CKGSB website

CKGSB Knowledge

A Counter Narrative

by Mable-Ann Chang

October 11, 2021

Kevin Rudd served as Australia’s 26th Prime Minister from 2007 to 2010, then as Foreign Minister from 2010 to 2012. In 2014, he was named Senior Fellow at the John F. Kennedy School of Government at Harvard University, where he led research on the future of China-United States relations. He is also Chair of the Independent Commission on Multilateralism, Chair of Sanitation and Water for All, and Chairman of the Board at the International Peace Institute. In January 2021, he was appointed the 8th President and CEO of the Asia Society.

While the world’s geopolitical environment is never stable, the volatility we see today is unprecedented and is having a greater impact on a wide range of issues including business and trade. Kevin Rudd has witnessed the geopolitical play firsthand, first as Australia’s 26th Prime Minister from 2007 to 2010 and then as Foreign Minister from 2010 to 2012. He has since remained active in a wide range of international issues including global economic management, the rise of China, climate change and sustainable development.

In this interview, Rudd looks at a whole host of issues including rising protectionism, the risks facing China’s economy and the future of the Australia-China relationship.

 

Q. The theme of decoupling has been prominent in recent years with regard to China and the United States, and some other countries. To what extent would you say the word is appropriate?
A. The term decoupling fits neatly in the land of journalism, but the reality is infinitely more complex. Describing the US-China relationship as, for example, a new Cold War is fraught with complexity and inaccuracy because it doesn’t capture the depth of continuing engagement. When you deconstruct decoupling, several parts of it come to mind. One is whether we are talking about trade, finance, investment, capital markets, technology, talent markets, or people-to-people decoupling more broadly. The more you look at that, the more you have to conclude that this is a highly differentiated beast where the generic term of decoupling doesn’t easily apply.

But we are going to see some continued constraints in the area of trade, and a lot of constraints in terms of foreign direct investment (FDI) in both directions. The capital markets is the huge unknown quantity, because the degree of enmeshment is large, and the process of de-enmeshment is complex but not impossible. In the technology market, of course, constraints and decoupling are going to be larger, but by no means complete. People-to-people interactions will return to a greater level of normality post COVID-19, once vaccine passports and visa protocols are in order.

Decoupling is not just the sound of one hand clapping, it’s the sound of both hands clapping. Most Americans looking at this question have failed to understand that the Chinese themselves, led by Xi Jinping, have embarked upon their own version [of decoupling], or, shall we say, separation from the US and some of its closest economic allies.

Q. What do you see as the future trajectory in terms of what is at least a clarification of boundaries?
A. The organizing principles both in the US and China strike me as being more along the lines of national self-reliance and degrees of mercantilism rather than decoupling and Cold War. And if [the pendulum moves] away from interdependency and towards national self-reliance, I would anticipate that we are in the beginning stages of that pendulum effect, that the pendulum still has some way to swing in the direction of nationalism, national self-reliance and various forms for mercantilism/protectionism.

It is difficult to foretell what would cause the pendulum to reach its natural extension in that direction, but the bottom line is that there is an economic cost to be paid, and the growth dividend delivered through the globalization revolution of the last quarter of a century, which has been phenomenal, will begin to become impaired. There is no such thing as a free lunch. If you are going to be sub-optimal in allocated efficiency terms by injecting a whole raft of national security, national self-reliance as well as mercantilist/protectionist factors into the economic equation, then you will begin to see retarded growth rates. That then translates into slower increases in living standards and for certain countries not fully escaping from the Middle-Income Trap.

Q. China’s economy has grown at a phenomenal rate over the past 40 years, underpinned by a certain balance of state-owned enterprises, private enterprises and foreign enterprises. What do you see as the current trend in that balance?
A. If you deconstruct the language used to describe Xi Jinping’s Dual Circulation economy model, it seems to be along the lines of: We in China will become, in terms of our future growth, much more dependent on domestic drivers, primarily through private consumption, but also in terms of private fixed-capital investment. The externally-derived growth for the trade sector in the economy will progressively hold declining significance for China’s overall growth numbers. The question is whether that model then translates into high-level sustainable growth in the future or whether we’ll see an arresting of growth levels compared to where they’ve been in the past. One of the big open questions in the Chinese economy is the extent to which the private sector will still play a role in terms of growth, tax generation, employment generation and innovation generation.

