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- Herausgeber: John Wiley & Sons
- Kategorie: Geisteswissenschaft
- Sprache: Englisch
After leading the world economy for a century, the United States faces the first real challenge to its supremacy in the rise of China. Is economic (or broader) conflict, well beyond the trade and technology war that has already erupted, inevitable between the world's two superpowers? Will their clash produce a new economic leadership vacuum akin to the 1930s, when Great Britain was unable to play its traditional leadership role and a rising United States was unwilling to step in to save the global order? In this sweeping and authoritative analysis of the competition for global economic leadership between China and the United States, C. Fred Bergsten warns of the disastrous consequences of hostile confrontation between these two superpowers. He paints a frightening picture of a world economy adopting Chinese characteristics, in which the United States, after Trump abdicated much of its role, engages in a self-defeating attempt to "decouple" from its rival. Drawing on more than 50 years of active participation as a policymaker and close observation as a scholar, Bergsten calls on China to exercise constructive global leadership in its own self-interest and on the United States to reject a policy of containment, avoid a new Cold War, and instead pursue "conditional competitive cooperation" to work with its allies, and especially China, to lead, rather than destroy, the world economy.
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CONTENTS
Cover
Title Page
Copyright
Preface
Notes
Abbreviations
Part I The Setting
1 A New Global Economic Order?
The Rise of China
The United States as Incumbent Power
The Systemic Alternatives
The Current System
The China Challenge
The New Systemic Shocks
Recent Systemic Competition
Recent Systemic Cooperation
The Policy Options
The Domestic Front
Notes
2 Why Global Economic Leadership Matters
Global Public Goods
Types of Global Economic Leadership
The Benefits and Costs of Global Economic Leadership
The Rise and Fall of American Global Economic Leadership
The Major Leadership Failures
The Trump Abdication
China’s Global Economic Leadership Record
Notes
Part II The Superpowers
3 China’s Leadership Capabilities
Economic Size
Economic Quality
Trade
Foreign Direct Investment
Foreign Exchange Reserves
Development Finance
Technology
Human Capital
Growth Projections
China’s Achilles Heels
Authoritarian Politics
Perceptions and Realities
Conclusion
Notes
4 China’s Aspirations
The Complexity of Chinese Views
Inflection Points: The Global Financial Crisis and the Coronavirus Pandemic
Revisionist or Revolutionary?
The Best of Both Worlds
The Costs of Global Economic Leadership
Conclusion
Notes
5 America’s Leadership Capabilities
The US Economy
Decoupling Economic and Security Issues
US Vulnerabilities
A Long-Term Erosion?
Conclusion
Notes
6 America’s Will to Lead
The Costs of Leadership
The Domestic Politics of Global Economic Leadership
Who is the United States?
Is US Leadership Still Necessary?
Conclusion
Notes
Part III The Systemic Alternatives
7 The Leadership Vacuum: A G-0 World?
A Stable or Unstable G-0?
What for the Future?
Potential G-0 Leaders
Toward a Stable G-0
Conclusion
Notes
8 G-1: Chinese Economic Pre-Eminence
The Path to a “G-1”
The Key Principles of the System
The Chinese Alternatives
The Role of the State
Law and Politics
Conclusion
Notes
9 Effective Co-Leadership: A US–China G-2
A G-2 Today?
The Case for a G-2
The Hurdles to a G-2
An Operational G-2
Potential Institutional Initiatives
Conclusion
10 Toward Conditional Competitive Cooperation
A New International Economic Order?
Restoring the Alliances
Trade Reform
International Monetary Reform
An International Institutional Integration Initiative
A Proposed US Strategy
Domestic Reform
Conclusion
Notes
References
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1
US policy options toward China
Chapter 3
Figure 3.1
How much does China exceed US GDP at PPP exchange rates?
Figure 3.2
When does China exceed US GDP at market exchange rates?
Figure 3.3
How much does China exceed US GDP at market exchange rates?
