How China became the biggest beneficiary of free trade (Or, why Jinping said what he did at Davos)

While Donald Trump was busy tweeting against an aged civil rights activist and Narendra Modi whined about Pakistan to a disappointing bunch of bureaucrats and politicians assembled in Delhi for the second Raisina Dialogue, Xi Jinping grabbed the opportunity offered by the World Economic Forum in Davos to stake a claim for global leadership.

Two decades ago, through a lecture at Harvard University, the then Chinese President Jiang Zemin demanded a seat at the high table by providing his American audience with a lesson in 5,000 years of the Asian giant’s history. Jinping’s Davos speech – in which he spoke strongly in favour of globalisation and against protectionism – was a play for the spot at the head of that table.

The bizarreness of the talk was not lost on his audience, nor on the millions viewing the speech online. Here was the leader of the world’s largest communist party lecturing West Europeans and Americans on the virtues of free trade, urging them to stay the course in the teeth of a populist gale. Jinping affected a patrician demeanour, but there’s little doubt it masked an urgent fear. He pointed out, accurately, that nobody wins in a trade war, but elided the fact that China stood to lose the most if Trump were to follow through on his threats of restricting imports through tariffs.

I, for one, am certain Trump will act on those threats, which also happen to be his promises to the American electorate. The man who will move into the White House this week has been consistent about very few things over the past 40 years, but an issue on which he has never veered an inch is his conviction that current trade agreements do the American economy and its citizens a grave injustice.

Once he begins erecting physical and regulatory barriers at the American border, Chinese goods will seek other outlets, setting off a cascade of retaliations and counter-measures. The process will start soon after Trump’s inauguration on January 20 and I cannot fathom why the markets are sanguine about such a damaging eventuality.

Mind the gap

Over its past few editions, the World Economic Forum has begun to take the issue of inequality seriously, or at least pay consistent lip service to it. Other organisations use the occasion to produce their own critiques of the economic order.

Every year, as some of the world’s richest and most powerful individuals pack their winter coats and head to the Swiss Alps, the charity Oxfam releases a report comparing those making up the apex of the wealth mountain with people who compose the broad and thick base. The current status is shocking (Oxfam used the word “obscene”). The eight richest people in the world own more than the bottom half of the world’s population combined. Oxfam calls for restrictions on how much wealthy individuals can accumulate, as a way to curb such stark inequality. I do not believe anybody needs $10 billion and would argue against any individual’s right to own $10 billion, provided there was some evidence it would help raise the mountain’s base.

Unfortunately, Oxfam provides no road map for achieving that and, as the example of Robert Mugabe demonstrates, thoughtless expropriation from the rich can have disastrous consequences for the poor. In the absence of a plan for improving the lot of the poorest by curbing the wealth of the richest, our best hope is that more members of global elite follow the example of Bill Gates and donate large chunks of their holdings to noble causes.

The process of globalisation may have made the rich richer (or displaced one group of extremely rich people with another group of even richer ones), but has not made the poor poorer. Though the relative wealth of the richest and poorest has diverged, the absolute wealth of the poorest has increased, admittedly at a slower pace than desirable, and the relative wealth of nations has converged. By far the most important reason for that convergence is, of course, the rise of China.

Winners and losers

Branko Milanovich’s famous “elephant chart” revealed in an accessible form which groups have done best in the race set off by globalisation. His analysis suggested that the biggest losers were working and middle class citizens of affluent nations, especially the United States, and the biggest winners, apart from those at the top of the heap, were the working and middle classes of Asia, especially China.

This analysis undermines the most persistent, as also the most wrong-headed critique of globalisation, namely that it is merely an extension of imperialism, a system put in place by rich nations to benefit themselves at the expense of less powerful ones. In India, the most influential exponent of this mistaken view is Arundhati Roy. She expressed it eloquently in a speech delivered in 2002, later published as a chapter titled Come September in her collection The End of Imagination.

Speaking of “a kind of barbaric dispossession that has few parallels in world history,” Roy stated, “Across the world as the free market brazenly protects western markets and forces developing countries to lift their trade barriers, the poor are getting poorer and the rich richer”.

If there were any truth to Roy’s claim about protected and open markets, the United States would export more goods and services than it imports from nations like India. Instead, the US-India trade has afforded consistent surpluses to the poorer nation and the US has run even bigger deficits with China and Mexico. The combination of those eye-watering deficits and a stagnating middle class has turned the United States against free trade agreements, even as gigantic surpluses and a burgeoning middle class has made China their foremost proponent.

Barack Obama negotiated the Trans-Pacific Partnership, a trade deal between 12 countries – including the US, Australia, Mexico, Chile, Japan, Singapore and Vietnam, among others – as a bulwark against the rise of China. Now that the agreement is dead, nations in East and Southeast Asia will move inexorably into Beijing’s orbit. Unless, of course, a trade war triggers a meltdown in China.

Neither of these is a happy prospect, but the first scenario, entailing Chinese domination, seems the preferable option. Which says a lot about the state of the world.