Why the West's Economic Engagement with China has Failed
THIS EVENT IS ARCHIVED
Date: 7 January 2019Time: 5:00 PM
Finishes: 7 January 2019Time: 6:30 PM
Venue: Russell Square: College Buildings Room: G3
Type of Event: Talk
This event is open to the public and free to attend, however registration is required. Online Registration
Book talk on China, Trade and Power by Stewart Paterson.
On 11 December 2001, China acceded to the World Trade Organization (WTO). China’s WTO membership was backed by Western governments who believed that its economic integration would lead to democratic capitalism in the communist country. It was also strongly supported by Western multinationals in anticipation of labour cost arbitrage and access to China’s vast domestic market. But policymakers in the West clearly miscalculated the size of the impact of China’s entry into the WTO and severely underestimated the ability of the Communist Party of China (CPC) to capitalize on this new opportunity.
Allowing a vast country like China, with 750 million low-cost workers, into the global trading system was always going to threaten the rules-based trading system which the WTO had been supervising. The negligence on the part of WTO members in not insisting on capital account convertibility and a floating exchange rate eventually led the Chinese to overtake America as the largest exporting nation in 2007, just six years after joining the WTO.
Cheaper manufactured imports from China were said to be a good thing for the Western consumer, but this benefit was netted away by a policy of inflation targeting by Western central banks that pushed up the cost of non-tradable services and asset prices, like homes. The economic integration of China into the global trading system therefore led to falling living standards for the majority in the West.
The easy monetary policy undertaken by the US to fight supply-induced deflation from China created the backdrop to the financial crisis of 2008. These factors resulted in an economic and financial catastrophe and discredited the market economy in the eyes of many.
From the perspective of the CPC, economic engagement with the rest of the world has been an unmitigated success. Living standards in China have risen and the new prosperity has reflected well on the Party, its leaders and their policies. Hundreds of millions of Chinese people have been lifted out of poverty and the average Chinese person enjoys an income not too far below the global average. But it has also cemented power with the CPC as they bask in the glory of economic success, the exact opposite of the stated aim of Western engagement.
In less than a decade following WTO entry, China has emerged as a global economic superpower. The WTO has failed to ensure trade was conducted fairly, showing they were not prepared to deal with China. Worse, China’s mercantilist model is now held up as being a viable alternative to the Washington Consensus.
This period of engagement with China has had a debilitating impact on Western democracies and economies. Although the theory of free trade is compelling, the actual practice is less so. Welldefined ‘mutual benefit’ needs to be the guiding principle of economic interaction with China in the future.
Stewart Paterson spent 25 years in capital markets as an equity researcher, strategist and fund manager. He has worked in London, Mumbai, Hong Kong and Singapore in senior roles with Credit Suisse, Credit Suisse First Boston, CLSA and more recently, as a Partner and Portfolio Manager of Tiburon Partners LLP. Having started his career with Hill Samuel in London in 1991, he has covered the full spectrum of global markets equity strategy, developed market equities and emerging market equities, and has seen firsthand the economic impact of China’s integration into the global financial system. In 2007, he co-founded Riley Paterson Investment Management in Singapore, where he ran a macro-driven hedge fund that exploited the anomalies in capital markets being created by globalisation and the existing monetary order. He holds an M.A. (Hons.) degree in Economics from the University of Aberdeen.
Organiser: SOAS China Institute
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