from Greenberg Center for Geoeconomic Studies

Geostrategic Implications of China’s Twin Economic Challenges

As China seeks to reorient the focus of its economy from investment and export to consumption, national security will become a more prominent strategic priority. The United States should recognize this shift and cooperate with China in its move toward a more sustainable growth path.

An employee works at a clothes factory in Huaxi village, of Jiangsu Province, on December 3, 2010. Carlos Barria/Reuters
Report

More on:

China

Economic Statecraft

Grand Strategy

U.S.-China Relations

Overview

The Chinese government has embarked on an effort to reorient its economy from an investment- and export-driven model toward one predicated on a larger role for consumption and market forces. At the same time, China is also experiencing a new normal of much slower economic growth. The economic downturn and concomitant structural shift in China’s economy has already begun affecting its foreign policy. Security, not economics, is becoming one of President Xi Jinping’s—and China’s—top strategic priorities.

There are several indicators that suggest such a shift is occurring. First, Xi seems more willing to take geopolitical risks to stand up for China’s territorial interests, even if that means tolerating a higher degree of regional instability. Second, Xi has argued that national security, not the economy, ought to supersede all other concerns. Third, Xi’s preoccupation with security—even at the expense of economic benefit—is also evidenced by recent legal measures. Fourth, the Xi administration created the National Security Commission, a high-level coordinating body that elevated and centralized the internal and external security missions directly under Xi. Fifth, the sweeping military reforms announced in November 2015, while partly designed to enhance war-fighting capabilities, also indicate Xi’s desire to consolidate the party’s dominance over the military.

Potential Risks of the Reorientation

China is attempting a three-part reorientation while managing a slowdown: move away from manufacturing sectors into service sectors, shift the composition of its GDP growth away from investment and toward consumption, and transition from export production to domestic spending. The path forward is not without risks, including:

An economic collapse could give rise to a Vladimir Putin–like redemption figure in China.
  • Domestic unrest. Poorer economic growth prospects will likely exacerbate domestic unrest in China. Inequality has long been a source of concern and potential instability, and economic challenges could place additional stress on the system.
  • Diversionary nationalism. Diversionary nationalist frictions would likely occur if the Chinese leadership portrayed a foreign adversary as having made the first move, thus forcing Xi to stand up for China’s interests. The Chinese government will use such tactics if it believes that the costs are relatively low.
  • Challenges to Xi’s leadership. Xi’s approach of centralizing authority over a diverse, complex, and massive social, political, and economic system is a recipe for brittleness. If his efforts to address economic challenges fail, an economic collapse could give rise to a Vladimir Putin–like redemption figure in China.
  • Weakened fetters of economic interdependence. If China successfully transitioned away from its export-driven growth model toward a consumption-driven economic engine over the next four or five years, it could no longer feel as constrained by economic interdependence. To the extent that such constraints are loosened, the U.S.-China relationship will be more prone to conflict and friction.
  • Shift from complementarity to competition. The aggregate demand from a consumption-driven Chinese economic growth engine may, at least partially, displace the United States as the dominant export market for the Asia-Pacific region. As China shifts to a consumption-driven model, producers could rely on Chinese rather than American consumers, leading to a reorientation around the Chinese economy.

The Future of China’s Economic Statecraft

Despite slowing economic growth, China will likely continue to seek to use economic power to prevent unfavorable strategic developments on its periphery. However, with a consumption-driven growth model and a slowing economy, some aspects of China’s grand strategy will likely change.

The future U.S.-China relationship is not predestined to become a new type of Cold War.

Less robust growth will diminish the attraction potential of the Chinese market and reduce the ability of the state to use the market to woo potential partners. Unfavorable economic conditions will also likely lead to enhanced state control over commercial actors. A fundamental shift away from investment and exports would likely reduce China’s need for massive quantities of raw materials and semifinished goods, which currently constitute a significant portion of China’s imports. One enduring feature of a consumption-driven China would likely be the continued need for imported energy.

Implications for U.S. China Strategy

As the United States responds to the geopolitical risks likely to arise as by-products of China’s response to its economic challenges, it needs to maintain flexibility and avoid defaulting into a strategy that is misaligned with a rapidly changing China. Specifically, two forms of strategic inertia are likely to bedevil U.S. strategy regarding China.

One is a reliance on the comfortable and familiar strategic logic of a rising China where economic considerations are dominant. If the United States relied on the same logic to explain how a consumption-driven, post-rise China might see the world, it would fail to recognize the shift in strategic conditions and the need to adjust U.S. responses accordingly.

Another type of strategic inertia would be to mistake a post-rise China for the Soviet Union. The future U.S.-China relationship is not predestined to become a new type of Cold War. The United States should continue to support a successful, smooth transition to a more open, consumption-driven economic model that remains deeply integrated into the global economic architecture and should work cooperatively with China to help move that country toward a more sustainable growth path. Having China on a productive and sustainable economic trajectory would be a win for China, the United States, and the world.