One of the unknown variables here is the extent to which the more restricted regulatory space in which China’s entrepreneurial elites now find themselves will begin to flow through to private fixed-capital investment decisions by large Chinese corporations. Will that have a material effect on growth, given the overall significance of the private sector within China’s overall gross numbers?

The counter narrative in China is that we don’t need to worry too much about what’s happening with the billionaire class, because we have tens of thousands of Chinese millionaires on the make, none of whom represent a real threat in terms of a tech-oligopoly or tech-monopoly. Therefore, innovation unleashed on a much broader scale across the breadth of the economy will more than offset any loss to net economic performance. To me this is an open-analytical question and I cannot answer it, but I think we need to pose it.

The second potential constraint on China’s growth will be the extent to which China has to adopt a range of corrective measures to deal with its continuing high debt levels. The central monetary authorities will have to implement corrective measures to keep debt from ballooning further, but when there is a threat to growth, the Chinese economic system’s response is always to loosen credit lines through local governments to local firms. That is likely to continue, but with one caveat: The Chinese financial system is deeply alert and toxic towards the possibility of a domestically-induced financial crisis. We could say that the regulators would never allow that to happen, but I do know that it is a concern for Chinese macro-economic managers.

SOEs as of a year ago represented around 40% of China’s GDP, which is significant. From the early 1990s, we’ve seen SOE-related reforms, and most recently, the reconcentration of nationally-significant SOEs and provincially-significant SOEs. But we know that the rolling reform drive to bring down the number of SOEs and to make the remaining ones operate in more contestable economic environments to enhance their efficiency has now lost momentum, particularly post 2015. The problem is that political and regulatory restraints are being imposed around the major private tech companies to prevent monopolies, but there is still a willingness to tolerate monopolies in the SOE sector. Both of those actions are going to be a further drag on the economy’s growth.

If you put all that together, China’s performance in terms of growth vis-à-vis net exports will continue to be robust. China’s public investments in infrastructure, either national or local, will continue to be significant. Consumption is still likely to be healthy. But private fixed-capital investments for me is the big question mark.

Q. What do you see as the role now and in the future for foreign companies and foreign investment in how the Chinese economy operates?
A. Here you have a large debate unfolding within the Chinese system. According to China’s medium-term needs, particularly in the financial services sector, it will be deemed to be not just welcome, but necessary over time. One purpose is to increase the efficiency of credit and capital allocation within the Chinese banking system, which is still heavily administratively-driven. Given the scale of the Chinese financial markets and economy, and given the intelligence level of Chinese financial regulators, I think there will be continued opening as far as the finance sector is concerned to international direct participation. However, if large global financial institutions think that the door is simply going to be swung wide open for participation at scale across all the subsets of the Chinese finance industry, my judgement is that it’s going to be much more gradual than that. There will be further opening, and yes, we can explain it in terms of the need for greater efficiency in Chinese domestic financial markets, but not at a scale which would cause the hawkish elements of the Chinese system nationally to conclude that we would in any way become vulnerable to external manipulation.

Q. What is your view on reciprocity and the extent to which the concept can actually be used to create a change to the situation?
A. Chinese political leaders and financial regulators fully understand, intuitively, rationally and experientially, the whole argument surrounding reciprocity. Secondly, there have been series of rhetorical positions from China over the last 20 years, usually around its developing country status, that have been used in the period since WTO accession to justify a range of non-reciprocal arrangements. Thirdly, whether we think it is valid or not, the reality is that it’s now the mainstream consensus in international financial communities and international economic communities with regard to China. It is not just a product of Trumpian popularization of the reciprocity argument in the US. You don’t have to travel far in Europe to find the same argument applying, whether it’s in FDI, trade or on financial market access. The Chinese political and regulatory class must be prepared, as I believe they increasingly are, to deal with the reality of the reciprocal access argument across the board. The flip side is that as far as full access is not provided, full access will not be provided reciprocally within various markets around the world.

