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ECONOMY| 18.05.2021

China’s position in a tripolarized world

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The epidemiological crisis has highlighted the existence of three global economic blocs. China continues its rapid growth and has emerged as a strong contender to be the top power, while Washington fears for its trade relations as EU-China agreements risk removing it from the playing field.

As a result of the pandemic and global uncertainty, the third decade of the century has begun with a clear winner. With an unprecedented growth rate of 2.3 percent in 2020, China comfortably outpaced the major economies and its US rival in particular, which shrank by 3.5 percent. Looking at the legacy left by the Soviet Union, the Asian giant faces the challenge of becoming the top economy in the coming years, a feat that will mostly depend on its technological competence, sustainable development and value chain integration.

China’s vision for the future will be conditioned by two factors: the adoption of international alliances, such as the Comprehensive Agreement on Investment (CAI) with Europe, with the aim of obstructing relations with the US, and the latest National People’s Congress, which addressed new challenges for the next five years. In its Economic and Industry Outlook report, MAPFRE Economics highlights the stance to be taken by the Biden administration toward the Chinese economy, explaining that it will follow the same line as that of his predecessor Trump, albeit with a more predictable, multilateral approach.

While the US may grow by decoupling from the Chinese market, the European Union is no stranger to maintaining important trade relations with the Asian country. For decades, China has seen Europe as the third pole of the global economy because of its strategic interests in the EU, targeting the EU’s main institutions, its most powerful members, and finally, its smaller nations. Its clearest objective, however, has been to ensure that the eurozone is committed to China.

Experts point out that the global outlook will revolve around technology and trade relations, with the US and the EU taking different approaches when it comes to support for Chinese technology companies; the US government has always seen the arrival of large Asian companies on American shores as a threat, while its European counterparts have given them a warmer welcome and, in fact, have come to include Chinese technology in the development of their infrastructure.


Agreement with Europe

As it stands, the EU-China Comprehensive Agreement on Investment, around which questions have arisen on the violation of human rights in the Asian country, is awaiting ratification by the European Parliament.

MAPFRE Economics analysis estimates that this agreement “creates a level playing field for Chinese and European companies, opens up new investment opportunities, improves consumer and worker protections and brings clarity regarding certain sectors open to cross-border investors” while also allowing investment flows to major European strategic sectors. With all this, the agreement aims to facilitate the equal economic relationship between the two and to put European sustainability principles and social rights at the forefront.

However, not all that glitters is gold. Europe, despite its good intentions, cannot be sure that China will follow the agreement to the letter. While the country’s commitment to climate change standards and labor rights is noteworthy, it has put up some resistance against adopting international human and labor rights standards.

In any case, for China, the CAI is more than just an economic deal, as its ratification may also put strain on future EU-US partnerships.

China looks to the future

China’s 2021 National People’s Congress, held in March, launched the country’s initiative to modernize its economy and position itself as the world’s biggest power. The General Secretary of the Community Party announced the country’s growth target of 6 percent for 2021, although institutions like the International Monetary Fund have exceeded that figure with a forecast of 8.1 percent. Along the same lines, the Asian country has predicted an unemployment rate of 5.5 percent or less, which would bring it back to its pre-pandemic situation.

Financially, the Chinese government estimated a reduction in its deficit from 3.6 percent of GDP to 3.2 percent by the end of 2021. In addition, with sustainable growth, macroprudential policies are expected to be adopted sooner or later to mitigate the risks of a bubble forming.

With the focus on China’s modernization in the short-term, stress has been placed on the importance of developing technological independence with other countries, with emphasis on the high-tech and artificial intelligence industries, and increasing spending on research, development and innovation. At the same time, China seems to be taking the environmental issue seriously, aiming for its carbon emissions to peak before 2030 and for net-zero emissions by 2060.

Ultimately, the National People’s Congress agreed to improve the national social security system this year and to work toward forging closer ties abroad, as is the case with its agreement with Europe. With all this, China has presented a declaration of intent to become one of the most advanced and sophisticated nations on the planet within the decade.