During the second half of the 20th century, economic multilateralism was on the march with institutions like the World Bank, WTO and IMF overseeing ‘cooperative’ action on international trade and economics. Even in the days of the Cold War and the ideological split that sat at its core, the West at least ran along rails greased by US financial stability and the international rules-based order that emerged from the ruins of the Second World War.
But the early 21st Century saw a new ‘winner takes all’ approach by the world’s two dominant economic players – the US and China. China’s geographic expansionism in the South and East China Seas was let slide for want of any real alternative, but then the Trump Administration, through the imposition of punitive tariffs and a range of other measures, sent a clear message to China: play by the rules or we will cut you off from the US economy. In the President’s own words: “Whether it’s [economic] decoupling or putting in massive tariffs like I’ve been doing already, we’re going to end our reliance on China once and for all”.
China is now pushing back with a new nationalist doctrine of its own: ‘dual circulation theory’. Only a few months old, this example of ‘Xi thought’ has been heavily promoted ahead of the plenary session of the Chinese Communist Party (CCP) to be held later this month. That means we can expect to see it emerge as official Party policy and as part of China’s next ‘5 Year Plan’ which will be adopted at the CCP Plenum. And that means it will be the doctrine which guides Chinese government investment, economic and trade policy through to 2025 at least.
So what is ‘dual circulation theory’?
Under this this theory, China will rely on “internal circulation” to stimulate domestic production, distribution and consumption as the engine of future economic growth. That internal consumption and production will be accompanied by “external circulation” i.e. opening up the economy to attract new sources of foreign investment and strengthen China’s supply chain. The emphasis of the new system of ‘external circulation’ will be on steering China away from reliance on the US and towards growth coming from its emerging ‘sphere of influence’, with the ‘belt and road initiative’ in the vanguard.
In some ways, ‘dual circulation theory’ is just a 21st century rebranding of Mao Zedong’s doctrine of ‘self reliance’ (自力更生), and there are plenty of China watchers and economist who question whether it is really anything new at all. Or even if it is achievable. But anyone who thinks that CCP slogans and policy diktats don’t have real world consequences really needs to brush up on the ‘Great Leap Forward’, the ‘Cultural Revolution’ and ‘socialism with Chinese characteristics’!
So, is such a fundamental shift in China’s economy even possible?
First, some numbers: private consumption in China accounts for less than 40 percent of GDP as compared to the around 70 percent in Western economies. Plus, Chinese households have huge savings (estimated at around 25 percent of disposable income) combined with low consumer debt levels. So there’s plenty of potential for China’s 1.4 billion consumers to drive increased self-reliance from within the domestic economy. Add to that the right incentives like lower tax rates or increases in investment and ‘dual circulation theory’ could just have a chance.
And there’s no ignoring the fact that China is investing heavily to close the technology gap with the US. By 2030, China will have an R & D budget of $US900bn and on current projections will invest at least $US70bn more per annum than all US industrial, government and academic R & D institutions combined. In a recent opinion piece for the New York Times, former Google CEO Eric Schmidt warned that Silicon Valley must work with the Pentagon or China would win the battle for tech supremacy.
As for ‘external circulation’, the ‘belt and road initiative’ has continued to expand despite the US and its partners taking active measures to stymie it, and even with the COVID-19 pandemic suppressing economic activity around the globe. According to Chinese government statistics, China has signed 200 ‘belt and road’ agreements with 138 countries and 30 international organizations, covering everything from infrastructure investment to cultural and sporting aid programs.
And the rise of economic nationalism doesn’t appear to be motivating US businesses to ‘reshore’ back to the US. Veteran Sinologist Arthur Kroeber notes that American companies have more than $US700bn ($980bn) of assets in China and do around $US500bn a year in domestic sales there. So it’s not surprising that the America-China Chamber of Commerce in China has found that over 90 percent of U.S. businesses plan to stay in China or even increase investment there.
The problem for an export-dependent, capital-hungry country like Australia is that a ‘hard decoupling’ of the US and Chinese economies could disrupt global supply chains, promote national protectionism, and trigger a second, post-COVID recession. And China has already indicated that it will look to diversify away from reliance on Australian raw materials, so we may have to accept that Australia has had ‘peak China’, and now needs to develop a new way to deliver national economic resilience.
The Australian Government under Prime Minister Scott Morrison has already taken significant steps in response to that possibility. The recent national Budget marks a huge shift in policy from the conservative Coalition’s traditional ‘small government, balanced budget’ approach to finance and instead has promoted major new spending commitments and revised economic priorities. These include: large fiscal commitments to ‘shovel ready’ infrastructure projects; a renewed emphasis on vocational tertiary courses over traditional liberal arts degrees and the ‘softer’ University programs; major new spends in national defence and national security; investment on supply chain security, in space technologies, agricultural innovation, and digital connectivity; and even a commitment to build a new strategic fuel reserve.
In the midst of all this geo-political manoeuvering, one thing is absolutely clear: the strategic and economic partnership between Australia and the US has never been more relevant, more important to both countries, or more likely to expand, not contract.
Sydney Avenue Consultants 