Foreign Policy Blogs

The Grand Disengagement

JASON LEE / REUTERS

There has been a great deal of discussion in Western and other countries surrounding an economic and political disengagement from China’s economy. Since the acceptance of China into the WTO in 2001 and the great re-introduction of China into the world economy after 2008, the Chinese economy has flourished, mainly based upon supplying consumer goods to the US and Europe. With an ever growing middle class in China, it made sense for many international firms to create a presence in China, all the while adapting their manufacturing processes to produce in China while exporting less expensive, Union free products back into the US and EU. The growth of China’s economy reached double digits in some years, with masses of rural Chinese residents flocking into the larger cities to take jobs in the newly reinvigorated manufacturing sector. Most international companies took advantage of this years long boom in China’s growth, setting up Chinese firms in a legal and political environment that took little notice of labour rights, while allowing for a maximization of profits in China and the ability to ship and profit abroad. Western companies made money, and the owners of these companies made money, allowing China’s government to profit and reinvest in China. The West and East were linked economically, with losses in China’s RMB value now affecting those in New Jersey, Amsterdam and Abu Dhabi.

The strategy of integrating two large economies was hailed as a success post Second World War. The idea of integrating the German and French economies into a European Economic Community arose from the theory that economic losses on both sides would deter future conflict, in a region that was known for having a great many conflicts over generations. While integrating China into the WTO and world economic system was not intended to solely reduce conflict, the hope was that implementing China into a democratic economic system would influence China to become more economically motivated, thus motivating property rights and the values of Western democracy in some form. The motivation on making money while passively promoting human rights values was part of the theory, but for the most part it never took shape. Nations that were once considered strong democracies, as in Hong Kong, are now losing rights rapidly while the rest of the world ignores their challenges. The suspicion of influence over international organisations has lead some countries to question the advice of those international bodies that have the majority of their economic ties to one or two countries. Even strong democracies are showing signs of influence, to the detriment of their own citizens.

For many large companies a pulling away from China’s economy would mean a great loss of revenue, and it is likely the case that any downsizing or sale of many of these companies may only find buyers from the Chinese market. For those who have benefitted from China’s economic boom to take a decade of lost revenue and little to no growth produces a large disincentive for them commercially. While often running very wealthy companies, the reality is that owner and CEOs would lose money personally as well. A separation from China’s economy would not only take a massive economic hit on most companies, it would also place them into the political realm as the idea to separate would place hard working Chinese employees against hard working American, European and other employees where the population, through no fault of their own, would take the brunt of the losses during separation. In the event that post-Covid-19 economies do not recover in the next two to three years, the reality may be that economic suffering hurting workers in the West may become the catalyst for political leaders to enforce a real separation from China’s economy.

To enable companies and governments to change their economic model that has been enshrined since 2008 would likely require a great deal of government lead incentives to push industries back into their own national economic system and away from China’s low cost production economy. Part of China’s economic plan in recent years has been to move from manufacturing into more Research and Development intensive industries and compete with Western economies on more value based product categories. While China still is in the process of making this change, Western governments may force rapid change before the new policy takes shape fully in China. In order to do this, Western governments would need the money and political will to fund losses to companies and incentivize them to return. Carrots may work better than sticks, as a move to another low cost production economy may become more of an incentive than returning home.

With the massive losses from Covid-19 shutdowns, even the US and EU have taken a great deal of economic damage, so much so that Chinese companies would benefit from gobbling up companies in other countries while the value is low. For the grand disengagement from China to work, it would have to be done with like minded countries working in concert, still depending on each other but collectively deciding to move their industries back into their own backyards. Trade and development would likely continue within these blocks of nations, or within large self-sustaining economies, but with the shared goal of reducing dependency. The ties between nation states and flag ship national companies may become crucial, and weaker countries may end up having to choose their blocks as nationally supported companies take precedence over shared trade. Legal instruments like prohibiting key industries from being sold to foreign entities would become crucial, as well as a restriction on the sharing of Research and Development. China would likely have a harder time reaching record growth levels in this scenario, but with so much economic development and new technologies now residing in China, they would be a strong competitor within the world economy. Without this massive and nearly implausible push, it will be the case that the international economy will remain the same for generations to come.

 

Author

Richard Basas
Richard Basas

Richard Basas, a Canadian Masters Level Law student educated in Spain, England, and Canada (U of London MA 2003 LL.M., 2007), has worked researching for CSIS and as a Reporter for the Latin America Advisor. He went on to study his MA in Latin American Political Economy in London with the University of London and LSE. Subsequently, Rich followed his career into Law focusing mostly on International Commerce and EU-Americas issues. He has worked for many commercial and legal organisations as well as within the Refugee Protection Community in Toronto, Canada, representing detained non-status indivduals residing in Canada. Rich will go on to study his PhD in International Law.

Areas of Focus:
Law; Economics and Commerce; Americas; Europe; Refugees; Immigration

Contact

Great Decisions Discussion group