For the world to grow, it requires a strong America and a strong ChinaWorldfolio | February 13 , 2020
Globalization 4.0 —a term coined by this year’s World Economic Forum— holds the promise of a brighter future. However, it also carries a series of challenges, such as the rise of new power structures, the impact of innovative technologies on the labor market, and the severity of global issues such as climate change. In front of this situation, world leaders have urged for the creation of a new global architecture. Christine Lagarde from the IMF called for a “new multilateralism,” as Klaus Schwab from the WEF stated that “global issues required global solutions.” Why is a new global governance model important today? And how would this new model differ from the current one?
In the aftermath of WWII, international institutions such as the World Bank, the IMF and the WTO were created. To a large extent, these institutions formed the first consensus for global governance. As our world greatly evolved during the following decades, the role and structure of these institutions remained untouched. As such, it is fair to assume that global governance has fallen behind global practice. To give a practical example as to the asymmetry between governance and practice, one can observe how difficult it is to effectively regulate multinational companies. Today, many global enterprises source the majority of their revenue from foreign markets, but because of unsynchronized fiscal policies, the host and the mother country fail to benefit from the wealth and revenue created by these entities. This lack of legislative unification has deepened inequalities. For instance in the US, it is common to hear that an affluent 1% of the population owns more wealth than that accumulated by 90% of the American population.
As a consequence of this disparity, the advance of populist and de-globalization sentiments have advanced and taken a louder voice. To tackle such issues, the current global governance system must be fixed, updated and rebalanced. For instance, China is currently the 2nd largest donor to the UN organization and the member that has sent the most soldiers to the Peacekeeping Forces. Compared to other permanent members, China undoubtedly provides more investment and assistance. Unfortunately, the influence granted to China within global governance has not been representative of its contribution to it. To function adequately, a modern global architecture must be reflective of the participation and commitment of its members.
Traditionally speaking, the US has been the most powerful decision-maker of the World Bank and the EU of the IMF. As such, there is a clear need for new institutions, such as the Asian Infrastructure Investment Bank, to play a greater role. From a micro level, global governance requires harmonized jurisdictions to oversee the use of innovative technologies. The utilization and scope of digital taxes, data flow and e-commerce must be addressed collaboratively.
To summarize my argument: Firstly, I believe that the new version of globalization must be more representative of current power structures. Secondly, it must cope with new technological challenges on a common and collaborative scale.
Over the past four decades, China’s unprecedented economic boom has averaged +10% annual GDP growth, effectively pulling 800 million individuals out of poverty and creating a 400 million strong middle class. Interestingly, it has done so by following a politico-economic model different to the classical neo-liberal one present in Western democracies. Do you believe that China’s success would have been possible had it not embraced its own path?
A quantity of outsiders are worried because they believe China has adopted a ‘different path.’ However, I would personally classify China as a ‘mixed-model;’ as a private-public economy. To a large extent, the PRC is similar to Singapore, which enjoys a true balance between large state owned enterprises and a thriving private sector. If one looks at the economic numbers, one will witness that the private sector accounts for 60% of the Chinese GDP, with SOEs and multinationals both representing 20% each. I believe this balance to be the right formula for China to grow.
Another similarity with Singapore is that the Government has full land ownership. Public land ownership allows for massive infrastructure development projects to occur in an effective and timely manner. Furthermore, China enjoys a truly stable governance, an effective top-down approach and a centralized economy; all of which have made important contributions to its economic rise.
It is largely assumed that China’s economic take-off occurred when it joined the WTO and became a market-driven economy. While some countries still don’t recognize China as a market economy, the reality on the field paints a different picture. In China, businesses enjoys effective and flexible employment laws coupled with a domestic market of gigantic scale and potential; a positive environment for the private sector to flourish.
In terms of innovation, China has embraced new technologies with accelerated speed, as embodied by its 1.2 billion smartphone users and its advanced digital economy.
On top of becoming a manufacturing powerhouse, China also transformed into a logistic hub, as embodied by the fact that it holds 7 of the world’s 10 largest ports. Furthermore, the public sector is committed to investing its resources in projects that contribute to economic development. For instance, the total kilometer length of China’s high-speed railway is greater than that of the next 10 countries combined. To find a similar comparison, one would have to look at military spending, a ranking where the USA’s budget is equal to the next 10 countries combined. Withholding neither a positive nor negative judgement, this allocation of resources simply shows different contexts.
Additionally, I believe that Chinese culture and history has played an important role. Since childhood, Chinese people are taught the value of hard work. At companies such as Alibaba and Tencent, managers and executives work six days a week, 10 hours a day, and that working culture fuels economic growth.
