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The 2021 Economic Scorecard: How China Stacks Up with the U.S. and Its Allies

Josh Lipsky wrote . . . . . . . . .

nce upon a time, the dominant narrative about China’s rise went something like this: What used to be a country stuck in a state-run economic morass had, thanks to its embrace of open-market reforms, broken out from the pack—putting it on track to eventually converge with the world’s largest economies. China might become a geopolitical challenger of the United States and its allies, the narrative went, but commercially both powers would increasingly play the same game. The story we in the capitalist world told ourselves was perhaps even comforting: On the economic front, at least, what China really wanted was to be more like us.

But then China seemingly changed course. In recent years, an increasingly powerful Xi Jinping reasserted the role of the state in the economy. Beijing’s new direction was no longer so clear—or comforting. Amid this uncertainty, a counternarrative was born: China’s purported economic liberalization had been an illusion all along, designed to get a naive United States to give Beijing a free pass as it gathered strength to become a superpower.

Both of these narratives are wrong. With China, the story is never so simple. The truth is that China still hasn’t decided which direction its economy is ultimately headed. And we need a credible way to track its trajectory.

Seeking clarity on China’s economic course, the Atlantic Council’s GeoEconomics Center, which I direct, joined with the China experts at Rhodium Group to launch an innovative, data-driven investigation. What we found tells a nuanced and often surprising story about China and its economic model—a primary source of tension between Beijing and the rest of the world.

Here’s the key takeaway: China is, in fact, conflicted—slowly opening up its economy in some areas while swiftly retrenching in others. In key sectors, Chinese leaders are backtracking. In others, they simply can’t figure out how to successfully reform. And while this zigzag worked in the 2010s, it could become a self-inflicted wound in the 2020s. That’s because China’s economy is now on shaky ground. Its growth over the last decade was largely built on credit-fueled spending that the country can’t afford to replicate in the decade ahead. This means officials in Beijing will need to get serious about the liberalizing reforms they’ve been promising since China’s accession to the World Trade Organization twenty years ago. Otherwise they may face a severe economic slowdown, which would upend the march to prosperity that has been so central to the Chinese Communist Party’s success.

China is, in fact, conflicted—slowly opening up its economy in some areas while swiftly retrenching in others.
Our project started with a foundational question: Is China’s economy becoming more or less like those of the United States and other open-market countries? The answer couldn’t be more important. Mutual trust between the two powers has eroded dramatically—with the United States convinced that it has been taken advantage of through unfair Chinese economic practices, and China insisting that it is in fact reforming and just needs more time to do so like any developing nation.

If China is converging with open-market systems, it would mean that its leaders still see benefit in economic liberalization. Policymakers in the United States and other open-market economies could assume Xi will eventually be compelled—by his desire for continued growth—to make more concessions to international norms such as reducing industrial subsidies and opening up to foreign capital. The United States could slowly reduce tariffs and step away from the mutually destructive trade wars that began in 2018. US and European businesses could count on predictability and continue to invest in China with confidence.

But if China is diverging from open-market systems, it would signal that Beijing believes the country can sustain sufficient growth even as the government clamps down on its private market. Policymakers in the West would then be justified in reassessing the way their countries engage with China and thinking more strategically about protecting their own supply chains and companies (even if those companies haven’t yet fully realized the risk).

To find the answer, we’re launching the inaugural report of our China Pathfinder Project—an exploration of China’s economy in six areas that economists consider critical for open markets. We used this data to create a new scoring system that compares both China’s record of liberalization and its economic performance with those of the United States and nine other leading open-market economies. We then tracked how China has progressed on these metrics over the last decade.

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The big picture

This study confounds the narrative that China has never wanted to play by international economic rules. The data demonstrates that under Xi, China has tried to implement some liberalizing reforms. Much of its post-2010 convergence with open-market economies, after all, was under his direction. But, in large part because Xi and other Chinese leaders have been unable to reconcile those efforts with their desire for more control, the reforms have failed to deliver.

That’s a significant distinction. If you’re a US strategist dealing with a Chinese economy that is on its way to becoming more interoperable with your own economy, you’ll play your cards differently than if you believe that Beijing is truly trying to move away from your economic model. For years, policymakers in Washington assumed that Chinese leaders wanted their economy to be more like America’s. Then many of those same people decided that China never wanted to emulate open-market economies at all. US policies have swung like a pendulum because of these assumptions, but both miss the mark.

For US policymakers, the key message from the study is this: China shouldn’t be treated as if it’s attempting to completely diverge from the international economic system. Chinese leaders might yet decide that liberalization is the answer after all. An effort to decouple the US and Chinese economies would thus be not only an implausible and costly economic strategy, but one that treats China like something it isn’t. Washington—and Wall Street—should instead respond to the China that actually exists and focus on areas where there’s real potential to make a difference. If you want to address an emerging problem rather than an old one, place less scrutiny on trade and more on China’s restrictive financial system and Chinese companies that are seeking to list on US exchanges.

The study also discredits the narrative that Chinese leaders have cracked the code coveted by so many authoritarians—that they have figured out a way to have a dynamic economy and illiberal political controls all at once. In category after category, China is inflicting costs on itself through its decisions to not be more like open-market economies. China’s own projections for its GDP growth in 2022 and beyond underscore the risk of this approach. Beijing has reached the limits of what it can achieve with the strategy it’s been pursuing for the past twenty years of attempting to have it both ways.

That means the 2020s could take the country in dramatically different directions. Pathfinder is designed to track the journey ahead. China could either jump to the middle of our dashboard and deliver strong economic growth, or stay mired in its current system and stagnate. Despite what you read about Xi and his intentions, neither outcome is predestined.


Source : Atlantic Council

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