An economic NATO: Searching for responses to mercantilist China
The idea of the West creating a NATO-like alliance to respond to China’s predatory trade and economic practices is alluring but tricky to implement.
In a nutshell
- China continues to move away from successful economic policies
- Its predatory trade practices have led to blowbacks from the West
- It is doubtful whether a united Western front against China is feasible
After its founding in 1949, the People’s Republic of China pursued a policy of economic self-reliance. Under the rule of Chairman Mao Zedong (1949-1976), it proved dramatically unsuccessful. From late 1978, the approach of the ruling Chinese Communist Party (CCP) began to change. Integration in the global economy over the following decades allowed China and its economic partners to thrive under what appeared to be a “win-win” arrangement.
However, since coming under the leadership of President Xi Jinping in 2012, Beijing has succumbed to the lure of self-reliance again, focusing its efforts on advanced manufacturing – much to the indignation of China’s economic partners, especially the United States.
Demands to separate the economic ties between China and the U.S. (or “decouple” the world’s two largest economies) are now heard in Washington as well as in Beijing. Political leaders on the two sides want to diminish the direct (bilateral trade and investment) and the indirect (trade through other countries) economic relationship. Neither leadership wants to allow the other side to have significant leverage over the rival.
Diverse supply chains
The U.S. and China continue to trade over $600 billion worth of goods and services each year. However, this large volume alone does not reflect the full extent of the interdependency between the world’s two largest economies. Both countries rely on geographically diverse supply chains, with most of China’s direct trading partners located in Asia and the majority of America’s trade coming from North America. Each country has specific interdependencies. Essentials such as food, energy and the manufacturing of cutting-edge technology are crucial areas in which China is much reliant on the U.S. and other Western economies.
Some observers now suggest that the U.S. and a coalition of like-minded countries could use China’s dependences as a tool to tame Beijing – for example, in response to its use of economic coercion. However, the efficacy of exploiting trade dependencies these days is questionable, given how diverse the global trading system has become over the last several decades.
Smaller players are less likely to join punitive actions that are nearly sure to hurt their exports.
The leverage over economic partners has decreased as global supply chains continue to diversify in response to the mounting geopolitical tensions that businesses seek to avoid. Previously localized markets are accessing global supply chains, making substitutes and alternative markets more easily accessible.
Read more from Riley Walters
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Additionally, building a coalition of economies is never easy. Smaller players are less likely to join punitive actions that are nearly sure to hurt their exports without realizing any positive tradeoff. Short of armed conflict involving China, putting together an economic front of nations against Beijing may seem like a good idea but is nearly impossible to implement.
China’s trade economy
Both the U.S. and China are significant trading partners for all other economies. In 2023, each power recorded over $5 trillion worth of goods trade (imports plus exports). Given that China’s economy is smaller, trade has a more significant impact on China than on the U.S.
In 2023, China’s total trade in goods was equivalent to roughly 33 percent of its annual gross domestic product (GDP), while for the U.S., the figure is approximately 19 percent of GDP. Direct trade between the two countries is even smaller as a percent of their respective GDPs. While the total value of trade between these two economies ebbs and flows each year, there are some specific goods on which China is consistently reliant on the U.S. and its Western allies.
China depends on global markets for energy and crops. Most of the oil and gas it uses comes from imports from Russia and countries across the Middle East. Nearly 70 percent of its soybean supply is imported – a large share of it arriving from the U.S. While only one-third of food consumed in China comes from abroad, this dependence is steadily expanding.
Even as China’s ruling communist party attempts to diversify away from foreign-made goods it deems strategic, it remains heavily dependent on foreign parts.
China requires basic minerals for its industrial production and export-led economy. Nearly 90 percent of its iron ore demand is met by imports, most of which come from Australia and Brazil. China is also a significant importer of minerals such as copper, as well as lithium- and platinum-group metals, to name just a few.
The high-tech challenges
There is an increasing demand in China for semiconductors, personal electronics and other advanced manufacturing goods. As a result, the country is highly dependent on Western countries for semiconductor manufacturing equipment and materials. It imports between 60 and 80 percent of its chipmaking equipment, depending on the type of machinery. More than 70 percent of the chips China uses to produce electronics are foreign made.
