How China Stands To Win From US Climate Decision

Business, China, Company Strategy, Economics, Environment, Middle East, Oil & Gas, Technology, US

chinausaBy John Richardson

How might China benefit from its decision to stick with the COP21 climate-change deal as the US withdraws? Here are some thoughts.

Easier to Escape the Middle Income Trap

China is already leading the global charge on renewable power generation, and on electric batteries for cars – and in many other areas of the global green economy.

These are the type higher-value goods and services it needs to develop in order to justify the higher wages resulting from a declining working population – its “middle-income trap”. The work of economist Sir Arthur Lewis tells us how any developing economy will always reach the point at which it has to escape a middle-income trap. But for China, this reckoning with economic destiny has been brought forward by its One-Child Policy. It is at risk of becoming an old country before it is a rich country.

This how China stands to benefit here:

  • The damage to US international relations caused by the withdrawal may mean that US green tech companies – including, of course, chemicals companies – will find it harder to sell their goods and services overseas. “Why should we buy from a country that has abandoned this agreement?” could be the attitude of governments in the EU, Canada, Brazil and Mexico, which were the first to express their disappointment. Perhaps even tariff barriers will be erected that damages US green tech innovators.
  • Into the fold may step Chinese companies. China has already poured billions of dollars into green tech R&D, which is a pillar of its 13th Five-Year-Plan (2016-2020). Funding by Beijing could well be stepped up in response to the US decision. It is hard to imagine the White House showing the same levels of enthusiasm for investing in the US green tech sector.

Higher Chance Of A Successful OBOR Project

Here is the essential context first…

The key to China escaping its middle-income trap is the success of its multi-generational, trillion dollar-plus project – One Belt, One Road (OBOR). This is partly about a.) Getting access to the higher-value technologies it needs to escape its middle-income trap from its OBOR partner countries, and b.) Building the infrastructure necessary to export its higher-value goods to overseas markets in cost-effective ways.

China also wants to outsource its lower-value manufacturing to less developed OBOR partner countries. In this way, it will keep control of these lower-value manufacturing chains, such as textiles and garments.  It thus has the opportunity of avoiding the “manufacturing drift” of jobs going overseas that is behind a lot of the resentment towards free trade in the US.

The idea here is that China outsources these manufacturing chains to say a country such as Iran, which has high youth unemployment, in return for which it receives preferentially-priced supplies of oil and gas. Unlike the US, China has no realistic change of by itself becoming energy independent. It it fails to secure enough hydrocarbons on the right terms, its economic future will be threatened.

There are two reasons why I believe China’s COP21 decision will make it more likely that the OBOR will succeed:

  1. The OBOR is hugely ambitious in scope as it requires lots of political goodwill amongst its 65 members if it is going to work. By sticking with COP21, China has sent an important message of goodwill to OBOR member countries, such as Bangladesh, that are very vulnerable to climate change.
  2.  China can also provide the goods and services  – and infrastructure investments such as flood defences – necessary for Bangladesh etc. to mitigate the impact of climate change, This trade and investment will come via the OBOR initiative.

“As The US Retreats From The World, China Is Doing The Opposite”

This was a comment from a very senior chemicals industry contact back in January – immediately after the landmark speech made by Chinese president Xi Jinping to the World Economic Forum in Davos.

Xi’s very internationalist speech was widely compared with the much more nationalist, isolationist approach of President Trump. “The two different approaches show that China is becoming a more responsive and responsible partner for the international community, whilst the US is moving in the opposite direction,” added my contact.

China’s re-affirmation of its commitment to COP21 is likely to be viewed as further confirmation of China’s more internationalist approach. What is also significant is that China and the EU issued a joint statement supporting the climate deal, immediately before the US announcement.

I must once again stress that this has nothing to do with my personal political opinions. Neither has this anything to do with whether or not human activity is behind climate change. I will leave that debate to the scientists. This is instead about the opinions of Angela Merkel, Emmanuel Macron and Justin Trudeau etc. and how their views will help reshape the global geopolitical and economic order. What you or I think is of course of much less importance.

You therefore need to ask yourself this question:

Do the events surrounding COP21 over the last 24 hours make it more likely that China will emerge as the dominant superpower, replacing the US?

If your answer is “yes”, you then need to think of how this could reshape global chemicals trade flows and investment strategies, probavly much more quickly than many people think. How chemicals trade flows investment strategies may change will be the subject of future posts on this blog.

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