The Chinese dilemma of G-7 countries

The G-7 – advanced industrial democracies – finance ministers in their meeting at Niigata in Japan have been exploring ways of decreasing the dependence on China in global supply chains, and they held discussions with their non-G7 counterparts from India, Indonesia, South Korea, Brazil, Singapore, and Comoros about the way to do it. United States Treasury Secretary Janet Yellen had mooted investment controls towards China so that the second largest economy in the world does not have dominance in key technological sectors to counter what she claims is China’s “economic coercion” on other countries.

German Finance Minister Christian Lindner framed the issue slightly differently saying that Germany would like to reduce its dependency on China. Germany does not want to be identified as heading an alliance against China because Germany does depend heavily on China in terms of imports of manufactured goods. Japanese finance ministry officials said that the issue was discussed at the conference but clarified that Japanese initiatives were not directed against any particular country. British Chancellor of Exchequer Jeremy Hunt did not speak of investment controls like Yellen did, but he spoke of countering China’s economic coercion.

A special session at the meeting devoted three hours to discuss engagement with Global South, as a way of moving from China. But a report of the Organisation of Economic Co-operation and Development (OECD), an international organisation of the developed countries, has in a report acknowledged that China has an advantage in technologies, especially dealing with green technologies like manufacture of batteries, solar panels and wind turbines, and that G-7 countries are lagging behind China in this sector.

The report said that China is a dominant player in processing raw materials for electric vehicle batteries because of its monopoly of manganese and graphite. It also has a majority share in component production, and Japan and South Korea are the other players but they are behind China. The OECD report says that cooperation between G-7 and non-G-7 countries can reduce “chokepoint risks”, that is excessive dependence on China. And it says that this can be achieved without risking “competitive neutrality”. That is, to isolate China, and to develop other sources of the global supply chain it would not be necessary to compromise on economic efficiency and favour other countries.  

The International Monetary Fund’s (IMF’s) January report said that there is need to take care not to fragment global trade because then the GDP costs would go up by 7 per cent and the increase in costs would even touch 12 per cent for some other countries because of “technological decoupling”.

One of the reasons that China has become a key player in the global supply chain is because of the economic factor of keeping costs low. The IMF communications director, Julie Kozack, told reporters that the IMF Managing Director, Kristalina Georgieva, who is at the conference, would encourage countries to go on the diversification of global supply chain path “on the basis of economic logic, and to limit these costs very much to the lower end of that bound to ensure that the global economy remains strong and robust.”

So, the G-7 countries in their desire to break away from the excessive dependence on China for strategic and ideological reasons will have to keep in mind the economic costs of moving away from China, and they will also have to keep in mind that China enjoys a technological lead in some of the green technologies, which are so necessary to make the energy transition to a climate change-friendly system.  The United States and the United Kingdom might be keen to break with China, but Germany and Japan are more cautious in achieving the same end without rocking the boat of global economy as it were.