India Ahead

Quad needs to outsmart an ageing China, cold war is not an option after pandemic

So, the decks have been cleared for another huddle of the Quad leaders, another attempt to rein in a muscular and assertive military and economic superpower China. At the very outset, the grouping is an admission that China is more than a handful for any other country to handle alone – including the United States.

Sample what US President Joe Biden has had to say about China immediately after his inauguration.

Biden has asserted “We need to meet the growing challenges posed by China to keep peace and defend our interests in the Indo-Pacific and globally.” And while speaking at the online Munich security conference last month, Biden said the US and its allies faced “long-term strategic competition” with China and had to “push back” against Beijing’s “economic abuses and coercion that undercut the foundations of the international economic system”.

These priorities reflect in the agenda before the Quad this time. It’s the first occasion when all the heads of state of the Quad will go into a huddle – over a virtual brainstorming session – and, unsurprisingly, economic issues top the agenda in the aftermath of the pandemic, along with the “climate crisis”. The US is already locked in a debilitating tariff war with China and may seek a broader front against China on business and trade. India too has it concerns in the aftermath of the crisis along the LAC and is widely seen to be mulling ways to cut its dependence on Chinese goods in critical sectors such as pharmaceuticals and IT.

China’s growing global economic footprint is seen as a signal of its expansionist agenda – for instance, many countries, including India, are still wary of its Belt and Road Initiative (BRI) that cuts across Pakistan Occupied Kashmir.

But despite the scramble to form multiple coalitions to take on the dragon, getting world powers to act in concert against China remains a challenge. Simply, the world has substantial business interests tied to China to confront its expansionist policies – economic and military. Biden got a sense of which way the wind is blowing just days before he was sworn in. China and the European Union inked an investment deal towards the end of December – Comprehensive Agreement on Investment – that gives both sides greater access to each other’s markets.

Now, mounting trade deficits (exports minus imports) with China has been a major grouse across the world, and such investment treaties hope to make Beijing open up its markets but that remains easier said than done as we know. Trump waded into a tariff war with China, but the US only has a growing trade deficit with China to show for its efforts (it was a hefty $26 billion in January).

Indeed, the Quad countries too have substantial business interests tied to China. China is the biggest trading partner of India, Australia, Japan, and the US. It makes it tougher to isolate Beijing and make it behave when it crosses the line.

China, as we know, has a giant, prosperous domestic market which most countries in the world want to tap into. But ironically, China, for long an export-driven market, is reducing its dependence on the world, and quietly shifting gears to become a domestic-consumption led economy. Exports as a share of GDP has dropped from 27% to 18.5% while domestic consumption has risen from 35% to 39% between 2010 and 2019.

In simple words, the prosperity that an export boom created over the past few decades in China, laid the foundation for a consumption boom of sorts in the country. And it is this flourishing Chinese domestic market that the world now wants access to. To get a sense of what we are talking about, consider this data I’ve pulled out from an International Monetary Fund (IMF) report. “Chinese exports rose on average 5.7 percent in the 1980s, 12.4 percent in the 1990s, and 20.3 percent between 2000 and 2003. By 2003, China’s export growth rate was seven times higher than the export growth rate recorded by the world as a whole,” says a March 7, 2006 report by Javier Silva-Ruete, an Alternate Executive Director of the IMF. And by all accounts, the rapid growth in exports continued for much of the past two decades. In 2001, when China joined the World Trade Organization (WTO), the country accounted for 4 per cent of the world’s exports, and by 2017, that had risen to 13 per cent.

All this prosperity has triggered a consumption boom in the country as we said earlier.

What then are the options global economic powers, including the Quad, have as they brainstorm the way forward for them? Another Cold War, reminiscent of the US-USSR frosty relations in the past, is not a solution, given China’s growing economic and military muscle – more so, given the relative decline of the US. China is projected to zip past the US to become the world’s biggest economy in 2028, five years before earlier estimates, because of the pandemic. In fact, the response of the two superpowers to Covid clearly gives an indication of which country is on the ascendance. While the US under Donald Trump was unable to tackle the crisis, China reined in the pandemic with clinical precision – perhaps the only country globally to effectively do so.

The solution then lies in even greater engagement – you heard that right – with Beijing on economic and military issues. Groupings like Quad need to push, prod China to adopt rules-based systems and processes. I believe trade pacts like the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive Agreement on Investment are an opportunity to do precisely that, more so in the context of the failure of the World Trade Organization in settling disputes effectively. Countries need to drive a hard bargain at the negotiating table to work out fair and equitable trading systems, and then make China play by the rules with punitive measures in place. True, China wants to cut its dependence on exports but will still be loath to let go of its pre-eminence in global trade to shield its domestic industry.

Meanwhile, India also needs to keep in mind another fundamental reality. China is ageing, and ageing fast, and that may slow down its march economically over the next couple of decades. It’ll be an opportunity for India to play catch-up, and narrow the gap with its superpower neighbour. India will have no such problems in the immediate future though it’s also ageing faster than previously thought.

In fact, according to the WHO: “China is ageing much faster than other low- and middle-income countries. The proportion of the population aged 60 years and over will increase from 12.4% in 2010 to 28% in 2040. Women outlive men, and populations in rural areas have higher proportions of older people.” It’ll clearly force China to expand its social-security net for the growing elderly population, stretching its economy.

Quad leaders then need to put on their thinking caps and figure out ways to outsmart China, keeping the big picture in mind. There’s a need for a long term strategy to counter Beijing but a protracted cold war is not the solution for the world – more so, in the aftermath of the pandemic that has roiled the global economy but may have left China at the top of the heap.