced by adding a historical perspective to it. It has been seen that stronger economies have always supported free trade whereas the weaker economies have wanted protectionist regime. Friedrich List’s famous theory of ‘kicking away the ladder’ comes into play (Chang, 2003). As China is becoming more developed and economically strong it is adopting a relatively liberal and open stance on trade. Between 1721 Trade Policy reforms and the repeal of the Corn Law in 1846, the United Kingdom used export subsidies, import tariff rebates and tariff protection on imports which were used as inputs for exports to protect its industry. The UK moved towards free trade with the repeal of the Corn Law. However, British economists in the later periods, when Britain had gained industrial strength, were the strongest supporters of free trade policies (Javed, 2006).

Therefore we can see a trend that once a country is strong enough to confidently compete in the free market it tends to support freer trade and open economies with a liberal perspective. On the contrary, when countries feel threatened by stronger competitors, they are prone to hide under the blanket of protectionism. Therefore, we have a strong reason to believe that China would not uproot the liberal world order and would rather want to remain in it, as that’s what supported its growth.

Section II

China’s initial growth was based on its domestic market, government and household consumption. However, from 2001 onwards exports have played a key role in China’s economic growth (Zhu & Kotz, 2010). Due to effective economic and fiscal policies, China began to amass an increasingly large export surplus. With the surplus becoming a special cash-cow for the Chinese economy the country began to depend on it for sustainability and accelerated growth.

Global trade is a critical factor in the sustained growth of China. It has been the largest export economy in the world between 2013 and 2015 (Cui, 2007). China’s economic growth was initially built on cheap machinery and equipment exports. In recent times the contribution made by net exports has significantly increased (Zhu & Kotz, 2010). It has been evident in the surging trade surplus as a share of GDP. The exports contribute 57.4% of China’s GDP growth and the estimated domestic content of exports contributed 31.7% of GDP growth over the period of. Nearly one-third of GDP growth was due to the increase in foreign demand for China’s goods and services (Zhu & Kotz, 2010). Therefore, for the Chinese economy to thrive they need to continuously engage in international trade.

China has been working on making grand sums of investments in Africa (Nassirri, 2017). The official Africa Policy introduced in 2006 by the Chinese government was one of the major steps on the road to building diplomatic links between the relatively neglected continent and themselves. It opened up enormous opportunities for them. Over the past few years, China’s outward foreign direct investment (OFDI) to Africa has been unprecedented, and trade between the two reached the US $106 billion by 2008.

One of the top destinations, although resource-poor, is Ethiopia, due to its Chinese-style of development and fast-growing population (Nassirri, 2017). China brings tangible benefits in finance and engineering. According to the Organization for Economic and Cooperation Development (OECD), official development assistance  (ODA) includes concessional loans, interest-free loans, and grants. However, Chinese ODA uses mechanisms that go beyond the definition by the OECD. This covers subsidies for private investment, export credits, natural-resource-backed credit lines and mixed credits, which are hybrid of market-rate loans and concessional loans.  Therefore, African leaders and governments portray Chinese engagement in the region as positive because of China’s contribution to infrastructure, which impacts the economy in a great manner (Nassirri, 2017).

Therefore, based on the factors discussed above it can be argued that China is most likely to maintain the liberal international order of trade. It would want more free markets for the vast exportable surplus it can generate being the global industrial powerhouse.

Section III

Chinese game plan of global dominance is supported by two of the regional initiatives it has taken in the recent past. The One Belt One Road (OBOR) is, in fact, a long-term plan to secure land and maritime export routes, matching the ever increasing growth requirements and a tool of regional and global dominance. (Lim, 2016).

Another evidence that China is learning from and following the same models of economic growth, as the west has been, is the establishment of Asian Infrastructure Investment Bank (AIIB) (Elek, 2014). This is essentially a response to the dominance of the World Bank and the Asian Development Bank that are US dominated. The move seems similar to the establishment of RCEP to counter TPP, implying that the Chinese model essentially playing by the global rules, but shifting the nucleus towards a China-centric world (Anon, 2017).

However, it can be argued that China will reshape the contours of global free trade. It switches the WTO from a rule-based institution to an infrastructure based one. The author of the new economic order would now be Beijing.

Section IV Analysis

At this point, a myriad of questions are raised. Does the rise of China by default means the decline of the West and thus the end of liberal ascendency? Can China and Asia, in general, be considered possible stakeholders seeking greater authority and leadership within the existing order or does their rise signal the emergence of a rival non-western international system? Would China want to transform the existing order or will seek to integrate into it? Lastly, Will it be a smooth transition to a new sort of liberal international order or does the decline of American-led order means the demise of liberal internationalism as well? These questions will be answered in the following section as we critically analyse the situation in terms of the arguments previously presented in light of the works of academics like Ikenberry, Bremmer, Steinfield, and McNally.

According to McNally (2013), China practices a form of state capitalism where the state is in charge of the commanding heights of the economy which take the shape of state-sponsored, state-owned, private as well as local corporations plus wealth funds. Bremmer (2010) holds that this form of state capitalism is fundamentally in conflict with the liberal international political economy centered on the US. He argues that the increase in state involvement in the global south is a rejection of the fundamental principles of the free market system.

