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China’s Neo Mercantilism and Sino-Pak Strategic Relations

Qura tul ain Hafeez

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The economic reforms of 1978 in China brought about an increase in its Foreign Direct Investment (FDI). Following the neo mercantilist policies it has encouraged the free trade wherein the Chinese firms introduced themselves and opened up to the international markets. Although the central government gave some relaxation on some of the industrial products but there are still state owned enterprises in large numbers. Better educational plans, export/import controlled regimes, and Chinese engagement in FTA with different South Asian countries including Pakistan are the contributing factors in the Chinese economic strides. Today China’s top trade commodities are textile, technological equipments and machinery, organic chemicals, iron, steel and other products. According to an estimate China earned $10.36 trillion GDP growth in the fiscal year 2014.In the mid of year 2015 China’s trade surplus was worth $59.49 billion achieving favorable amount of 70.9 hundred million as balance of trade.

It is to be understood that the Chinese neo mercantilism in not harmful for the developing countries and under developed regions of the world although there is a lot of criticism on China’s economic policies. It is one of the core assumptions of neo mercantilism, which addresses that along with the economic development of a state it emphasizes on the world economic development. Neo mercantilism promotes the regional organizations and markets. It’s a broader platform. Hence in the light of that it can be assumed that the Chinese investment projects are going to be beneficial for Pakistan as well as for China. China receives a positive response that encourages it for investment abroad because most of the investment is done for providing better conditions of infrastructure, roads, bridges, energy sector, railway projects etc. It not only benefits China by providing Chinese contractors business, but it is also helpful for creating job opportunities in Pakistan and for its economic growth .The purpose behind neo mercantilist policies of China is that China itself is running through the process of development. So it encourages doing business in different parts of the world because overseas economic relations are mutually beneficial for China’s home markets and other countries.

Similarly, China’s neo mercantilist approach should not be seen as harmful for Pakistan’s strategic relations specifically within the context of Sino-Pak strategic partnership .Both countries are enjoying trustworthy strategic relations whereas for past one decade there has been a lot of improvement in the economic relations as well. China believes in regionalization through promoting regional trade and interaction with business community. China’s active role in regional organizations like SARRC, ASEAN, and SCO is meant as part of its efforts to bring economic stability for the whole South Asian region.

Another aspect of neo mercantilism is that it puts emphasis on increasing the exports and decreasing the imports.  According to the estimates collected from the UN Comtrade Database and United Nations Comtrade Statistics and International Trade Centre (2016) by 2013 the trade volume between China and Pakistan increased over $12 billion. In 2000 Pakistan’s exports to China were $244.65 million and in 2004 and 2005 it reached $300.53 and $435.68 million respectively. While Pakistan’s imports to China in 2000, 2004 and 2005 were $550.11, $1488.7 and $2349.3 respectively. The overall volume of Pakistan’s imports and China’s exports is more than Pakistan’s exports and China’s imports. It might appear that China through its mercantilist policies is only increasing the level of exports but the reality is that it is simultaneously providing business to Pakistan. As per the official records, in 2006, the percentage of Pakistan’s export to China after free trade agreements was $506.64 million i.e. around 6% of what?.And Pakistan’s share of total import to the world was 7%. Similarly in 2012 exports to China were 30% and percentage of share to world was 27%. While Pakistan’s imports in 2006, and 2012 were 9% and 20% whereas total share to the world was 11% and 18% respectively. It shows that Pakistan is doing most of its trade with China, and Chinese companies are providing Pakistan a good business. Hence it surely is proving beneficial for Pakistan. The amount of this trade balance increased after Pakistan’s FTA with China. At the same time Chinese neo mercantilist policies are bringing developments for Pakistan’s as well as for its own trade enlargement.

There is no denying the fact that China is one of the world’s largest economies and it is hoped that Pak-China economic collaboration will bring economic stability in South Asia and will make Pakistan a regional hub of trade activities. Currently China has started about 22 projects in Pakistan including reconstruction of Karakorum highway, heavy machinery complex, tank and aircraft building, and the mega project of Gwadar Seaport under the umbrella of CPEC (China Pakistan Economic Corridor).  CPEC being a flagship project of China’s BRI strategy  includes Chinese investment of about $52 billion from deep seaport Gwadar to civil energy agreements, infrastructure and road projects. This will enhance trade and commercial opportunities for Pakistan. Moreover about 10,000 MW of electricity will be generated when it is completed by the end of 2018.