Launched in 2013, the Belt & Road Initiative (BRI) aims to integrate 3 continents, over 60 countries and more than 65% of the World’s population through enhanced physical and digital connectivity. Six years after its debut, it has entered a “second stage,” and faces some challenges. With more than 120 nations joining its regulatory framework, the BRI has become a truly international project without having had the time to adjust. Secondly, it has been the target of a skeptical and binary discourse that labels it as a threat to the status-quo. In an article you authored for the South China Morning Post, you mentioned that the BRI needed to be redefined to match its second stage. What are the next steps for the BRI to match what it has become?
For the past 41 years, China has embraced the world’s generosity and welcomed foreign investments into its land. By receiving international resources, knowledge and capital, China has grown at accelerated speed. To give back to the world the wealth it received, the PRC decided to revive the 2000-year-old spirit of peace and collaboration of the Silk Road, and unveiled the BRI.
It has been 6 years since the Belt and Road started, and calling it an “initiative” is no longer accurate. Rather, it is should now be labeled a “project in action.” For the BRI to continue its progress, we must further its capacity and the capacity of its supporting institutions, such as the Asia Infrastructure Investment Bank (AIIB), to be multilateral. Today, the AIIB is composed of nearly 100 participants countries who have dispersed over $8 billion on 40 projects in loans. Its staff of 230 permanent employees comes from 44 countries, and out of the six presidents that govern it, five are non-Chinese.
To further the project’s multilateral approach, we could install an international steering committee combined with a global secretary office. We could also establish an arbitration center based in a multicultural city, such as Singapore or Geneva. Furthering the strength of the BRI and its funding institutions, such as the World Bank, the Asia Infrastructure Investment Bank and the Asian Development Bank, would allow to leverage the risks posed by political instability. To give you an example, Italy’s Government was recently reshuffled. Consequently, observers are now worried that the new party may withdraw Italy’s prior commitment to the initiative. However, if we can strengthen the institutions of the BRI and the BRI itself, participants will have to fulfill their commitments regardless of political changes.
Another breakthrough would be to promote deeper cooperation between the different development banks and transform them into a collaborative consortium. In order to enhance the transparency of its loans, China may also consider joining the Paris club. For the BRI to embrace its second stage, it must become a symbol of transparency, collaboration and inclusion. Even though it is a long-term project planned to have an effect on a 50-year basis, transforming it into a truly multilateral action should be done right from the start.
When skeptical observers portray the BRI as a geopolitical project or a debt trap, they are inevitably wrong. Let’s make it clear: it’s a development project. It was created to assist emerging economies in their development, and as they grow, it advances international GDP and is therefore beneficial to the world at large.
BRI spending in developing countries has raised concerns about debt sustainability in the West. This issue was discussed at length during the second Belt and Road Forum, where a total of 283 items of practical outcomes were achieved and cooperation agreements worth more than 64 billion U.S. dollars were signed. How would you convince our audience that this “debt trap” is a fake issue?
Unfortunately, “bad news” carry more weight than positive stories. The BRI has countless academic studies and success stories to share, but the latter tend to be disregarded. For instance, Rhodium Group, in New York, published an annual China Investment report, which was relayed in the Financial Times. In said report, they exposed a 10 year comparison of China’s loaned projects. Out of the hundreds of projects they found, only a minimal amount fell in the so-called “debt trap.” The truth being that the vast majority of these projects were refinanced or rescheduled, and a multitude of loans forgiven. Regions suffering from the debt trap were limited to a few isolated cases, whereas 90% of the projects showed stability and performance. During this year’s Munk Debates in Toronto, I asked my interlocutors: “Why is it that no one talks about the fact that China has forgiven a multitude of loans?” “Why is it that no outlet deems it relevant to cover the success stories of the BRI?”
Recently I was invited to attend the Athens Forum. In Athens, the Piraeus Port project is another success of the Belt and Road. China’s Cosco Shipping Company’ s investment and management has truly revived and modernized this port into a significant transit hub for rapidly growing trade between Asia and Europe. Now the Piraeus Port has been ranked 36 in terms of container accommodation capability, while it was ranked 93 before China’s engagement. This project has also created 3,100 jobs for Greece.
In addition to the Piraeus Port project, there are more good example of BRI. In Kenya, the newly constructed railway links the capital Nairobi with the Indian Ocean port city of Mombasa, effectively reducing travel time and logistic costs. Kazakhstan’s new port has allowed it to ship its resources to China and enhance its export value. In Ethiopia, a China-built factory is now responsible for half of the shoes exports of the country and employs 6000 local workers… Why is it that the public never hears about these stories?
In 2019, China unveiled new relaxed negative lists that liberated a variety of industrial sectors, such as mining and nonferrous metals. Furthermore, the Chinese Government recently announced that a new Foreign Investment Law will come into effect in 2020, and will have as an objective to protect foreign IP. What impact do you expect these reforms to have?
