Trade war and China's economic prospects

In the short to medium term, growth may suffer but Beijing can bounce back if it has coherent leadership

The world breathed a sigh of relief at the truce arrived at between US President Donald Trump and his Chinese counterpart, Xi Jinping in Buenos Aires on the sidelines of the recent G-20 summit, which appeared to prevent a further escalation of their ongoing tariff war. These expectations have been mostly belied as the focus has now shifted to domains where China has much less room for making concessions. These relate to the ambiguities inherent in the governance of ostensibly private Chinese companies, intellectual property and access to technology. The arrest of the chief financial officer of one of China’s biggest corporations, Huawei, in Canada last week, for violating US sanctions against Iran, has not only put a question mark on the Trump-Xi agreement but also ratcheted up the confrontation between the two countries several notches higher. This also comes at a time when the US has been urging its friends and allies not to use Huawei-made equipment and devices, which may be backdoors to gathering intelligence and commercial secrets. In the past few days, majorJapanese telecom companies have announced that in rolling out 5G services they will not be using Huawei equipment, which is said to be both efficient and cost-effective. Huawei, like another Chinese corporation ZTE, is dependent on high-tech microchips imported mainly from the US. Any restrictions on these imports may severely damage Huawei at least in the short run as it did ZTE earlier, which Mr Trump had then withdrawn on Mr Xi’s personal request.

Most Indian telecom companies are dependent on Huawei equipment and technology and for 5G services, they are working together with that company. How the unfolding saga elsewhere may affect this collaboration should be carefully assessed. There is also a security angle that has so far escaped scrutiny. 
 

The structure of Chinese business and industry, in particular, its recent evolution, is being targeted by the US and other Western countries, including the ones in European Union (EU). As part of reforms introduced by Deng Xiaoping and by his reform-minded successors, the state allowed the private sector to expand and flourish in a market-oriented economy. Even State-owned enterprises (SOEs) were freed from Communist Party interference in their management. The stress was on professional management. Private companies such as Alibaba, Haier (white goods) and indeed Huawei, emerged as successful multinationals, establishing themselves as major players in an open and competitive global market. This trend of separating the Party from corporate governance has now been reversed and Party committees are back not only in SOEs but also private companies. Jack Ma, who in September announced to retire as chairman of Alibaba in a year, has revealed that he is a member of the Communist Party. Therefore, are they truly private sector companies? And if they are subject to governmental directives, then could their international operations be used for pursuit of China’s political and security aims?

Illustration: Ajay Mohanty

These matters  should also be debated in India. The digital payments segment in this country is almost entirely dominated by Alibaba.

The US, Japan and the EU have already given notice that these issues must be addressed in World Trade Organization reforms.

China may be able to buy temporary peace in the trade war by using its deep pockets to buy more from its trade partners; and it has been doing this already. However, it will not be able to escape pressures on other fronts, and later, these would require a fundamental reversal of Xi Jinping’s determination to bring the Party back and place it front and centre into all aspects of political, military, social and economic governance of the country. Though this year marks the 40th anniversary of the initiation of Deng Xiaoping’s reform and opening-up policy, there have been few references to his achievements and to the reforms themselves. The focus instead continues to be on Mr Xi as the “core leader” and “Xi Jinping Thought” as the guiding philosophy for the country. Deng saw reform as the separation between Party and State, the introduction of professionalism in the armed forces and professional management in the corporate sector, with the Party assuming an overall supervisory role. Mr Xi considers those reforms as having weakened and even corrupted the Party and various organs of the State. He has, therefore, brought the Party back in operational roles in all key domains. The role of SOEs has been enhanced in preference to private enterprise. They will be the leaders in the realisation of the ambitious Made in China 2025 plan, which aims to put the country in the pole position in the most advanced, high-tech sectors such as artificial intelligence, robotics, quantum computing and electronic vehicles among others. However, these are precisely the areas where China has benefited greatly by acquiring high-tech firms and start-ups in the US and Europe. It has also been able to train, over the years, a large and expanding cohort of Chinese youth, at centres of excellence and universities in the West. What we are now witnessing are significant, though not total, restrictions on this access to emerging technologies and acquisitions of Western firms. 

This will certainly constitute a setback to China’s economic prospects but it is debatable how serious it will be. One suspects that China will double down on enhancing its relative self-reliance in high technology. In some areas such as artificial intelligence, facial recognition technology, quantum computing and electronic vehicles, it may already be ahead of its Western peers. It is certainly spending much more resources in these areas than even the US.

In the short to medium term, there may be a loss of growth momentum and disruptions in the Chinese economy. Some experts believe this could well be a loss of 2 percentage points per annum in GDP growth. China is financially over-leveraged with an overall debt overhang of nearly 300 per cent of GDP. A loss of growth momentum and a ratcheting up of the trade war may well prove to be the trigger for a Lehman type of financial crash. But over 40 years of spectacular growth has enabled China to build the most modern infrastructure and accumulate a vast pool of highly qualified human resources. These are assets which can help it to  bounce back from a crisis provided it continues to have a united and coherent political leadership. This last bit is an assumption one cannot make with confidence. 

The writer is a former Foreign Secretary of India, is currently Senior Fellow, Centre for Policy Research