Lessons from Davos: Xi’s message to the West

Chinese President Xi Jinping’s assertive defence of globalisation in his address to world economic and political leaders at the Davos forum surprised many. Few were expecting the Chinese President and head of the Communist Party to attend the spiritual home of global capitalism for the first time, and fewer still to hear such a forthright speech.
What do his comments mean? What has brought Xi to join this gathering in the first place? What does it imply for the world?

Lessons from Davos: Xi’s message to the West 

Chinese President Xi Jinping’s assertive defence of globalisation in his address to world economic and political leaders at the Davos forum surprised many. Few were expecting the Chinese President and head of the Communist Party to attend the spiritual home of global capitalism for the first time, and fewer still to hear such a forthright speech.

What do his comments mean? What has brought Xi to join this gathering in the first place? What does it imply for the world? 

A reaction to tensions with the U.S.

Although not mentioning Donald Trump or the United States directly, Xi’s address contained numerous pointed references to the (then) President-elect’s protectionist policy proposals.

Xi firmly defended globalisation, noting that “blaming economic globalisation for the world’s problems is inconsistent with reality, and it will not solve the problems”.

He defended the Paris Agreement on climate change, describing it as a “hard-won achievement” about which, in contrast to Trump’s threat during his election campaign to abandon it, “All countries should stick to it instead of walking away from it”.

He also cautioned against protectionism, stating that “pursuing protectionism is like locking oneself in a dark room” and even more pointedly towards Trump’s apparent threats of a trade war, warning that “No one will emerge as a winner in a trade war”

These warnings should be seen in the backdrop of worsening relations between China and the U.S. There have been frequent military tensions between the two powers, which have been increasing during the Obama Presidency.

In his election campaign, Trump threatened to raise barriers to protect U.S. jobs, which he believes are being taken by foreign countries, and has singled out China for particular criticism. He pledged to label China a currency manipulator, bring cases against China for “unfair subsidy behavior” and use “every lawful presidential power to remedy trade disputes”.

While Beijing, like many other observers, would like to know whether Trump’s statements will become reality, several of his recent actions have been very concerning to China. These include:

  • Recent appointments & nominations, especially that of Peter Navarro, a notorious China hawk, to lead a new National Trade Council from inside the White House.
  • Taking a call from President Tsai Chun-Ying in Taiwan, which broke convention over the One China Policy, something about which China is extremely sensitive.
  • His personal comments on the drone taken by the Chinese navy, which Beijing may have thought a slight escalation of the issue. China has consistently disliked public confrontation: one reason is because the Ministry of Foreign Affairs is relatively low in the ministerial hierarchy, which can lead to domestic issues pressuring foreign policy, especially after disputes become public. Instead, Beijing prefers to manage conflict behind the scenes, but Trump’s seemingly impulsive comments suggest that this will hard to achieve.

In this context, Xi’s remarks suggest that China is taking Trump’s bellicose statements seriously, and are using a public occasion to warn him off.

However, the fact that Chinese media have dampened their coverage of his Presidential inauguration suggests that they have not decided their ‘line to take’ with him, and are keeping their options open. The Chinese government is very sensitive to accusations that it is an insufficient guardian of Chinese national interest and, if they portray him in a negative light vis-à-vis China too soon, they may feel pressured into standing up to him later, which would limit their diplomatic freedom of movement.

A challenge to the West?

Xi’s remarks go much deeper than just a warning to the Trump administration.

In his address, Xi attacked the established system of global economic governance, noting that there is “inadequate global economic governance” and how the current system fails to take into account that “emerging markets and developing countries already contribute to 80 percent of the growth of the global economy”.

His criticism that global financial institutions insufficiently recognise China and other developing countries is not new, but by making it the heart of a speech in a public for a to world economic elites – indeed the heart of global capitalism – it is a very high-profile way of doing so. There is some justification for his point of view: for example, China only controls some 6% of voting rights in the IMF, versus 16.5% for the US and 4% each for France and the UK.

However, Xi expanded beyond this point, arguing that these institutions were not fit for purpose, being “unable to effectively resolve problems such as frequent international financial market volatility”.

He added a call for change, proposing to “develop a model of fair and equitable governance in keeping with the trend of the times … Countries big or small, rich or poor, are all members of the international community … they are entitled to participate in decision-making, enjoy rights and fulfil obligations on an equal basis. Emerging markets and developing countries deserver greater representation and voice.”

