China’s rise and the international order

China’s rapid economic rise has had a major impact first and foremost on China’s people, but increasingly on the rest of the world.  These consequences are increasingly geopolitical in nature. Indeed, today we are living in the era of “geoeconomics.”

It is no surprise that China, as its economic weight in the world rose in the past decades, also gained in diplomatic, military and soft power.  In the past decade, it is also increasingly keen to help shape the international order, and it has gained the confidence to let go of Deng Xiaoping’s guidance to “bide your time, hide your capabilities, never take the lead.” 

Under President Xi Jinping, China increasingly presents itself as a successful alternative to the “western” development paradigm, and sees the liberal international order that was created after World War II no longer as cast in stone.  Not unlike other countries, it seeks to change this order to suit its goals and objectives, but this is a far cry from rejecting this order altogether.   

In recent decades, China has been a principal beneficiary of the existing international order.  Without it, its economic success would not have been possible, as it provided the peaceful environment and open global economy that enabled the country to thrive. As its wealth and power rises, China seeks to amend the economic order to an extend we are yet to fully understand.  This contrasts sharply with the Russian Federation, which considers itself a loser in the existing order, and with its invasion of Ukraine, has demonstrated it is willing to trample on it. 

To explain China’s economic success of recent decades, we also have to explain why China was so poor by the time Chico Romano and others visited the country, and before Deng Xiaoping unleashed economic reforms in 1978.  At that time, according to some estimates, some 95 percent of China’s population was poor by international standards.  In terms of GDP per capita in current dollars, China was the 5^th poorest country in the world, after Burma. Nepal, Somalia, Burundi and Guinea-Bissau.  China’s share of world output measured in current dollars was at 1.7 percent a tad below the share of the Netherlands at the time.  So at the time, 1 billion Chinese shared the same income as 15 million people in the Netherlands.

Barely a century earlier in 1850, China had been the largest economy in the world with its economy roughly the size of one quarter of the global economy, and had been so for more than 4 centuries, succeeding India at around the 15^th century. 

So what happened?  3 things happened: First, China missed out on the industrial revolution.  Second, China went through what the Chinese call “the century of humiliation”.  And third, China under Mao embarked on the failed experiment of communist management of the economy.  These were the building blocks of what has become known as “The Great Divergence”

The term "Great Divergence" was coined by Samuel P. Huntington in 1996 and used by Kenneth Pomeranz in his book The Great Divergence: China, Europe, and the Making of the Modern World Economy (2000).  But the question goes back to Joseph Needham and his work.

Why did China Miss the Industrial Revolution?

The Needham Question was, to paraphrase, Why had China been overtaken by the West in science and technology, has occupied historians ever since he posed it.  The scientific revolution in the west became the basis for the industrial revolution that enabled the west to rapidly overtake China and other traditional economic powerhouses such as India. 

Needham’s observation was that Ming Dynasty China had possessed every ingredient of what later made the industrial revolution in Europe: coal, steel, steam, paper, typeset printing, gunpowder, and much more. It had a well-organized state, a tradition of education and knowledge among the elite, and a thriving commercial economy and an abundance of artisans and artisinal industries that catered for the rich elite.  And yet, the industrial revolution took place in England at the end of the 18^th century, not in China.

Historians and economists have tried to answer Needham’s question ever since it was posed.  Answers ranging from the conservative outlook embedded Confucian philosophy, the lack of competitors for power in China’s immediate surroundings, to the efficiency of the agricultural economy. 

One of the more interesting explanations comes from historian Joel Mokyr, who argued in his “Republic of Letters” that the renaissance thrived in a divided Europe amongst a community of intellectuals that transcended national borders. Newton, Leibnitz, van Leeuwenhoek, Descartes, Spinoza and other intellectual giants were free to think what they wanted as they could move to another principality when their thoughts displeased the rulers.

Another explanation comes from Justin Lin—a prominent economist in China, and one of the former Chief Economists of the World Bank.  He argues that China’s large population gave it a comparative advantage in experience-based knowledge, as opposed to scientific knowledge, which emerged in Europe with the renaissance, and became a hotbed of new ideas that fuelled the industrial revolution. Interestingly,  Practice is the Sole Criterion for Testing Truth is the famous 1978 article by Hu Fuming, which paved the way for Deng Xiaoping’s reforms.