Eventually China’s neo mercantilist policies are a source of regional economic integration and the BRI will bring the countries economically more close to each other in a network of interdependence. The CPEC will be especially a major project of China’s Vision of BRI and will make Pakistan a boon for economy and a source for FDI. Already according to Board of Investment, Pakistan’s expected net foreign direct investment (FDI) has had a jump of about 60 percent in 2017/2018. Hence it can easily be interpreted as a project of mutual interests and collective benefits and by no means the CPEC should be viewed as  another East India Company.

Qura tul ain Hafeez has done M Phil in international relations from Quaid-I Azam University Islamabad. She is currently working as a Research Associate at Strategic Vision Institute Islamabad. She can be reached at Quraathashmi[at]gmail.com

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The Implication of China’s Diplomacy in APEC and ASEAN

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It is truly unusual that the Chinese President Xi Jinping and its Premier Li Keqiang are visiting the same area during nearly the same time: Xi’s visit to APEC from15th to 21st November and Li’s visit to ASEAN on 15th November. Yet, if we look into China’s foreign policy towards this area over the past years since President Xi took power, it is not difficult to understand both Xi’s and Li’s official visits to the “larger Pacific” and the meaning beyond.

As we know, President Xi has reiterated that the Pacific is large enough for the countries involved to share the prosperity with each other. In order to achieve the inclusive rather than exclusive benefits for all, China’s diplomacy aims to reject any kind of unilateralism, trade protectionism and anti-globalization. Given this, Xi’s at APEC and Li’s at AEASN is defined as a signal of China’s diplomacy to further reform and bold openness.

As a rising great country, China is surely eager to expand its investment and trade with the south Pacific area, and Papua New Guinea (PNG) is the first country visited by Chinese president. What is more, PNG joined the Asian Infrastructure Investment Bank (AIIB) early 2018 and then became the first state of Pacific islands to sign the MoU on “The Belt and Road Initiative” construction. As the theme “Harnessing Inclusive Opportunities, Embracing the Digital Future,” the APEC summit will focus on Regional economic integration, digital economy, connectivity, sustainable and inclusive growth and so forth.

Also during Premier Li’s visit to the ASEAN, he highlighted the necessity of the collaboration and mutual benefit among the countries involved on the 21st China-ASEAN leaders meeting. This is also the 21st ASEAN Plus Three Summit (10+3) and the 13th East Asia Summit (EAS).

Quite understandable, since the 1960s, the center of world economy has shifted from North Atlantic to Asia-Pacific, its dynamic growth in the region create countless jobs and push the development of world economy. This is the reason that Asia-Pacific region has the most trade agreements and the most complicated economic architecture around world. APEC and ASEAN, as two institutions that possess most member states, are the very pillars of the tumbledown regional economic architecture. APEC was launched by Australia and later included 21 member states in the region, amongst are United States, China, Japan, the economic giant three of the world economy. ASEAN is an institution that consist of ten small and middle states. Though they are not strong enough to meet the challenges from the power politics alone, ASEAN is a core force that firmly facilitate the economic integration of the whole region of East Asia and the Pacific. No matter what the way they embrace, they are the de facto basic regionalism of Asia-Pacific. The withdrawing of United States from Trans-Pacific Partnership (TPP) and hard-achieved Regional Comprehensive Economic Partnership (RCEP) once brought the regional economic architecture a fig leave and strengthened the impact of APEC and ASEAN.

As a result, the two visits of Chinese top leaders to the same region at the same time definitely attract worldwide attention, because they not only represent China’s recent diplomatic focus but also mark the fact that Asia-Pacific region has become one of the vital fields where China’s diplomacy will be actively conducting in terms of the Belt and Road Initiative, and carry on the good-neighbor policy. Since China has argued for creating a peaceful development milieu, to enhance economic transformation and upgrading oversea markets and partners in Asia-Pacific region.

Consider these facets, China, as the second largest economy, aims to promote its well-articulated stance on multilateralism and inclusiveness and globalization. As both President Xi and Premier Li have strongly said that China is ready to work with Pacific island countries to endeavor together and sail for a better future for bilateral relations. For the sake of that goal, China always believes that as long as all the countries involved have firm confidence in each other’s development, cooperation and the future of East Asia, and work closely together and forge ahead, all sides would achieve more and reach a higher level in the next 15 years.

For sure, China belongs to the part of a larger Asia-Pacific family, and the Chinese government defines its goal as the shared prosperity of this region. Therefore, China will continue to work hard and constructively to promote the overall development of impoverished but promising Pacific island countries under the Belt and Road Initiative.

