China now the unlikely champion of free trade in the Trump era

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It was a scene unparalleled in modern Chinese history: the most powerful man in the Communist Party with the lions of capitalism arranged in front of him, eating out of his hand.

While an eager audience recorded the moment on their cellphones, Xi Jinping spent nearly an hour expounding on the state of the world, and China's rising role in it.

Here stood the authoritarian successor to thousands of years of cloistered imperial rule addressing the distillation of the Western liberal approach that populates the World Economic Forum at Davos, the annual Swiss mingling of titans, stars, soothsayers and heavyweights.

But this year, it was a crowd freighted with fear, searching for comfort from the spectre of Donald Trump taking office and, plank by plank – a tariff here, a torn-up trade deal there – disassembling the global trade structure that has dominated the latter half of the postwar era.

No wonder, then, that Mr. Xi commanded rapt attention with his presentation of China as the new guardian of borderless trade and custodian-in-chief of international priorities, a responsible and reliable new global leader for the Trump age.

He name-dropped Christine Lagarde, Charles Dickens, Red Cross founder Henry Dunant and Alibaba. And he delivered a stirring defence of the system of globalization and barrier-free trade that has concentrated untold wealth and power in the hands of those in the room.

"Pursuing protectionism is like locking oneself in a dark room," Mr. Xi said. "While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war."

For those willing to take the Chinese leader at his word – and he was speaking as much to those at home as abroad – he offered an appealing alternative to the new U.S. President's chaotic rule-by-tweet, and Mr. Trump's evident joy in shredding long-held conventions, and dismissing the growing scientific evidence of a rapidly-warming earth.

A day later, Mr. Xi came to the United Nations to promise Chinese leadership on climate change, too. "There is only one Earth in the universe and we mankind have only one homeland," he said.

Not since 1979, when Deng Xiaoping donned a cowboy hat in Texas and strolled through Coca-Cola headquarters in Georgia, has a Chinese leader put a smile on so many Western faces.

If Washington bows out of upholding the global agreements and systems of order it helped to create – and, in fact, begins attempting to tear them down – could China fill play that role?

Eight thousand kilometres from Mr. Xi's Swiss stage, however, an entire country lies as testament to the likelihood that those hopes are unlikely to be fulfilled.

The China of reality is far different from the place conjured in its President's speeches, a place that has consistently embraced, not rejected, the locked-off room of Mr. Xi's metaphor. China has ensconced itself inside high walls of its own making. Some keep out unwanted outside investment into the large sectors of its economy it has protected from foreign ownership. Others repel the global flow of ideas, through a strict censorship regime that blocks the Western world's most important online and media companies.

"Under more normal circumstances, the hypocrisy in Mr. Xi's Davos speech would be its most prominent attribute," said Allen Carlson, a researcher at Cornell University's government department who has written about China's changing relationship with the outside world. "They talk a good talk," said Guy Saint-Jacques, the former Canadian ambassador to China. But for all China's rising economic might and influence, when it comes to the broader world stage, "their approach is still dictated by clearly their own interests."

Beijing has rejected the rulings of international courts and routinely teamed with Russia to frustrate the work of the United Nations. Its largest contributions to peacekeeping missions have been to places where it has significant corporate interests. It has used its economic might as a tool to silence critics. Its typical reaction to foreign crises and hostilities is determined inaction, under the guise of non-interference in the internal affairs of others. When disaster breaks out, China is more likely to dispatch cruise ships to evacuate its own people than send help.

Mr. Xi's very priorities this week – trade and a green future – are deeply important to China itself, a country that has in recent decades arguably been the world's single-greatest beneficiary of the free flow of goods, and which has staked its own economic future in part on the production of wind, solar and electric-vehicle technologies, industries it already dominates.

Mr. Xi may preside "over a major global power, and one which, in almost every dimension, has global impact," but his core mandate is to enhance the standing and sustainability of Communist Party rule at home, said Kerry Brown, director of the Lau China Institute at King's College, London, and the author of CEO, China: The Rise of Xi Jinping.

"Their mission is to make one-party rule sustainable, and to make China the dominant Asian power," Mr. Kerry said. "The outside world will at best be ambiguous about this, and, at worst, oppose it."

China nonetheless has perhaps more reason than any other nation to fear what Mr. Trump will bring. As a presidential candidate, he threatened a 45-per-cent tariff on goods imported from China and, even if he pursues a more moderate path as president, has made clear his willingness to use punitive border and tax tools to favour U.S. manufacturing.

No country sells more to the U.S. than China – the value of its U.S. exports is nearly double Canada's.

But for China to credibly take leadership in maintaining the free flow of goods, it will have to stop treating globalization like a one-way door, where its goods can flow out but others are either barred from entry, or allowed in only if they can surmount tax and other regulatory barriers.

