Reopening A Fillip To Global Economic Recovery – Analysis
By Zhongmei Wang*
According to data from the National Bureau of Statistics of China, China’s GDP grew by only 3 per cent in 2022, compared with 8.4 per cent in 2021, a decline that left growth well short of expectations. In December 2022 exports fell by 9.9 per cent year-on-year and imports fell by 7.5 per cent, the third consecutive month registering negative growth. What is more noteworthy is that the Purchasing Managers’ Index for the whole of 2022 hovered at around 50, with most months below the line.
China’s population also shrank for the first time in 60 years. The number of new retirees in China will exceed 40 million between 2021–25, an average annual increase of more than 8 million people. With a net decrease of 35 million people, China’s working-age population will decrease on average by about 7 million during that period, much faster than in 2016–20.
Despite these headwinds, China’s macroeconomic policy shifted gears at the end of 2022. Strict COVID-19 measures were lifted suddenly. All restrictions on venues, transportation and movement of people were eliminated within one month, easing supply chain disruptions. The idea of ‘levelling the playing field’ was reemphasised by policymakers, along with the promise that protections and fair competition opportunities would be accorded to private and foreign enterprises.
Interventions and restrictions on investments in sectors including real estate, manufacturing, e-sports, private tutoring and internet finance were loosened. Senior government officials also stated on many occasions that China would not return to a ‘planned economy’ and reiterated that reactive ‘supply and marketing cooperatives’ in rural areas were only supplementary business forms.
For Beijing, restoring internal and external confidence is a top priority. China’s huge population means that COVID-19 is still an important negative factor in international economic forecasts for 2023. But the market order is regaining its vitality and recovery has been swift. Most domestic think tanks and scholars predicted that the Chinese economy would fully recover in the second quarter of 2023 and bring a new round of exponential growth.
The most important idea in the report of the 20th Party Congress is ‘Chinese-style modernisation’. From an economic point of view, modernisation in the Chinese context has focused on improving the industrial system, innovation and international competitiveness. Past experience shows that in China, deregulation and liberalisation are more effective policy tools than fiscal stimulus. In the next three to five years a China that stands its ground will demonstrate its potential and provide an anchor of stability in an unpredictable world.
Economically successful countries have tended to carry out effective domestic reforms that match global production, trade and investment. With both internal and external driving forces, China experienced rapid growth for over two decades. And China was not the only beneficiary of globalisation. The abundance of goods, services and technologies promoted by the globalised production model of the past few decades was unprecedented. But since 2008, especially after the pandemic, globalisation is being challenged by protectionist and inward looking measures.
Government intervention in markets in the name of ‘resilience’ and ‘security’ peaked during the pandemic, with insecurity exacerbated by supply chain disruptions and crises. A 2022 IMF report showed that 82 per cent of enterprises in the Western hemisphere purchase intermediate inputs domestically. This ‘local preference’ reduces the degree of diversification and actually makes supply chains more fragile.
Emphasis on economic resilience is increasingly focused on critical industries, including semiconductors, biomedicine, alternative energy, large-capacity batteries and cloud services. Subsidy competition for local investment has given rise to US and European legislation on chip production and biomedicine development. Although economists doubt the effectiveness of resurrecting industrial policies, policymakers are overwhelmingly enthusiastic about subsidies and their benefit for redistribution.
But the global supply chain model that has developed in critical industries also makes it difficult for production to return fully to the ‘localisation’ of the past. Industrial policy in the new era of protectionism incorporates external content such as the development of ‘alliance-based’ supply chains and the exclusion and containment of ‘non-partner’ or ‘enemy markets’. These are discriminatory policy actions that go against multilateral disciplines.
In December 2022 China filed a case at the WTO against the United States over chip export control measures, accusing Washington of abusing the national security exception, which constitutes trade discrimination. The European Union also aired its displeasure with the US Inflation Reduction Act, arguing that US$369 billion in subsidies and tax credits to US domestic producers and consumers under the climate change reduction package violates WTO non-discriminatory requirements.
At the 2023 World Economic Forum in Davos, WTO Director-General Ngozi Okonjo-Iweala reiterated the warning — that confining trade within alliances will hinder world economic growth and lead to inefficiencies, duplication and inflation. Okonjo-Iweala has expressed concern about the ‘subsidy competition’ implemented by a number of WTO members, even if subsidies target carbon reduction or consumption stimulus.
The United States and China are key to the outcome of economic conflict arising from protectionist policies. However, the world is not going to be unipolar or bipolar but presents more complex possibilities, like increasingly intertwined production and manufacturing networks. For most participants in globalisation, it is important that the multilateral governance mechanism be revived as soon as possible.
There have been few notable breakthroughs under the WTO framework and no substantive progress has been made in the reform of the IMF and the World Bank. The investment dispute arbitration mechanism among countries in regional agreements is also limited and beset by exceptions. This reflects negative developments in global economic governance.
While the road back to multilateralism may be tortuous and long, it may still be possible to address some of the most pressing issues affecting the multilateral framework. At an informal WTO ministerial meeting in January 2023, Chinese trade negotiator Wang Shouwen presented China’s four priorities for the WTO.
The first is to promote the reform of the dispute settlement mechanism — preserving core features such as neutrality, enforceability and two-tiered adjudication — with the aim of installing a complete and well functioning mechanism by 2024. The second is to conclude the investment facilitation negotiations in the first half of 2023 and end e-commerce negotiations within the year, so that the WTO rules can keep pace with the times. China’s third priority for the WTO is to respond to climate change through trade and investment liberalisation and oppose trade restrictions and subsidy competition. The fourth is to solve the problem of excessively subsidised agriculture and the distortions it brings to international food prices to help deal with the global food crisis.
Current global economic disarray can be explained by the phenomenon of individually rational behaviour leading to collective irrationality. Even so, economic and trade relations are still the most likely entry point for countries to narrow value gaps and bridge geopolitical fault lines. The abuse of security exceptions and alliance arrangements that foreclose markets are also issues for negotiation under the WTO.
A flurry of diplomatic activities in late 2022 and early 2023 shows that Beijing is trying to promote economic cooperation with developing countries and improve communications on trade policy with developed countries such as Germany, France and Australia. In January 2023, Chinese Foreign Minister Qin Gang signalled this intention, calling on all concerned parties to alleviate Africa’s debt burden in line with the principle of fair burden-sharing.
Despite adverse circumstances over the past three years, globalisation survives. World markets are still integrating and becoming more efficient despite short-sighted political efforts to intervene in and disrupt them. The responsibility of the big powers is to promote integration and help weaker states. Even though current predictions about the world economy are pessimistic, an open China is likely to be an important and positive factor for the global economy’s recovery.
*About the author: Zhongmei Wang is Senior Fellow and Director of the Institute for World Economic Studies at the Shanghai Institutes for International Studies.
Source: This article was published by East Asia Forum