China and the Rise of a Multipolar Economic Order: What Lies Ahead?

China has managed to accumulate significant economic power in just a short period of time, and that has moved the world toward what Stewart Paterson, a Research Fellow at the Hinrich Foundation with more than two decades of experience as an equity researcher, strategist and fund manager, refers to as a “multipolar economic order."

Can you explain the difference between a unipolar and a multipolar world and how China has benefited from the current wave of globalization?

I would describe the unipolar world as existing from the time of the fall of the Berlin Wall (when the Soviet bloc ceased to be a rival to the democratic states) to the global financial crisis in 2008 and 2009. This period was typified by unchallenged U.S. hegemony and globalization under the aegis of multilateral organizations such as the World Trade Organization (WTO).

China's mercantilism is not compatible with the current global system: Not every country—by definition—can run perennial current account surpluses. Not every country can rely on others to soak up surplus output. Not every country can run an undervalued exchange rate. By definition, these policies are not universally applicable in any trading system. For every dollar of surplus there must be a dollar of deficit somewhere else. The current system was not designed to regulate against non-market practices on the scale or prevalence that China employs.

As China's economy has grown in importance to the world, it has set out to normalize these mercantilist policies, holding them out to be an alternative route to economic development. While China is far from being alone in adopting such policies, other countries have moved away from them as their economies have developed. China on the other hand appears to be doubling down on them. In doing so they risk breaking a system that has facilitated their economic rise to middle income status.

Why has China's economy remained "firmly rooted" in manufacturing?

Under state direction, China has accumulated a significant level of efficiency and skill at manufacturing. Its domestic work force size and the scale of the domestic market deliver economies of scale and state subsidies facilitate market share gains. The relatively closed nature of the domestic market has prevented outsiders from benefiting from those economies of scale and domestic procurement policies that favour local producers have helped embryonic industries become established.

China's policy makers make no secret of their belief that market orientated economies have been weakened by their loss of manufacturing—where productivity gains are most evident—and are determined not to make the same mistake. Hence, industrial policies such as Made In China 2025 remain a core plank of China's economic management.

What are the consequences for countries that seek to disentangle themselves economically from China? Would such a move even be possible at this juncture?

Journalists in the United States tend to view China through the lens of how its rise will affect the U.S. and by extension other Western nations. How have nations more directly within China's sphere of influence pushed back against its economic goals, if at all?

It is early days and it is hard to say that any policies have achieved much success at present. However, recognition of the trade dependency is perhaps a large part of the solution. Japan and Korea have taken the first steps to diversify away from China in critical areas. In other countries such as Australia, the initial steps towards a downplaying of the bilateral trade relationship were in fact driven by Chinese action.

China's huge contribution to global growth in the past 20 years—China has accounted for about 40% of world growth—has re-enforced a compelling narrative that a country's economic future is intrinsically entwined with China. The current slowdown in China will dent that narrative, potentially leading countries to reassess the degree to which they wish to sacrifice resilience in the pursuit of harmonious relations with China.

How has the current multilateral trade system enabled China's ascension?

China's accession to the WTO in 2001 was a watershed in terms of China's export performance. It is debatable to what degree member states have failed to utilize the WTO's sanctioning capacity to hold China to account or to what degree WTO rules have been shown to be insufficient, but either way, China has been able to use the trading system to achieve great results without adopting market practices.

Why has the United States' domination of the world order shrunk? What decisions over the last few decades contributed to this erosion?

At the end of World War II, the United States had about a 45% share in global manufacturing. This was always unsustainable. As other more populous countries learned how to better manage their economies and harness incentive structures, and as technology spread through the world, the gap would inevitably narrow.

Market-orientated economies still enjoy per capita incomes four to six times that of more command-orientated economies but in the case of China that gap has closed somewhat. Market economies are not perfect and policy makers failed in the case of the global financial crisis to preempt trouble. In my view (and it's not universally held), monetary policy failed to adapt to reflect the deflationary impact of globalization and to broaden the range of objectives beyond headline consumer price indexes to include things such as financial markets and credit growth and the current account. So in the economic sense, some of the loss of hegemony was inevitable and it has been hastened by the lack of a coherent policy response to the incorporation of a quasi-command economy into the global economic system.

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Adapted from the original article by ForeignPress.org.

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