In recent years, it has shown the opposite inclination, becoming increasingly hostile ground for foreign money, even as its own companies and entrepreneurs scour the planet for pharmaceutical companies, gold mines, mansions and farmland.

Recent statistics show a dramatic and growing imbalance: last year, China invested nearly $50-billion into European Union countries, more than quadruple the amount that flowed the other way. The imbalance has fomented anger in Germany, where Sigmar Gabriel, the economic minister and Vice-Chancellor, complained last fall that "Germany sacrifices its companies on the altar of free markets, while at the same time our own companies have huge problems investing in China."

A similar disparity exists with the U.S. – where China has provoked similar anger.

Less than 24 hours after Mr. Xi took the stage this week in Switzerland, the American Chamber of Commerce released a report showing that 81 per cent of its members felt less welcome in China last year. They blamed an inconsistent regulatory environment, unclear laws and rising protectionism.

"China is far less open than, say, the United States or Europe has been or Canada, and so it would be difficult for China to really position itself as a leader in this regard," said Lester Ross, a mergers-and-acquisitions lawyer in Beijing and senior official with the American Chamber.

The OECD rates China second worst in a ranking of restrictions on foreign direct investment (Canada, too, is worse than average).

And Beijing is now pursuing a new "China 2025" strategy, a massive effort to further push out foreign companies in favour of locally-made goods and materials, with an aim to ensuring fully 70 per cent of core industrial components are domestic by 2025. It is chasing targets big and perplexingly small: a state-owned company recently boasted that after a half decade of effort, it has now mastered the technology necessary to make the special hardened steel for the tip of a ballpoint pen.

Mr. Xi's speech is an indication that the rise of Mr. Trump has struck enough fear that some of those plans may be rethought.

An hour before the Chinese president stood up at Davos, China's cabinet – the State Council – released a new "fair competition" plan that promises equal treatment for domestic and international companies while easing foreign-investment restrictions in services, manufacturing and mining. It even pledged that China 2025 "also applies to foreign-invested enterprises," state media reported.

Mr. Xi also sought to reassure the world that it wants to further lower barriers. Over the next five years, the President said in Davos, China will import $8-trillion (U.S.) in goods, allow in $600-billion in foreign investment and invest $750-billion abroad.

In saying so, he "actually committed China to continue opening up. And that's music to the ears of the CEOs and the international business community," said Wang Huiyao, president of the Center for China and Globalization, a Beijing think tank.

That message will also be heard at home, by officials whose decisions at all different levels of government will determine the actual direction of China.

Hearing a rousing defence of globalization from the top, the "policy impact is enormous," Mr. Wang said. "We want China to be open and transparent and globalized. When President Xi speaks on that, I think it gives a lot of credibility to his commitment."

That is, if it happens. Skeptics point to a long list of promised reforms that have not fully materialized in China.

"If the U.S. is abdicating leadership under Mr. Trump, as it appears to be, a clever repositioning by China can bring China lots of benefits, solidifying a loose anti-U.S. association. But to make this stick, [the Chinese president] will have to make some concrete moves," said Barry Naughton, an expert on the Chinese economy at the University of California San Diego.

"Some real opening, some real reform. Mr. Xi certainly has enough levers that he could pull one that would demonstrate his seriousness."

Even if Beijing, Washington and Davos do share an interest in globalization, the object of their pursuit is in many ways very different.

Take the Trans-Pacific Partnership, a U.S.-led a sprawling agreement heavy on rules and legal measures to create a more open and level field of play between 12 signatory nations. The idea: reduce barriers to trade and investment, and new wealth will flourish. But the TPP would also impose strict requirements that fit U.S. standards on labour and environmental standards, intellectual property rights and the Internet.

Under Mr. Xi's China, a "One Belt, One Road" project stands to touch as many as 64 nations, binding them together in a massively ambitious plan to build new roads, rail lines, ports and power plants. The idea: build infrastructure, connect people, and new wealth will flourish.

Though China's vision involves many nations, it is also catered toward Beijing, which sits at the crossroads of many of those new connections, and whose banks and companies are heavily involved in the financing and building. To buttress it, China has also built an Asian Infrastructure Investment Bank, and is proposing a Regional Comprehensive Economic Partnership, a very different form of free-trade agreement that seeks to make it easier for goods to move – much like new highways and train tracks – with far fewer demands about how a country treats its workers or environment.

China is nonetheless developing a form of real international leadership, one that relies on "institution building and commitment of real resources," said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics and author of Markets Over Mao: The Rise of Private Business in China.

In those areas, "China at the moment certainly has more credibility" than the U.S., he said. "Certainly the rest of Asia is going to follow China's initiatives."

