February 17, 2017

Yongnian Zheng

According to the latest World Trade Organization (WTO) estimates, the growth in world trade in 2016 will be lower than the growth in global GDP. This scenario is of particular concern especially in the context of rising anti-globalization sentiment in the West, as seen in UK’s Brexit, US’ Trumpism, France’s National Front, and Germany’s right wing movements. The anti-free trade politics that is brewing in the US and Europe has cast a great deal of uncertainty on the world economy. The West has always been the leader in globalization. Without it, there is hardly any economic order to speak of. Free trade, a part of sustainable economic development, is also a form of soft power wielded by the Western countries. However, free trade is becoming taboo in the West now.

While anti-globalization movements have always been around, it is only now that the phenomenon has become a mainstream ideology in the West. Inevitably, trade policies and the political ecology of the Western countries will change too. The West used to criticize China for building different kinds of “walls”; ironically, the UK is now putting up barriers to stem the tide of refugees and Donald Trump has suggested constructing a wall on the Mexican border to keep away immigrants. There are also invisible walls, such as how some Western economies have turned away investments from China and other countries under the rationales of “national security,” “environmental protection” and “you are taking away our jobs.”

However, globalization is not dead; it is just that the de facto leader of globalization, the West, has become ineffective and unfit to lead the charge. Globalization is still very much alive and kicking in the developing economies. The BRICS countries are playing an increasingly important role in the world economy. The “One Belt One Road” (OBOR) plan rolled out by China is giving a mighty push to globalization (at least at the regional stage). However, compared to the Western developed countries, developing countries have much smaller economies; without the impetus from the West, there will be negative impacts on globalization.

An Opportunity for China to Lead

Historically, the British Empire led the world’s economy before the United States took over. Now, a frail US economy sets the stage for China to ascend to the leader’s podium. China is the world’s second largest economy; although its economic growth has dropped to a lower gear, the volume of its economy will overtake the US’ in the near future. At the same time, China is the world’s largest production base and trading nation. The country has enjoyed a fairly good run at globalization, having its GDP double in a short span of time after joining the WTO. Having benefited tremendously from its open-door policy, China should use its momentum to seize this rare opportunity to lead the world economically.

Being a leader comes with challenges. First, China should learn from the mistakes the West made with globalization. The most important lesson is the creation and distribution of wealth. Globalization has indeed created immense wealth and other benefits, but they are unevenly divided amongst countries, regions, and communities. Most of the riches went to the few who controlled the reins of globalization. Many did not get to share the fruits of their labor; some even became victims. Therefore, the ills of globalization are a yawning income gap, a highly divided society, and more seriously, a shrinking middle-class. The West, especially the US, used to have a large base of middle-class citizens who served as the foundation for democracy. As the middle-class shrinks, the face of politics has changed into populism, disrupting the smooth functioning of democracy.

If China wants to be a leader, it should reconstruct globalization, so that it becomes more inclusive. At the very least, the gap between the rich and poor countries should become smaller, not bigger. At the same time, governments should cooperate with one another to curb the unrestricted use of capital and to strike a balance between appeasing businesses and appeasing the masses. Governments should also prevent capitalists from using globalization as a tool for evading taxes.

Second, China should work with other countries to look for new initiatives to drive globalization. Technology is creating new waves in globalization in the forms of finance and the internet. However, it should not be left to capitalists to do the work; governments should provide the infrastructure and platforms. In the current environment where globalization is facing headwinds, countries are beginning to promote “regional globalization,” such as China’s OBOR, the Asia-dominated Regional Comprehensive Economic Partnership, and the US-led Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership. As the US-led initiatives are facing difficulties now, it is a great opportunity for China to push for regional free trade. There are many things that can be done, such as signing enhanced versions of bilateral free trade agreements, upgrading bilateral trade to multilateral trade, and creating new types of economic and trade cooperation around the OBOR initiative.

Third, China needs a more sophisticated “opening up” policy. With the OBOR plan seeing early fruits, more Chinese capital will leave the country. This will speed up the economic development of regional countries and result in a rebalance of the world economy. However, it cannot be just Chinese capital flowing out — foreign capital needs to flow into the country as well. Otherwise, the OBOR initiative will hollow out China, making economic development unsustainable. To ensure an inflow of capital into the domestic market is therefore another important part of China-led globalization. As China has a huge middle class and consumer market, it should emulate what the US did after World War II, and open its consumer market to the world. If the US had not done so then, there would be no globalization to speak of today. Therefore, capital flows in and out of China are inseparable components of globalization.

