The economic transformation of China is the most important global economic event of the past forty years. It has changed the balance of power on the Eurasian landmass, in ways we are only beginning to comprehend.
The economic transformation of China happened because, since 1979, there has been lively economic competition within China, something that was not allowed in the Soviet model. China’s economy grew, while the centralised Soviet system stagnated. This explains why Communism survived in China, but collapsed in the Soviet sphere. China also grew thanks to the opening up of global trade, under successive rounds of trade liberalisation, which allowed China to build a powerful export sector.
Now China is having to transform itself again. Its export led model has reached its limits. Labour costs are rising because the big transfer of labour from farming to industry is over, and the Chinese population is beginning to age. The working age population of China peaked in 2015 and will decline from now on. Chinese exporters are being undercut by lower wage economies like Vietnam.
The Chinese economy has also reached environmental limits. The pollution level in some cities is dreadful, and the air is dangerous to breathe, even on an apparently clear day. I experienced this for myself when I visited China in the past fortnight on business. Environmental losses reduce China’s GDP by 10%.
The proportion of its population living in cities will grow from 20% in 1978, to 50% today, and to 75% by 2030. This will lead to even more pollution, unless the cities are built to a different model. China is devoting a lot of research to this and may soon become an exporter of green technology. Necessity is the mother of invention.
Meanwhile China has an increasing number of well off, high spending, consumers. The Boston Consulting Group recently estimated that what it calls the “upper middle class” ( a group that can afford regular foreign holidays) will rise from 53 million today, to 102 million by 2020. Interestingly it estimates that, by 2020, the upper middle class in will reach 73 million in Indonesia, 32 million in India, and 21 million in Thailand.
At the other end of the scale, China has not got a well developed welfare system. The income gap is very wide. Stress is high. Parents are left looking after grandchildren back in rural China while sons and daughters seek work in the cities. There is a two tier labour market, under which long established city residents qualify for social supports, but recent arrivals in cities do not, and can remain in a precarious situation for years.
Nationalism is very strong in China, and one can foresee a clash between the American nationalism of Donald Trump, and the Chinese nationalism of the Communist party.
Both can exploit suspicion of the other, to rally political support internally.
The United States should be cautious. The abandonment of the Trans Pacific Partnership, by both Donald Trump and Hillary Clinton, will leave China in the driving seat, as far as trade policy in East Asia is concerned. It is ironic that China increasingly sees itself as the defender of an open world trading system, while the United States adopts protectionist rhetoric. Adding a conflict over the status of Taiwan to this mix could have unpredictable results.
If, under Donald Trump, the US moves closer to Russia, the EU may find its interests aligned more with those of China in some fields, like climate change. This will be reinforced by the anxiety many of the central European members of the EU feel about Russian intentions, and Russia’s view that some of them should properly belong in a Russian sphere of influence, rather than being so closely aligned with Western Europe through the EU. Russian support for west European politicians like Marine le Pen is part of a strategy to undermine the EU.
Historically, China has been a supporter of EU integration, while Russia has been hostile, because it felt itself excluded from pan European security structures. Russia feels itself hemmed in. Russia’s seizure of Crimea, and its involvement in the Syrian Civil War, can also be seen as attempts to break out of its strategic isolation and gain access to the Black Sea and the Mediterranean.
It is also to break out of its sense of isolation, that China has promoted its “one Belt, One Road” policy to link itself with Western Europe.
As a continuing member of the European Union, it will be in Ireland’s economic and political interests to play its full part in building a balanced structure of peace on the Eurasian land mass, that protects the rights of small states, but which also one that ensures that no great power feels itself hemmed in, or isolated. For that is how wars start.