Scientific knowledge was reinforced by the protestant reformation, which questioned the ultimate authority of the days, the church.   Rather than a special role for protestant ethics in capitalism, as Max Weber famously argued, Protestantism brought about a major increase in literacy rates because, according to the protestants, although you did not need a church to speak to god, you needed to know his word—the bible.  This boosted literacy, and with it the rapid dissemination of new knowledge.

A further potential influence on the great divergence also has its roots in the work of the church: the monogamy enforced by the church in Europe since the 10^th-11^th century, reduced the size of the extended family, and forced nuclear families to trade outside the family. For trade to happen, impartial rules and institutions were needed.  This contrasted with China, where larger extended families allowed for much of economic life to take place with relatives, thus reducing the need for the institutions of the market economy. 

Acermoglu and Johnston in their sweeping book “Why Nations Fail” extend the importance of institutions for sustaining growth to inclusive institutions.  The essential Christian idea that all are equal in the eyes of god led those institutions of the market economy, admittedly after much detour, and with exceptions, were inclusive institutions:  just societies were those that allowed all people to share in its benefit, and in its governance.  

As an aside, on China today, Acermoglu and Johnston are not very optimistic, because they argue that China has not developed the type of inclusive institutions that it takes to sustain growth.  So perhaps Xi Jinping, with his “Common Prosperity” theory is on to something.

International Disorder

A second factor that disrupted China’s industrialization is what the Chinese call the century of humiliation.  Though often over-used for propaganda purposes, the fact remains that the century between the first opium war in 1839 and the end of the civil war in 1949 were extraordinary disruptive, and much of the disruption came from what the western powers called the “international order.”

That order, based on the 1648 Westphalian Peace, and enhanced by the 1815 Vienna Congress did bring, by and large, peace to Europe until World War I.  But peace in Europe was also the launching pad for colonialism and infringement of sovereignty by western powers for much of the rest of the world. The trading empires that had existed for centuries became territorial empires in the course of the 19^th century. 

China, for two millenia had lived with the broad notion of “Tian Xia” or “everything under heaven” as its concept of international relations—a notion of international relations with China and its emperor at the center and concentric circles of relationships with other powers and cultures—including a tributary relationship with some.  It was woefully unprepared for the maritime invasion of the Westphalian powers, and later, Japan, which was the first Asian nation to modernize after the Meiji restauration. 

China lost Hong Kong and Taiwan, control over the concessions in all the major cities, and part of its sovereignty in the rest of the country, and in the end it lost its emperor in 1912.  Even then, the humiliation was not yet over. Though China sided with the allies against Germany in World War I, at the Versailles peace treaty, Germany’s concessions in China were not handed back to China, but to Japan. This sparked the May 4 movement of 1919, which is often considered the origin of the Communist Party 2 years later—a party that was as much a nationalist party as it was communist.

The League of Nations, the mainstay of the post-World War I international order was also powerless against the invasion of Manchuria by Japan in 1931, much as it was against Hitler’s rearmament, the invasion of the Rhineland, and in the end the forces that led to a second world war.

After the second World War, at the dawn of the People’s Republic, China made the disastrous decision to join the North in the Korean war, which meant it was the Republic of China, not the People’s Republic that represented China for another 20 years in the institutions the international order. 

The third factor in that determined China’s poverty in 1978 were its own policies after the establishment of the People’s Republic.  The rapid collectivization of the 1950s of agriculture and industry aborted a revival of the relatively dynamic economy that had budded in the 1920s and 30s.  The disastrous Great Leap Forward ended in a great famine and tend of millions of Chinese dead.  The Great Leap followed was followed by the Great Proletarian Cultural Revolution, which was Mao’s attempt to side-line, if not destroy the party altogether. 