Inheriting the rules and regulations of free trade and building upon this system to advance globalization have become an effective path for China’s peaceful rise.

Currently, China is facing some problems in globalization, and its decreased level of trade investment is linked to its insufficient opening of the domestic market. It is undeniable that the Chinese government is determined in its push for free trade, as can be seen from the numerous free trade zones (FTZs) in China. However, these FTZs have not achieved significant breakthroughs because of internal problems, such as a long negative list and free trade languishing as “internal trade”: money taken from the right pocket is transferred to the left pocket. As there is too much homogeneity in the FTZs, it is difficult to achieve a systemic breakthrough. The solution would be to open the Chinese market in greater depth and breadth. Enticing foreign capital to invest in China is undoubtedly the most effective way to do so, as has been proven by the country’s open-door policy in yesteryears. Before China joined the WTO, some people in China viewed foreign capital as a wolf in sheep’s clothing. Nevertheless, this “wolf” has transformed China’s economy. Similarly, in today’s circumstances, foreign capital cannot be simply written off as a “wolf.” If the Chinese have such as a mentality, then they would be less willing to open their market. Unfortunately, there is already a diminished level of opening in some quarters. For instance, there are some who interpret “self-dependent innovation” in a nationalistic way, cajoling the Chinese to innovate behind closed doors. A deeper and broader opening up needs a forward-looking political judgement and a strong political support.

China Takes Over the Reins of Free Trade

Fourth, China needs to manage its relationship with the existing system and rules of global trade. At a time when the West is unable to lead the charge, China should take over the reins of free trade. Free trade however should not be over-politicized or be treated as a Western dogma — rather it should be viewed as the common heritage of mankind. Free trade is a result of the experience and lessons learned by the West. During the early stages of Western economic development, free trade was intertwined with colonialism and imperialism, where military force was used to open foreign markets. Later, when colonialism and imperialism lost their legitimacy, the West had to slowly work out the international rules and regulations that would protect and promote free trade. It is obvious that rules and regulations reign supreme over military force.

Free trade is beneficial to the developing countries, including China, which is most in need of globalization. The size of its economy, the volume of its trade, and the momentum of its future economic development, have determined the role China will take in the development of globalization. Most importantly, China should not replicate the colonialism and imperialism used by the West in the past. Instead, China should make full use of the rules and regulations of free trade that have been established by the West. Where the rules are reasonable, China will need to reform its own system and keep pace with the international system. Where the rules are not reasonable, China should cooperate with other countries to amend and improve the rules. In new areas where there are no governing rules, China can lead the way to set new regulations. Most important of all, the rules need to be accepted by other countries, hence China should take their interests into account.

The set of existing rules will not only help China’s “Going Out” policy in encouraging enterprises to invest overseas; they can also help to protect China’s overseas interests. However, Chinese businessmen should not dream that the rules will help open up a world market instantly. Nevertheless, China has one advantage lacking in other countries when it comes to carving out an overseas market — it has two “legs,” that is, its state-owned enterprises (SOEs) and its private enterprises. The SOEs have played an important role in opening up an overseas market for China. They have withstood the huge risks undertaken in going overseas, something which private enterprises have not been able to do. Since implementing the “Going Out” policy, the SOEs have utilized an enormous amount of funds to enter overseas markets. Although the West has always criticized China as brandishing neocolonialism or even imperialism, China has never used a single gun or bullet in its overseas ventures, even in places which have high political risks. At the same time, China’s private enterprises can invest in Western or other markets according to the existing rules. As compared with SOEs, private businesses are smaller in size and hence are seen by the West as less of a threat to national security, thereby increasing their chances of entering Western markets. Both SOEs and private enterprises can be effectively protected by the existing rules of international trade.

To a certain extent, inheriting the rules and regulations of free trade established by the West and building upon this system to advance globalization has become an effective path for China’s peaceful rise. At the recent G20 meeting at Hangzhou, China presented its plan for globalization. This plan was not aimed at overturning the existing system and its rules; it instead supplements and innovates on the current structure. Or rather, China’s plan is a test-bed for its coming role as the main driver of globalization. China wants to make the world freer, not the opposite.

(Translated by Chean Chian Cheong)

A version of this article appeared in the IPP Review.