Three days before Donald Trump takes office as the most protectionist and nationalist American president since before World War II, and on the same day that British prime minister Theresa May outlined her vision of a ‘hard’ Brexit from both the European Union and the European single market, Chinese president Xi Jinping (习近平) made an audacious claim for China’s global leadership in the 21st century.
Xi, who delivered a landmark speech at the World Economic Forum in Davos, Switzerland, made that claim by embracing the values that American leaders have globally championed for decades (at least prior to Trump’s rise): a stable world order, free trade among nations and the notion that globalization, for all its faults, makes everyone better off.
Xi’s speech, the first ever by a Chinese leader at the World Economic Forum, is the most high-profile response so far from China’s president to Trump’s election. Despite Xi’s generally measured and cautious prose — he never once mentioned Trump by name — there’s no way to view Xi’s remarks other than as a warning and a rebuke to the rise of populist nationalism and protectionism in the United States and Europe over the last 18 months.
There’s a lot of justified ridicule of Davos as the gathering of self-important global ‘elites,’ but Xi’s speech today is perhaps the most important one that’s ever taken place during the forum.
Opening with a line from Charles Dickens, Xi pledged to keep opening China’s economy to the world, and he committed China to a stabilizing role in the world, including to the Paris accord on climate change, and to reforming the global financial system to smooth its bumpiest elements.
But the key point from Xi’s speech is this: ironically, jaw-droppingly, and likely not for the first time in the Trump era, the head of the world’s largest and most durable Communist Party took to the international stage to defend some of the fundamental principles of global capitalism.
Make no mistake, Xi Jinping is not coming to Davos to embrace those other values that remain a hallmark of what American global leadership projects — individual liberty, political freedom and liberal democracy with broad-based protections of civil and minority rights. Notably, no one today can claim that the People’s Republic of China under Xi enjoys the same political freedoms as Americans and Europeans do.
In 2016, China ranked 176 out of 180 countries in the Reporters Without Borders press freedom index (only Syria, Turkmenistan, North Korea and Eritrea were worse). Under Xi, Chinese censorship of the Internet has worsened, with fewer VPN networks still available to circumvent state controls. Under Xi, political dissent has been less tolerated than at any time in the recent past, even in traditionally liberal Hong Kong. Critics allege that Xi’s wide-ranging anti-corruption campaign amounts to a power grab designed to eliminate Xi’s internal enemies. Taiwan’s rejection of a services trade agreement with Beijing and the election of a nominally pro-independence president in Tsai Ing-wen (蔡英文) have worsened cross-straits relations. China’s east Asian allies are increasingly on alert over Chinese aggression in the South China Sea.
Nevertheless, Xi’s remarks were a consequential turning point for a country that is home to the world’s largest population (1.3 billion) and its second-largest economy, and a sign that China very much expects to take a stronger global leadership role in the years ahead.
In three key ways, Xi challenged Trump’s world view even before the incoming US president has taken the oath of office. Xi’s gauntlet comes just days after Trump blasted both NATO and the European Union in interviews over the weekend, alienating traditional US allies across the continent and stirring anxiety over the future of the trans-Atlantic alliance.
First, a trade war will be mutually harmful to China and the United States
During the US presidential campaign, Trump suggested that he could impose a tariff of up to 45% on Chinese exports into the United States. Xi made it clear how he feels about a trade war with a Trump-led America — no one will win.
If Trump slaps huge tariffs on Chinese exports, American consumers will feel the pain. After decades of taking for granted cheap products imported from China (and, increasingly, places with lower labor costs like Vietnam and Bangladesh), the shock would be incredible to consumers, especially those Trump supporters who have not seen real wage growth in years. There’s simply no way for American manufacturers to replicate low-cost consumer goods. Imagine what would happen if your next iPhone’s cost rises by 45% — or if half the products for sale at Target are 45% more expensive. Even a driftless Democratic Party would be hard-pressed to lose the 2018 midterm elections or the 2020 presidential election after such a deep consumer shock.
In the long run, though, it’s even worse. To the extent that American exporters have a bright future, they will increasingly rely on a growing global middle class — hundreds of millions of people who are leaving poverty behind and are now consumers for American products in China, in India, in the rest of Asia and Africa and Latin America. It’s worth noting that the first two decades of the 21st century have sharply reduced extreme poverty, thanks in large part to globalization and free trade. More middle-class consumers across the world means a larger market for American goods and service.
The effect of Trump’s trade war would be to deploy American workers into less efficient career paths. Manufacturing workers would be making blue jeans and toasters instead of airplane engines and computer circuitry and high-end consumer products. It would push more American workers into manufacturing at a time when the services economy is growing far more rapidly, and when jobs in American manufacturing are declining due to more automation and robotics than by offshoring.