After Mao’s death, the short-lived reign of Hua Guofeng saw the arrest of the principal instigators of the Cultural revolution, the Gang of Four, but his “Two whatevers” (“we will follow whatever policy decision Mao made, whatever instruction Mao gave”) was short-lived, soon to be overtaken by Deng Xiaoping’s Reform and Opening up.

So after centuries of relative decline, a century of humiliation, and 30 years of a failed communist experiment, Deng Xiaoping, Chen Yun and other reformers put development first, and decide to “seek truth from facts, emancipate the mind and unite as one to face the future.”  The rest is history, as they say, and Deng’s line was the recipe for China’s economic success of the past 40 years. Offering stability, refocus politics from class struggle to development, learning from the outside world, and creating a tolerance for the tensions that reforms brought with it.  The rest is history, as they say.

The results have been historic indeed.  China’s GDP rose from less than $200 per capita per year to about $12,000 now.  China is now the second largest economy in the world, the largest exporter, the largest manufacturer, and the country has become a central node in global supply chains.  From a net importer of foreign investment, it has become a major capital exporter itself.

Wealth and Power

With growing wealth, along came growing power.  Indeed, the quest for wealth and power has been present in China’s literature ever since the warring states as Orvil Schell and John Delury’s book with the same name pointed out.  FuqiAng, or Fu Guo Qiang Bing “enrich the state and strengthen its military power” has been a long-standing goal for China.  It is a goal that now seems well within reach. 

The Lowy Institute puts China’s comprehensive power today as only second to the United States, and ahead of the Russian Federation.  It is not only economic power, though this stands out. China’s influence in international organizations, its diplomatic presence—now larger than the US, and its leadership in new international organizations of its own making such as the Shanghai Cooperation Organization, the Asia Infrastructure Development Bank and New Development Bank reflect that new-found power. 

Nevertheless, globally, the US is still by far the dominant power.  It still has the largest economy in the world, is more than 5 times richer on a per capita basis than China, spends more on its military than the next 9 countries taken together, has 800 overseas military bases compared to China’s 1 (yes one), and despite a dip during the Trump years, has an abundance of soft power that China can only dream of. 

China’s ambition to restore power and rejuvenate the nation was there ever since the final days of the Qing Dynasty, and central to the thinking of the “New Cultural Movement” which argued that China needed to embrace modernization .  Xi Jinping’s “second millennial goal” as expressed at the 19^th Party Congress in 2017 is “To build China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful by the middle of the century”

This quite similar to Hu Jintao’s speech in 1998: “Our goal is to basically achieve modernization and build the motherland into a prosperous, strong, democratic, and civilized socialist country by the time of the 100th anniversary of the founding of the People's Republic of China” [1] In fact, it is not altogether different from the goals that Zhou Enlai spelled out in 1963 in his speech that introduced the “Four Modernizations”, of Agriculture, industry, science and technology and national defence [2] to “build our motherland into a strong socialist country.”

Hu’s remarks went unnoticed, whereas Xi Jinping’s became a lighting rod.

These ambitions are quite similar to those expressed by American Leaders when the US was a rising power, and even before that.

John Adams, the second president of the United States had already claimed: “Our pure, virtuous, public-spirited federative republic will last forever, will govern the globe, and introduce the perfection of man.” This was at a time when the United States consisted of 16 states, and had a little over 5 million inhabitants.

The US’ international ambition at the time was largely confined to the North American Continent, and its “manifest Destiny” was to conquer it.  But well before that,  President James Monroe had declared his doctrine as early as 1823—at a time when the US was no yet in a position to enforce it itself.  And Teddy Roosevelt had expanded this doctrine to the Mid-Pacific, after the US had won its first colonial war against Spain and had suppressed a liberation movement in the Philippines.

With less hubris, Woodrow Wilson concluded: “The days of our isolation [is]...past. A new age is before us in which, it would seem, we must lead the world.” 

Of course, great powers are also great examples for others to follow. A now famous 1630 sermon by John Winthrop proposed this already for what later became the United States: “we shall be as a city upon a hill.” Ronald Reagan took that line to be the center of his political career, and at the center of the competition with the Soviet Union.  

