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2016-March-6

China's New Position in Global Economic Governance

 

By JOHN ROSS

AT the beginning of 2016 changes in the structure of the IMF, which had been originally agreed in December 2010 under the impact of the international financial crisis, at last came into effect. They gave China the third largest place among IMF quotas and meant that the BRIC economies (Brazil, China, India, and Russia) became among the 10 largest members of the IMF – joining the U.S., Japan, Germany, France, the U.K. and Italy. More than six percent of quota shares were shifted to developing economies.

The reason for the prolonged five-year delay in implementing these necessary changes, reflecting the growing economic weight of developing countries, was that until the end of 2015 the U.S. Congress refused to pass legislation on implementing agreements already negotiated by the U.S. government.

It is clear what persuaded Congress to change its position. It was China’s success in setting up the Asian Infrastructure Investment Bank (AIIB) and the refusal of key U.S. allies, such as Britain, to go along with U.S. government calls to boycott the AIIB. This made plain that if the U.S. continued to block necessary reforms in existing international economic institutions, China had the strength to create alternatives, and that other countries would not endorse U.S. inflexibility.

The delayed change in the IMF illustrates China’s overall approach to global economic governance. China had not sought confrontation or attempted to bypass existing global institutions for no valid reason – on the contrary, China showed considerable patience when confronted with prolonged foot dragging by the U.S. legislature. Also the AIIB from the outset was open to all countries. China showed the same patience in the rather lengthy process by which the RMB was included in the IMF’s basket of currencies for Special Drawing Rights (SDRs). These cases confirm that China is pursuing a path of gradually and organically adapting multilateral economic institutions, to take account of major shifts in the world economy; it is being forced to go outside existing institutions only if evidently required changes are entirely blocked.  

In contrast the U.S. has recently initiated a new foreign policy path of going outside existing global economic organisations in a confrontational fashion – as seen clearly in international trade. When the World Trade Organization (WTO) was created in 1995 this was the culmination of seven previous rounds of post-World War II trade negotiations under the earlier General Agreement on Tariffs and Trade (GATT). For half a century the U.S. had played a leading role in negotiating such multilateral agreements.

With the emergence of China as the world’s largest goods trading organization, second only to the U.S. in total trade, the most important multilateral negotiations to further liberalize world trade should clearly involve the U.S., China and the EU – the three main world trade centers. But instead of pursuing multilateral liberalization, centering on the WTO, the U.S. instead sought negotiations excluding China – seeking to arrive at agreements with certain Pacific countries via the Trans-Pacific Partnership (TPP) and with Europe in the Trans-Atlantic Trade and Investment Partnership (TTIP). Therefore, whereas China pursued a strategy of maintaining and developing the framework of exiting multilateral organizations, except in the case where change in these was entirely blocked, the U.S. deliberately initiated a process going outside them.

The contrast is clearer still if the content of the proposed TPP is examined.  Instead of being based on the most dynamic sectors of the world economy, which would include China, the TPP is an agreement between a group of economies declining in global economic weight – in 1985 economies in the proposed TPP accounted for 54 percent of world GDP, while by 2014 this had dropped to 36 percent.

The TPP’s main mechanisms are aimed at protecting the position of the U.S. and its companies. Under the TPP, private companies, principally U.S. ones, would have the right to sue participating governments in courts dominated by the U.S., but whose decisions are binding on national governments.

In contrast to the narrow TPP, China has advocated a wider multilateral Asia-Pacific Free Trade Agreement. Therefore in trade, as with the IMF reform, China has been pursuing a multilateral approach. The U.S., meanwhile has turned from earlier post-World War II support for multilateral agreements and organizations to unilaterally pursuing specifically U.S. interests. As most other countries benefit greatly from a multilateral approach, wherein they also have a role to play in negotiations, why is there now this contrast in approach between China and the U.S., and will it continue?

The U.S. turn is clearly in line with that advocated in “Revising U.S. Grand Strategy Toward China,” a policy paper published by the prestigious U.S. Council on Foreign Relations. It argued bluntly that the U.S. should create “new trade arrangements in Asia that exclude China.” Also the U.S. should seek to “create new preferential trading arrangements among U.S. friends and allies to increase their mutual gains through instruments that consciously exclude China.”

The reason for this shift is clear. Contrary to the myth the U.S. promotes that it is a uniquely “dynamic” economy, the reality is the U.S. economy has been slowing and its weight in the global economy declining. From 1984 to 2014 the U.S. share of world GDP fell from 34 percent to 23 percent at current exchange rates. Taking a 20-year moving average, to eliminate the effects of short-term business cycle fluctuations, average U.S. GDP growth fell from 4.4 percent in the late 1960s to 2.4 percent by 2015.

Therefore, as Philip Stephens of the Financial Times summarized U.S. goals: “China has been the big winner from the open global economy.” Consequently the U.S. “has given up on the grand multilateralism that defined the postwar era.”

In summary, these economic trends explain and will strengthen the recent pattern whereby China has become the main pillar of adapting and extending existing global multilateral economic governance institutions while the U.S. makes a turn towards adopting a unilateral approach.