Is China well on its way to becoming the world’s preeminent economic and military power within, say, the next 10 years? Listening to President Donald Trump’s erratic pronouncements, it is easy to believe that the US is moving downwards inexorably. As of May 27, the Covid-19 pandemic has caused about 352,155 deaths globally and it is clear that the ongoing global economic downturn will be severe and long lasting.
The high number of Covid deaths and disastrously negative economic consequences around the world are to a considerable extent due to the inexcusable delay in timely communications from China about the deadly nature of this virus. The World Health Organization, probably under Chinese pressure, is culpable too of delaying health warnings. After the development of a vaccine for Covid-19, could there be a moment of epiphany for the community of democracies that has been mesmerised by the competitive pricing of China’s merchandise exports? That is, could the rest of the world wake up to how accepting it has been of Chinese exceptionalism?
The table lists the nationalities of physics and chemistry Nobel-prize winners in the last two decades. The huge gap between G7 countries and China in basic scientific research is evident. Taking purchasing power parity into account, per capita incomes in Western countries were still way ahead of that in China in 2019. As for cumulative defence expenditure over the past two decades, the US spent close to five times more than China. On the trade front, over the past 20 years, the US had an average current account-to-gross domestic product (GDP) ratio of negative 3.46 per cent. Coincidentally, China had a positive current account balance of exactly the same number. The US has been borrowing from the rest of the world to consume, while China has been lending to developed countries by investing in their government debt securities. Germany and Japan with competitively priced quality products and Russia with its large exports of fossil fuels had sizeable positive current account balances.
Illustration by Binay Sinha
China has made highly impressive technological progress — example, it produces advanced fighter jets and has set up the sophisticated telecommunications equipment manufacturer Huawei. However, even a tiny democratic nation like Taiwan has done well in setting up the Taiwan Semiconductor Manufacturing Company, which is the world’s largest manufacturer of computer chips. Several commentaries have mistakenly suggested that the Chinese currency renminbi would soon become an international reserve currency because it has gone digital. To start with, China would need to shed most of its controls on capital account convertibility and make its political and legal processes more transparent for the renminbi to gain wider international acceptability.
An overwhelming fraction of the global trade in goods in 2018, amounting to $19.5 trillion, was transacted in convertible hard currencies. In 2018, China’s exports amounted to $2.5 trillion or 12.8 per cent of the global total. In the same year, probably to the discomfort of developing countries, China had a favourable balance of trade in goods with them totalling $430 billion. The US had the largest share of 14.3 per cent of the $5.8 trillion global trade in services in 2018. The share of UK, Germany and France of the trade in services was 4 to 6 per cent, somewhat higher than the share of China and India at 3.7 and 3.5 per cent, respectively. (Source: UNCTAD and WTO). Given the lack of Chinese accountability for viruses coming from that country, the rest of the world should be looking for ways to reduce the systemic and perennial deficits in the trade in goods with China.
Turning to India’s relations with major powers, it would be reasonable to suggest that the US and continental Europe are not as much against an eventual rise of India as China. To that extent, India has reason to lean towards Western democracies without alarming Russia. In recent years, whenever China has been uncomfortable with India, skirmishes tend to start on the India-China border. Such Chinese flexing of muscles is happening right now in Ladakh — probably to caution India against blaming China about Covid and also to inhibit the building of infrastructure on the Indian side of the border. India needs to reduce its dependence on imports from China.
For example, imports of chemicals which go into the preparation of generic pharmaceutical products. These generics amount to a significant component of Indian exports. As for India’s defence vulnerabilities, it has to invest more in improving its border roads, bridges and landing strips and for greater precision of its delivery systems for conventional and tactical nuclear weapons. To this end, India needs to increase its defence expenditure from present levels by about 1.5 per cent of GDP. If the Indian government were to substitute action for words against tax evasion, it could raise direct tax collection by 4-5 per cent of GDP.
To sum up, the world needs to trade with China given its huge consumer base and export capabilities. However, it is necessary for democracies to resist Chinese exceptionalism and link economic interaction with China to greater openness about that country’s political and medical research establishments.
firstname.lastname@example.org; The author is a former ambassador and World Bank finance professional