Figure 3.4
Shares of world growth
Figure 3.5
The power index: China and the hegemonic coalition
Figure 3.6
Global trade projections
Figure 3.7
Stock of foreign direct investment: 2018
Chapter 5
Figure 5.1
Power index @ 2019
Figure 5.2
GDP @ 2019
List of Tables
Chapter 1
Table 1.1
IMF quotas: Projections to 2050 on current IMF formula
Chapter 2
Table 2.1
The United States and the hegemonic coalition: 2018
Chapter 3
Table 3.1
GDP at purchasing power parity: 2019
Table 3.2
GDP at market exchange rates: 2019
Table 3.3
Growth rates of total factor productivity
Table 3.4
Per capita GDP at purchasing power parity: 2019
Table 3.5
Per capita GDP at market exchange rates: 2019
Table 3.6
The power index (GDP × GDP per capita)
Table 3.7
National wealth per World Bank
Table 3.8
National wealth per United Nations
Table 3.9
The power index: China and the hegemonic coalition
Table 3.10
The share of trade in GDP
Table 3.11
World trade (exports plus imports): 2019
Table 3.12
Trade growth: 1980–2018
Table 3.13
Growth of foreign direct investment
Table 3.14
Foreign exchange reserves: end of 2019
Table 3.15
R&D expenditures
Table 3.16
World Bank Human Capital Project: 2020
Table 3.17
Estimates of long-term China growth
Chapter 5
Table 5.1
Patent applications
List of Boxes
Chapter 1
Box 1.1
(When) Will the IMF and World Bank move to China?
Chapter 2
Box 2.1
The Nixon shocks
Box 2.2
President Obama and TPP
Guide
Cover
Table of Contents
Title Page
Copyright
Preface
Abbreviations
Begin Reading
References
Index
End User License Agreement
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THE UNITED STATES VS. CHINA
The Quest for Global Economic Leadership
C. Fred Bergsten
polity
Copyright © C. Fred Bergsten 2022
The right of C. Fred Bergsten to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.
First published in 2022 by Polity Press
Polity Press65 Bridge StreetCambridge CB2 1UR, UK
Polity Press101 Station LandingSuite 300Medford, MA 02155, USA
All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the publisher.
ISBN-13: 978-1-5095-4736-4
A catalogue record for this book is available from the British Library.
Library of Congress Control Number: 2021944914
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Every effort has been made to trace all copyright holders, but if any have been overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.
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Preface
In October 1993, President Bill Clinton was preparing to host the first-ever summit of leaders of the top powers of the Asia Pacific region: China, Japan, South Korea, Indonesia, and a dozen others, along with the United States. I briefed him at the White House on the main recommendations of the Asia Pacific Economic Cooperation (APEC) forum’s Eminent Persons Group, which I chaired: that the upcoming meeting agree to establish a “community of Asia Pacific nations” that would seek to achieve “free and open trade and investment in the region by 2020.” The President agreed with those proposals and led their unanimous approval at the summit a month later, accelerating the integration and expansion of the most dynamic region of the world economy.1
Before deciding to do so, President Clinton asked the question that is even more central to US and global economic policy today than it was then: will China simply take the huge opportunities that have been offered to it, to benefit from an open world economy and access to the world’s most important markets, and then “tell us bye-bye when they no longer need us?” Like seven other US presidents before and after him, Clinton decided to gamble on engaging with China – at a time when the United States, basking in the glow of winning the Cold War, was near the peak of its global economic power and leadership position, and China was still in the early stages of its stunning rise.
A number of Americans, including former President Trump, now believe that was a huge mistake and want to reverse the policy. They fear that China will overtake the United States as a regional and even global power, and represents an existential threat to its world leadership, perhaps even its national security. They argue that “the China shock” and many of China’s policies are severely damaging the US economy. They worry that the American model of market economics and democratic politics may give way to China’s state capitalism and authoritarian rule. They conclude that China must be confronted and contained. The trade wars from 2017 could be just the start of prolonged and escalating hostilities between the economic superpowers.
China is indeed rising rapidly. Its economy is already larger than that of the United States on some measures, and is growing at least twice as fast. It is the world’s largest trading country and, by far, holder of foreign exchange reserves. It has accounted for a quarter to a third of total world growth for more than a decade – far more than the United States. Its technological capability is growing rapidly and already rivals the United States in such keys areas as the Internet and artificial intelligence (AI).
Unless it experiences unforeseen setbacks, China will achieve and maintain economic power roughly equivalent to that of the United States for the foreseeable future. It thus represents the first real challenge to American supremacy since the United States became the world’s dominant economy a century ago; the Soviet Union was never an economic factor, and Japan was both much smaller and a reliable ally. China clearly wants to translate its increased power into a much greater role in the world economy (and more broadly) but it is unclear whether it will use that power to provide constructive global economic leadership.
The United States is not a declining power in any generalized sense. However, its global economic leadership has been waning for a quarter of a century, for both internal and external reasons, and President Trump abdicated much of what remained during his tenure. Its will to maintain that role is in doubt and much domestic reform will be needed to restore it. It will be critical whether President Biden and his successors can credibly regain at least part of America’s traditional role, and whether their policy agendas will succeed in supporting such a reversal, as the rest of the world legitimately questions whether Trump or Biden most accurately approximates the country’s international stance on a sustained basis.