Even as China’s ruling communist party attempts to diversify away from foreign-made goods it deems strategic, such as commercial aircraft, it remains heavily dependent on foreign parts. Less than 20 percent of the suppliers of parts for China’s locally-made airliner, the C919, are local. Most of its components come from American aerospace giants like Honeywell International Inc. and General Electric Company.
Aviation, semiconductor manufacturing, farming equipment and materials are just some of the industries targeted in Beijing’s Made in China 2025 initiative (launched in 2015). In this program, the government unveiled plans to make China more self-sufficient and turn it into a global production leader. But after nearly 10 years, the attempt to become self-reliant in some of these strategic areas has yet to materialize. In fact, China is 70 percent reliant on the G7 community for up to 380 of its crucial imports.
So, can China’s global dependencies be used against it in the event of an all-out economic and trade war?
Can NATO be a model?
There have been calls for the U.S. to form a NATO-like Western trade alliance with its economic and security partners. Like the military alliance and its mutual defense clause (Article 5), an economic NATO would call on its members to respond jointly when one or more of its members are targeted with economic coercion.
Resolving the technical issues of such a proposal is one problem. For example, to what kind of coercion would this alliance respond? Only mercantilist trade practices, or other actions? China uses a rich arsenal of tools for economic pressure, including restrictions on imports, exports, investment and even tourism, restricting its citizens from going to certain countries. It allows the use of predatory financial practices and stands accused of flooding foreign markets with its subsidized products. The Chinese system encourages intellectual property theft to undermine Western competitiveness. It will punish foreign companies if they do not adhere to Beijing’s tight political restrictions on speech, even outside of the country, to name just a few bad practices.
Given how long it takes the WTO to respond to a complaint, China’s predatory practices could continue for years.
Assuming this economic NATO could look past its own trade and economic issues with each other when not in conflict with the Chinese, how would they respond to these practices? What would be the proportional response if Beijing, for example, again limited its exports of rare earth metals to Japan?
Smaller countries, whose economies and businesses rely more on trade with China and the U.S., do not want to get caught up in a trade dispute if it appears to be primarily between China and another country. Such countries do not want to hurt their domestic industries that sell to China without seeing a tangible economic (and not merely political) benefit.
Even if these problems can be resolved somehow, there will be limitations on how often such an alliance would be willing to act given the prevalence of China’s mercantilism and the extent of its disputable economic practices. Also, there is already an institution with a mandate to deal with such problems, and all economies are members of it: the World Trade Organization (WTO).
The (marginally) better solution
That body is meant to deal with trade disputes and has successfully done so in the past. However, it is not very efficient: Given how long it takes the WTO to respond to a complaint, China’s predatory practices could continue for years. Still, compared to the prospect of an economic NATO whose activities and membership would be irregular, the WTO already has an established framework for all economies to challenge bad actors.
Economic coercion was a significant topic at the 2023 G7 Summit in Hiroshima, Japan. The group released a Leader’s Statement that reaffirms the G7’s opposition to economic coercion, even though it does not explicitly name the People’s Republic of China. The document emphatically urges the continued use of multilateral institutions like the WTO.
Scenarios
Very likely: Beijing hangs in tough
Beijing’s use of economic arm-twisting, its diplomatic belligerence and rapid military buildup continue to bring the U.S., its allies and its partners closer together. So far, it does not appear that Beijing is ready to change its ways. Already this year, it has targeted various imports from Taiwan and engaged in a tit-for-tat game of tariffs with the European Union. One can expect to see more economic pressure coming from Beijing.
Unlikely: An economic NATO emerges
Both the U.S. and China will continue to further diversify their supply chains to try to lessen their mutual dependence. However, breaking the remaining interdependencies is not going to be easy, especially in industries that require massive investments but offer diminishing returns (like minerals production).
The U.S. will continue to find partners who are frustrated with China’s economic rules-breaking and coercive practices. It will also continue to build new networks for supply chain stability. However, taking these networks a step further and creating an economic NATO is unlikely to happen.
While the WTO may be less efficient in enforcing good trade practices, little action will be taken to reform it and give it more teeth. The U.S., in particular, will continue to emphasize its use of unilateral actions and tariffs on imports from China.
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