The new byword in Beijing is "China wisdom" – and the world could use a lot more of it, Mr. Wang said.

The Chinese approach is not without its attractions. Jack Ma, the billionaire founder of e-commerce giant Alibaba, suggested this week that the U.S. would have done better spending trillions of dollars over the last 30 years on infrastructure, as China has done, rather than on defence and foreign wars.

"China seems to be shaping an economic model combining elements from both unfettered capitalism and state-led growth, and as China's economy continues to expand, Beijing's final choice of economic model will influence the growth model in a number of countries," said Jo Inge Bekkevold, who heads the Centre for Asian Security Studies at the Norwegian Institute for Defence Studies.

China, too, has gone to great lengths to calm the waters with Mr. Trump, even telling its media – which normally have a liberal hand in raging against the U.S. – that "unauthorized criticism of Trump's words or actions is not allowed," according to a leaked censorship directive obtained by China Digital Times.

At the same time, the friendly China on display in Switzerland this week could quickly transform into a more hostile force if Mr. Trump continues to question Beijing's claim to sovereignty over Taiwan.

Taiwan is "Beijing's Achilles heel," said Cornell's Prof. Carlson.

"On many fronts China is quite well placed to position itself as the reasonable, responsible alternative to Donald Trump's America," he said. "However, at the same time, China's leaders will not, and cannot, act in a magnanimous, forward looking, fashion, should they be challenged on Taiwan."

China, too, is likely to strike back at measures to stifle its economy. Inside the country, some academics already see a trade war as nearly inevitable. Western business leaders say there are signs, too, of China preparing a volley of anti-dumping measures against U.S. goods.

Even if calm prevails, though, China shows little sign of willingness to supplant the U.S. as either architect or maintenance engineer of the specific ideas that gave rise to the World Trade Organization, the International Monetary Fund and the like.

If the U.S. under Mr. Trump begins to step away, then, "you end up with a fracturing order," said Arthur Kroeber, a respected author and China analyst who is managing director of Gavekal Dragonomics.

"Or, in the words of international relations theorists, you are in a more anarchic world, where the common projects that have bound different countries and regions together – those bonds become much weaker and it becomes much more a matter of individual countries pursuing their self-interest in somewhat narrow ways."

Perhaps no single number better illustrates the difference between Chinese and U.S. approaches than the balance of trade, the gap between the value of a nation's imports and exports.

China runs one of the world's single largest trade surpluses, a measure of the great sums of money its manufacturers and exporters inhale from the rest of the world.

The U.S. stands at the opposite end of the spectrum as holder of the world's largest trade deficit. In fact, the U.S. has maintained a negative trade balance each year since 1971, an uninterrupted record now approaching a half-century.

That means the U.S. – for all of its own self-interested policies and ill-fated international interventions – has consistently allowed itself to be a foundation on which the rest of the world can build.

"The U.S., I think, can authentically say that in that arrangement it is giving up something so other people can have something," said Mr. Kroeber.

"If you are the largest economy in the world running a trade deficit, that enables pretty much everyone else to have a trade surplus and have export-driven growth."

The U.S. trade deficit, and the way it has echoed into emptied factories and jobs that have departed overseas, lies deep in the well of unhappiness that sustained Mr. Trump's victory.

"We've made other countries rich while the wealth, strength, and confidence of our country has disappeared over the horizon," Mr. Trump said in his inauguration address Friday.

He added: "From this day forward, a new vision will govern our land. From this moment on, it's going to be only America First."

Mr. Trump's presence in the White House means it is suddenly unclear the degree to which the U.S. will continue its position as the world's chief buyer.

If that happens, don't expect China to move in.

"The Chinese have no interest in playing that role," Mr. Kroeber said. "They have made it very, very clear that their own industrial strategy is to make sure they can basically produce everything and not be reliant on anyone else. And that is a huge difference. Because if you are now the world's second-biggest economy and insist on running a trade surplus, you are essentially saying that everyone else in the world – or most major economies have to be in a deficit."

That, then, is the risk posed by Mr. Trump to the system of liberal globalization: that his presidency will be marked by the rise of both his own "Make America Great Again," and its Asian counterpart, often enunciated by Mr. Xi himself: "the great rejuvenation of the Chinese nation."

Embedded in those two slogans is a "confrontation of two nationalisms," said Pang Zhongying, a professor of international relations at Renmin University of China, at a conference arranged this week in Beijing to consider what Mr. Trump might mean for China.

To some, it suggests dusk is descending on the 30-year era of globalization.

"With Mr. Trump's election victory, the world enters a new phase," Prof. Pang said. "The only thing we know about what's to come is uncertainty."

With reporting by Yu Mei.

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail.