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China as a Responsible Global Stakeholder

CIC National Capital Branch | March 28, 2013

Dr. Yukon Huang, Senior Associate of the Carnegie Asia Program and World Bank Director for China from 1997-2004, delivered one of three keynote addresses at the Canada-China Opportunities in Transition Conference.

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Thank you for the kind introduction.   I wish to thank CIC for developing this forum and bringing to Ottawa such a distinguished group of visitors from Beijing.  It is only through these kinds of track two interactions that better relations between China and the West can be achieved.

My talk will be on China as a responsible global stakeholder.

China’s impressive economic achievements have been the focus of global attention for much of the past decade.

As the country became an economic power, expectations were raised that it would act as a responsible global stakeholder, as Robert Zoellick put it as the U.S. deputy secretary of state.

In 2003, the Communist Party’s theorist Zheng Bijian echoed this sentiment, explaining that China’s economic ascendancy should be seen as a “peaceful development” that posed little threat to its neighbors but offered many benefits to the world at large.  

But China’s rise has been viewed with mixed emotions. 

Many see China’s successes as not only good for the Chinese people but also for the world at large.  Some 600 million Chinese have been uplifted from poverty in the last several decades.  Its double-digit growth has elevated growth in the entire Asia region.  China is not only the fastest growing export market for all of Asia but also for countries like Canada, US and Germany and much of Latin America and Africa.

But others are worried about China’s rise.  Many in the West see large bilateral trade deficits with China as hindering their economic recovery.   Some argue that rising nationalism and related security interests have hardened China’s foreign policy positions as exemplified in the island disputes and its positions in the middle-east and North Korea.  Accusations about cyber-security have elevated tensions most recently. This has created the impression—arguably unfair at times—that Beijing is more inclined to use its economic strength to advance core interests than to strengthen international relationships.

How should one view such conflicting images of this nation which make it harder to forge a constructive dialogue on global issues between China and the West?

The prerequisite for improved global relationships depends on a better understanding of each other’s perspectives and respecting inevitable differences but focusing more on areas where objectives are complementary.  In fact commonality is more prevalent than both sides realize.

Let me begin by noting that China’s rise is unusual in comparison with other major economies. 

After three decades of rapid growth, it is now becoming a more “normal” economy but also an “abnormal” great power.  What do I mean by this?

China is moving to a more sustainable but slower growth path that will be driven more by market forces than state interventions.  Part of becoming more normal is increased vulnerability to global economic cycles and less centrally managed initiatives to drive growth.  The country will no longer be able to maintain stability by controlling key economic prices, such as interest and exchange rates, and limiting capital movements.  Internationalizing the renminbi naturally involves greater exposure and risks.

And Beijing is also becoming a great power but one which is unlike what we have seen historically.  China’s rapid economic rise has pushed it into the unique position of becoming a superpower earlier than expected or intended.  

Some see Beijing as being able to exercise considerable influence, but in reality, its ability to do so is more limited.  Its international potential is constrained by significant domestic economic vulnerabilities.   

All this has the effect of elevating risks  for the new leadership and this will affect China’s relationship with its neighbors and beyond.

This was not the path or outcome that Deng Xiaoping laid out four decades ago when he said at the UN that “China is not a superpower, nor will she ever seek to be one” and broadly cautioned that China should not play an active role on the global stage given its need to focus on its domestic problems.

While the country is often criticized for becoming more assertive, in reality it should be seen as being too reactive.

China’s position stems in part from the fact that the leadership in Beijing feels the need to get its own house in order before forging its international path.

China’s emergence as a great power also differs from that of the United States, Japan, and the major European economies. Unlike the others, whose ascendancy represented a broadly continuous and lengthy process, China is unique in being a returning great power—one that accounted for 30 percent of global production two centuries ago but saw its share fall to less than 5 percent by 1950. Even today, after three decades of double-digit growth, its share at 15 percent is only half of what it once was.

Moreover, despite its economic resurgence, China’s ability to escape the middle-income trap is not a foregone conclusion. Domestic wages have risen so China is no longer the least expensive producer of low-cost goods. But it still cannot compete effectively with technologically more advanced countries. China also faces particular impediments that were not present for other rising states.  Thus, contrary to expectations, its economic successes do not translate necessarily into greater self-confidence at this stage in its development.  Only a handful of middle-income countries have made the transition to high-income status in the past quarter century — and none of them had China’s formidable handicaps. 

Foremost among these is that China will become old before it becomes rich. Its working-age labor force is shrinking, and the needs of the elderly represent a major financial burden. Many observers do not realize how relatively poor China is, with a per capita income ranking only around 90th internationally. Even by 2030, only about 10 percent of China’s population will be seen as relatively well-off compared with about 90 percent of the population in Canada or the United States.

China is more inward focused than most great powers.  And that stance has affected its relationships with the outside world. Tensions have arisen in a number of areas as the Chinese leadership attempts to balance its internal struggles with an evolving international order that waits for no one.

Traditionally, Beijing has sought to bide its time in dealing with many sensitive geopolitical issues, preferring to build up its capabilities and wait for a favorable shift in the balance of power.  But in many cases, events have forced it to act earlier than it would have liked. This reactive posture is often not well thought through and therefore is not as constructive as it could be.

Many areas of friction have emerged as a result of these tendencies.

These include the emotionally charged claims over the sovereignty of various small islands in neighboring seas that have elevated tensions with Japan and some Southeast Asian countries. But these tensions also emanate from a wider set of issues, including trade and investment flows, intellectual property rights and other geopolitical concerns.

Many of these tensions are manageable. The new leadership is already moving in the direction of taking a more nimble and practical outward view—recognizing that a reactive posture is counterproductive. In the meantime, both China and countries like Canada should focus on building their relationship in the economic realm and encouraging more inclusive international policies.  In which areas is progress possible?

Over the past decade, friction with China has been most often reflected in trade issues.

Headline criticism focuses on complaints that Beijing manipulates the exchange rate and unfairly subsidizes exporters. Since accession to the WTO in 2001, China has become the number-one target for complaints filed by the United States and Europe.  

Increased complaints  against China does not jibe with the country’s decreasing trade surplus, which has fallen sharply to around 2 percent of its GDP from a high of 8 percent five years ago. Nevertheless, trade tensions with the West persist because of China’s unique position in the East Asian production-sharing network. Components produced by its neighbors are shipped to China for assembly and final export largely to the United States and Europe. China actually benefits much less financially but bears the brunt of trade tensions with the West that should in theory be shared with others in Asia.

China’s economic success has been facilitated by its rapid assimilation of foreign technology through direct investments of multinationals.  

But the country now faces the challenge of producing more sophisticated components that rely on indigenous technology. This structural transition will further raise tensions as China begins to compete with more developed Asian economies as well as the OECD countries. This influences perceptions about its behavior as an international stakeholder as it grapples with the structural and legal transformations that are required to enforce intellectual property rights.

Further complicating matters is China’s overseas investment strategy and its search for new energy and natural resources which is an issue for Canada.

The success of the Nexen deal is to be applauded for coming to a constructive outcome but in many other countries, tensions persist.  China’s voracious appetite for securing these resources abroad will not diminish because its industrial structure will remain heavily resource intensive for the rest of this decade.

China’s external capital flows are also a subject of concern.  Its unconditioned assistance programs to developing countries may be welcome by many recipients but many in the West feel that China does not adhere to established international practices.

But perhaps the greatest source of tensions arises from the fact that China’s time perspective in dealing with sensitive geopolitical issues differs from that of many western powers.

The most emotional global reactions to China’s perceived assertiveness come from interactions that are seen as impacting security and humanitarian interests. China’s intentions in supporting the six-party talks on North Korea, for example, are often questioned.  Arms sales to Taiwan are a continuing point of contention with the United States. And most recently, perceptions about China’s aggressive use of the internet for seemingly inappropriate activities have elevated tensions even as Beijing points out that it too is a victim of such practices.

On these issues, China has been firm in supporting its long-standing principle of noninterference or pointing out that the West has been inconsistent in its own actions. But China’s position is also influenced by differing concepts of time.  In such disputes, China often prefers to put off addressing the issue. This approach reflects its belief that many sensitive issues will resolve themselves eventually without the need for confrontation or that waiting will promote better outcomes.

Political differences between China and Western powers only heighten this divergence, as democracies like the United States, Canada or Japan with frequent election cycles tend to think of achieving results in terms of the coming year while China’s leaders consider policy choices more in terms of muli- years or even decades. But events have often forced China to react before it really wanted to. The result is that its actions may not be well considered. This stance harms China’s image as a responsible stakeholder if others see it as being deliberately uncooperative.

Deng’s admonition that China should avoid getting involved in external issues remains a guiding principle for Beijing. But if the actions of others are seen as jeopardizing China’s longer-term interests, the Chinese leadership may feel that its decades-old posture is no longer tenable and presents risks for both sides.  I believe that the new leadership will be reconsidering its external policies.

In this context, China does not see defending its interests in Asia as being more assertive but rather as ensuring that the country can move forward on its “rightful path” at the right time.

This is clear in the context of China’s response to shifting Asian alliances. Its response has been seen as a sign of rising nationalism fueling increased assertiveness abroad. But it can also be seen as an instinctive reaction to what Beijing sees as the provocative acts of others.

Nationalism is on the rise not only in China but also elsewhere in the region.  China is not necessarily the aggressor in many of these conflicts. But it can be seen as not being helpful in staking out more clearly in advance what it would tolerate and thus encouraging others to take actions that end up as being seen by China as aggressive.

These disputes and related actions have caused many in the Asia region to welcome an expanded U.S. role in Asia to counterbalance China’s influence.  China is concerned about America’s intentions in launching its much-heralded “pivot” or rebalancing toward Asia. For Chinese policy makers, such a move calls into question Washington’s willingness to provide more space for a rising China.

The ambitious way that America has been pushing the Trans-Pacific Partnership (TPP) which involves a group of countries including Canada is a case in point. There is little logic in a major regional trade and investment agreement that does not include the region’s largest trader and investor. The TPP might have been made more flexible so that China would see itself as having a stake in constructing a productive outcome rather than seeing little to be gained by being included.

How should the West engage this unusual great power?

China does not see itself as an unstoppable economic juggernaut. Chinese leaders see a country with deeply ingrained national interests and an economy faced with significant challenges that constrain its behavior on the international stage.

But biding time until circumstances become more favorable is not a workable option for China if the actions of others force an earlier-than-desired reaction.  Beijing believes that responding more firmly will forestall future disputes, but such behavior has only increased tensions with regional partners and drawn the United States into establishing a greater presence in the region—both unanticipated results of a self-defeating strategy.

A stance of engagement, reaching out, and seeking compromise with due consideration of the interests of others in region would serve China better.  And I believe that this is already beginning to happen with the new leadership.

Of course, China cannot be expected to follow the international consensus when this harms its own interests—that can be expected of no great power, including the United States. And thus far, China has largely been an outsider to an international system built by the West. It does not see itself as necessarily part of the system or bound by its rules.

In an ideal world, China would not be seen as a threat to be contained but as a major stakeholder to be brought in when needed to help reduce tensions and ensure more constructive outcomes on global issues. Providing China with more say in dealing with these issues might encourage a more cooperative relationship with the West.

This will require greater openness on the part of both US and China in particular.   The two powers should begin by concentrating on promoting cooperative commercial relations, which will help them avoid fueling tensions over hot-button political issues, such as cyber-security.

Beijing can start by taking the lead in supporting open markets and fighting protectionism. It would help China counter criticisms of its trade practices and put pressure on developed countries that are moving in the direction of more protectionism.  

As it seeks to increase its outbound investment, China also needs to support a level playing field at home. More open capital markets and bilateral and multilateral investment agreements can help ensure appropriate treatment and provide more flexibility to address security concerns.

China needs to be sensitive to international norms about its use of aid money, but the West can also learn from China’s more efficient use of assistance for infrastructure investments.

Given the charged nature of sovereignty disputes, China and other Asian claimants might be well served by setting aside this question and focusing on narrow confidence-building measures or negotiating less troublesome resource rights.  Other major powers should avoid making commitments that destabilize the situation and appear to favor one claimant over others.

And because the disputes are complex, with multiple claims and overlapping interests, China should consider the potential benefits from multilateral approaches that can help achieve fairer and more inclusive solutions—a consistent goal in China’s history of international relations.

A reactive China is helping neither itself nor others. The United States and other major powers should stress the benefits of more active participation in shaping the international agenda as China enters a riskier period of economic transition. Harsh rhetoric and actions that are perceived as attempts to contain China’s development will not be helpful, but reaching out and constructing sensible solutions would be wise policy for Washington. The key is convincing Beijing that its interests are best served by forging solutions now, showing that compromise and cooperation will help China in the long run, and reassuring Beijing that its concerns will be heard.

It is in this context that Canada can play an important role.  Canada has a very positive image among the Chinese people.  It is seen as aligned with the West in values and political systems but more open and non-doctrinaire in its thinking.

No country – big or small – should expect to change China. But do expect the Chinese people to be sincere in sharing ideas and working toward mutually beneficial outcomes.  Thank you.