The May 2020 Politburo meeting saw the launch of China’s ‘dual circulation’ strategy as the new organising framework for China’s economic development. There was, though, little detail on what the phrase actually means, leading quickly to divergent views. For some observers, it marks a critical policy change. For others, it is more a case of ‘old wine in new bottles’. For some, it marks an inward turn by China, away from the world. For others, it emphasises China’s continued opening to the world.
Such ambiguity is nothing new. There are, for example, similar discussions about the ‘Belt and Road Initiative’ and China’s goal of building a ‘shared community of common destiny’. In fact, ‘dual circulation’ is not so much a specific policy agenda. It represents rather a framework for recasting discussion of policy choices. It shifts the emphasis from assuming continued integration into the global economy to a more measured, nation-based thinking on the merits of such integration. As such, it has relevance not just for China but for all countries.
What is ‘dual circulation’ and why does it have such broad relevance, beyond China?
Since 1978, China has celebrated the process of ‘reform and opening up’, and ever-greater integration into a global economy. In the words of Tom Friedman in 2005, the world is flat. Or at least getting flatter and flatter, as barriers to trade, investment, communication and travel fall away. ‘Dual circulation’ has a different framing. It explicitly divides the world, as seen from Beijing, into two systems of ‘circulation’ or economic activity – internal (or domestic) and external (or international). The two ‘circulations’—or, one could say, ‘spheres of activity’—connect to one another, but are different in nature. Crucially, the ability of the Chinese government to shape and control them is different.
‘External circulation’ (which refers to the global economy beyond China) offers export markets and investment opportunities. It is the source of valuable imports, foreign direct investment and technology. But the past few years have shown how much this sphere lies beyond China’s control and represents a risk exposure. China has experienced tariffs on its exports, bans on semiconductor imports and sanctions on certain Chinese enterprises. There are concerns about weakening structural demand in economies hit more severely by COVID-19 than China.
The realm of ‘internal circulation’ is more easily controlled and steered, even if any government must recognise limits to this ability in an economy of 1.4 billion people. China’s prosperity requires continuing productivity growth that supports higher incomes for Chinese people. This in turn rests on innovation, competition and upgrading of capabilities and is, ultimately, a domestic challenge. It is also actions domestically that provide the means to reduce dependence on critical imports, be they semiconductors, energy or food.
In the wake of the COVID-19 pandemic, countries have sought to strengthen their onshore medical equipment and healthcare sectors. It is not just China seeking to build high-end manufacturing capabilities – so too are the US, Germany and the UK to name but three.
Not uniquely Chinese
Economic considerations are increasingly intertwined with security concerns and risk management. In December 2020, President Xi spoke of ‘balancing both (economic) development and security, while placing equal emphasis on development and security’. And China’s definition of national security is now broad indeed.
In Hong Kong, a recent definition included ecological, technological, economic, cultural, territorial, social and cyber security. Against this backdrop, the role of ‘external circulation’ depends on an assessment of the benefits and risks it can bring to China. In the words of Mao Zedong: “Make the foreign serve China”.
But there is nothing uniquely Chinese about this way of thinking. The same framework describes the three areas of intervention open to any national government.
First, how best to shape and develop the domestic economy? For China, the questions here have not changed with the announcement of ‘dual circulation’: How to increase consumption? What is the role of private versus state-owned enterprises, especially in innovation and technology upgrading? How best to manage indebtedness and financial risks? All countries must first start at home where they can act to the most effect.
Second—and critically—how does ‘external circulation’ best serve the needs of a country? What are the benefits? What are the risks? And so, on what terms and what policies should the domestic economy link to the global economy? One answer, of course, is ever-increasing integration and opening up. But this is no longer taken for granted. The other extreme is complete autarky, an isolation even more extreme than that of North Korea. That is not seen as a serious policy option. But there is a wide range of policies in-between. The nature and terms of connectivity are back as a major policy variable. Governments can change the terms based on an assessment of benefits and risks.
Third, how best to play a role in shaping the development of the global economy, rather than taking the nature of ‘external circulation’ as a given? For any individual country, influence here is less and time horizons typically longer. But China invests time and effort in multilateral organisations and new structures. Other countries, too, debate the future of ‘the rules-based order’ and reform of the World Trade Organization and are creating new groupings such as CPTPP in Asia-Pacific trade.
