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Yet all those who would celebrate China’s daunting challenges should consider the emerging risks that come with them — and be careful what they wish for.
A deep crisis in China, should it come, would pose a choice for two leading powers: Can China pivot from the path that has delivered it here? And can the United States remain confident in the things that make it so much more resilient?
China’s economy, of course, is deeply intertwined with the world economy. It is the top trading partner to more than 120 countries and the largest driver of global gross domestic product growth. It is the economic engine of the Asia-Pacific region, which is forecast to contribute 67 percent to the world’s GDP expansion.
It’s too soon to bet against its economy, but if China were to fall into a prolonged economic crisis, the effect on global markets would ripple around the world, economically and geopolitically. Instantaneous repercussions could be felt in worldwide capital markets. Recall that in 2015, a crash in China’s stock market sent all U.S. and international stock indexes into correction territory. On trade, the world could see a flood of cheap Chinese exports, while global exports to China could dry up.
Broadly, China’s failure could seriously impair global growth and prosperity. And remember: China would not have the ability or willingness to help mitigate a global financial crisis as it did in 2008.
The United States is far from immune. Although trade with China accounts for only around 2 percent of the U.S. economy, the effect of a slowing Chinese economy on so many other countries would inevitably impact the United States and its geopolitical relationships. Furthermore, the United States still relies on China for some key imports and supply chain linkages — despite having taken measures to protect certain sectors for national security reasons — and China remains a major investor in U.S. treasuries and other debt obligations.
Given the range of potential harms worldwide, it would be wrong to describe a crisis in the Chinese economy as an opportunity. But it certainly poses a test of two wildly different economic and political systems. The decisions that Chinese and U.S. leaders make in the months ahead could have enormous implications — for the global economy, global security, business and the future of the U.S.-China competition.
First, China, which faces a test of its ability to adapt. Whether we are witnessing a short-term blip or the beginning of the country’s long-term stagnation will ultimately depend on choices Beijing’s leadership makes.
Under President Xi Jinping, China has doubled down on the role of the Communist Party as the means to oversee the economy. With this renewed focus on ideology, it has emphasized national security and stability at the expense of economic expansion. This has taken a heavy toll on the entrepreneurial spirit of the Chinese people, which had been the driving force behind past decades of growth.
A severe, prolonged economic slump would force a choice upon China. It could continue on the path of greater Communist Party involvement in business and the allocation of economic resources, limiting access to economic data and arbitrarily enforcing vague legislation such as the national security law. Or it could pivot, making necessary changes to place more reliance on markets and the private sector, competition and openness.
The choice it makes matters greatly for the security of the world. A failed or low-growth economy has the potential to heighten geopolitical tensions if China opts to stoke nationalism and blames outside forces for its domestic challenges. If nationalist fervor results, the U.S.-China relationship could further spiral toward conflict.
China’s leaders have shown they can change course, as demonstrated with their abrupt reversal of “zero-covid” policies. But even if that happens, the road ahead will not be easy. U.S. policymakers need to be prepared for a wide range of outcomes for the Chinese economy.
For the United States, the test is about confidence. Whereas China’s economic challenges have exposed its structural shortcomings, the foundation of the U.S. economic system and the competitiveness of our businesses are so strong and resilient that we have so far been able to withstand our government’s dysfunction and other significant challenges, including covid-19. But uncharted and volatile waters lie ahead with the upcoming presidential election.
The test for U.S. policymakers will be whether we lose confidence in our own system by continuing to attempt to beat China at its own game — or whether we trust in the economic principles that have made our economy and our companies leaders in the world.
We are in a position of strength, with big structural and institutional advantages. Our companies and universities are global leaders. We are energy independent, we have a lead in cutting-edge technologies and are in a favorable geopolitical neighborhood.
Once and for all, China’s economic challenges should put to rest the belief that to compete, Washington should adopt more statist economic and industrial policies. Instead, U.S. policymakers need to do more to reduce our national debt and address our looming fiscal crisis, which is the primary threat to our economic and national security. And we need to resist the impulse to adopt more top-down, bureaucracy-implemented approaches and avoid populist bullying of private businesses.
For the sake of global growth, geopolitical security and our continued prosperity, we should hope that China pivots toward policies which encourage competition and openness.
And here at home, we should remember that our national security depends upon our economic strength and stay focused on what has made our country strong.
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