De Toqueville had already branded the United States as an exceptional country in its democracy and power fo civil society, it was ironically Joseph Stalin who coined the term “American exceptionalism”[3] though this was to reject the notion that the country was exempt from Marxist historical determinism.

China is no different.  From exporting the revolution under Mao Zedong, under Xi it has gradually developed its own “Chinese Exceptionalism.”  China is proud of its economic achievements, and believes others can benefit from the wisdom gained: XI Jinping’s speech at the 19thParty Congress can be an example for others to follow, without losing its independence.

“It means that the path, the theory, the system, and the culture of socialism with Chinese characteristics have kept developing, blazing a new trail for other developing countries to achieve modernization. It offers a new option for other countries and nations who want to speed up their development while preserving their independence; and it offers Chinese wisdom and a Chinese approach to solving the problems facing mankind.”

In 2013, Xi Jinping offered a new view on the international order: A “community of a shared future for mankind.” Since then, China’s views on the international order have also taken more shape.  China launched its Global Development Initiative, its Global Security Initiative and its Cybersecurity Initiative.  China has also embarked on the Belt and Road Initiative and has set up the AIIB, the NDB, and has expanded the Shanghai Cooperation Organization.  At the same time, though, it has intensified its participation in the institutions of the existing world order.

Will China Win?

Despite all of China’s ambitions, and its undeniable achievements, past success is no guarantee for future success.  China is now at the cusp of becoming a high-income country, but many countries have failed at that very threshold—Mexico, Brazil, Argentina have been middle income for decades, and even Korea, which is now comfortably a high-income country, stumbled shortly after becoming a high-income country during the Asia Financial Crisis.

For China, two narratives exist in parallel.  One narrative is that it is the unstoppable power that will soon become the largest economy in the world and needs to be prevented from doing do.  The other is that the country is incapable of changing its growth model, and is on the verge of a major crisis.  The latter narrative is nothing new: when I first took off to live in China in the early 2000s, a friend of mine handed me a book with the ominous title “The coming collapse of China,” a bestseller at the time. 

No doubt, China faces serious challenges at the current point in time.  After decades of double- digit growth, the past decade has shown only modest growth rates.  Demographics is now working against China, productivity growth has been lacklustre, and growth is increasingly driven by investments that go to less and less productive uses in infrastructure and housing, financed by a growing mountain of debt that has outpaced GDP ever since the Global Financial Crisis.

Economic reforms can turn this around.  A package of reforms in the fiscal system, the financial sector, labour market, pension system, the household registration system, the innovation system and in State Enterprises can still yield relatively high growth rates in the coming decades, in the order of 5 to 6 percent per annum.  This would mean that China will catch up with the United States by the middle of the next decade.  Failing those reforms, though, China will not catch up, at least according to the model simulations that my colleagues and I have developed.

Geoeconomic Headwinds

China’s next phase of development will take place in an environment that will be far less conducive than the past 50 years.  China’s greater wealth and power has raised more and more resistance.  This growing resistance more or less coincided with the ascent to power to general secretary Xi Jinping, and many blame him (or praise him depending where you sit) for taking China into a different direction—more nationalistic, more state-driven, more assertive abroad and more repressive of diverse opinions at home.  It is this direction that has triggered a response to China’s rise, at least in the views of most observers outside China.

China saw Obama’s 2011 “Pivot to Asia” as the turning point in the international environment.  It was in their eyes the beginning of the end of 4 decades of engagement that had followed Nixon’s visit to China.  The Pivot promised to shift diplomatic, economic, and security resources to Asia to ensure a strong presence of the US in the region.  China was not amused.  According to Hilary Clinton’s book Hard Choices, China’s former State Councillor Dai Binguo, suggested “Why don’t you pivot out of here?”

The US almost did, at least economically.  The economic mainstay of the Pivot was to be the Transpacific Partnership or TPP.  The trade agreement, initiated by a few small countries in the Asia-Pacific including Singapore, was supposed to be an agreement for the 21^st Century, with high standards on labour rights, environment, state support, and data.  Standards that China could not meet at the time.  No doubt champagne corks popped in Beijing when Trump, on his first day in office, pulled out of the TPP negotiations.  This was probably the single biggest foreign policy own goal of the past decade.

