China will gain economically from the Ukraine war. What might it lose?

China is positioned to benefit economically from Russia’s invasion of Ukraine. With Russia increasingly blocked from global markets, China could plausibly gain access to Russia’s grain, energy, and other commodities at discounted prices, denominated in renminbi (RMB) rather than US dollars. This will provide China with a hedge against the inflation rippling through much of the rest of the world, and further boost its competitiveness. On top of that, China’s state-owned enterprises (SOEs) will eagerly take or expand stakes in Russian energy and food companies, ensuring both security of supply and attractive commercial terms.

Expect China’s government to be laser-focused and shrewd in fully exploiting every opportunity for economic gain. Some have gone so far as to proclaim China the “winner” of the Ukraine war. When viewed through a wider lens, however, the picture becomes considerably more nuanced over the longer term.

Finally, and perhaps most importantly, China benefited tremendously from a welcoming and benign set of assumptions throughout the West about the implications of China’s rise. This conducive global environment provided the supporting infrastructure which enabled China’s rise.

That infrastructure has weakened considerably in recent years. Russia’s invasion of Ukraine is dramatically accelerating a further deterioration and is fueling the emergence of the following three dynamics that will make China’s path forward considerably more precarious.

1. An intensification in the “democracy versus autocracy” mindset

With China continuing to stand by Russia as the bloodshed in Ukraine drags on, the clash between democracy and autocracy has taken on a deeper and a far more graphic resonance. The resolve and unity of the US and its partners has been strengthened, and the stakes are viewed in emotional, almost existential terms. Under these circumstances, the bandwidth for cooperation with China on economic, trade, or other issues has narrowed, and the potential flashpoints have expanded.

2. Increasing Western comfort with the deployment of devastating sanctions 

The speed and unity with which the West and many of its partners around the world moved to institute unprecedented, crushing sanctions on Russia caught many by surprise.

In economic warfare as well as actual warfare, the generals invariably learn lessons which are put to effective use the next time the battle is joined. The West and its partners now understand better than ever before “how to hit where it hurts”. They have honed their ability to tightly coordinate such policies and will have greater acuity and a higher comfort level in deploying tough sanctions for any reason that might arise in the future.

The sanctions heat is being turned up, China will be under a microscope, and the potential pain points have multiplied and intensified. None of this will be helpful for China.

3. Trade and security concerns drive action outside the WTO

There is growing discomfort with conducting “business as usual” in the World Trade Organization (WTO) with a country that is actively using brutal military might to subjugate a fellow WTO member. But trade rules related to security considerations are vague and incomplete, leaving individual members to essentially chart their own course, as many are currently doing. Canada, Japan, and the EU have revoked Russia’s Most Favored Nation status and the US seems poised to do the same. But the organization as a whole has done nothing.

The WTO’s credibility has been battered in recent years and Russia’s invasion has only highlighted another area in which the organization is struggling for relevance. On many fronts, countries are increasingly seeing the need to take unilateral action outside the WTO. This will be problematic for China. Gaps in WTO law and ineffectual enforcement have provided China with a “safe harbor” within the WTO system. As countries grow more willing to pursue remedies beyond WTO channels, this safe harbor will start to shrink. Going forward, China will find itself facing more robust and effective challenges to its trade and economic policies.

A new era indeed

The now infamous joint declaration issued on February 4 in which President Putin and President Xi pledged their “no limits” partnership also made reference to “international relations entering a new era”. It’s unlikely that either leader fully comprehended how prescient those words would be. It is especially unlikely that China would have grasped the extent to which the benign global environment which enabled its rise would be fractured. It is often said that the first casualty of war is truth. In the case of Ukraine, the second casualty might be the global stability on which China has relied.

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