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China and global economic governance: History matters

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In Brief

China’s embrace of global institutions and their rules and norms has helped guide its spectacular economic growth and integration into the world economy.

But China’s impact on the global economic order is still an open question. Its sheer size and dynamism make it a force to be reckoned with.

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So far, its influence has been largely constructive but recent signs of assertiveness in the Asian region and at home, coincident with the 2012 leadership transition, raise questions about the future. History matters to the answer.

China’s interaction with international economic institutions reflects its leaders’ own conclusion that, in a globalised world, China must learn from, and participate in, international organisations. Up to now, China has largely played by the existing rules of multilateralism. Its participation in the international economic system is constructive. In the Asian region China has been receptive to its neighbours’ initiatives to develop cooperative regional institutions.

Just playing by the rules is insufficient in an interdependent world economy. The existing institutions were created by the western powers but allow for new participants and leadership. In a multi-polar world no one power can ensure the global interest (or get what it wants) by itself. Partnerships, coalitions and networks may be required in which the emerging powers take on more responsibility for providing global public goods. Yet China’s demonstrated record is that of a still-poor developing country pursuing its own interests. Sometimes these interests overlap with the collective interest, as was the case with the 2008 stimulus package after the global financial crisis, China’s super-sovereign reserve currency proposal, and the compromise between the United States and the BASICs to create the non-binding accord at Copenhagen. Sometimes these interests have collided, such as when China backed India in blocking the deal that could have concluded the Doha round. Overall China has mostly been a relatively passive participant with the ideas and leadership provided by others.

The picture is somewhat different in the region where China has actively participated in the Chiang Mai Initiative Multilateralisation (CMIM) and negotiated the FTA with ASEAN. But the plethora of regional institutions reflects the underlying rivalries among China, Japan and India. China’s assertion of historical claims to territory and natural resources have been counter-productive.

How will China deal with impending global economic governance and will it be willing, if desired, to modify its own policies in the collective interest?

The relationship is two-way; China has been a major beneficiary of global institutions and their rules and standards as it has opened and modernised its economy. There are few signs that, because of its size and potential influence on world trade and finance, China is reshaping the institutions and their rules and norms to suit itself. China is a strong and vocal supporter of more democratic behavior, the use of consensus in these institutions, and more respect for differences among countries — laudable values to be sure, but they avoid the reality that effective multilateral governance sometimes requires tough decisions in the interests of global stability.

History matters. There is little evidence that China is (yet) willing to modify its own economic policies in recognition of international interdependence, with two exceptions: Foregoing nominal exchange rate devaluation in the Asian crisis and presenting the large stimulus package in 2008 as ‘good for China and good for the world.’ Most evidence suggests China is still primarily focused on safeguarding its sovereignty and advancing its own development objectives.

Some argue China’s foot-dragging on modernising the exchange rate regime is at the expense of the international order. The Chinese leadership openly agrees that change is required but sets its own pace according to the political importance of steady growth in output and employment. The transition in the exchange rate regime will not be easy as it will need to be accompanied by extensive domestic restructuring, challenging powerful interests vested in the status quo. Internationalising the RMB will reduce some of the pressure but the pace and extent will be limited by capital controls and heavy exchange rate management. The related buildup of foreign exchange reserves may be seen in China to be a source of economic power that fits well with state capitalism but it is an increasingly inefficient allocation of capital.

Politics matter. China’s relationship with the United States is of central importance. US re-commitment to multilateralism is welcome but the United States also needs to put its own house in order if it is to continue to be a credible leader of the economic order. As a major deficit country it lacks a credible plan for medium-term fiscal consolidation, and like China’s exchange rate appreciation, action is constrained by domestic politics. Quantitative easing in November 2010 may have been necessary to head off deflation but it triggered disruptive capital flows seeking higher returns in emerging economies. Looking ahead, just as it could take a decade for the United States to learn to live within its means, China’s internal rebalancing will take time to change policies and institutions. Branding China as a long-term adversary could become a self fulfilling prophecy and would be counter-productive. Indeed, the interests of both countries and that of the global commons are best served by strengthening the global institutions in ways that include China.

Other economies in the region will have to adjust to the rebalancing required in both the United States and China by relying more on domestic and regional demand. Regional institutions can help promote such adjustment. Greater reliance on partnerships and positive sum outcomes by the United States signals a cooperative route forward in the region with China as a more active player. Much will depend on the United States setting the example for this new reality through its willingness to observe global rules and to bargain and compromise to accommodate China’s interests.

It should be no surprise that the spectacular speed of China’s rise to global pre-eminence disturbs the global status quo in unexpected ways. A more assertive China creates a new, more complicated, norm, replacing the relative simplicity of America’s unipolar moment. The evolving framework for global economic governance has much to commend it to China’s leaders but depends on investments in confidence building to overcome the inertia of historical sensitivities and mistrust.

Dr Wendy Dobson is co-director of the Institute for International Business in the University of Toronto’s Rotman School of Management and former Associate Deputy Minister of Finance in the Canadian government.

This is an excerpt from a paper delivered to the 34th Pacific Trade and Development Conference in Beijing in December 2010.

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