Part of theQuick Takes
Minister Liu He, the trusted economic adviser to President Xi Jinping, gave a much-anticipated speech to the Davos attendees. In keeping with the new normal in China post 19th Party Congress, Liu quoted President Xi: “As long as we keep to the goal of building a community with a shared future for mankind and work hand in hand to fulfill our responsibilities and overcome difficulties, we will be able to create a better world and deliver better lives for our people." This was the defining quote from Xi’s speech last year that was considered by many as China taking of the globalist mantle. It was the first time that a Chinese President attended the event – and he swooped in to pick up the free trade gauntlet just as President Trump threw it down in favor of the protectionist cudgel.
Liu’s own presentation was built around these themes of promoting market opening, not protectionism, the importance of respecting intellectual property rights, and China’s intention to work with the international community to combat terrorism and fight climate change. He noted: “History may repeat itself when we find we’re at a similar crossroads. At that moment, making cautious and rational choices will be very important as no country alone can win the battle against terrorism and the double-edged sword of technological development.”
It is ironic that significant parts of the Minister’s speech could have been cut and pasted from previous U.S. Administrations’ talking points. China is repeating back to us many of the arguments made by U.S. policymakers over the years on the need for China to step up its action to open to American goods and services, protect our technology and ideas, and abide by the international trading rules.
Liu’s remarks come at a time when three successive policy documents from the U.S. Administration focus on the importance of taking a tough line with China: the National Security Strategy, the U.S. Trade Representative’s (USTR) annual report on China’s WTO Compliance, and the Pentagon’s National Defense Strategy. Essentially, there is a common theme that international institutions have failed to keep China in check and that the U.S. must take the necessary action – bilaterally if necessary – to protect our strategic interests. USTR’s report went so far as to say that China’s WTO accession was a mistake.
To correct for these perceived failings of the international system, the Administration is planning a “shock and awe” campaign against China on trade, starting with raising tariffs on washing machines and solar panels. The results of the 301 Trade Action are expected to be announced around the time of the State of the Union on January 30, as well.
In the meantime, President Xi has taken some small steps to allow for greater market access, including in the energy and financial services sectors. In addition, they have announced the intention for further reforms as part of the 40th anniversary of “reform and opening.” There have been rumors that the Chinese will also make an announcement soon to clarify that technology transfer will not be linked to the right to establish in the market – and some tough action against companies doing so could be taken.
While we expect to see more steps taken to allow foreign firms to play a greater role in the economy, this will be combined with the Chinese Communist Party playing a stronger oversight role, including with the creation of party committees in foreign firms. The Chinese have been sending strong signals since the October 19th Party Congress that they intend additional reform and market opening for international companies. Market access will likely be limited however to sectors where the Chinese either have dominant domestic players already established – such as financial services – or in areas not viewed as a strategic priority. We don’t expect to see the internet and AI sectors, for example, being part of this market opening in any significant way.
China has dominated the WEF at Davos now for two years running. If China keeps to its word, it could return three years running as the Star of the Show.