East wind prevails over the West wind

IN the escalating contest between the West and the Rest, it is now clear that the former, while still packing the more powerful punch, is weakening. In the Asia-Pacific, the US Navy’s stance has shifted from dominance to deterrence. In the economic sphere, too, Washington has switched from being on the offensive (technology bans, trade restrictions and financial sanctions) to playing defensive (putting up a tariff wall around the US market). And Western support for Ukraine has not stopped Russia. Mao Zedong had declared somewhat ahead of time that the East wind prevails over the West wind. That may now be beginning to happen.

Russia and China have developed payment systems that bypass the dollar and even banking communication systems like SWIFT.

For years, Western analysts and journalists misread both China and Russia. The latter was portrayed as economically vulnerable and Vladimir Putin as politically challengeable, perhaps even terminally ill. China’s collapse has been forecast for decades; more recently it has been seen as beleaguered. Yet Russia has withstood Western sanctions unexpectedly well; it has gained the upper hand in Ukraine, and Putin has been elected to a fresh term in office. China, meanwhile, remains the fastest-growing among economies with comparable income levels.

The steep tariffs that the US has announced recently on some Chinese products do not signal a full-scale trade war since they target items that China does not sell much in the US. So, the signalling may be primarily to President Biden’s domestic political base. Regardless, China remains the dominant producer of many of the targeted products, and can find other markets. It is US importers who may have no alternative sources of supply for some items. China could also route supplies through factories in third countries. Meanwhile, American consumers will pay through inflation.

Such defensive ploys (the flip side of a subsidy-laden policy to revive American manufacturing) contrast with the offensive thrust of earlier moves. The hope was that those aggressive moves would box in America’s enemies. Without question, the sanctions have hurt, but (as almost always with sanctions) the impact has been partial. Russia has found new customers for its oil and gas, while Europe has lost a vital source of cheap energy, thereby hobbling economies like Germany’s. Meanwhile, the Russian economy has continued to grow.

Both Russia and China have developed payment systems that bypass the dollar (95 per cent of the Russia-China trade is now in local currencies) and even banking communication systems like SWIFT (Society for Worldwide Interbank Financial Telecommunications). Russia now holds more renminbis in its reserve armoury than it does dollars. And China has been switching to gold, of which it has bought vast quantities over the past 18 months. The People’s Bank of China’s 2,250-tonne gold hoard still accounts for less than 5 per cent of the total reserves, but is the highest ever.

As for technology, China moved earlier and faster than anyone else and occupies pole position in the clean-energy fields of electric mobility, solar power and lithium batteries. China also moved ahead of the pack to secure supplies of the special materials needed for these industries, and may have a lock on some of those markets. It may now be ready to break through tech barriers in electronics, life sciences and defence manufacture.

Huawei, for instance, recently surprised the West by showcasing smartphones loaded with 7-nm (nanometre) chips, and is getting prepared to turn out 5-nm chips. China has set itself the target of 70 per cent self-sufficiency in chipmaking by next year. Meanwhile, Western pharmaceutical firms have acknowledged China’s emerging leadership in biopharma and life sciences in places like BioBay, a mega-hub for innovation at Suzhou, near Shanghai. In defence, China is building a fourth aircraft carrier, which may be nuclear-powered, signalling the crossing of another technology threshold. The bald fact is that it is too late to shut the technology door on China.

On the security front, Western commentators worry about possible convulsions if Russia gets its way in Ukraine, and further carves up that half-destroyed country. Matters could get worse if Donald Trump returns as US President and carries out his threat to hobble the North Atlantic Treaty Organisation (NATO). Given the extreme limitations of European defence forces in terms of manpower, equipment, fighting capabilities and defence production capacities, all of Europe would suddenly feel more vulnerable than at any time since the start of the Cold War. European defence budgets have belatedly gone up to the targeted 2 per cent of the GDP, but it will be at least a decade before Europe can hope to be viable in its defence without the assurance of US support—not to mention the US nuclear umbrella.

In comparison, Moscow and Beijing have moved closer, while scoring diplomatic gains elsewhere in the world. Russia played a successful card in Syria and now gets drones from Iran. Last year, China brokered the normalisation of ties between Iran and Saudi Arabia. In Africa, China is outspending the US on a continent that needs lots of money, while one country after another is booting out French and American soldiers and inviting in Russian soldiers for security support. Even in South-East Asia, countries whose economies are closely interlinked with China’s, and getting even more so, do not wish to choose between the US and China. It doesn’t help that the US frequently shows itself as an unreliable support pillar, as seen on arms supplies to Ukraine. Nor does it help Western credibility with the Global South when it adopts hypocritically contradictory stances on Ukraine and Gaza.

Western commentators argue, with reason, that China has for long been single-mindedly pursuing a mercantilist course, promoting industries with massive government support and running huge trade surpluses without allowing its currency to appreciate; and that China is provoking the West into applying (belated) counter-measures. Fair enough. But what they don’t add is that China has intensely competitive home markets. No fewer than 139 companies turn out electric vehicles, for example. Only the fittest will survive, and companies like BYD therefore emerge as potential world-beaters.

Still, it would be a challenge for China’s manufacturing capabilities if major export markets were denied to it. But as India’s experience shows, tariff walls do not necessarily keep out Chinese products. Indeed, China could soon be in a position to play tit-for-tat on both technology and market access. That seems a more likely response to Western pressure than Japan’s in the mid-1980s, when Tokyo reined in its exports and got the yen to appreciate. In today’s world, whether it is on security matters, technological development, manufacturing and trade prowess or diplomatic heft — in short, the global power balance — the East wind is blowing harder than before.