Davos 2018: China and the west head for a clash of systems

The Davos splash made last year by Xi Jinping, China’s leader, derived from his apparent defence of globalisation. His message played well to the globetrotting elite, but a year later the disharmonies between China and the west are proliferating.

The US, EU and Japan are complaining about perceived Chinese unfairness in areas such as intellectual property, industrial subsidies and Beijing’s orders that foreign companies should host Communist party cells. For its part, China is concerned at growing US and EU scrutiny of its outward investments.

Such matters, however, are all expressions of a deeper discord. The basic problem between China and the west is that the hopes for “convergence” that attended Beijing’s accession to the World Trade Organization (WTO) in 2001 have foundered on the rocks of incompatible political economies.

The idea that China would be integrated into a western-led global system created under Pax Americana looks to have been wishful thinking. China in late 2016 was denied “market economy status” under the WTO, triggering lawsuits by Beijing against the EU and US.

The future, analysts say, appears to be one of systemic dissonance. China on one side is building a state-driven, hybrid economy while espousing its own distinct vision for globalisation. For its part, the west’s adherence to rules-based, free market economics is undermined by the “America first” doctrine of Donald Trump, the US president.

Lawrence Summers, the former US Treasury secretary, sees such contradictions resulting not so much in confrontation as in “parallel play” between China and the west. “Right now I would describe the modus vivendi that the world has found as being parallel play,” he said in a speech late last year. “The west does its thing; China does its thing. Countries get a bunch of money from China and they do it China’s way. Countries get a bunch of money from us and they do it our way.”

Such accommodations at least allow all parties to move forward but do not resolve a fundamental question: what is the system of global governance in which the US and the west and China are all going to participate? Neither is “parallel play” a stable state. China’s focus on building multilateral structures that follow its lead and abide by its rules suggests that over time Beijing will become less dependent on the western-led systems that dominate global governance.

The Belt and Road Initiative (BRI), through which China intends to boost commerce with about 70 countries in Asia, Africa and Europe, puts Beijing in the driving seat of a new type of multilateralism. The BRI diverges from the US playbook in that it does not seek to negotiate a free trade treaty with member countries but promises infrastructure projects financed and built by Beijing.

In Europe, 16+1, a China-led political and commercial group, brings together 11 EU members and five non-EU central and eastern European countries. All 16 nations are also BRI countries, and several have signed up to significant Chinese-financed infrastructure deals, boosting Beijing’s influence in the EU.

Several other Beijing-led bodies, including the Asian Infrastructure Investment Bank (AIIB), stand as alternatives to western-dominated institutions. Some emphasise co-operation with western counterparts but others seek to balance or challenge the established order, analysts say.

“If the narrative since 1978 was of China’s slow integration to the international order and adoption of norms, it is turning now towards a systemic clash,” say François Godement and Abigaël Vasselier of the European Council on Foreign Relations think-tank.

Indeed, tensions are increasingly apparent among multinationals operating in China: nearly 50 per cent of European companies reported in 2016 that it had become more difficult to do business in China than in the previous year. The American Chamber of Commerce reported in 2017 that more than three-quarters of members felt less welcome.

The World Bank’s ease of doing business ranking puts China 78th out of 190 countries, and the OECD puts it fourth from last among 62 countries evaluated on restrictions to foreign investment.

Such perceptions stem partly from China’s technology drive. In 2015, it unveiled its “Made in China 2025” policy, which targets bigger market shares in 10 global industries. The aim is to boost “indigenous innovation” and self-reliance in making key components.

Such objectives add fuel to western concerns. But in common with other accusations that China favours its state industries, resulting in overcapacity that floods the world with cheap steel and other products, these anxieties do not make the west any more likely to prevail.

The areas the US, EU and Japan have identified are fused into the nature of Beijing’s party state. They are expressions of a political economy that China has no intention of rolling back.