The coronavirus pandemic, and their respective responses to it, underline the competition between the two economic superpowers. China clearly responded more effectively to the pandemic itself, registering far fewer infections and deaths, and suffered much less setback to its economic growth. But its lack of transparency surrounding the origins and transmission of the disease, and its limited cooperation with international efforts to combat it, sullied rather than enhanced its global status, and thus its leadership aspirations.
The United States must in any event reject any efforts to contain China. Even if it were desirable, containment cannot succeed, as President Trump demonstrated: China is too large and too dynamic to be suppressed and few, if any, other countries would join the United States in an effort to do so. The effort would indeed be counterproductive as it would simply motivate China to push even harder to achieve economic superiority, and America’s traditional allies to tilt increasingly toward the rising power.
The United States, along with its traditional allies, should instead pursue a policy of “conditional competitive cooperation,” through which it would seek to work informally but cooperatively with the rising superpower to lead a stable and prosperous world economy. Competition would characterize the day-to-day interactions between the two economies. Conditionality would require both countries to implement the leadership commitments they make to each other and to fulfill their international obligations more broadly. The other key countries, especially the Europeans and Japanese, would be integrated into the process as well.
Systemic cooperation will probably require modifications in the international rules and institutions to satisfy Chinese preferences. It will certainly accord China a larger voice in international decision-making circles. But the essential “conditional” part of the strategy will require China to significantly alter policies and practices of its own that undermine, and thus jeopardize, the relatively open trade and investment regime on which China itself, as well as the United States, depends so heavily.
The purpose of this book is to fill a critical gap in the otherwise voluminous literature on the rise of China and on relations between China and the United States: the contest between them for global economic leadership. Is there an economic equivalent of the Thucydides trap, through which that competition between the rising and incumbent powers inevitably leads to conflict – much worse than the trade war that already erupted in 2018, perhaps a new Cold War? Will the world economy be left without any effective leader at all and thus exposed to a replay of the early 1930s, when incumbent Great Britain no longer had the capacity to fend off the international spiral that produced the Great Depression and the rising United States was unwilling to step in – and, indeed, made the situation worse? What type of leadership is feasible in today’s intensely competitive but also highly interdependent world economy?
Many studies of China’s rise, of course, include its economic dimension. So do many analyses of China – United States relations. But very few have focused primarily on the economic aspects of these issues, including whether it would be feasible or desirable to decouple them from the even more contentious security and political dimensions of the relationship – rather than to decouple the United States and China more broadly.
Fewer studies still have been devoted to the implications of the competition for the functioning of the global economic order. That system was created under US leadership at the end of the Second World War and has underpinned both the stunning economic progress and the “long peace” among the great powers that characterized the succeeding 75 years. Does rising China seek revolutionary or merely revisionist changes in that order? This book attempts to fill these gaps from the perspective of the United States, China, and the international economic system as a whole.
The book is divided into three parts. The first two chapters set the stage by analyzing the challenges facing the global economic order due to the rising capabilities of a new superpower and the declining will of the incumbent leader; the current and prospective global positions of those two superpowers; and the meaning and requirements of global economic leadership. The next four chapters examine the capability and will of China and the United States, respectively, to exercise such leadership.
The following three chapters assess the possible systemic alternatives: a G-0 world with no effective leader at all, which could turn out to be either stable (G-0s) or unstable (G-0u); a new G-1 “with Chinese characteristics” that might involve a Chinese “dash for dominance”; and a G-2 based on systemic co-leadership between the superpowers. Chapter 10 closes with conclusions and recommendations for a policy of conditional competitive cooperation, advocating policy steps to seek a G-0s in the short run, and an informal but effective G-2 over the longer term.
The book seeks to draw on the author’s unique experience as both an active participant in, and a continuing observer of, the evolution of global economic leadership for almost 60 years, and especially the roles of the United States and China in the enormous transformation of the world economy that has occurred over that period. As economic deputy to Dr. Henry Kissinger at the National Security Council (1969–71) and Assistant Secretary of the Treasury for International Affairs (1977–81), and later as an advisor to the US and a number of other governments, especially in Asia as Chairman of APEC’s Eminent Persons Group, I had the opportunity to play a modest role in the numerous global economic leadership efforts of this era. As Founding Director of the (now Peterson) Institute for International Economics for over 30 years, I was able to lead a team of superb economists that sought to develop ideas to promote a stable and prosperous global economic order. As a scholar myself, I have written numerous books and articles on these topics, and two explicitly on the rise of China with its international implications. Completion of this book was deliberately postponed to take account of the US elections of November 2020 and the first six months of the Biden Administration.