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An uncertain step in moving China-Japan relations

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Authors: Meshach Ampwera  & Luo Xinghuan

On October 26, Chinese President Xi Jinping met Japanese PM Shinzo Abe and praised that both China and Japan have pledged to strengthen bilateral ties amid continuous efforts made by the two nations. Xi said, “Bilateral relations have returned to the right track and gained positive momentum, which is something the two sides should cherish.” As the two largest economies in Asia, China and Japan are also the vital players in Asian security and the global development.

In addition, since this is the first official visit to China by a Japanese PM in a seven-year “Cold Peace” period, it is widely assumed that Abe’s visit symbolizes the resumption of high-level visits and will be followed by an increasing rapprochement between China and Japan. True, the leaders of the two economic giants witnessed a wide range of agreements, including a 30 billion US dollar worth of currency swap pact, the establishment of a maritime and air liaison mechanism, and enhancing people-to-people exchanges.

Yet, three factors have to be considered seriously in looking into Japanese foreign policy given the current changing geopolitical landscape regionally and globally. First, Japan has still regarded itself as a “defeated” state during the WWII. Since then, Japan’s postwar posture has frequently described as a new pacifism; yet in fact it is considerably more complex. As Henry Kissinger put it: “Japan had acquiesced in the U.S. predominance and followed the strategic landscape and the imperatives of Japan’s survival and long-term success.” This means that the governing elites in Tokyo used to hold the constitution drafted by U.S. occupying authorities with its stringent prohibition on military action, and adapted to their long-term strategic purposes. As a result, Japan was transformed from the pacific aspects of the postwar order (that prohibited military action) into a nation that has focused on other key elements of national strategy, particularly using economic leverage regionally and globally, though not uncontroversial.

Second, in a recently-released paper written by the former US Secretary of Defense Ash Carter, he maintained that “Japan is a close ally of the U.S. and a rising military power, too, because of legal and constitutional changes of great significance championed by Prime Minister Abe.” In practice, the Japanese administration has engineered an expansion to enable its military to operate regionally and even globally in response to the rise of China, violent extremist activity in Asia, and the alleged North Korean belligerence.

Actually in 2013, Japanese Government White Paper revealed a desire to become a “normal country” with an active alliance policy. In a searching for a new role in the Asia-pacific region, Japan aims to act as an “anchor” of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) concluded in 2018 after the withdrawal of the United States. Now it involves 11 countries and representing 13.4% of global GDP ($ 13.5tri.). As the largest economy of the CPTPP, Japan has been active in moving it forward. Early this year when the British government stated it is exploring becoming a member of the CPTPP to stimulate exports after Brexit in 2019, Abe stated that the United Kingdom would be welcomed to join the partnership. It is said that even the U.S. reconsiders possibly rejoining the CPTPP if it were a “substantially new deal” for the United States.

Japan’s ardent involvement into the US-led strategy in Asia has also been endorsed to expand steadily as a normal power regionally and globally. For example, the Asia-Africa Growth Corridor (AAGC) is the result of the joint declaration issued by the India and Japan in 2016. Although it is premised on four pillars of development and cooperation, it is self-evident that the AAGC reflects a growing special “strategic and global partnership between India and Japan” in which both sides have viewed China’s growing, pragmatic and successful presence in Africa as a menace. There is no question that AAGC is a well-crafted vision and agenda of both India and Japan, linking with their own development priorities. But with increasing pressure from Washington and Brussels, Japan and India are in effect driven by the option for the AAGC to rebalance China’s Belt and Road Initiative (BRI).

From the inception of the BRI, they have more than ever before been concerned with being isolated in Africa by Beijing’s initiative. But, as Ampwera Meshach, a researcher at Jilin University put it, “Africa is on the growth trend and offers potential markets and raw materials. For this reason, Africa largely needs pragmatic and scientific, technological and development- oriented initiatives and these are clearly reflected in China’s BRI.” In light of this, the AAGC does neither reflect a novel nor pragmatic approach on how it fits within the African agenda. Instead, AAGC’s foundational pillars seem more inclined to the Western cooperation approaches that have for decades not been translated into development.

Controversially, two days before Abe’s visit to Beijing, Japan had decided to scrap official development assistance (ODA) to China, which is a program where Japan provides aids to developing countries starting back in 1954. Even though some people argue that Japan’s ODA is reasonably cancelled because China’s GDP is even 2.5 times larger than that of Japan, yet, it is necessary for Chinese to be aware of the reality that Japan is a longstanding ally of the United States. As Japan has long been an economic power, its impressive military capabilities would not be confined to a strict policy of territorial defense—no projection of Japanese power or the U.S.-Japan alliance to the region as a whole.

