China has been the chief beneficiary of the globalisation of the world economy which began accelerating since the end of the Cold War in the early 1990s. This phase of relatively free movement of capital and technology and goods and services enabled China to transform itself into a low-cost manufacturing hub for the world. It became an export powerhouse leveraging its access to the large consuming markets of the US, Europe and Japan. Thanks to its brand of state capitalism and managed markets, China emerged relatively unscathed from the global financial and economic crisis (GFEC) of 2007-8 while the advanced capitalist economies of the West faced prolonged disruption and stagnation. The Western consensus behind globalisation has been eroded as competition from China has sharpened. There is a rise in protectionist sentiments in the West, a greater scrutiny of inward investment particularly for acquisitions in the high-tech sector, and growing sensitivity over loss of intellectual property to Chinese firms.
China has hitherto remained a vocal advocate of globalisation and free trade, which it had leveraged for its economic success. It has been critical of the US tariffs on Chinese imports and restrictions on Chinese investment in the US. It has been particularly hurt by America denying Chinese companies access to high-tech components. During the past couple of years, the US-China trade war has intensified and China has also faced headwinds in its economic relations with Europe and Japan. As Chinese power has expanded, great power competition has resurfaced. There has been an assumption that the density of economic and commercial relations between China and its major partners — the US, Europe and Japan — would moderate security competition among them. In fact, the economic relationship is being disrupted by the sharpening geopolitical competition. The decoupling of the US and Chinese economies is a reality, though it is not clear how far this will go.
The COVID-19 pandemic has only exacerbated these trends. The acute awareness of how dependent countries have become on China-centred global supply chains, including for critical health products and pharmaceuticals, the ongoing shift towards relocation or re-shoring of production facilities, the renewed stress on resilience as against efficiency — all these trends triggered by the pandemic — are stalling globalisation, if not putting it in reverse.
This shift in economic perspective is apparent across the world, in lesser or larger measure. In India, we have announced Atmanirbhar Bharat to signal a renewed stress on self-reliance and indigenous production. The economy will hitherto be selectively open. India, like China, also benefited from the globalised economy though it adopted economic reforms and liberalisation a decade later. However, unlike China, India did not use this favourable international environment to develop a globally-competitive economy. After the GFEC, India’s growth began to decelerate and has been unable to pick up so far. The pandemic has added to the slowdown. It is unlikely that globalisation will find many champions in the corridors of power.
What is of interest is that China, too, appears to have adopted its own brand of atmanirbhar economic strategy under the intriguing label of “dual circulation”. This is defined as “taking the domestic market as the mainstay while letting domestic and foreign markets boost each other”. The term was first used at a Chinese Communist Party Politburo meeting held on May 14. It was described as a policy that would “fully bring out the advantage of its super-large market scale and the potential of domestic demand to establish a new development pattern featuring domestic and international dual circulations that complement each other”.
Some analysts have pointed out that this policy is no different from the economic rebalancing which has been a stated objective for the past decade and more. Chinese leaders have repeatedly called for bringing about a calculated shift from an investment and export-led growth strategy to one based on domestic consumption and services. There has been progress in this respect. Consumption has risen to 56 per cent of GDP today as compared to about 35 per cent a decade ago. Exports were 36 per cent of GDP in 2007 but constituted only 18 per cent in 2019. However, Chinese analysts argue that it is a significant policy departure which has been influenced by the emerging negative geopolitical trends and trade headwinds China is running into. There is a realisation that the US-China confrontation is structural and likely to persist irrespective of who occupies the White House next year. There is also an acknowledgement that the global economic environment will become progressively less conducive to free trade and capital and technology flows. China would therefore have to rely more on domestic drivers of growth. One Chinese commentary urged that the new strategy should be approached with “the mindset of fighting a protracted war”, language that harks back to the Maoist era.
In a recent statement, President Xi Jinping has said that “dual circulation” is by no means a closed domestic loop and reaffirmed that opening up was a fundamental national policy. But it appears that the era of encouraging Chinese companies to “go out” and become global multinationals is now over. What is also interesting is that the ambitious Belt and Road Initiative (BRI), Xi Jinping’s signature project, has barely been mentioned in the context of dual circulation. Reports indicate that as a result of the pandemic, the initiative has stalled in most countries and there are major cost over-runs and delays in implementation. Most partner countries have demanded deferral of loan repayments or converting some of the loans into grants. This is being resisted and fresh lending by Chinese policy banks such as Exim Bank has been halted. The difficulties faced by the BRI may also be reinforcing the inward turn that the new strategy suggests.
China will soon be launching its 14th Five Year Plan, which will be deliberated upon by the Party Central Committee this October. We will then get a clearer picture of what China’s atmanirbhar strategy with Chinese characteristics looks like.
Saran is a former Foreign Secretary and senior fellow, CPR