Yes, a trade war would still hurt China significantly, which still relies on exports for its growth, even as its GDP growth has slowed in recent years (to between 6.5% and 7% in 2016). Maintaining or increasing Chinese growth will be the most difficult challenge for Xi in the years ahead, and a protectionist US trade policy will hurt. But for the same reasons that a stronger Chinese middle class will benefit the long-run American economy, Chinese manufacturers — no longer just confined in Gunazhou, Shenzhen and Shanghai and the Pearl River delta — can increasingly rely on robust domestic demand. In the long run, China will rely less on American consumers, too.
While Trump has said that he will allow the Trans-Pacific Partnership among 12 Pacific Rim countries wither and die, China is working to secure its own trade agreement, the Regional Comprehensive Economic Partnership, that would establish the rules of trade across the Asia-Pacific region if the TPP collapses. Last January, China debuted the Asian Infrastructure Investment Bank, a Chinese-based international investment institution designed as an alternative to the World Bank and other western-dominated institutions.
Second, globalization is the future, whether Trump likes it or not
In the 19th century, it was Great Britain (not the United States) that embraced free trade. Only after the American economy began to eclipse the British as the leading global economy in the late 19th century and first half of the 20th century did American policymakers at long last champion free trade.
In the same way, China has not been the most open country on its path to global prosperity. Its economy is still dominated by a heavy-handed public sector (which has often led to over-investment in infrastructure in certain regions), currency controls and a yuan that does not trade freely against other currencies around the world. In his speech earlier today, Xi pledged that China would not seek to devalue its currency in the years ahead. In the 1990s and 2000s, China (as Trump has alleged) kept the value of the renminbi low. But from the mid-2000s through last year, China manipulated the yuan to keep it at a steady value with the US dollar. While the value of the yuan declined significantly throughout 2016 as the dollar’s strength rose, China actually took drastic steps to keep its value artificially higher.
In short, Trump’s idea of Chinese currency manipulation is at least a decade out of date at a time. If the yuan was artificially weaker in the 1990s and early 2000s, if anything, it’s artificially stronger against the US dollar today.
Proclaiming that ‘China will keep its door wide open, and not close it,’ Xi committed to importing $8 billion in US goods over the next five years and investing $750 billion abroad, all while ever greater numbers of Chinese tourists make international visits. There is reason for healthy skepticism, though, and the burden is now on Xi and China’s leadership to follow through with their currency pledge and to continue to open China to greater foreign investment.
But to the extent that the United States is retreating from free trade and China is embracing it is an unmistakable sign that Trump is tacitly admitting China’s rise as the next global power. He can rattle sabers all day long about Taiwan, about currency manipulation and about imposing tariffs, but the story of the 21st century will be the story of an emerging world economy increasingly dominated by developing powers like China, India, Nigeria and others. There’s no guarantee that US relevance will continue if it turns inward.
Just as the demise of Spain and Portugal as world powers in the 17th century discredited mercantilism, and just as the Great Depression in the 1930s forced economist to rethink the perils of rising tariffs and the gold standard, history teaches us that a revived 21st century neo-mercantilism under Trump could undermine the dominant position that the United States still enjoys today as the world’s largest economy.
Xi today compared protectionism to ‘locking oneself in a dark room,’ which keeps out ‘light and air’ as well as the ‘wind and rain.’
Trump and his cohorts will take this as a threat, but it’s actually sound advice, and it has been since David Ricardo and the other Enlightenment-era economists established the basic economic principles of free trade. The incoming Trump administration’s economic and trade team would do well to heed it. It’s certainly true that the forces of globalization have hurt some industries more than others in the United States, sometimes deeply. But the proper policy response isn’t to shut American borders to additional trade, which will close far more doors for American consumers and workers than it would open.
Third, greed and ineffective regulation — not globalization — caused the the financial crisis of 2008-09
For good measure, Xi also tweaked previous US administrations when he argued that the financial crisis that roiled world markets in 2008 and 2009 wasn’t rooted in globalization, but by ‘excessive chase of profit by financial capital’ (read that as the greed of traders on Wall Street) and by the inability of both Democratic and Republican administrations of the 1990s and 2000s to regulate the financial sector.
Xi also blamed the current (US- and European-dominated) global financial system for creating asset bubbles and for failing to smooth market volatility and suggested that a new system, guided by Chinese leadership, could mark an improvement.
Xi pointedly noted that the refugee crisis resulted from war and internal conflict, not from globalization, and he defended the deal that his government struck with the outgoing Obama administration on climate change.
In perhaps his sharpest criticism, another thinly-veiled reference to Trump, Xi cited a Chinese proverb: ‘people with petty shrewdness attend to trivial matters while people with great vision attend to governance of institutions.’
China’s president made clear that if the rest of the world views Trump as attending to trivial matters after assuming the presidency, there should be no doubt that Xi and his government will offer a great vision for the world’s institutions at a time when those institutions have reached crisis mode.