Go to Original
By EDWARD LUCE
In January 2017 the global economy changed guard. The venue was Davos, the annual gathering of the world’s wealthiest recyclers of conventional wisdom—and consistently one of the last places to anticipate what is going to happen next. This time was different. The assembled hedge-fund tycoons, Silicon Valley data executives, management gurus, and government officials were treated to a preview of how rapidly the world is about to change. Xi Jinping, the president of China, had come to the Swiss Alpine resort to defend the global trade system against the attacks of the U.S. president-elect, Donald Trump. With minimal fanfare, the leader of the world’s largest developing economy took over the role of defending the global trading system in the teeth of protectionist war cries from the world’s most developed nation. It portended a new era in which China would apparently play the role of the responsible global citizen. The bad guys were swapping places with the good. “Some people blame economic globalization for the chaos in our world,” Xi told Davos. “We should not retreat into the harbor whenever we encounter a storm or we will never reach the other shore. … No one will emerge as a winner from a trade war.”
After more than 70 years of U.S.-led globalization, Xi’s declaration of global stewardship in the spiritual home of capitalism was an Alice in Wonderland moment. A few days later President Trump gave his by now notorious “American carnage” inaugural address. Much has changed since then. For the time being at least, Trump has dialed back his more outlandish protectionist rhetoric. A U.S.-China trade war looks less likely than it did in January. But things can change fast in Trumpland. In the space of half a day this week, Trump was reported to be considering scrapping NAFTA but then seemed to change his mind after talking to his Canadian and Mexican counterparts. Earlier in the week he slapped steep tariffs on Canadian softwood lumber imports. Even if Trump’s protectionism ceasefire with Xi sticks, that switch in roles—the changing of the global economy’s sentinel from the U.S. to China—is taking place nonetheless.
It has long been anticipated. Set aside the most recent forecasts. As far back as 1902, when China’s imperial ruins had long since been picked over by the European powers and the United States, the British historian John Hobson anticipated the day when a resurgent China would turn the tables. Hobson’s prescience is worth savoring: “China, passing more quickly than other ‘lower races’ through the period of dependence on Western science and Western capital, and quickly assimilating what they have to give, may re-establish her own economic independence, finding out of her own resources the capital and organizing skill required for the machine industries and … may quickly launch herself upon the world-market as the biggest and most effective competitor, taking to herself first the trade of Asia and the Pacific, and then swamping the free markets of the West, and driving the closed markets of the West to an ever more rigorous Protection.”
Though something of a Nostradamus, not even Hobson envisaged the speed with which China would pull this off. From barely a statistical rounding error in 1978, with less than 1 percent of global trade, China rose to become in 2013 the world’s leading trading nation with almost a quarter of its annual flows. As recently as the turn of the 21st century, the U.S. accounted for almost three times as much global trade as China. Nothing on this scale or speed has been witnessed before in history. In 1750, China and India accounted for almost three quarters of global manufacturing production, according to economic historians. By 1914 their share had shrunk to 7.5 percent. We are now in an age of convergence as the rest catches up with the West. There is still a long way to go.
The return of China, and the 15 other fast-growing non-Western economies, including Indonesia, Thailand, and India, which together account for half the world’s population, is dramatically reconfiguring the global power structure.
Within my lifetime, the emerging middle class has gone from virtually nowhere to supplant the established Western middle class as the engine of global growth.
Since 1970, Asia’s per capita incomes have increased fivefold. Even in Africa, the world’s worst performing continent, incomes have almost doubled. The West’s median income, meanwhile, has barely shifted in the last half-century. In some parts of Asia, such as Singapore and South Korea, incomes have either overtaken or are level with those in the West. In others, notably India, they still languish at less than a 10th of the Western average. But the direction is clear. If you chart a global economic map, the center of gravity in the 20th century could be found somewhere in the mid-Atlantic, according to the Singaporean economist Danny Quah. That point has now shifted eastwards to Iran. Over the coming decades it will settle at a point somewhere between China and India, in the Himalayas. From the middle of the Atlantic to the roof of the world in 50 years—our generation is present at the re-creation.
China has profited beyond its wildest hopes from the club it joined, and now offers to cheerlead. Whether the global trading system remains open will depend on the actions of the West’s increasingly reactive democracies. Xi Jinping and his peers can bank on the support of their largest foreign investors, the multinational companies that have located large chunks of their production supply chains in China and other parts of the Asia Pacific. In today’s world, most cross-border trade is intra-company movement of unfinished goods. Apple’s iPhone is produced in nine different countries. Since the goal is to capture Western technology, it makes no sense for developing countries to slap tariffs on imports, which are as likely to be intermediate goods moving from one part of the supply chain to the next. It differs greatly from the old factory model in which all a product’s components were made in one location. Since China has the world’s largest labor force, and its most rapidly growing consumer base, Xi’s best allies are the global chief executives who came to hear him in Davos.
Their wagons are tightly hitched. The rise of China has coincided with the golden age of the global corporation. Both are also threatened by the stagnation of the West’s middle classes. From Procter & Gamble to Unilever, Western consumer goods companies are increasingly tailoring their output to where the money is—among the West’s upper income groups and the emerging world middle classes. The median Western consumer is no longer driving their bottom line. That is why corporate investment rates in the U.S. are so low even as corporate profitability is remains at near record highs. The Western middle class consumer is no longer a cash cow. Buying back your company’s shares offers an easier return than investing in research and development.
In China’s case, the West’s populist disaffection threatens the goose that lays its golden eggs. Although Trump has tamped down his protectionist rhetoric since January, China is aware that he achieved victory partly by targeting China for stealing American jobs. In reality, most of the downward pressure on Western incomes has come from the effects of technology. China, itself, is now confronting the same unstoppable forces. Its manufacturing employment is shrinking even as its value-added production rises. But China serves as a more tangible scapegoat for frustrated Western voters than the abstractions of automated software.
Like the Western elites, China dreads the wrath of an alienated Western middle class. Yet for all its brainpower, the Davos crowd is perhaps the least equipped on earth to know what to do about it. Every January, the Davos gathering sounds a little more bemused about what is happening in the world outside. In 2016 it worried about the threat of mass disease, just as the Ebola epidemic was receding.
In 2015, its annual report dwelt on the return of geopolitics following Russia’s annexation of Crimea the year before. In its first report in 2006 it was anxious about epidemics and the risk of terrorism after the Asian flu crisis and the London Underground terror attacks. And so on. Davos specializes in projecting the future from a recent past that took it by surprise. We are all guilty of this. But Davos has made a brand of its blow-dried conventional wisdom. George Orwell said that “the great enemy of clear language is insincerity.” By that measure the global elites have something to hide—although I believe they are concealing it mainly from themselves. The more our elites call for “thought leadership” and “disruptive thinking,” the less they seem to mean it. Buzz terms, such as resiliency, global governance, multi-stakeholder collaboration, and digital public square, are the answer to every problem, regardless of its nature. Too many wars happening? We need more collaboration. High risk of another global pandemic? More stakeholder participation. Populist revolts convulsing the Western world? We must rebuild trust in global governance.
