Report | The pursuit of self-sufficiency is a calculated risk

Executive Summary

China’s 14th Five-year Plan (14FYP) sets a clear course for the country to reduce its reliance on the rest of the world, before ultimately achieving a high degree of self-sufficiency. The first part of this plan—avoiding over-reliance on any one country—will require China to both diversify and strengthen its existing supply chains. This is a course that several other countries have opted to pursue, largely in response to the coronavirus pandemic having highlighted the fragility of many global supply chains, particularly for crucial goods like medical devices and pharmaceuticals. 

However, the pursuit of self-sufficiency is a calculated risk that is being taken on the back of China’s belief that, within the next decade or so, it can successfully attain a higher level of innovation and manufacturing capability that will allow it to lead in the technologies likely to define the global economy of the future. At the same time, China looks set to further reduce the role that foreign companies currently play in its economy—particularly in high-technology sectors—while simultaneously attempting to increase global dependency on its own economy.

The size of its economy and strong gross domestic product (GDP) growth relative to most of the rest ofthe world seems to have given China the confidence that it can afford to largely go it alone. However, the European Chamber believes that while the potential costs—both to China and foreign companies—will not be felt immediately, they will be extensive and have a long-term, negative impact. They include the following: 

• A decrease in foreign direct investment (FDI) as international companies are forced out of, or deterred from, expanding in or even entering the Chinese market.

• A deceleration of innovation capacity due to the continuing, rapid decrease of international talent from developed economies. 

• An increase in challenges for Chinese companies attempting to expand globally, as the European banks that provide the cross-border services they rely on to facilitate their expansion into foreign markets face further constraints to do so. 

• A significant misallocation of resources, as state support will be increasingly diverted to multiple industries in an attempt to replicate the manufacturing of goods that are already globally available. 

• A reduction in access to the core technologies China requires to upgrade its value chains, as developed economies employ tools—such as export controls—in an attempt to force reciprocity.

• An increase in challenges for China to meet its ambitious 2060 carbon-neutral target due to a lack of access to innovative green technologies and solutions that European companies can provide. 

• Growing international push-back against perceived mercantilist trade policies, leading to a deterioration of trade and political relations with other countries.

Simply put, the pursuit of self-sufficiency runs contrary to the spirit of comprehensive reform and opening up that China began in 1978, and persisting with this goal will have a direct impact on per capita GDP growth.

This can be seen by viewing the trajectory China’s growth could take from 2021 until 2050, based on three different growth scenarios – a baseline projection, one based on comprehensive reforms and one based on limited reforms. If China were to implement comprehensive reforms to boost productivity growth, after three decades it would attain per capita GDP of approximately United Statesdollars (USD) 55,876, which is 65 per cent higher than if it were to follow a path of limited reforms.

Output-side real GDP per capita (purchasing power parity- (PPP-) based) with three projections: limited reforms, baseline and comprehensive reforms

Source: World Bank

For these reasons, the European Chamber presents this paper with the recommendations that China instead continues with the spirit of the reform and opening plan it first started in 1978, (re)builds international bridges and recommits to increasing integration into the global economy.

Download the Position Paper

in English and Chinese

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