Chinese President Xi Jinping speaks at the World Economic Forum in Davos, Switzerland, in 2017. Photo: Reuters / Ruben Sprich

The year 2016 was marked by a strong wave of right-wing populism, isolationism, protectionism, and anti-globalization on both sides of the Atlantic. The current British Prime Minister Boris Johnson and UK Independence Party leader Nigel Farage successfully sold their anti-globalization campaign in the run-up to the Brexit referendum in June 2016.

Similarly, real-estate mogul Donald Trump successfully won the US presidential election on November 3 the same year with bombastic anti-globalization speech and the “America First” slogan.

Amid these trans-Atlantic upsurges in protectionism, Chinese President Xi Jinping firmly stood up as a leading defender of globalization and free trade, and as an anti-isolationism campaigner.

For instance, three days before Trump was inaugurated as the 45th president of the United States, Xi vigorously criticized protectionism. He defended free trade and pluralateralism at the World Economic Forum in Davos, Switzerland, on January 17, 2017. He emphasized China’s ambition for a more significant global role in the pro-globalization and free-trade leadership left vacant after Trump’s victory.

Xi compared protectionism to “locking oneself in a dark room in the hopes of protecting oneself from danger, but in so doing, cutting off all light and air.”

“No one will emerge as a winner in a trade war,” Xi said in the massive jamboree of politicians, businesspeople, and policymakers from all over the world, where current Democratic Party presidential contender and former US vice-president Joe Biden was also present.

“Ready or not, China has become the de facto world leader seeking to maintain an open global economy…. In effect, President Xi has become the general secretary of globalization,” was how the state-run China Daily extolled the Chinese leader before he visited Davos.

About 42 months later, Xi changed his anti-protectionist stance amid the global pressure resulting from China’s alleged mishandling of the Covid-19 outbreak that triggered a worldwide economic nosedive.

What does this mean for the global outlook for trade, technology, and economic growth in the future?

Chinese strategists reckon that there is no substantial difference between Democrats and Republicans on US foreign policy. It seems Xi considers a trade and technology war with the US is inevitable whoever wins the November 3 election, and he wants to prepare his country for it.

The semi-annual meeting of the Politburo of the Communist Party of China on July 30 adopted a so-called “dual circulation” strategy as the country’s economic development model amid a trade and technology war with the US.

The new economic growth strategy aims to replace the prevailing one driven by exports and infrastructure investment by one led by domestic consumption.

Beijing has already been trying to restructure its economy because many economists have warned that the export-led growth strategy is not a sustainable option for China in the long run.

In recent years, export’s contribution to China’s gross domestic product has been falling significantly. As World Bank data suggest, exports’ peak contribution was 36% of GDP in 2006, double the 18% in 2019. China wants to reduce export’s contribution to its GDP to a single-digit percentage as soon as possible.

The Politburo chaired by the country’s “core leader” has proposed a “dual circulation” model to boost domestic consumer demand supplemented by the external sector. For Chinese leaders, “the rest of the world” is no longer the leading sector of the economy.

By adopting the “dual circulation” model, China signaled that it is considering both the best-case scenario and a worst-case trade and technology scenario. The model hints that China is willing to cooperate and coordinate with the US for global trade and technology governance. But if the trade and technology war drags on, China is ready to tackle it.

“The current economic situation is still complex and grim, with instabilities and uncertainties,” the Xinhua news agency notes, saying in its report in Mandarin, “Many problems we encounter are medium and long term, and must be approached from the mindset of fighting a protracted war. We should accelerate the formation of a new development pattern with domestic circulation as the main body, with the dual circulation of domestic and international markets supporting each other.”

So why did Xi relinquish his free-trade and anti-protectionism stand?

The answer is simple. It seems Chinese policymakers concluded that the open international rules-based system is no longer likely to prevail. The United States’ unilateralism implies that it will not collaborate to revitalize the World Trade Organization through “plurilateral” negotiations.

Significant issues such as modernizing trade rules, minimizing economic distortions created by unfair tariffs due to a trade war, and strengthening the WTO framework are not likely to be resolved soon.

The increasing US bans on Chinese technology companies made Chinese strategists think that the private sector’s free-trade stakeholders such as US-based multinational corporations (MNCs) had failed to persuade their government to build consensus with China to ensure coherent global trade, technology, and investment governance.

The Chinese are also aware that the WTO will become redundant; the flows of trade, investment, data, and advanced industrial and digital technology will be subject to muscular national-security policy. Trade, investment flow, and technology transfer are more dependent on geopolitical factors than economic factors such as price mechanisms, consumer demand, and consumers’ taste, preference, and income level.

Many MNCs will have to restructure, localize, and even relocate from one country to another in the future. Their sales, profits, brand names and value, and global reach, may not look the same in the future.

So Chinese leaders, by announcing the “dual circulation” strategy, signaled that they were prepared for any future scenario in trade and technology wars.

However, there is terrible news for the poor, working, and middle-class people in developed and developing countries due to looming uncertainty.

Why trade war matters for global economy

It matters for several reasons. First, there will be multilateral trade and investment governance systems overseen by powerful blocs, possibly the US, the European Union, and the Chinese. Many least developed and developing countries in Africa, Asia and Latin America will be divided by these geopolitical spheres. As a result, geopolitical stability, economic growth, and global governance will be more unpredictable in the future.

Second, another fundamental outlook is the technological divide across the world due to the cost differences in technological innovation and different research and development spending in the future. The technological race will also be bloc-based. Each bloc’s partners may benefit from cheap, efficient, and borderless technologies. The countries outside the bloc will face costly, inefficient technologies, and even more uncertainty.

Trade and technology blocs will be based on preferential treatment on trade, and price undercutting on technology made to bloc members, not by cold war-style ideology.

Third, small and weak economies might be denied access to the latest technologies and services. Today’s technology companies may not be global brands as they are now. The operating systems of electronic devices may not be the same as we have now.

Fourth, in the absence of a rules-based dispute-settlement mechanism, trade disputes will be settled by coercive measures that add more uncertainty in business and higher production costs. As a result, consumers have to pay higher prices. The working and middle classes of both developed and developing countries will suffer more.

Fifth, the economic outlook is gloomy and uncertain, which leads to losing business confidence in both developing and advanced economies, high barriers to technology transfer, knowledge exchange, and deep disruptions in global supply chains, which may finally lead to a complete end of globalization in the future.

Last, in the worst-case scenario, the global economy will plummet sharply, and a recovery will not be foreseeable. That situation could be even more profound than the Great Depression of the 1930s.

The majority of economies will be characterized by higher costs for consumers, mounting unemployment, sky-high inflation, economic stagnation, and possibly political turmoil in many countries. The middle-power countries, India and Brazil and other highly populated developing countries such as Argentina, Bangladesh, Indonesia, Nigeria, Pakistan and South Africa, will suffer more.

As the world’s largest and second-largest economies, the US and China are looking for an inward-looking populist and protectionist strategy that increases confrontational risks. There are high risks of a long-lasting global economic downturn as a result.

The Chinese president is sending a message to his future US counterpart to choose between a conciliatory or a confrontational option. If the US president chooses the first, it will be a great relief for the world economy. If he chooses the second, worldwide economic catastrophe will be inevitable.

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Bhim Bhurtel

Bhim Bhurtel is visiting faculty for a master's in international relations and diplomacy, Tribhuvan University in Kathmandu, and faculty for a master's program of Development Economics, Nepal Open University. He was the executive director of the Nepal South Asia Center (2009-14), a Kathmandu-based South Asian development think-tank. Bhurtel can be reached at bhim.bhurtel@gmail.com.