My acknowledgments begin with my colleagues at the Institute, many of whom provided invaluable comments and insights on succeeding versions of the manuscript through several seminars and innumerable brainstorming sessions. Special thanks go to Nicholas Lardy, one of the world’s leading experts on the Chinese economy; Ted Truman, with his enormous experience with global economic governance; Jeffrey Schott, our expert on the crucial trade policy aspects of the issue; Steve Weisman, Vice President for Communications and Publications, who provided moral support and wise guidance throughout; and Adam Posen, my successor as CEO who strongly encouraged the project from its outset. My particular gratitude is extended to the Smith Richardson Foundation, which provided initial funding.
I am particularly grateful to the members of the Study Group that the Institute convened for the project. My greatest appreciation goes to those who read all or parts of earlier drafts of the manuscript: Thomas Christensen, the late Richard N. Cooper, Joseph Nye, David Shambaugh, Robert Zoellick (in addition to Lardy, Schott, and Truman), and three very conscientious anonymous reviewers.
This book would not have been possible without the ongoing support of the Peterson Institute for International Economics. David Xu provided superb research assistance. My executive assistant, Jill Villatoro, prepared the initial manuscript and shepherded the bulk of the project. Meseret Ayele took over for her in the final stages, and Madeleine Weisman, Michael Welch, and Charlene Mui completed the typing. My publishers at Polity Press, especially Louise Knight and Inès Boxman, were indispensable in bringing the volume to completion. Needless to say, none of those cited bears any responsibility for the views expressed in the book, which are wholly mine.
C. Fred BergstenSenior Fellow and Director EmeritusPeterson Institute for International EconomicsAugust 2021
Notes
1.
The recent conclusions of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) of 11 nations, and the Regional Comprehensive Economic Partnership (RCEP) of 15, mean that more than half of APEC’s original goal has now been achieved – without the United States.
Abbreviations
ACT
American College Test
ADB
Asian Development Bank
AI
artificial intelligence
AIIB
Asian Infrastructure Investment Bank
APEC
Asia Pacific Economic Cooperation (forum)
ASCM
Agreement on Subsidies and Countervailing Measures
ASEAN
Association of Southeast Asian Nations: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam
ASEAN+1
ASEAN members plus one partner
ASEAN+6
ASEAN members plus Australia, China, India, Japan, New Zealand, and South Korea
BIT
bilateral investment treaty
BRI
Belt and Road Initiative
C3
conditional competitive cooperation
CAI
Comprehensive Agreement on Investment
CBO
Congressional Budget Office
CCP
Chinese Communist Party
CFIUS
Committee on Foreign Investment in the United States
CPTPP
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
DAC
Development Assistance Committee
ECB
European Central Bank
EGA
Environmental Goods Agreement
EU
European Union
FDI
foreign direct investment
Fed
Federal Reserve
FTA
free trade agreement
FTAAP
Free Trade Area of the Asia Pacific
G-7
Canada, France, Germany, Italy, Japan, UK, US
G-20
Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK, US, EU
GATT
General Agreement on Tariffs and Trade
GDP
Gross Domestic Product
GPA
Government Procurement Agreement
GPG
global public goods
ICT
Information and Communications Technology
IEA
International Energy Agency
IMF
International Monetary Fund
IP
intellectual property
IPR
intellectual property rights
KORUS
United States – Korea Free Trade Agreement
MDB
multilateral development bank
NAFTA
North American Free Trade Agreement
NATO
North Atlantic Treaty Organization
NDB
New Development Bank
NIIP
Net International Investment Position
OECD
Organisation for Economic Co-operation and Development
OPEC
Organization of Petroleum Exporting Countries
P-4
Pacific 4: Brunei, Chile, New Zealand, Singapore
PBOC
People’s Bank of China
PISA
Programme for International Student Assessment
PLA
People’s Liberation Army
PPP
purchasing power parity
RCEP
Regional Comprehensive Economic Partnership
RMB
renminbi
S&ED
Strategic and Economic Dialogue
SDR
Special Drawing Rights
SED
Strategic Economic Dialogue
SOE
state-owned enterprise
TAA
Trade Adjustment Assistance
TEA
Trade Expansion Act
TFP
total factor productivity
TIC
Treasury International Capital (report)
TiSA
Trade in Services Agreement
TPP
Trans-Pacific Partnership
TTIP
Transatlantic Trade and Investment Partnership
UNCTAD
United Nations Conference on Trade and Development
UNEP
UN Environment Programme
UNU-IHDP
UN University’s International Human Dimensions Programme on Global Environmental Change
USMCA
United States–Mexico–Canada Agreement (revised NAFTA)
USTR
United States Trade Representative
WHO
World Health Organization
WIPO
World Intellectual Property Organization
WTO
World Trade Organization
XR
exchange rates
PART IThe Setting
1A New Global Economic Order?