These reforms will have a consequent impact. I believe that one of the reasons for the slowdown of the US-China trade negotiations is that Washington caught itself thinking: “Let’s change all the laws of China.” As such, it is important to note that this new Investment Law was drafted and designed by MOFCOM (Ministry of Commerce), which is China’s direct representative at the negotiation table..
At the G20 in Osaka, President Xi explained that the implementation details of this new law will be released in January 2020, and will explicitly address the concerns of American firms. The new Investment Law will forbid forced technology transfer, condone a severe punishment for those who engage in IP violation, and ensure equal treatment between foreign and local companies operating in China.
I believe the impact of these new laws will be consequential. On top of addressing the concerns of multinational organizations, it will allow China to continue its development. During this year’s World Economic Forum in Davos, Premier Li stated that the Chinese financial sector will be opened to foreign firms one year ahead of schedule. By allowing foreign banks and insurances to operate in China, end-consumers will have more choice, thereof enhancing competition and forcing financial organization to ameliorate their product offering. Simultaneously, it will make it easier for private sector enterprises and SMEs to gain loans since foreign banks may provide them with further funding methods. Additionally, it will push state-owned banks to reform their funding evaluation standards. These changes will further improve China’s business environment.
2020 will mark the end of the 13th Five Year Plan, which had as some of its key objectives to achieve a GDP growth of aprox. 6.5%, boost R&D expenditure to 2.5% of GDP, reduce the utilization of fossil fuel and further China’s urbanization, amongst others. Do you believe the plan will be on target?
As a counselor to the State Council, I can say with confidence that the 13th Five Year Plan will largely be on target. Firstly, 6% GDP growth has been systematically achieved, which, if put into perspective, is similar to adding Australia’s entire GDP every year. In terms of logistics, the investments made to the Chinese railway have transformed it into a world leading network. In the sphere of digitalization, more than 1.2 billion Chinese citizens use digital phones and thanks to innovative applications such as WeChat and Alipay, China is now leading the world in terms of cashless economy. The introduction of new technologies also allowed productivity to increase and solved certain structural problems. At last, the policy implementation capacity of the Government has been streamlined and made more efficient. For all these reasons, I am confident that China will largely achieve the objectives of the 13th Five Year Plan.
What can we expect from the 14th Five Year Plan?
The US-China Trade dispute is forcing China to think: “how can we better innovate by ourselves.” The tensions that have arisen are forcing us to consider having a “plan B” that reduces our reliance on the knowledge of other countries. For example, if we cannot utilize the Android Operating System, we can use the China-designed Harmony. Consequently, I believe that the next Five Year Plan will further strengthen our innovative edge and technological independence. The city of Shenzhen was recently voted as one of the most innovative in Asia, and it reflects our quest to enhance innovation, talent development and international collaboration. As such, one can expect the next Five Year Plan to be the rational development and improvement of the prior one… And that is the beauty of the Chinese system! Every plan is the logical continuity of the other. In comparison to other styles of governance where a newly elected party can delete the former administration’s work, the Chinese system shines by its continuity, stability and steadiness.
Where do you think that the disconnect between America and China comes from?
Firstly, China is a truly centralized country with a strict rule of management and little unrest. That is not to say it doesn’t have its problems, but it will never be to the extent where the Government can be overthrown. The legitimacy of the current regime is sustained by its ability to maintain a steady 6% GDP growth year after year. As long as citizens live better lives and young people have a future to look forward to, the country will remain stable.
Secondly, I believe that China wasn’t focused enough “on telling its story right.” Anthropologically speaking, the Chinese population is modest and less vocal than its US counterpart. This observation can be made about other Asian countries, such as Korea and Japan, where modesty is a virtue. Furthermore, the Chinese language is complex and unaffiliated to Germanic- or Latin-based rules. As a consequence, we haven’t been able to produce a narrative that makes our country acceptable. Moreover, China has grown so suddenly, so quickly, and at a time when Western countries began to decline, that sour feelings have naturally arisen. Unfortunately, we haven’t been able to propose a truer narrative yet.
Thirdly, our unique development process has created antagonism. China hasn’t followed the standard democratic system of one-person/one-vote rule. But is that really the end of history? Since its establishment, China has worked on building consultative democracy to seek consensus from different political parties and social groups. China’s accelerated development coupled with its distinct ideological system has generated diversion.
Despite these misapprehensions, I remain confident and optimistic that people will grow sensitive and reasonable. Ultimately, economics is what makes the world go round. If today we are able to avoid major conflicts, it is because our world is interconnected. As China continues to generate economic growth and provides products, technologies and capital, foreign countries will gradually accept and tolerate a model different to the Western neo-liberal one.
