At the World Economic Forum in Davos last month, President Xi Jinping used the opportunity to sing the praises of globalization, “we must remain committed to developing global free trade and investment through opening-up, and say no to protectionism.”

 

Meanwhile, US President Donald Trump has talked-up protectionism, often on twitter. This has led some commentators to mislabel China as the new “leader of the free trade world” and “leader of globalization,” whilst others worry about a potential trade war.

 

In the face of Trump’s America-first rhetoric, seeing China’s embrace of globalization as a response to US protectionism is a tempting narrative. As Trump pivots towards protectionism, China embraces globalization; as Trump denies climate change, China defends the Paris climate agreement. One could see China’s global advance as a typically Taiji response to America’s retreat: America closes, China opens; yin and yang. However, the picture is more complicated than that. Yes, China is taking advantage of US protectionism, but the globalization and free trade rhetoric are a result of hyperbole. China’s true strategy involves heavy outflows of foreign direct investment (FDI), not free trade.

 

As one of his first protectionist measures in office, Trump withdrew from the Trans-Pacific Partnership (TPP). It was a broad trade agreement aiming to bring about a reduction in barriers to trade, setting rules for intellectual property rights, business competition policies, and rules relating to state owned enterprises and labour policies. All 12 nations needed to ratify it for it to come into effect. The agreement included Japan (who had already ratified the deal), Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile, and Peru.  

 

Trump hated the TPP. On the campaign trail at an evening rally in St. Clairsville, Ohio, in the summer last year, Trump claimed that the TPP was “a rape of our country. It’s a harsh word, but that’s what it is – rape of our country”, believing it would have hurt American workers and undercut US companies with cheap labour costs in Asia.

 

According to Moody’s Investors Service, “the failure to implement the deal (TPP) represents a lost opportunity for exporters aiming to gain greater access to major markets. With this lost opportunity, prospects for significant large gains in incomes, for instance in Vietnam or Malaysia over the medium term – on the back of higher trade – will be reassessed”.

 

In the wake of the US withdrawal, some see a potential replacement for the TPP in a trade deal called the Regional Comprehensive Economic Partnership (RCEP), which would allow China to step into the power vacuum left behind by the US. The RCEP looked at removing barriers to trade among Pacific-region countries, but included China, and excluded the US.

 

The RCEP agreement is significantly less ambitious than the TPP, lacking the potential to stimulate structural change, and including countries with which China already has FTAs, such as Asean members and South Korea. According to Moody’s, “(RCEP) is unlikely to provide as big an economic benefit as the TPP, where member countries accounted for 40% of global GDP”. Despite recent cajoling by Australia, China is so far uninterested in becoming a signatory to the TPP.

 

Some commentators have been tempted to get caught up in Xi’s rhetoric and the significance of the TPP withdrawal. One commentator declared, “communist China is now the leader of the free trade world”. Other commentators have talked of China as the new leader of globalization. As America steps back from its role as global leader, does China set-sail into an open laissez-faire sea of free trade, with Xi at the helm? A little reality is needed.

 

There has been some move towards free trade in China. On top of the liberalization of the four existing free trade zones: Shanghai, Guangdong, Tianjin, and Fujian, seven new free trade zones have been approved by the National Development and Reform Commission. However, in other respects, China’s economy is less free.

 

Movement of capital is restricted, both in and out of China. Under the Chinese Foreign Investment Catalogue, several industries have heavy restrictions limiting foreign ownership, such as banking, telecommunications, and cultural industries, restricting FDI inflows into China.

 

“The growing imbalance in two-way FDI flows, persisting asymmetries in market access, and growing Chinese acquisitions of advanced technology and infrastructure assets (in foreign countries) have spurred heated debates in Germany and other nations about related risks,” says the Mercator Institute for China Studies (MERICS), as China is seen as non-reciprocal to foreign investment. Recently, Germany blocked a Chinese takeover of Aixtron, a technology company in the semiconductor industry, despite the deal already being voted through by shareholders.