It is during the Abe’s administration which has recognized an environment of growing Chinese assertiveness, violent extremist activity in Asia, and North Korean hostility, and therefore, Japan has eagerly participated in Asian security, including training and exercising with other nations, beyond a purely passive, home-island defense role. This makes it an increasingly important player serving the US strategy in Asia but challenging the rise of China globally.

It is true that Abe tweeted about the trip — while recognizing the challenges in moving bilateral relations forward, he said that he would still work to “push Sino-Japan relations to the next level”. Given the two countries’ economic links, it is only understandable that there is a need for the two sides to come closer. Moreover, Japanese businesses has been an extremely active force behind the government’s shift of attitude on the Belt and Road Initiative (BRI).

Yet, all in all, we should never ignore that Japan’s ambitious foreign policy has gone beyond the economic goal.

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Red Flags: Why Xi’s China is in Jeopardy – Book Review

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George Magnus writes about the dangers of the Middle-Income Trap in the Middle Kingdom, among other issues, in Red Flags: Why Xi’s China is in Jeopardy. President Xi’s face adorns the book cover, with his name looming above.  Fitting, seeing as China has removed presidential term limits; China’s fate is thus likely to be tied to the decision making of Xi for the next couple decades.

Magnus writes about the dangers of Xi’s likely ascendance to President-for-Life.  Ever since the excesses of Mao’s one-man rule, China’s Communist Party has largely ruled by consensus, while provincial governments have served as a counterweight to federal authority via control of their land and many of their local State Owned Enterprises (SOEs).  Xi is challenging this staus quo.  So-called Xi Jinping Thought is now official party canon, being taught in schools and in the media.  The 2012 crackdown on corruption by Xi in his inaugural year was widely seen as a pretense for taking out political opponents and sending a message to his potential opponents.  Ever since, Xi has been working to centralize power to himself.  Magnus notes that being leader for life largely shields Xi from short-term popular discontent, but also means that every long-term decision, good or bad, will become part of Xi’s legacy.  Hence, the book informally reads as a personal policy checklist for Xi.

Red Flags lists four, well, red flags of likely impediments to Chinese economic development.  Firstly is debt.  China has been an unprecedented money-making machine for the past three decades or so.  However, signs are starting to appear of a possible economic slowdown.  Most significant is the debt-GDP ratio, which has skyrocketed over the past few years.  Magnus writes extensively about how China’s growth, up to this point, has largely been fuelled by credit (debt).  China’s much-maligned (by Trump, most notably) trade balance surplus has shrunk to no more than a few percent, statistically insignificant.  China could theoretically make up for shrinking foreign demand for goods and services with domestic consumers.  Magnus is unfortunately the bearer of bad news in this regard: “Household savings rose from about 5% of disposable income in the late 1970s to about 38% in 2016, or just over 25% of GDP. Savings by companies are also elevated, amounting to about 17% of GDP in 2016.”

Hence, the Xi regime has been trying to maintain economic growth via ever-greater sums of state investment funding.  Magnus explicitly warns against this: “The reason the investment rate has to fall is because the more China relies on it, the more inefficient that investment will become.”  Such a statement might seem self-evident, but Magnus backs it up with facts.  For instance, he points out, “Between 1978 and 2006, for example, China spent between 2 to 4 yuan of investment to get 1 additional yuan of GDP. Since then, the amount has risen steadily to reach about 9 yuan in 2015, corresponding to a marked fall in investment efficiency.”

Magnus writes a lot about the inefficiency of China’s thousands and thousands of SOEs.  “Officially, and according to some China-watchers, SOEs now account for just a fifth of output and a tenth of employment. The presumption though that the rest of the economy is in private hands, as we understand it in the West, is incorrect. Many private firms have large or majority state owners, who exercise significant control over senior appointments and corporate strategy, and state ownership is often disguised by multiple layers of investment companies ultimately owned by a state entity. Allowing for these opaque adjustments, the purely private part of the enterprise sector may actually be little higher than 20–30 per cent.”  SOEs have built much of modern China, but their efforts are increasingly being wasted on skyscrapers and airports that remain almost empty, Chinese Roads-to-Nowhere.  A blank check invites planners to ignore long-terms concerns of viability, blinded by short-term gains that go directly into the pockets of Party-affiliated contractors.  China’s financial services sector isn’t much better off.  Magnus writes about all the bailouts, takeovers and general heavy-handedness by the government of various Chinese banks and other related companies.  Due to a slowdown in trade and many other issues discussed in the book, state investment will figure to play an ever-larger role in China’s economy, inefficiency be damned.