Nature and terms of integration as a policy variable, and not just in China
It is the second question of how to connect the domestic and global economy that gets most attention today. Debate has turned to the risks rather than benefits of integration into the global economy. Dependence is now feared more than interdependence is welcomed. Questions of economics, security and values have become increasingly intertwined after decades where they were considered to be quite separate. The policy linkages that countries have made and the pervasive dual-role of technology in economic prosperity and security both contribute to this.
Moreover, after decades of blithe assumptions by some analysts that all countries would converge on western models of social and economic governance, it is now clear that this is not happening – if anything, differences are increasing. As differences increase and economic power equalises, some increased separation and mutual caution is to be expected.
And so, beyond China, we have a world where governments are putting more conditions on how the domestic connects with the global. In the US, the UK, across the EU, in India and elsewhere, governments are more active in developing their own technological capabilities and reducing reliance on potentially high-risk overseas suppliers – often seen as those from China.
In the wake of the COVID-19 pandemic, countries have sought to strengthen their onshore medical equipment and healthcare sectors. It is not just China seeking to build high-end manufacturing capabilities – so too are the US, Germany and the UK to name but three. The UK has introduced the National Security and Investment Bill to apply a national security lens to foreign acquisitions of British assets. The new Biden administration has launched an extensive review of supply chains to identify risks in sectors such as semiconductors, batteries and pharmaceuticals. India and the EU have also increased its screening of foreign investments. These countries all, quite naturally, seek to ensure that the ‘foreign’ serves their interests, rather than bringing risk.
‘Dual circulation’ is not so much a specific policy agenda. It represents a framework for recasting discussion of policy choices. It shifts the emphasis from assuming continued integration into the global economy to a more measured, nation-based thinking on the merits of such integration.
The third question—how to shape the global economy—has also taken on new relevance. In a world of continual integration, the shape, or ‘target shape’, of the international sphere was straightforward. Flat! Barriers would fall and all would interact on common terms. Trade negotiations were global through the World Trade Organization. The answer now is more a patchwork, regional, plurilateral, agreements between the ‘like-minded’, however that word is defined.
At the extreme, the EU represents countries coming together to form an expanded zone of domestic circulation – a single market with a common customs tariff and freedom of movement. But as questions of security and values become more intertwined with economics, the EU is now grappling with how to become more ‘geopolitical’; what form a European army might take; and the role of the EU vis-à-vis member states in addressing security concerns linked to investments.
With Brexit, the UK has moved from being a member state to a ‘third party’ for the EU. The UK chose to move from being part of the EU’s ‘internal circulation’ to part of its ‘external circulation’. The ongoing saga of UK-EU negotiations is about agreeing how the two should now connect. It brings to the fore some of the dynamics of the US-China relationship. The EU expresses concern at its dependence on London for clearing euro derivatives transactions and seeks to shift activity to the EU, building its own capacity. The City of London changes its own position, recognising the risks of accepting EU regulatory standards in exchange for market access. It would rather make its own UK-focused regulatory choices.
Not a policy prescription
So ‘dual circulation’ has taken us from China to Brexit. It is an organising framework rather than a set of policy prescriptions. It separates out two distinct circulations or spheres of economic activity – and so places a spotlight on how they connect.
Regarding China, western policy debates have one word for this: Decoupling. But that too is just one policy direction. With China attracting more foreign investment than any other country in 2020, the reality is more complex. ‘Dual circulation’ may then be a way to apply a more systems-based approach and get the mix right in policymaking.
Andrew Cainey is a senior associate fellow at the Royal United Services Institute in London and author of Xiconomics: What China’s Dual Circulation Strategy means for global business. Andrew has 30 years’ experience advising governments, companies and non-profit organisations across Asia and Europe. Andrew was previously the managing partner of Booz & Company’s Greater China consulting operations; the partner leading the Rt Hon Tony Blair’s Asian government advisory practice; and the partner in charge of Boston Consulting Group’s Asian financial institutions practice. He has also been a Senior Fellow with Fung Global Institute in Hong Kong; an Associate Fellow in Chatham House’s Asia-Pacific Programme; a Senior Fellow in the Security and Crisis Management Programme (International Centre) at the Shanghai Academy of Social Sciences; and a Policy Advisor in the Conservative Party’s Policy Unit.