To some extent, I believe the current US-China trade dispute to be a necessary process towards future collaboration. If one looks at the main geo-political alliances of today, one will notice that they grew on the backdrop of major conflicts. During WWII, the USA fought against Germany and Japan. When America launched the Marshall plan, it revived both the European and Japanese economy. Since then, former enemies have transformed into friends. Intrinsically, I believe that one of the reasons for the current economic frictions between the US and China is linked to the fact that they haven’t fought each other on a large scale conflict.
As such, the BRI represents an opportunity for competition and collaboration, and could carry peace for the next decades. On the one hand, America has large multinationals, strong soft power and substantial capital. On the other hand, China has world-leading infrastructure, a large workforce and superior 5G network development capabilities. Should they both embrace the BRI, the US and China would prove to be truly complementary partners. By creating a common objective and future, both countries could compete with one another, but towards common betterment. To that end, I also believe that we should create new institutions, such as a “G2” that would represent the two largest economies. Instead of identifying each other as adversaries, China and America should perceive themselves as ‘collaborative rivals’ that embrace cooperative competition and cooperation.
With regards to the trade dispute, how can we generate a truer lecture?
The true inequity is that we are still using XXth century calculation methods to measure XXIstcentury trade practices. For example, President Donald J. Trump constantly repeats that America’s trade deficit to China is of $300 billion. What he ignores is that half of that sum is exported by US companies, and another lot reflects middle value-chain products that cannot be manufactured in the United States. Take a company with various suppliers such as Apple. Let’s theorize that “Supplier A” makes 100 items and “Supplier B” makes 300 items. When both suppliers ship their products to the USA, the entirety of the 400 items come on to China’s account! Even though the mother company isn’t Chinese and the suppliers might not even be either, they are treated as a Chinese export. Developing a new method to calculate bilateral trade is a necessity if we wish to propose a truer lecture.
Today, it is estimated that the 70,000 American companies present in China generate around $700 to $900 billion a year in revenue, including services. This number more than doubles the US-China trade deficit! There are countless examples of China’s importance to US companies: Boeing sells more planes in China than it does anywhere else in the world; China is Apple’s second largest market; General Motors sells more cars in the Chinese market than in the American one; Walmart imports 20% of its goods from China to supply its American supermarkets. Furthermore, the benefits China has brought to the US have been kept quiet. Few observers report that China has allowed the US to live comfortably by producing goods cheaply, and that it has allowed the US to maintain low inflation. All in all, I believe that for the world to grow, it requires a strong America and a strong China. Weakening one another is, ultimately, counter-productive.
Together with Dr. Miao Lu, you founded the Center for China & Globalization (CCG) in 2008. Today, you are the largest Chinese non-governmental Think Tank and ranked amongst the world’ top 50 independent Think Tanks, according to the University of Pennsylvania’s Think Tank and Civil Society Program. Can you tell us more about CCG and its evolution?
CCG was founded 11 years ago. Since the 18th Party Congress, the Government began paying greater attention to think tanks. Because we are living in an increasingly competitive and complex world, the public sector requires greater amount of information and advisors to make the right decisions. This need for knowledge and understanding led to the rise of Think Tanks.
CCG operates under a unique model. We are the only Chinese think tank that operates under the American model, meaning that we are largely funded by private enterprises. Our donors come from major private companies with private memberships. By not being attached to any ministry, we are not required to report to a single governmental body, and as such, we have access to all ministries. We have the liberty to choose our fields of research and publication. We take great pride in contrasting different viewpoints and make substantial efforts in receiving people from different parts of the world. One of Australia’s Ministers recently visited us and we have built constructive relationships with embassies.
As the largest non-governmental think tank, we generate a variety of reports, and publish our own magazines and memos. We are also present in policy making. For example, we were the first organization to argue that China should join the TPP and we also pleaded for the establishment of new Ministries more in line with global trends. Last year, Premier Li, President Xi and the Committee Members established a new ministry called the National Immigration Administration based on a proposal authored by CCG.
We also organize more than 100 events per year, and we are proud to be one of China’s busiest think tank. Moreover, we are the only Chinese think tank recognized by the UN who granted us a “Special Consultant” status.
If we were to come back here in 10 years, what changes and evolutions would you like to see?
In 10 years’ time, I would like to see a China that is even more open to the world. When CCG was established in 2008, globalization was not a widely accepted concept. At the time, many Chinese viewed ‘globalization’ as a double edge sword and another label for ‘Americanization.’ However, CCG kept arguing in favor of globalization and contributed to opening China to the world. CCG helped to shape the current pro-globalization narrative. In the next 10 years, I hope to continue my efforts and frame a more inclusive type of globalization. I hope that CCG will become an even bigger bridge between China and the world.
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