The Chinese counter case will be that ‘We’re big and we can dictate terms.’ But with that view, you will find increasingly the OECD economies mounting a common cause against China across the board, demanding reciprocal access in each of the domains I just referred to.

Q. What would you like to see as a way of organizing trade agreements or trade organizations as a mechanism in resolving some of these issues?
A. The WTO will only work to the extent that the member states allow it to. With the demise of the Trump administration and Biden on a search-and-rescue mission for the WTO at the moment, there are some prospects, possibly even supported by China, that a reconstitution of its dispute mechanism is possible. The more important point, beyond dispute mechanism resolutions, is the overall momentum tide around free trade versus protectionism globally and the extent to which that can be navigated in a positive way for the future.

Right now, we have the US in a mega protectionist mode, but that will come at a cost for the US economy, which the current administration is in the process of working out. But secondly, if the US remains neuralgic about re-embracing free trade agreements in the Indo-Pacific region, either in the form of RCEP, TTP or about the Quad turning into something which actually has an economic trade dimension which was real as opposed to rhetorical—if the Americans don’t do that, China is now robust in terms of its global trade volumes, global trade growth, global trade presence and most acutely global trade significance to all the major economies in the world. This will be the single domain in which Xi Jinping can outflank the Americans altogether. RCEP is simply the entrée and the main course will be Chinese accession to the TPP if the Americans are still undecided about whether they like it or not. Beyond that, a digital TPP or digital free trade agreement across the RCEPs and more broadly which would be radically to the advantage of the Chinese, should not be ruled out.

This is the major battlefield of the future and it will be determined by whether the Americans can lift themselves out of their own self-determined political trenches on this question to re-embrace free trade as they once did. If that doesn’t happen, then watch this space in terms of China moving forward and filling these vacuums.

Q. The relationship between China and Australia has moved into difficult waters in recent years. To what extent do you see this as being an anomalous situation or reflective of changes in China’s overall relationship with other countries?
A. It has been politically to the advantage of certain politicians in Australia to beat their chests as being “tough on China,” sometimes in excess of the objective material differences of policy between Beijing and Canberra on any relevant set of security, environment and economic policy questions. It is the rhetorical turbo-charging of what would ordinarily be a complex set of operational policy questions which has further shifted the Australia-China relationship in a negative direction. So what should the Australian government do about the China relationship? My advice is: Talk less, do more.

Australia is a consolidated liberal democracy, an ally of the United States, and outward looking in the Indo-Pacific region. These facts are fundamental to the character and worldview of Australians. They don’t want to be pushed around by anybody. There is a problem if the calculation in Beijing has been that Australia is a piece on a chessboard capable of manipulation simply by the application of maximum pressure. So, if we want to restabilize the Australia-China relationship, it would be useful for both sides to actually push the pause button in terms of public rhetoric. We should regroup around particular policy issues, interests and values where there actually is a material difference, and then prioritize those and work through them one by one. The problem with rhetorical fusillades in both directions is it just turbo-charges existing difficulties.

Interview by Mable-Ann Chang

You may also like

An Uncommon Theory for Common Prosperity

The author of In Line Behind a Billion People: How Scarcity Will Define China’s Ascent reflects on the scenarios put forward.

by Damien Ma | Sep. 7 2022

New Technology, New Choices

The adoption of AI technologies into society will disproportionately affect different sectors and raise ethical questions that need to be addressed.

by Liu Zhiyi | Aug. 5 2022

Diversified Thinking

Given the unique challenges presented by the China market to foreign businesses, the importance of strategic thinking cannot be understated.

by Edward Tse | Aug. 5 2022

Globalization in a Divided Yet Connected World

Globalization in its current form appears to be ending. As we enter its next stage, it’s important to keep some key.

by Zhou Li | Aug. 2 2022