China will gain economically from the Ukraine war. What might it lose?
Published 22 March 2022
China will almost certainly gain economically from Russia’s invasion of Ukraine, at least in the short term. However, the resulting global upheaval and emergence of three dynamics will force China to navigate a considerably more challenging external environment if it is to continue its economic rise.
China is positioned to benefit economically from Russia’s invasion of Ukraine. With Russia increasingly blocked from global markets, China could plausibly gain access to Russia’s grain, energy, and other commodities at discounted prices, denominated in renminbi (RMB) rather than US dollars. This will provide China with a hedge against the inflation rippling through much of the rest of the world, and further boost its competitiveness. On top of that, China’s state-owned enterprises (SOEs) will eagerly take or expand stakes in Russian energy and food companies, ensuring both security of supply and attractive commercial terms.
Expect China’s government to be laser-focused and shrewd in fully exploiting every opportunity for economic gain. Some have gone so far as to proclaim China the “winner” of the Ukraine war. When viewed through a wider lens, however, the picture becomes considerably more nuanced over the longer term.
China’s economic rise over several decades has been fueled by abundant labor, low wages, access to global markets, transformative foreign direct investment, and a willingness to aggressively pursue mercantilist policies. There has also been another key ingredient which is frequently overlooked. China’s rise could not have taken place without the existence of a highly conducive external environment, consisting of several discreet elements.
China needed a period of relative global peace, stability, and orderly relations among nations. China’s rise also required a high degree of global confidence in the rules-based multilateral trade system which ensured that trade disputes did not become trade wars.
Finally, and perhaps most importantly, China benefited tremendously from a welcoming and benign set of assumptions throughout the West about the implications of China’s rise. This conducive global environment provided the supporting infrastructure which enabled China’s rise.
That infrastructure has weakened considerably in recent years. Russia’s invasion of Ukraine is dramatically accelerating a further deterioration and is fueling the emergence of the following three dynamics that will make China’s path forward considerably more precarious.
1. An intensification in the “democracy versus autocracy” mindset
President Biden came into office speaking in incredibly blunt terms about the US-China relationship embodying a competition between democracy and autocracy. China’s response to the Russian invasion has only intensified that sense of division and competition.
According to China, the US and NATO are responsible for Russia’s invasion of Ukraine, which China refuses to even refer to as an invasion. China has not instituted any sanctions and declined to join the other 141 United Nations members who approved a resolution condemning Russia’s invasion. This is against the backdrop of President Xi proclaiming that the China-Russia relationship is “more than an alliance”. Fairly or unfairly, President Putin and President Xi are now seen by many as two autocrats joined at the hip.
With China continuing to stand by Russia as the bloodshed in Ukraine drags on, the clash between democracy and autocracy has taken on a deeper and a far more graphic resonance. The resolve and unity of the US and its partners has been strengthened, and the stakes are viewed in emotional, almost existential terms. Under these circumstances, the bandwidth for cooperation with China on economic, trade, or other issues has narrowed, and the potential flashpoints have expanded.
2. Increasing Western comfort with the deployment of devastating sanctions
The speed and unity with which the West and many of its partners around the world moved to institute unprecedented, crushing sanctions on Russia caught many by surprise.
In economic warfare as well as actual warfare, the generals invariably learn lessons which are put to effective use the next time the battle is joined. The West and its partners now understand better than ever before “how to hit where it hurts”. They have honed their ability to tightly coordinate such policies and will have greater acuity and a higher comfort level in deploying tough sanctions for any reason that might arise in the future.
China has already been put on notice that the US will “not allow any country to compensate Russia for its losses”. US Commerce Secretary Raimondo has stated that her department will be keeping a close eye on China’s semiconductor companies to make sure they don’t help Russia circumvent sanctions. For any companies caught in breach, the consequences will be swift and punishing.
And long before Russia invaded Ukraine, China had already come under close scrutiny on various issues ranging from human rights practices to economic coercion. Both the US and EU have already deployed sanctions, and both are strengthening their unilateral capacity under domestic law to hit even harder.
The sanctions heat is being turned up, China will be under a microscope, and the potential pain points have multiplied and intensified. None of this will be helpful for China.
3. Trade and security concerns drive action outside the WTO
There is growing discomfort with conducting “business as usual” in the World Trade Organization (WTO) with a country that is actively using brutal military might to subjugate a fellow WTO member. But trade rules related to security considerations are vague and incomplete, leaving individual members to essentially chart their own course, as many are currently doing. Canada, Japan, and the EU have revoked Russia’s Most Favored Nation status and the US seems poised to do the same. But the organization as a whole has done nothing.
The WTO’s credibility has been battered in recent years and Russia’s invasion has only highlighted another area in which the organization is struggling for relevance. On many fronts, countries are increasingly seeing the need to take unilateral action outside the WTO. This will be problematic for China. Gaps in WTO law and ineffectual enforcement have provided China with a “safe harbor” within the WTO system. As countries grow more willing to pursue remedies beyond WTO channels, this safe harbor will start to shrink. Going forward, China will find itself facing more robust and effective challenges to its trade and economic policies.
A new era indeed
China will almost certainly gain economically from Russia’s invasion of Ukraine, at least in the short term. However, the resulting global upheaval will force China to navigate a considerably more challenging external environment if it is to continue its economic rise.
We know from experience that some events – wars in particular – are so cataclysmic that they rock the foundations of the prevailing global system. Possibilities which previously seemed inconceivable are openly and seriously considered. And by the time the dust settles, the pre-existing world order is sometimes turned on its head. Russia’s invasion of Ukraine is potentially one such seismic event.
The now infamous joint declaration issued on February 4 in which President Putin and President Xi pledged their “no limits” partnership also made reference to “international relations entering a new era”. It’s unlikely that either leader fully comprehended how prescient those words would be. It is especially unlikely that China would have grasped the extent to which the benign global environment which enabled its rise would be fractured. It is often said that the first casualty of war is truth. In the case of Ukraine, the second casualty might be the global stability on which China has relied.
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