The book’s second diagnosed problem for China’s future growth is its currency, the renminbi.  Xi mirrors the isolationist mindset of China’s ancient emperors with regards to cash inflows and outflows.  It’s very hard for Chinese investors to send renminbi out of the country.  Likewise, China restricts the ability of foreigners to own reserves of renminbi, or Chinese financial assets in general.  The renminbi is subject not only to this lack of liquidity, but also the confines of a planned economy.  China is infamous for its strict control of its currency valuation, as well as its monetary policy via diktats, investment and bailouts.  Its ownership of USD and other foreign currency reserves must always be flawlessly balanced to safely back up the value of the renminbi.  This resulted, for instance, in the selling off of a trillion of its USD reserves between 2014-2016.  The combination of currency illiquidity and over-management limits the ability of the renminbi to fuel Chinese economic growth.

Thirdly, the book mentions the so-called Middle Income Trap.  Once a country reaches a certain benchmark of development, it’s hard to maintain further momentum.  China’s already experiencing slowed growth due to factors such as increased global manufacturing competition.  As Magnus points out, China has already had its coming-out party to the world economy.  It can’t join the WTO again or eliminate mass hunger again.  Likewise, China has stalled in terms of rural development and education.  Rural China is increasingly falling behind the major cities and the hukou system of restricted movement and rights for migrant workers isn’t helping.  Students in China still attend far fewer years of school than students in developed countries like the US, especially in advanced fields like IT.  These issues of inequality and 21st-century education must be addressed if China is to fully develop.

Lastly, Magnus writes about the demographics crisis.  China has one of the highest ratios of elderly people in the world.  Combine this with China’s 1.45 birth rate and the gender disparity caused by the 1-Child Policy and you have a ticking time bomb.  The workforce is increasingly running out of youngsters who can take the place of retirees, causing a slowdown in economic output.  The higher the elderly population becomes, the more each working-age person will have to contribute to pensions and healthcare.  The economic burden that only-children will have to shoulder taking care of their aging parents will inevitably lower marriage rates and thus further lower the unsustainably low birth rate.

This is the most dire problem because there’s very little that society can do about it.  Xenophobia has prevented any meaningful amount of migration to China, but even if China were to let in tens of millions of foreign workers, that would be a drop in the bucket for a nation of 1.4B people.  Even after China ended its One-Child Policy, couples are still averaging well below 2 children, despite increasing prosperity.  The only real hope for China’s demography problem would be a literal ex machina: automation.  Robots may be able to generate untold wealth that could buoy a small nation like Singapore, but even an army of robots is unlikely to completely offset the gradual loss of hundreds of millions of working-age people to aging.  Even if AI is a magic bullet for all productivity woes, it take probably at least a century to meaningfully scale up, by which time China’s population will have substantially shrank.  It doesn’t help that China is, in many respects, barely keeping pace in the AI race with the US, Japan and the EU.  In the race for artificial intelligence, even being a year behind the competition can cost trillions of dollars; China’s tech sector will likely take a few decades to completely match Silicon Valley.  Lastly, it should be noted that not even innovation can overcome the limit resources of our planet.  We’re already running out of industrial resources like oil and lithium.  It would be foolish to place all of one’s eggs in the basket of a sci-fi utopia.

Red Flags is a very detailed and interesting book about the future of China.  Magnus isn’t anti-China by any means; he gives credit to China’s marvelous successes and doesn’t moralize.  If anything, the book was too generous by barely mentioning the unrest in Xinjiang and not mentioning the occupation of Tibet at all.  In an objective fashion, he succinctly explains China’s problems and offers possible solutions.  China has shown an unprecedented ability to adapt to change.  This flexibility may wind up being undone not external adversaries or limitations, but by increasing autocracy.  Dictatorship has rarely resulted in long-term, across-the-board growth.  One can look at a fellow Communist country for an example: the Soviet Union.  Though the USSR made impressive leaps in technology, manufacturing and agricultural output and human longevity, it was ultimately undone by its ideological rigidity.  A lack of accountability for its leaders meant that the USSR was forever a captive to bad policy.  Likewise, a lack of freedom stunted innovation.  If Xi is to avoid the pitfalls of the USSR, he must avoid letting his power get to his head and embrace a flow of ideas from both fellow Party members and private citizens.  Xi’s consolidation of control and crackdown on dissent would point otherwise, unfortunately.  Only time will tell if China will continues to beat the odds…

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