Executive Summary: Policy Recommendations for Foreign Consideration
In part seven of the executive summary, Daniel H. Rosen offers recommendations for how policy makers, business leaders, and other constituencies outside China can better monitor, understand, and prepare for the changes in China’s economy that reform is expected to bring about. For more on this topic, read Chapter 4 of the full report.
We have taken care to avoid normative prescriptions in this assessment, preferring to stick with describing — as objectively as possible — the economic challenges arising from 35 years of rapid growth, the program of reform to government’s mission and specific regulatory clusters, and the indications that China is moving ahead on that program. Uncertainty about the Third Plenum program, and different interpretations of Xi’s muscular leadership to date, led to a wait-and-see attitude. In year 1 of Xi’s economic program, a strong down payment of new economic thinking was made. Our conclusion, stated earlier, is that China’s reforms are game changing, market oriented, destined to be fraught with compromises temporary or enduring, and connected to geopolitical strategy beyond the economic realm. In light of these considerations, we offer five recommendations for foreign observers.
1. Gauge Incremental Progress
Discordant views on the pace and direction of reform in China and confusion about the implications if reform does play out as fully as we expect undermine policy formation and implementation abroad and distract from the urgency of a response. This is true within firms and governments. An effort to assess reform may leave decision makers unconvinced or in disagreement, but it still holds value even if certainty remains elusive. A promising strategy for overcoming this hesitancy is to define and track economic metrics that respond to reform. President Xi’s Decisions and subsequent implementation orders have called for a wealth of new economic data to be collected and made public in a timely manner, supplementing a rich foundation of real and financial economy indicators that are already observable. Foreign officials should encourage and applaud this trend, for it facilitates a shared understanding of China’s economic directions. With solid enough consensus around metrics indicating Chinese reform — for instance, on the number of industries listed for exceptional treatment by Beijing — it becomes much easier to build a positive bilateral or multilateral economic agenda with China based not on where conditions stand today but on mutual expectations about where China will be in three or five or seven years.
2. Demonstrate Support for Reform
Acknowledging the existential stakes of reform for China supports the reform process by strengthening confidence that goals are shared. Governments and firms in advanced economies have wrestled with many of the adjustment challenges China is encountering, including rising operating costs, calls for protectionism, opposition to environmental policy enforcement and other aspects of regulatory reform, and myriad other obstacles in the political economy. Many bilateral and multilateral programs of capacity building are in place, but some have lost momentum because China’s reform had stalled over the past decade; these should be reinvigorated, or in some cases replaced. There is no shortage of disagreement among advanced economies about the details of reform: more liberal and statist OECD nations have bickered about proper economic policy since the organization’s founding 53 years ago. Supporting reform in China will require patience and self-confidence. In China, as in the United States and Europe, some oppose marketization out of fear or insecurity or have legitimate concerns about the limits of materialism as the measure of social welfare. These voices should not all be lumped together as anti-reform: it is a challenge of our era to encourage traditional marketization at the same time our advanced conception of the goals of public policy is evolving.
3. Focus on a Domestic Response
Given China’s mixed political and international security signals, there will be a powerful temptation to view China’s reform-driven economic strength as a threat, and to respond by focusing on external power and influence. Foreign policy must certainly evolve in light of China’s domestic reforms, but if China’s reform program is to be taken seriously, and it should be, then advanced and emerging nations alike need to strive to remain competitive. After adjustment, a more competitive China will emerge. Reforms will include policy changes that respond to long-standing requests from China’s business and trading partners: financial account liberalization, two-way investment opening, a more level playing field for internal competition, and the withdrawal of government from much intervention in the economy. Nations have often defined their past China policies in terms of what China needs to do differently, or what they will do at their borders to manage integration with China. Looking ahead, the policies of other nations toward China must include better enabling environments to keep pace with China’s productivity gains. This will require top-led national conversations about competing effectively in a global environment.
4. Include a Multilateral Element
While competitiveness begins at home, it often ends abroad in today’s global economy. In many areas, including international direct investment and competition policy, no robust international organizations and norms guide behavior, and the need to build new regimes is likely to be enhanced by expanding Chinese weight in the system. Economies, especially incumbent leaders, should prepare to help facilitate such undertakings. And as they do so, they should welcome Chinese participation without either excluding Beijing or conceding to Chinese views and seek to maintain confidence in the market-economy principles that have worked in the past.
5. Stop Negotiating for What Beijing Is Already Doing
A typical bilateral or plurilateral negotiation with China has become a set piece in recent years, with China’s partners asking for market access, intellectual property rights protection, and a litany of other policy reforms. The broad slate of domestic reforms in the Decisions tells us Beijing knows these reforms are in its own national interest and must be achieved regardless of foreign pleading. It makes sense from China’s perspective to negotiate concessions from abroad for reforms that must be taken in any case. Those concessions may in turn be good for China’s partners as well, such as reductions in their barriers to Chinese trade and investment; also, the logic of an international negotiation may be mutually valuable for reformers on both sides to make the case for reform to their less change-friendly compatriots. However, it is important to recognize that China is pursuing market-oriented economic reforms for the simple, self-interested reason that it is the smart thing to do.