China has already started building some of its own institutions that could one day rival the IMF. For example, this includes the Asian Infrastructure Investment Bank (from which the U.S. was notably excluded) of which China controls 26% of the voting shares, enough for a veto over major decisions., and the New Development Bank, established with other BRICS nations.

Other examples of a nascent Chinese institutional framework could be the new White Paper issued by the Chinese state council promoting China’s vision for a non-Western led Asian security system, and the Conference on Interaction and Confidence Building in Asia (CICA), a possible competitor to APEC.[1]

A diplomatic opportunity?

With this in mind, Xi’s comments illustrate how China has seen an opportunity to seize the diplomatic high ground.

ASEAN countries have not only been shocked by Trump’s pledge – and now formal decision – to pull out of the Trans-Pacific Partnership (TPP), but also by his criticism of US allies for being ‘free-riders’ due to their lower levels of military spending and associated threats to withdraw US support unless they pay more for defence.

This prospect might rattle most ASEAN countries, Korea and especially Japan, but could have a real impact in the Philippines, for which relations are very fluid following President Duterte’s recent apparent re-orientation away from the U.S. and towards China. An announcement that Beijing and Manila have signed US $3.7bn of joint projects suggest that this is gaining momentum.[2]

His address therefore not only earns China influence by positioning itself as a well-meaning internationalist but also, given the U.S.’ partial withdrawal from commitments in  Asia, has very opportune timing that may reap short-term diplomatic rewards.

More Chinese business in international fora

After outlining this new vision for the international financial community, China is hardly likely to drop the issue, and is likely to campaign vigorously for increased influence within global institutions or to build Chinese-favoured alternatives where this does not happen. Throughout China’s modernisation of government, China has been loath to implement international standards directly, and prefers to build its own versions, although has learnt, copied and adapted many such examples from abroad.

And where the Chinese government leads, companies will follow. This is likely to lead to increased participation in other major fora by Chinese companies, especially SOEs. 

Does China’s record match the rhetoric?

With such a forthright anti-protectionist message, Xi invites an examination as to whether China is as open as the U.S. and on this front, China has a poor record. There are large swathes of the Chinese economy that are restricted to foreign investment or require the operation of joint ventures with Chinese businesses. In contrast, there are far fewer restrictions in the U.S., let alone the even more open European economies.

The massive jump in Chinese investment in the U.S. and EU over the last couple of years has already focused attention amongst policymakers, with the European Union Chamber of Commerce in China encapsulating these issues by criticising China for a lack of ‘reciprocity’ in trade access.[3]

This was not lost on the EU Commission which, although it supports a very similar line to China on globalisation, has also commented in a similar message to the EU Chamber, although with less powerfully charged language, proposing plans to “maintain a strong trade defence system” and build up more flexible (stronger) protectionist measures that could be more easily enacted on an ‘industry by industry’ basis.

As China continues to promote globalisation, businesses should therefore expect to see increased pressure on China to open its markets further.

Cooperation with the EU, tensions with the U.S.?

Despite concerns about China’s domestic policies, Xi’s message about globalisation will find common ground in the EU Commission.

China’s relations with the EU as a whole are good; China’s the quick public declaration of support for European integration following Trump’s comments that, following the UK’s exit from the EU ‘others will leave’ is one example.[4]

If Trump continues his protectionist stance, this could lead to a scenario where the EU and China find increasingly common ground, perhaps supported by opening markets between each other (such as via the planned Bilateral Investment Agreement) and developing support for globalisation, while the U.S. moves ahead with more unilateral protectionist measures.

A more active, global China

These trends will need to be watched closely.

Either way, China has demonstrated its concern for global issues and an ability to use public fora in international diplomacy. This is highly likely to continue; companies and policymakers alike should be prepared to work with China when it does so.

After publication of this article, Matthew Lackie at WE Worldwide wrote a great follow-up looking at the historical significance of Xi’s announcement and what it means for China’s communication with the world. See this here.

[1] Entitled, “China’s Policies on Asia-Pacific Security Cooperation”, see http://english.sina.com/news/2017-01-11/detail-ifxzkhfx4742425.shtml

[2] http://www.chinadaily.com.cn/cndy/2017-01/24/content_28040397.htm

[3] See details here.

[4] http://www.ecns.cn/2017/01-18/242168.shtml

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Author

Mark Pinner

Managing Partner, China

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