The current US administration has perhaps better table manners than the previous one, but they have not changed the trade and tech measures the Trump administration imposed on China.  In fact, they have doubled down on it. 

A monumental shift in United States policy vis-à-vis China took place on October 7.  On that day, the US Commerce department released a 139 page document listing measures that effectively restrict China’s access to the most advanced semiconductors.  Since then, Japan and the Netherlands, two key suppliers of technology to make high-end chips, have joined the United States.

These measures are likely to set back China’s ambitions in many areas of technological development. Semiconductors and their information processing power are the basis of technologies ranging from AI to supercomputing to medical and biological innovations—all priorities in China’s 14th Five Year Plan.  Advanced semiconductors are also key building blocks for today’s most sophisticated weapons, and that is what led the US to impose the measures. 

China will no doubt intensify its “indigenous innovation” agenda and seek to use industrial policies to gain the capabilities for producing its own high-end chips. Recently, Chinese chips producer SMIC announced that it had developed its own 7 nanometer chips using older technologies that would not be banned under the new sanctions regime. 

Nevertheless, China will have a hard time catching up in chips technology.  For the past 20 years or more semiconductors have been a key plank in China’s industrial policies, and the results have been disappointing.  While it can produce the lower tech memory chips, the high end market is dominated by Korea and Taiwan in manufacturing of chips, and the US and Europe in providing the tools for design and manufacturing.

China could also double down on its national security strategy.  The 20th Party Congress still confirmed that development was still the first priority for the Party, but general secretary Xi Jinping also pointed out that “security is the root of development.”  In a more adversarial external environment, China may revert to a more state-driven, less reformist development model, which in the long run lowers its potential GDP.  

A Fragmented World

Irrespective, the path towards an ever growing split in technology, trade and investment seems now set.  Talk of decoupling, reshoring and friend-shoring have become common place, not just in online chatter, but in boardrooms around the world. 

Despite the uptick in global trade during the COVID-19 pandemic, which was largely caused by necessity, and the relative decline of services during the pandemic, the heydays of globalization are probably behind us, and without a change in direction, a new cold war threatens to once again split the world into blocks, and protectionists trade measures and industrial policy steps are on the rise.

The IMF has done some work on the economic impact of decoupling and fragmentation.  The results are not pretty.  A fragmented world, according to their models, would be much poorer than the globalized world we know.  It should be noted that the models economists use are not very good at projecting the costs of decoupling, much as they are not that good at projecting the gains from trade.  In that context, a loss of 7 percent of global GDP is gigantic.  For China, the losses would add up to 6 percent of GDP by 2030.

If there is to be a new cold war, it will be very different from the last one. The Soviet Union and its COMECON trade block had very little economic interaction with the west.  OECD economies never sourced more than 2 percent of their total from the Soviet Union.  This is in contrast with China, which supplies almost 20 percent of total today.  More so, China has moved up the value chain in recent decades, and rather than just an assembler of final goods from parts made elsewhere, the country is a critical supplier of intermediates, thus its position in global supply chains is well beyond what raw trade data suggest.  In other words, this will not be your grandfather’s cold war.   

---

This post is based on a talk I gave in honor of the late Ambassador Cito Santa Romana, Manila, February 10 2023.

[1] Hu Jintao: Entering the New Century and Creating New Achievements, June 19, 1998 (胡锦涛：迈向新世纪，创造新业绩, http://www.reformdata.org/1998/0619/4562.shtml; accessed 30/1/2023.

[2] People’s Daily, January 30^, 1963, 在上海市举行的科学技术工作会议上 周总理阐述科学技术现代化的重大意义 (Last week at the Science and Technology Work Conference held in Shanghai, the Prime Minister expounded on the great significance of the modernization of science and technology). https://web.archive.org/web/20160214201234/http://rmrbw.net/read.php?tid=302475

[3] McCoy, Terrence (March 15, 2012). "How Joseph Stalin Invented 'American Exceptionalism'". The Atlantic, March 15, 2012.