In 2015, American economic growth will be the most prominent among developed countries, while China's economic performance will continue to be relatively stable among emerging economies. This economic dynamic is likely to make the unofficial G2 into an objective existence, resulting in a new status quo that the Chinese will have to face squarely in the coming years. Over the past several years, China managed considerable achievements in the field of international economic governance, but the overall results were not quite satisfactory. China is in need of executing a new economic diplomatic strategy, which is articulated through the Silk Road Initiative.
Rights and Obligations of Major Economies
At the beginning of 2015, global economic development could be characterized by a new type of “dichotomy.” Simply put, American economic growth emerged as the most robust among developed countries, whereas China's economic performance continued to be relatively stable among emerging economies. This dynamic has made the G2 into an objective fact that the Chinese government will have to deal with in future years. During the China- US Strategic and Economic Dialogue (S&ED) in May 2012, the Chinese government proposed the concept of the “C2,” which was closely linked tothe G2 but differed in that the core of the C2 rested on coordination between two states, while the goal of G2 was to have the two nations directly address global and regional economic governance issues.
The core of developed countries used to make up the G7, which was led by the United States, the Eurozone and Japan. Lately, the economic situation in Europe and Japan has been bleak with few prospects. The European economy, locked in a serious debt crisis, was slow to recover and is apparently now weighing a comprehensive quantitative easing (QE) policy. The third arrow of the Abenomics – structural reform – has not been unleashed, with some pundits claiming that Japan is on its way into a third “lost decade.” In contrast, the US economy is comparatively optimistic, largely due to a resolute QE policy from the Federal Reserve, as well as efficient market mechanisms of the American economy and powerful scientific and technological capabilities. Banking institutions underwent a painful deleveraging process, while nonbanking enterprises revamped their negative balance of sheets.
The BRICS countries – namely, China, India, Russia, Brazil and South Africa – are the representatives of emerging economies. Over the past several decades, emerging economies made much headway, significantly changing the dynamics of the G7. Regrettably, the economic performances of the main BRICS nations have been quite dim over the last few years. World economic growth slowed down with a sluggish investment and a lukewarm bulk commodity market. It is evident that three BRICS nations are facing stern pressure. Relatively speaking, the economies of China and India are faring a lot better. Though they have both slowed down somewhat, the Chinese economy is still robust with controllable risks, while India's new Prime Minister Narendra Modi put forth a range of reform policies that have the potential to improve economic prospects.
This ongoing dynamic is likely to facilitate the entrance into an era of G2 framework for international relations. The G2, first put forth in 2008 by Fred Bergstan, former director of the Peterson Institute for International Economics, was echoed by Robert Zoellick, then president of the World Bank in 2009, and Lin Yifu, chief economist at the World Bank. Interestingly, the proposal was not adopted by the two respective governments that put it forward, perhaps because it was not conducive to the mobilizing initiatives of other powers and neither the United States nor China felt ready to undertake one-on-one cooperation to address important issues. As such, future multilateral frameworks featuring such organizations as the IMF, the G20 and APEC will still serve as leading platforms for international economic governance. This cannot however prevent the world economy from entering into an era of unofficial G2.
In China's case, this is both an opportunity and a challenge. Objectively speaking, it is unclear whether or not China is ready to take on a leading global responsibility. A few years ago, on issues of economic affairs, China originally held an opposing attitude, but it later found out that such a position was in its own interest. On the issue of carbon emissions, China stubbornly emphasized the stage of its development and tried to circumvent global commitment in line with its economic aggregate. Besides, the United States is already capable of playing a leading role in a great deal of international economic decisionmaking. In addition to several unique mechanisms, such as the Bretton Woods system, the United States currently enjoys the advantage of having a large number of devoted allies. To date, China does not boast a similar set of allies, whether among the BRICS or in the East Asian region.
In summary, China's policy of keeping a low profile is not working anymore. Measured in terms of its exchange rate, China has grown into the world's second largest economy. Measured using PPP, China overtook the United States as the world's largest economy in 2014. Today, China's economic influence is being felt everywhere in the world, with China buying more expensive things and continuing to sell goods at cheap prices to global markets, a testament to China's ongoing prowess. In the words of Peking University Professor Zhu Feng, the elephant can no longer hide behind big trees. Even the United States President admonishes China time and time again, saying that China must shoulder relevant responsibilities tantamount to its status as a major power, refraining from taking a free ride as it did in the past. China reached its present status in an inadvertent way.
Efforts Aimed at Reforming Global Economic Governance
The current global economic governance system traces its roots to the Bretton Woods conference in 1944. This system boasts two big policy frameworks: the exchange rate system and international organizations. The essence of the exchange rate is two fixed rates – the US dollar is pegged to gold, while other currencies are all pegged to the US dollar. This exchange rate system was no longer extant after the US dollar de-pegged from gold, instead being substituted only by an international monetary system based on credibility in which all parties resorted to a floating exchange rate system. As such, two major international institutions – the World Bank and the IMF – came into existence, with the former responsible for poverty relief work and the latter tasked with safeguarding financial stability. Under these two “hardware” systems, there are two “software” systems – the so-called “Washington Consensus” and US domination, with the US holding a veto power over a wide range of issues.
Ostentatiously, this system is becoming increasingly detached from the realities of the global economy. Ever since the 1980s, the economic growth of emerging economies has been steadily intensifying; they now make up more than half of the global economy. In the first decade of the 21st century, BRICS nations contributed more than half of global economic growth. And yet, these countries are mostly excluded from international economic governance systems, with the G7 and the United States having their way on some major world issues. Energetically practicing the policy recommendations of the “Washington Consensus,” some international organizations have received unfavorable outcomes. Conversely, the East Asia Economic Community, which was denounced for being in contravention of the policies of “Washington Consensus,” has achieved high-speed economic growth, growing into high-income economies.
The US sub-prime debt crisis occurred against this backdrop, and former President George Bush invited the heads of G20 nations to Washington to discuss ways and means to counter the financial crisis. The G20 has since evolved into the most important annual event for discussing global economic affairs. Under the coordination of the G20, international financial reforms scored immense achievements in terms of liquidation, shadow banks, systematic importance as well as capital base. Accordingly, the World Bank and the IMF have appointed more citizens from developing countries including China to toplevel management positions and altered voting rights in light of these patterns.
Until now, these efforts have not been reassuring. On the one hand, the inertia of the old forces still lingers, unwilling to discard its former status. For instance, the reallocation of voting rights in the IMF will mean that developed countries, especially European countries, will have to drastically reduce their ratio of influence. It appears almost politically impossible to change the unreasonable way in which Europeans are assumed to take on the post of managing director of the IMF, while Americans are assumed to be in control of the World Bank, let alone to require the United States to drop its veto power. Even in new international platforms such as the G20, emerging economies are not positioned to play a more active role, unable to contribute new topics or ways of thinking. Although the Republic of Korea succeeded in adding the issue of development on the agenda when it hosted the Summit, the policy proposals of the G20 were led by the G7 and the US.
Over the last few years, China has taken an active role in the reform of the international economic governance system and seen some good results. But more often than not, the results are not entirely gratifying. This may result from the following reasons. First, Chinese officials are inexperienced and lack the ability to participate in international economic governance, sometimes not knowing what they themselves want in international policy forums. Second, they lack effective coordination, sometimes with conflicting positions and stances, forcing officials into a passive state. Third, China, being a novice, does not have many stable allies, truly reflecting China's diverse economic interests. Because of this, China is somewhat caught in the middle, sharing common interests with some developing countries on the one hand, while sharing other common interests with developed countries.
A Sobering Take on China's International Status
Today, the diplomatic reality facing China is that it can no longer keep a low profile and focus on developing its domestic economy. That said, China is still a developing country, lacking experience in leading international economic affairs. Some domestic scholars take the view that the immense success of the past 30-odd years laid the ground for China to export capital, concepts and models to the international community. This view is not without some reason, but if it is carried out in the form of economic diplomatic policy, it may backfire on China. China's first step in playing a positive role in international economic affairs is for China to understand its actual conditions as well as environment, roughly on the following points:
While the Chinese economy has already become the largest or second largest economy in the world, China itself is still a developing country with an annual per capita income of 7,000 dollars, and its science and technological development are relatively behind. At the beginning of 20th century, the UK remained leader of world economic order, even though the economic scale of the US had surpassed the UK, Germany and France. It was only after the Second World War that the US became the absolute leader of world economy. More importantly, this was all based on economic, technical, political and military strength. For a nation that desires international economic leadership, economic scale is merely an advantage, not the primary condition.
Though China has benefited from economic globalization, it enjoys no edge in trade and investment liberalization reforms. The high growth rates in China over the past three decades are to a large extent due to the globalization of the world economy, with China being at the receiving end of foreign direct investment and exports increasing rapidly for decades. Since the outbreak of the world financial crisis, various countries have adjusted their policies and China is now the backbone pushing forward economic globalization. Objectively speaking, China is rather underdeveloped in some sensitive areas of economic liberalization, including areas such as technology, intellectual property protection, agricultural produce trade liberalization and state-owned enterprises. As such, many people believe that China should take part in negotiations for the TPP, while others think that the time is not yet ripe.
Furthermore, disparities in political systems are an objective existence that cannot be written off. There is no need for further discussion on this subject, but it is important for China to be prudent when exporting its concepts and development models. In fact, it serves China better to stick to its path of development and keep this model within China instead of exporting it to others. When it comes to the choices of other countries, it is up to them make decisions. Lately, relations between China and some neighboring countries have become strained. Whatever the underlying reasons, the vast disparity in economic scale is bound to give the international community the impression that China is bullying smaller countries. This is another reason why it is not appropriate for China to overly stress its economic size.
The world's entrance into an unofficial G2 era implies that China's international standing has been greatly elevated. However, relations between China and the United States will be getting increasingly sensitive, and China will not be capable of challenging the United States in the foreseeable future. Some scholars note that changes in international powers invariably occur through wars in the history. It is not easy to predict whether or not there will be military conflict between China and the United States, but it is clear that China's economic scale surpassing the United States encouraged more Americans from both civilian and political circles to want to contain China. In recent years, the United States has claimed that it will return to the Pacific and openly support Japan, the Philippines and Vietnam, which are at loggerheads with China. The United States' purpose is transparent. It can be expected that future relations between China and the US will have dual features of cooperation and struggle.
The New Economic Diplomacy via the Silk Road Initiative
China's new economic diplomacy should adhere to one cardinal principle – “one axle with multiple polarities.” Under the current international economic order, it is essential for China to recognize the leadership of the United States, to stick to economic globalization and to encourage more stakeholders to participate and promote the reform of the international economic system. China's aim is not to make a fresh start, but rather to alter the ongoing regime so that it can better reflect new world economic patterns. China should avoid entering into direct conflict with the United States, and refrain from attempting to export the Chinese model or trying to restructure the international economic order. The underlying reason is simple – China is a large economy but not a strong one, and it is high time for it to guard against becoming overly inflated.
As far as international economic system development is concerned, China is still a novice. But China's concrete measures and contributions have been welcomed by the international community. For example, during the Asian financial crisis, the Chinese government decided not to devalue the RMB and went to great lengths to stabilize the regional currency system. Amid the global crisis, the Chinese government energetically stimulated economic growth, offering robust economic support to various countries. During the APEC summit in November 2014, President Xi Jinping and President Obama jointly released a joint communiqué on the climate change. One common point of all these measures is that China has strived (making some sacrifices and shouldering rather big risks) to benefit the international economy. In implementing new economic diplomacy, perhaps China should focus more on similar measures that will help it gain the trust, prestige and circles of friends.
The economic diplomacy policy carried out by the Chinese government over the past several years explicitly demonstrates the priority areas of China's governmental work. First, China emphasizes the establishment of a new type of major-country relations with the US based on partnership, mutual respect, mutual benefit and win-win results. This is a new way of dealing with conflicts between a rising power and an established one, with a purpose being to avoid the historical trend of confrontation between powers and a zero-sum game. Second, China has engaged in the reform of multilateral policy frameworks. In November 2014, China hosted the APEC Summit and overcoming the “middle-income trap” was put on the agenda and the discussion of FTAAP was advanced in an earnest way. In addition, China elected to host the G20 summit in 2016. Third, China is strengthening regional economic cooperation by implementing the Silk Road Economic Belt and the 21st Century Maritime Silk Road, otherwise known as the Belt and Road Initiative.
The introduction of the Silk Road Initiative is a rationale and sensible choice. Promoting economic cooperation and development by reinforcing infrastructure construction constitutes a contribution of the Chinese government to the international economic policy sphere. This represents one of China's key successful experiences as developing economy over the last scores of years, and it has a good chance of putting China's comparative advantages into full international play. To enhance economic and trade ties through infrastructure development has no bearing on the current international economic systems or ideology. The main orientation of Silk Road Initiative is westward, thus avoiding a head-on conflict with the United States' rebalancing to Asia. The countries in this region are neither allies nor adversaries of China. Moreover, the majority of these countries are underdeveloped economically and should have a more welcoming attitude towards new development opportunities.
The details of the plan can never be overstated. Whether or not it can yield good results depends on how it is being implemented. Since this is a grand undertaking, it is not advisable to stick to short-term factors, and some experts expect that the Silk Road Initiative will galvanize sluggish domestic economic growth and transfer China's surplus production capacity. This understanding, however, could distort the purpose of the initiative. In the meantime, China boasts a large number of state-owned and private enterprises that are good at infrastructure development, even if they are inexperienced in global business, dealing with foreign partners and engaging with foreign governments. China has a lot to learn in this regard. If they do the same things they did domestically, they will not receive favorable results and may end up damaging China's image.
There is considerable foreign skepticism about the Silk Road Initiative, but the biggest strength of the initiative rests on doing solid, tangible things. Should the region's economic and trade development and cooperation be truly promoted through infrastructure construction, it is expected that the Silk Road Initiative will win international supporters. It is crucial that the first couple projects are successful, which will then open up new vistas. If the first several projects fail at the very beginning, the Silk Road Initiative will encounter immense difficulties.
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