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Where China is headed and what it means for India

Globally, the most significant geopolitical event of 2022 was the Russian invasion of Ukraine. But the Ukraine war is not simply a geopolitical clash; it also dealt a massive blow to globalisation. As the energy and grain markets were disrupted, an old contradiction, first noted by John Maynard Keynes, returned. In 1914, the world economy was more integrated than ever before, but a World War erupted, severely undermining the decades-long international economic integration. Economic globalisation and major wars, Keynes suggested, simply could not go together. In our times, too, so long as wars were confined to Iraq and Afghanistan, globalisation proceeded apace. But as Russia brought war next to the heart of Europe, the logic of security triumphed over the logic of economics. That, by creating interdependence, trade generates peace is a theory once again in ruins.

Speaking potentially to the same theme, the second most important development of 2022 was the re-coronation of Xi Jinping for a third term as President of the People’s Republic of China. The appointment broke two interconnected norms of post-Mao China: Collective responsibility (replacing the idea of concentration of power in a single leader as during the Maoist era), and term limits for the party’s and nation’s head. For Xi, no one is ruling out a further, even life-long, extension in power.

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This is important for two reasons. Unlike Russia, the 11th largest economy of the world in December 2021, whose international economic role is primarily confined to energy markets, China is the second largest economy and market of the world, the largest foreign trader and one of the biggest receivers of foreign investment. Should a clash between security and economics arise, China’s capacity to throw the international economy into disarray will go far beyond natural gas, oil and food grain.

Second, Xi’s, indeed China’s, Taiwan argument roughly echoes Putin’s claim about Ukraine — namely, Taiwan has no reason to maintain a separate independent existence, for Taiwan was historically an integral part of China. Were China to do to Taiwan what Russia has done to Ukraine, the implications for the global system would be incalculably greater. Apart from the purely strategic issues, such as whether the US or Japan would get involved in the defence of Taiwan, some serious economic consequences will be at stake.

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Unlike Ukraine, Taiwan is a first-world economy. In December 2021, Ukraine’s per capita income was a little less than $5,000, Taiwan’s was over $35,000. Ukraine’s GDP was about $200 billion, Taiwan’s over $820 billion, which included cutting-edge industries such as semiconductors. Add to this a Russia-China comparison, too. As against Russia’s GDP at $1.5 trillion, China’s GDP in December 2021 was $17.7 trillion, just a bit less than a fifth of the entire world’s GDP, estimated at $96.5 trillion by the World Bank. If in Xi’s calculations, China’s security or power imperatives required an invasion of Taiwan, the economic implications would be astronomical.

Understanding which way China is headed under Xi thus becomes not only a domestic Chinese question but a significant global question. More precisely, is Xi prioritising economics over security, as was the case in China for over three decades after Mao, or is it the other way round?

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More and more China specialists now believe it is the latter. In the latest issue of International Security (Fall 2022), three China scholars — Margaret Pearson (Maryland), Meg Rithmire (Harvard Business School) and Kellee Tsai (Hong Kong) — have taken the issue head-on. The fact that a leading journal in the field of security has published an article on China’s economic model should indicate how, under Xi, security and economics are getting intermingled.

Pearson, Rithmire and Tsai argue that Xi’s economic system is best described as “party state capitalism”, to be distinguished from “state capitalism”. The latter basically means that even in an economy increasingly reliant on markets, the private sector cannot challenge the dominance of state-owned enterprises (SOEs). In 1999, Yasheng Huang (MIT) had argued that the political prioritisation of firms in China was becoming manifestly clear. The SOEs were on top, the foreign invested enterprises (FIEs) were next in importance, and private local firms — what he called “ethnic Chinese enterprises” (ECEs) — were at the bottom of the governmental hierarchy.

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The concept of “party state capitalism” adds something novel to this account. It depicts (i) the establishment of Communist party’s authority over firms in a very different way, especially via creation of party cells in firms and appointment of Communist party members on corporate boards; and (2) enforcement of political loyalty among private sector executives, including by punishment of those who seek business autonomy. According to Pearson, Rithmire and Tsai, 1.88 million nonstate firms — 73 per cent of all — had established party cells by 2018. Xi’s model thus blurs the boundary between the Chinese state and firms. It “obfuscates where the party-state ends and firms begin”.

From an external perspective, this sort of boundary erasure is not a critical problem if it remains confined to small companies. But it becomes a huge security concern, especially for the US, as also Japan, if the party-state penetrates high-tech: 5-G telecom, semi-conductors, robotics, aerospace and maritime engineering. Economics and security are not interconnected if party cells are created in textiles and footwear, but they are hard to disentangle if high-tech private firms become intertwined with the state.

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This was clearly the rationale underlying Biden’s chip ban on China two months back, supported by both political parties. The ban covers not only the sale of cutting-edge chips, but also the advanced equipment required to make them, as well as the passing of strategic knowledge by any US citizen or resident. These chips have become critical to the evolution of “technologies of the future” in virtually all sectors ranging from pharmaceuticals, artificial intelligence to defence and weapons. Essentially, China will have to produce these chips on its own, which can substantially delay its further industrial advance, unless US allies can step in to fill the void, which is highly unlikely but not impossible.

As India debates the latest border clashes with China, Delhi should keep in mind that China has moved to a security over economics mode, making a Chinese compromise less likely. But whether Taiwan, China’s prime security focus, makes China-India border problems more or less manageable remains wholly unclear. It could go either way.

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The writer is Sol Goldman professor of international studies and the social sciences at Brown University

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