As the world was grappling with the coronavirus crisis, way back in May 2020, President Xi Jinping revealed ‘dual circulation strategy (DCS). In economics jargon, it is a combination of import substitution and expanding domestic demand.
China aims to achieve equilibrium by enhancing the domestic demand (internal circulation) with external demand (international circulation).
Why Now?
It is interesting to assess why China wants to move away from an investment-led-export strategy to a domestic demand-driven one as the coronavirus ravaged across the globe, countries after countries realized the importance of de-risking from a single source. The trend of reverse globalization (or slowbolisation) had started with the US under President Trump leading the charge.
Chinese policymakers had already anticipated that the export-led external demand depended model will run its course. The pandemic pushed this thinking that if China doesn’t want to get into the middle-income trap, it has to boost its domestic demand. Flipping its domestic market as bait to global companies would be a better bet as it has already got the crucial tech know-how by any means, and all it needs is a slow opening of the market for MNC’s to cater.
Decoupling from China is not an easy proposition, and it would cost at least a trillion-dollar for the world. That would be a steep ask and not a slow process.
Ring-fencing against external shocks
It looks like by following inward-looking policy, and the Chinese strategist wants to ring-fence the economy for the worst scenario. However, much would depend on how the global economic powers move with their trade alliances.
In the case of China, the contribution of domestic consumption to GDP was 35.3 percent in 2008, and now it stands at 58 percent. In 2019, China’s GDP per capita exceeded USD 10,000 for the first time, reinforcing that domestic demand is the natural choice for sustaining long-term GDP growth.
Impact on Global economy
The question is will this new strategy have an impact on the global economic order. As China wants to move to the center of the international economic order, this will have some cascading effects. The pass-through will be via the supply chain integration. One recent example is the global semiconductor chip shortage that is riling the market. Much of it is due to China hoarding the global chip supply. As the import component in their export market is very high, China started accumulating the chips. It caters to 80 percent of the global electronic appliance market while it hardly produces 16 percent. Under the Made in China 2025 plan, it wants to increase this to 70 percent, thereby reducing the external dependency.
We could see similar shortages as China goes about cornering the inputs it needs for its exports.
Smart strategy or more to it?
Chinese policymakers have been vary of the vagaries of external demand to be the bulwark of their GDP growth sustenance. The pandemic has made them realize how quickly sentiments can turn against. The underlying threat is that the middle class that has now tasted a high standard of living can also cause chaos in case the country falls into the middle-income trap. The recent relaxation to three-child norms is where they now want in-house demand to compensate for the loss of external demand. Also, lesser the external dependence more uncomplicated would be to push the geopolitical agenda and occupy the ‘center-of-everything’ in the global order.
Many global companies will now find it increasingly difficult to cash in the domestic market of China. They will be subject to more stringent laws and regulations – much like Tesla faces in-car cameras and the data sharing therein. Ironically, China has been resorting to all kinds of deception when it wants to steal the IP from other countries, but when their turns come, they develop their version of techno-nationalism.
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