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China is the Biggest Protectionist Threat to World Trade Not the US

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There may be another reason that the global trading system is under threat — China simply isn’t satisfied with its role, and wants to shift to a less interdependent, self-contained economy.

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China’s foreign minister has literally called the kettle black after saying US protectionism could trigger a world recession. Vowing to stand firm in a trade row with the United States.

“The lessons of the Great Depression should not be forgotten,” Wang Yi told the United Nations General Assembly in New York.

“Tariffs and provocation of trade disputes, which upset global industrial and supply chains, serve to undermine the multilateral trading regime and global economic and trade order,” he said.

“They may even plunge the world into recession,” the foreign minister added.

However even before Trump, China was pursuing a go-it-alone economic strategy that had little use for trade.

Global trade was slowing even before President Donald Trump was elected, Bloomberg reports.

There may be another reason that the global trading system is under threat — China simply isn’t satisfied with its role, and wants to shift to a less interdependent, self-contained economy.

China Enters the World Trade Organization

In the 2000s, China became the center of the world trading system, dominating both Asian and intercontinental trade.

But this wasn’t necessarily optimal for China, because much of this trade wasn’t adding much value. China started out doing a lot of low-value assembly for other countries; a piece of electronics would be researched and designed in the U.S; its expensive high-tech components manufactured in Taiwan or South Korea. And the final product slapped together for export by human hands in China.

Then sold and marketed back in the U.S. or other developed nation.

Though the products say “made in China,” most of the value in these chains weren’t captured by Chinese companies and workers.

This is known in economics as the smile curve. — the people who occupy the middle of the production process get paid less than the people at either end.

China naturally wanted to do more of the high-value stuff for itself. Thus, even as it expanded its trade with other countries, China strove to increase the domestic content of its exports, with some success.

Now China has other reasons to want to bring supply chains within its borders. U.S. export restrictions on the sale of critical technological components; equipment, and software to flagship Chinese technology companies such as; Huawei Technologies Co. have demonstrated just how vulnerable China’s reliance on global supply chains has left it.

China Ramping Up Military Tensions

The country’s military tensions are also ramping up, with potential flash points in in the South China Sea; the East China Sea, and with Taiwan.

In the event of a clash, China’s government doesn’t want its military-industrial complex to be hamstrung by reliance on global suppliers.

For these reasons, China’s government has been making a systematic push to build up its own high-technology industries and rely less on imported components.

The Made in China 2025 initiative is using a variety of industrial policy tools; Government investment, intellectual property acquisition; subsidies and directives to state-owned companies to bolster domestic champions in robotics; pharmaceuticals, aerospace, advanced materials and information technology.

The stated goal is for China to achieve 70% self-sufficiency in these industries by 2025.

From the perspective of developed nations, this is a troubling development for several reasons. It will create new competition for U.S., Japanese, European and South Korean companies. And further disrupt global supply chains.

Also, a more autarkic, less globally engaged China might feel emboldened to start a military conflict; with the U.S., Japan or other countries.

Economist Brad Setser of the Council on Foreign Relations believes that China is already de-globalizing at a rapid rate. He notes that the growth of China’s imports of manufactured goods is falling faster than overall economic growth as the country slows down.

A world of self-contained national supply chains is probably going to be both less efficient and more dangerous than a world of distributed international production.

At the very least, the trend threatens to raise prices for consumers. But the ramifications could be much more serious than that. The roll-up of supply chains into nationalist systems of production could take us back to a world where great powers feel less constrained in resorting to military means to settle conflicts. That’s a future that should worry everyone.

Source: Bloomberg