Economics, National Security, and Competition With China - SOAS China Institute

//Economics, National Security, and Competition With China

Economics, National Security, and Competition With China

Beijing – Photo credit: Road Trip with Raj (Flickr)

By George Magnus | 05 March 2021

Once viewed by liberal-leaning democracies simply as a formidable consumer and feisty competitor, China has also grown and changed over the last decade to become an economic and national security adversary with which the United States has locked horns in ideological and strategic competition.

 

Economic and financial rivalry between Beijing and Washington is now commonplace in industry, investment, information systems, and innovation, all the more so in the wake of vulnerabilities, including high levels of economic interdependence, exposed by the pandemic. These have raised anxiety about what needs to be done to strengthen America’s economic system and national security. Yet, China worries about these things too, and for good reason.

 

At the National People’s Congress, now in session, more details of the new 14th Five Year Plan (2021- 2025), will be aired, including, for the first time, a stand-alone section on national security. Communist Party leaders revealed late last year that their concerns were not confined to military and internal security  but comprised also food and natural resources, commerce and technology, and finance and the environment. Ultimately, though, national security in China is indistinguishable from that of the Communist Party’s control and rule, and in turn, therefore, from that of President and General Secretary Xi Jinping.

 

China’s growing economic weight in the world economy is what has propelled economic issues to the heart of geopolitics. The American thinker Edward Luttwak once alluded to America’s trade disputes with Europe and Japan in the 1970s as the “logic of conflict in the grammar of commerce,” but Sino-Western trade and commercial relations have underscored this with gravity. Today’s grammar of commerce embraces everything from export controls and close scrutiny over foreign direct investment, to entity lists of companies forbidden to sell or trade certain products. Moreover, disputes over industrial policies and corporate governance, different standards and protocols for advanced technologies and communications systems, internet access, data gathering, and cybersecurity are all up for grabs in the current Sino-American economic competition.

 

The U.S. government, for example, has used its own more than 300-strong entity list to restrict or ban the sale of certain types of semiconductors without a license, especially where there are links to the People’s Liberation Army or to the repression in Xinjiang. On the other side, it was recently reported, for example, that China was considering export controls on rare earth metals, used especially in the manufacture and maintenance of  American F-35 fighter jets and other sophisticated weaponry and their intricate electrical power systems and magnets.

 

The U.S. dollar financial system is also a big deal in geopolitics, and still dominates in spite of China’s wish for dollar hegemony to be replaced by alternative arrangements. Dollar dominance is the basis for financial sanctions against Chinese officials and firms, the banning of federal pension funds from investing in Chinese stocks, executive orders to ban U.S. investments in 31 Chinese firms tied to the People’s Liberation Army, and the proposed delisting of up to 200 Chinese firms from U.S. exchanges. Washington has set up a whole of government bureaucratic infrastructure to oversee the economic and financial decoupling with Beijing.

 

In China itself, it is over a year since some analysts deemed the pandemic was presenting China with its ‘Chernobyl’ moment, but the analogy couldn’t have been more wrong. Draconian suppression brought COVID-19 under control, allowing the economy to turn back up as of spring 2020. The return to economic growth has won China bragging rights in the global system, and the economy will provide a favourable backdrop for the party’s centenary celebrations in July.

 

Yet, leaving the economic noise from the pandemic to one side, it is also clear that confronted by the harshest external environment in over four decades, and structural economic headwinds including stalled productivity growth, China faces internal threats to its economic security too. In order to combat this, China intends to try its own version of decoupling, and make a dash for science and technology dominance.

 

Self-reliance is to be advanced through ‘dual circulation’ strategy in which China will continue to emphasise exports along with import substitution and  protected supply chains, but prioritise domestic consumption of domestically produced goods. Although these are mutually contradictory goals, the government wants to upgrade consumption and services and boost the labour and household shares of income. It also intends to tackle inequality, promote social welfare, and finally raise the retirement age as a contribution to ageing society problems. We shall see if these oft-stated policy goals translate into workable policies.  China’s planners recognise that institutional barriers to income redistribution and efficient resource allocation need to be dismantled, but this can only happen if China’s politicians are willing and able to embrace hitherto unacceptable political and market reforms.

 

Top priority will also be given to a $1.4 trillion state-led science and technology strategy, designed to make China self-reliant, and a global leader in advanced technologies, such as AI, quantum computing, life sciences, and above all, semiconductors, which lie at the door to all advanced technologies. Whether or not this pays off better than in the past is a moot point, given China’s continued strong dependency on technology, notably semiconductor, imports. The latter cost more than crude oil. It meets only 16 per cent of its own chip requirements, is a long way behind the United States, Taiwan, S. Korea and Europe, for example, and must contend with the American-driven restraint infrastructure now comprising export controls, sanctions, and investment scrutiny under the auspices of the Treasury, Commerce and Justice Departments and the Congress.

 

China’s pandemic experience may be instructive. It showed yet again that China’s leaders can be highly effective in addressing crises, but much less capable of really preventing or resolving them. Moreover, while authoritarian control, the demand for compliance, and the suppression of debate certainly helped China manage a grave public health crisis, they also constitute substantial sand deposits in the gears of successful economic development for an upper middle income country with big aspirations to get rich. This could have a material impact on China’s security sensitivities.

 

The implications for the United States and other liberal-leaning democracies are equivocal. In the digital era, we cannot know if China’s governance system will succeed in delivering the party’s lofty goals or not. President Biden wants to strengthen alliances  with other countries, especially in Asia, all the more so because China’s own coercive diplomacy and interference actions are proving to be major impediment to its already limited soft power. Yet, Washington cannot change the party’s politics or chosen path directly, and must solidify its own economic security by focusing on the strength and structure of its own economy and financial system, and the dynamism of its enterprises and culture. Put another way, in its thinking about competition with China, the Biden team working on China should focus Detroit, Disney, and the dollar.

George Magnus, formerly the chief economist of UBS, is a Research Associate at the SOAS China Institute and at the China Centre, Oxford University. He is the author of Red Flags: Why Xi Jinping’s China is in Jeopardy (Yale University Press, 2018).

This is an abridged and slightly amended version of a longer essay that was published in War On The Rocks on 03 March 2021

 

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.

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