Sino-capitalism is a capitalist system that is already global in reach but is different from Anglo-American capitalism in essential respects. It is more dependent on informal business networks than formal codes. Chinese state has been assigned the leading figure in guiding and fostering capitalist accumulation. Sino-capitalism, therefore, has more faith in the state rule and stability than free markets.

Sino-capitalism is rising in an incredibly globalised system, which is even more deeply integrated into international products and knowledge networks than were earlier developed in Asia (McNally, 2012).

The Chinese need to go global and open up the market necessitated them to relatively de-link their centralized political system and the free market economy. Evidence is found in the annexation of Hong Kong. The Chinese allowed and furthered the existing systems of economy and did not force it into the mainland economic framework of the time. This delinking appears to be a smart move, as it provides them global opportunities, without rocking the boat.

It is for the first time that the American model of capitalism has been challenged and is anticipated to become an equal rival in the foreseeable future (Wilkonson, 2014). Through Sino-capitalism the developing world would have great financial, technological and industrial capacities even if it would have lower institutional predictability and certainty (McNally, 2013).

Edward Steinfield (2010), on the contrary, argues that China has aggressively pursued networked production and thus embracing contemporary industrial revolution, which involves multinational global production to be an example of market-like control systems. Therefore, according to Steinfield instead of taking China to be a threat to the liberal system, it must be taken as an integral part of it.

The political economy debate attempts to integrate the political and economic aspects of China’s re-emergence. It also projects the domestic political economic arrangements of China’s emergent capitalism onto how the country might act within the international political economy (Arrighi & Lu, 2011).

Steinfield represents the flip side of the debate and emphasizes on the networked production China has aggressively pursued under Sino-capitalism. He argues that China has positively opened up its industry to international firms and moulded its system to fit into the liberal system of production. China is therefore not a threat but a part of the Western system of trade. And the deep global enmeshment of Sino-capitalism could ever see china’s authoritarian way of governing become increasingly obsolete.

Although the Japanese and European models of capitalism have in the past challenged the Anglo-American model, it is for the first time that the world has encountered a capitalist power with the potential to rival Anglo-American global preponderance.

It can be argued that it is only the American influence in the global system that is declining (Ikenberry, 2012). The foundation of the liberal international order, however, is bound to thrive. The USA will still be required for public goods and leadership and will maintain its geopolitical position even but with the decrease of power and wealth the USA’s influence to mold and influence the global system overall will significantly be reduced.

In the past years, there have been several upheavals, like the global recession of the 1930s, financial crisis of 2008 and severe disputes amongst allies over American unipolar ambitions. However, despite all this, the liberal international order survived. No alternative to a rule-based, open system has been able to crystallize (Ikenberry, 2012). The durability of liberal internationalism is striking. The increasing inter-dependence and economic growth, on the contrary, are creating new constituencies for the liberal international order.

An alternative to this system may not be sustainable or at least as rugged. The existing order is massive and inherently different from those of the past which were easily taken over. The anticipated divide is between supporters of rule-based, open order and assorted components.

The order is easier to join and harder to overturn (Ikenberry, 2008). The evolving nature of the order makes it easy for accommodating emerging powers. China has not only reached this level within a milieu of international institutions but also by being an active member of all of them. Therefore, China has been part of the Western order (Yiang, 2010). Chinese leadership has been increasingly aware that it is impossible for any state to modernize without integrating itself into the globalized capitalist system. In order to achieve global dominance, it needs to embrace Western principles practiced in multilateral economic institutions.

As China sheds its status as a developing country it will increasingly be able to act as a stakeholder instead, and a significant one indeed. Economic advancement within these institutions is expected to create further opportunities for China and not otherwise. It is, therefore, unlikely that China will ever manage or even try to overtake the liberal international order. The US global position may no longer be as strong as before but the liberal system that the US leads can remain the dominant order of this century (Ikenberry, 2008). The relative stakes and roles might shift hands.

Conclusion

Therefore, it has been shown through robust arguments and substantiated evidence that China does not pose a major threat to the liberal international order of the capitalist free market economy. Despite desires and plans for the global leadership and hegemony, the Chinese leadership made a calculated move and has been designing a system that integrates with the liberal world order, rather than forcing its own centralized model. A smart move was to relatively delink the political and economic components of the system, growing with an expert-led competitive economy and expanding in the region, with OBOR, AIIT, and RCEP. China requires an environment for foreign investments, as its meteoric growth largely depends on exports and deeply integrated into the global production chain. It is perfectly compatible with the existing order. In fact, it has been the USA under Trump, which has been recently trying to defend the America Frist kind of protectionist regime. The Chinese growth over the next few decades is more likely to transform the contours of the global trading system, which suit it better, but will not bring a radical change to the basic structure of the existing order, as was predicted in the early years of its rise.

Saniya Nasir Javaid is originally from Pakistan and is currently completing a degree in International Relations and Development at the University of Sussex. Her main research interest is US relations with the world.

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