China won’t mix Russia with US ties

The Russian daily Nezavisimaya Gazeta carried a thoughtful commentary on Tuesday titled Russia becomes China’s raw material storeroom. The argument runs like this: There has been a phenomenal shift in the structure of Sino-Russian trade through the past two decades. The share of Russian supplies of machinery and equipment to China in the export basket has dramatically shrunk to a mere tenth of what it used to be just twenty years ago. 

Instead, “most primitive commodities” have surged. On the other hand, China has become a supplier to Russia of “complex high value-added products.” China’s exports to Russia are today principally machinery and equipment. The Russian studies suggest that through the next two decades, this trend will only accelerate and “the structure of Russian exports to China will become more raw and primitive.” 

The Russian experts attribute this trend to “development features”. That is to say, as the Chinese economy rapidly grew and expanded through the past two-decade period, all sectors were evolving alongside and the country began producing a wide range of high value-added products that are in demand abroad. Whereas, the Russian story ran in an opposite direction. In the Russian economy, the main growth sector turned out to be the oil and gas sector and the country’s exports today are mainly out of the energy sector. 

(Power of Siberia gas pipeline to China: Delivery to begin late 2019)

The head of the Veta expert group in Moscow Dmitry Zharsky drew some profound conclusions out of all this. He said, “China is a country with economic development dictated by the lack of potential for developing commodity exports, which creates the pre-requisites for the development of the manufacturing sector.” According to Zharsky, investment in technology and intellectual capital shaped up the Chinese economy into its present mode and Russia is lacking here. He added, “In order to diversify exports to China in the future, it is necessary to start producing something that China would be interested in besides oil and timber.” For this to happen, Russia needs to invest money in the development of the manufacturing industry.

Indeed, the Russia-China trade is doing splendidly. Trade increased by 20.8% during the last two-year period, touching a record figure of $107.06 billion. It is a success story and trade balance is in Russia’s favour — exports to China worth $59.08 billion as against imports of $47.98 billion.

The big question is whether a similar trend awaits the US’ trade with China. The point is, President Trump is so much focused on the US’ trade deficit with China that Beijing is compelled to seriously explore opportunities to import more from America. The catch is that in the process, the US may end up as an important supplier of raw materials for China. Indeed, China is at present the biggest importer of oil and soybeans in the world and a potential buyer of bulk commodities like LNG. 

The US on the other hand, is shaping up as one of the world’s top exporters of crude oil and natural gas, following the technological innovations known as the shale gas revolution. Simply put, bulk commodities are likely to be thrust areas in the US’ exports to China. A commentary in the Global Times argues, China will retain its status as a “major manufacturing power with the world’s most complete industrial chain”, and China’s manufacturing industry will no doubt be a huge guzzler of bulk commodities.

But then, what the GT says is not the whole story about China-US trade. Arguably, it is not even a fraction of the story. Thus, Alibaba co-founder Joseph Tsai was quoted by US-based financial network CNBC as saying on Wednesday that the US trade deficit with China will reverse in the long term. He explained how this may happen. According to him, Chinese economy is very much driven by consumption and China’s middle class consumers who are the growth drivers today already number 300 million (by world standards) and this number is expected to increase to a staggering 850 billion in a little over a decade, by 2030. To quote Joseph Tsai, 

“With regards to the trade war (with US), I would say this: the — if you look at the long term, the trade deficit itself will reverse. You know, I have talked about this 300 million middle class consumers that would continue to buy more from over the world. The government has made a commitment to import $30 trillion of goods and $10 trillion of services over the next 15 years.” 

(A container terminal in Shanghai)

Joseph Tsai’s interview gives a fantastic insight into the level of Sino-American matrix. The following passages are so revealing: 

“Well, I think there’s a very symbiotic relationship of Chinese businesses and U.S. businesses doing business in each other’s countries. And we hope – we are hopeful that this relationship will be maintained. I think there are some specific circumstances on some of the Chinese companies and they will have to work through their issues with the regulators…”

“Well, I think it’s not quite right to pit China against the United States when it comes to AI or any kind of technology. The fact of the matter is everything is symbiotic. So specific to AI, if you look at the applications of AI, we’re applying that to agriculture, to manufacturing, to health care. So, for example, there’s just an article this morning about Chinese hospitals develop new ways using AI to detect diseases. And if the benefits of AI can be shared globally with all the different country that will be great. But right now, I think there’s kind of a knee jerk tendency to say, ‘Oh, we’re competitors,’ and parallel universes are being created. I think that’s the wrong approach. The fact of the matter is there are scientists from China here in the United States working on AI. Lots of American companies that are very, very good in AI that want to get into China. I think that — I think having a more symbiotic relationship and working together on AI is really the way to move forward.”

Quite obviously, Beijing will never mix its respective relationships with Russia and the US, especially by teaming up with Moscow to challenge Washington. The US remains the most important partnership for China. Equally, the same can be said for Moscow as well — although from a different perspective of security and strategic stability.

Indian analysts often draw simplistic geopolitical conclusions while exaggerating the dimensions of the Russian-Chinese partnership or underestimating the profound matrix of interdependency that exists in the relations between China and the US. Read the transcript of Joseph Tsai’s exclusive interview with the CNBC — Alibaba Co-Founder Joe Tsai Speaks with CNBC’s Leslie Picker Today.