 

At the same time, despite efforts to internationalize the renminbi, China has also recently introduced measures which have curbed the outflow of renminbi, with limits on the amount of yuan individuals can move out of the country.

 

Further, freedom of movement of people and workers still lags behind in China, both for Chinese citizens and for foreign talent. The Chinese government operates a ‘hukou’ system of household registration, which restricts where citizens can live, in an attempt to stop the flow of people from the countryside to the city. Foreign tourists also generally require visas, whereas elsewhere in Asia the need for tourist visas is frequently waived, making it easier for foreigners to visit and look for work or set up a business. Foreign-born nationals gaining Chinese citizenship is also rare.

 

Add to this the slow speed and restrictions on the internet, with Google, YouTube, and Facebook being blocked, hampering foreign e-giant competition, frustrating foreign businessmen trying to check their e-mail or messages on business trips, and restricting the flow of ideas into China.

 

China is well positioned to take advantage of American protectionism. China has been making heavy foreign investments in infrastructure programmes, mainly through its Belt and Road Initiative, but also through other initiatives, such as the China-Pakistan Economic Corridor (CPEC). A report by MERICS estimated that Chinese outward FDI came near to US$200 billion in 2016, a 40% increase compared to 2015. Chinese officials have said the total investment in belt-road countries will be over US$4 trillion, although they do not specify a timeline.

 

The initiative has covered gas pipelines in Turkey, ports in Greece, highspeed railway in Hungary, airports in Germany, and energy projects in Pakistan, driven in part by China’s recently established Asian Infrastructure Investment Bank (AIIB), which is now looking to expand its membership of 57 by another 25 members. China’s spending spree does, however, come at the cost of a rising debt-to-GDP ratio. Both Fitch Ratings and Moody’s forecast China to prioritize growth over debt reduction in 2017.

 

China is more outward looking, but not as open as Xi’s rhetoric would want us to think. China’s Belt and Road strategy of foreign investment has much more to do with China’s long term investment interests, rather than an earnest wish for free trade.

 

The protectionist bent of Trumponomics brings into question potential trade conflicts between China and the US. Alarms were first raised when Trump accepted a congratulatory phone-call from Taiwanese President Tsai Ing-Wen, and brought into question the One-China policy. After Trump’s sabre rattling, Xi continued to position China as an outward looking power, saying in Davos, “no one will emerge as a winner in a trade war”.

 

In the face of Trump’s threats, China still has its own retaliatory actions. China imported US$116.2 billion worth of goods from the US in 2015, which makes China the US’s largest importer, followed by Canada and Mexico. In addition, China is the second largest US treasury holder, behind Japan. According to Jing Li-Ulrich, managing director and vice chairman of Asia Pacific at J.P. Morgan, as a retaliation, China has the option to liquidate some of its US Treasury holdings, which would lift interest rates in the US. The increase would be unbearable for the US economy.  To a lesser extent, China could become far less interested in buying US treasury debt.

 

Fitch ratings has recently stated that US protectionism is a credible downside risk for Asia, even beyond the collapse of the TPP, as retaliatory Chinese counter measures would likely have adverse spillovers for APAC economies, particularly those that are closely connected to regional supply chains and that are most dependent on exports.

 

US protectionism, though, is not yet explicitly factored into credit ratings, as senior director Stephen Schwartz explains in a statement made to The Asset, “we see the risk of US protectionism as a downside risk to the APAC growth outlook, but it has not been incorporated into our baseline nor ratings at this stage”.

 

Although, predictions of a trade-war are far from doom-mongering, Fitch Ratings predict a more tempered outcome: “a sharp increase in protectionism would be resisted by US corporate lobbyists and mainstream Republican legislators. We think it more likely that the new administration will pursue incremental measures, such as bringing more trade cases. If more aggressive tariff policies were pursued, Fitch would expect China to take counter measures including, but not necessarily limited to, tariffs on US imports.”