Xi Jinping and “dual circulation”

The end of the “great international circulation”

If we take the case of the automobile industry in China, the prevalence of joint ventures indicates a unique developmental model, in which foreign and Chinese automakers cooperate in building highly efficient value chains. Joint ventures are legal partnerships between a domestic firm and a foreign investor to form a new operation in the domestic market and typically involve widespread use of proprietary technologies, intellectual property, and advanced production methods. This model was extremely successful in China, less so elsewhere. To gain a foothold in an overseas market, international automakers generally prefer direct exports, or to set up wholly-owned corporations. The establishment of joint ventures has often been a compromise for the foreign firms, and indicates strong negotiating power on the part of the host country, which sees it as a way to force technology transfer. In other words, China deliberately avoided both the Mexican and the Korean models of subordination to large foreign firms or autonomous national development, opting to integrate its automobile industry in global value chains while preserving control over the process. Revealingly, in China enterprises owned by the central government all set up international joint ventures, while national carmakers are all private companies.

I was reminded of this example by the new “dual circulation” strategy introduced by Xi Jinping in the May Politburo meeting. The strategy is a major theoretical innovation deserving much closer study in the West than it has received so far. Formally, it introduces a clear break between a domestic and a global economic system: the two circulations. Something of the concept had been present in Chinese practice. As we have seen, control in the auto sector is drastically different depending on whether a company is operating in the national or the global system and the difference followed the intuition that a company needs

the backing of the Chinese state when dealing with foreign interests or counterparts. Now, after the trade wars and after the pandemic, that intuition is being transformed into a new general concept meant to guide Chinese economic policy as a whole. Deng Xiaoping, by contrast, had spoken of a “great international circulation” strategy.

The “dual circulation” strategy is not a strategy of economic autarchy. What it argues is that the “two economies” must follow different rules. The domestic system is governed by a general imperative of efficiency, which is often pursued through competition between private actors. In the global system, however, efficiency is a subordinate goal. State power, national security and national greatness are much more important. While supply chains in the domestic system may be left to the outcomes of the market, abroad they must be built and protected through the use of state power and state resources. In other words, a “dual circulation” strategy is actually a strategy of economic globalization. What Xi is saying is that Chinese economic expansion will not be left to the vagaries of global markets.