“The war in Ukraine has rendered all election programs totally obsolete.”
That’s the warning issued last Friday (March 18) by France’s former president François Hollande to put a new perspective on the country’s next month general elections.
Most probably, China’s economic strategists would not disagree with that radical view when they take another look at policy guidelines adopted during the recent session of the National People’s Congress.
The reason for the French alarm is simple enough. In a rage to punish Russia for its “special military operation” in Ukraine -- and ignoring its own vital economic interests -- the European Union (EU) has introduced open ended and wide ranging economic and financial sanctions to “destroy the Russian economy.”
That knife, however, cuts both ways. Since Russia provides nearly half of EU’s oil and gas supplies, the region’s already accelerating inflation is now fired up by exploding energy costs. The European Central Bank (ECB) will have to respond with rising interest rates, which will lead to economic recession, higher unemployment and increasing poverty.
All that, of course, is blowing up to pieces election year promises by candidates competing to lead France during the next five years.
Diversify trade and investment flows
China must take note. With an economy whose external sector (exports plus imports) accounts for one-third of its demand and output, Beijing is staring at huge income losses in EU markets that take half-a-trillion dollar of Chinese exports.
Indeed, China edged out the U.S. last year to become the EU’s largest trade partner.
Another important change in the EU-China trade also seemed likely this year -- before the unfortunate events in Central Europe began to unfold. Based on bilateral trade transactions in January and February, the EU took a top spot in China’s foreign trade.
The future of all that business is now very much in doubt as the EU continues to struggle with accelerating inflation, an impending economic downturn and a prospect of its radically changing security architecture.
China’s trade problems with the U.S. are equally worrying. In spite of the U.S. economy’s sustained forward momentum, trade with China has considerably slowed down in the first two months of this year. That is setting the stage for growing trade and political frictions, because China’s declining purchases of American goods will widen the U.S. trade deficit.
Can Asia offer a way out of China’s looming trade difficulties in U.S. and EU markets?
The answer is no. Based on last year’s numbers, the EU and the U.S. account for 30% of China’s foreign trade business – and they provide 90% of China’s net trade income.
Beijing has two options to protect its economy from the current trade headwinds: (a) generate more growth from its vast domestic markets and (b) diversify destinations for its foreign trade and investment flows.
Keep a strong and open economy
China has plenty of resources to finance the modernization of its economy, and to build its “moderately prosperous society” by widening and upgrading its infrastructure and urbanization, improving its system of social welfare and stepping up its public spending on science and education.
With the core consumer price inflation of 1.1% last month, China’s economic activity can also be supported through a broadly accommodative monetary stance, while the fiscal policy continues its consolidation drive.
The Belt & Road should remain the main vehicle for trade and investment diversification. The Hunan Province offers an example of that with a soaring trade business with ASEAN, India and Russia during the first two months of this year.
China must keep in mind that trade with the U.S. and the EU is taking place in a fiercely adversarial context of “strategic and systemic competition.” That’s an uncompromising contest for a new world order where economic warfare takes center stage. So far, China has been able to trade effectively through that geopolitical minefield, but Beijing would do well to realize that its “win-win cooperation” is not finding any takers within the U.S. leadership of the Western community.
Apart from that, Russia’s “special military operation” in Ukraine is an acceleration of history that finds China with a number of vitally important and pending strategic issues.
Chief among them are: (a) China’s internationally unrecognized “nine-dash” maritime borders, (b) “whatever it takes” opposition by the U.S., EU and Japan to unilateral changes of Taiwan’s status quo and (c) a 70-year-old armistice on the Korean Peninsula packed with nuclear-armed ballistic missiles.
China’s appeals for dialogue, consultations, mutual respect and peaceful coexistence all sound as reasonable ways of dealing with world affairs, but their constant invocations by Beijing is just kicking the can down the road – because none of that has been able to narrow widely diverging national interests of countries that are parties to those issues.
There, however, is one thing that China can do: It can protect its growth by strengthening domestic demand and diversifying foreign trade and investments. That would be an outstanding service to the world economy, and it would also show how Beijing’s pledge of a “win-win cooperation” could be an instrument of peace and prosperity.