China will celebrate the hundredth anniversary of the takeover of the country by the Communist Party in 2049. President Xi Jinping envisages China becoming a, or the, “global leader by 2050.” He aims to establish a world-class military “that can rival or exceed the United States by 2049.” These are the target dates of the “hundred-year marathon” through which Chinese leaders since Mao Zedong have allegedly sought to catch up with the United States (Pillsbury 2016). The most thorough analysis to date of China’s intentions concludes that “Beijing’s ultimate objective is to displace the United States order globally in order to emerge as the world’s dominant state by 2049” (Doshi 2021). According to reasonable economic projections, China will by then account for about one-third of the world economy, and its per capita income would be about double the global average (Yang 2020).
The annual meetings of the International Monetary Fund (IMF) and World Bank in one of those mid-century years could well take place at the gleaming new headquarters of the two institutions in Beijing or Shanghai. As mandated in their charters, the “principal offices” of the main international financial institutions will move from the United States to China if and when China becomes the largest shareholder in both.
China has already become the largest economy in the world on some metrics. It is clearly the largest trading nation. It is, by far, the largest holder of foreign exchange reserves and is likely to soon become the world’s largest creditor country (Dollar 2020). By mid-century, China is quite likely to be the largest economy by all measures.
If the Bretton Woods institutions continue to play by their current rules, China would then be eligible to hold the largest quotas and voting rights in both. Such a shift would dramatically symbolize the ascent of China in the world economy of the twenty-first century (see box 1.1).
Box 1.1 (When) Will the IMF and World Bank move to China?
Article XIII:1 of the charter of the IMF requires that “the principal office of the Fund shall be located in the territory of the member having the largest quota,” i.e., its largest shareholder. The World Bank has a similar provision (Article V:9). These requirements were written into the charters in 1944 to ensure that the key financial institutions would be located in the United States.
That premise has gone unchallenged for 75 years but will have to be revisited over the next several decades if China moves into a clearly superior position in terms of global economic presence, as projected in chapter 3. IMF Managing Director Christine Lagarde mused as early as 2014 that “the way things are going, I wouldn’t be surprised if one of these days the IMF is headquartered in Beijing” (Reuters 2014). China is now providing $50 million to fund a modest China–IMF Capacity Development Center in Beijing, administered by the Fund to offer courses on core IMF policy to students drawn half-and-half from China and developing countries (Dollar 2020).
IMF quotas are supposed to be reviewed every five years to make sure that they faithfully reflect changes in the international status of the member countries. The last major realignment was agreed in 2010, with decisions made at that year’s G-20 summit in Seoul, to significantly increase the shares of China and a few other emerging market economies, largely at the expense of several European countries. The quotas are notionally based on formulas that have been negotiated over the years and “adjusted” judgmentally when final decisions are made. The formulas encompass four variables. The first and largest, with a 50% weight, is countries’ economic size, measured by their Gross Domestic Products (GDPs); these are in turn a blended combination with a 60% weighting for GDP at market exchange rates, and a 40% weighting for purchasing power parity (PPP) rates. The second main variable (at 30%) is a country’s exposure to the world economy, measured by its share of world trade. The third component is the variability (and hence vulnerability) of a country’s international economic position. The final component, with a weight of only 5%, is a country’s international reserve position.
Table 1.1 presents the current array of IMF quotas among the three largest currency issuers (United States, eurozone, China); a calculation of where they should be now if the formulas were applied faithfully; and projections of what the formulas would suggest for future quota allocation out to 2050 on the basis of our projections of economic and trade growth in chapter 3. They show that China is substantially under-represented now, would probably move into the top quota slot according to the formula by 2030 – ahead of the United States, and since the eurozone is not a country (see below) – and will clearly be in the lead by 2050 (even if its growth declines to 4 percent after 2030 and 3 percent after 2040). If the IMF and World Bank adhere to the mandates of their charters, China should therefore become the host of their headquarters by the middle of this century if the postulated economic developments come to pass.
Table 1.1 IMF quotas: Projections to 2050 on current IMF formula
Note: Assume openness, variability, reserves remain constant over time. GDP projections are from IMF until 2024. Starting from 2025, GDP growth rates are specified as in the table. Euro includes 19 eurozone countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain. Euro quota is the sum of quotas of these 19 countries.
Source: IMF, World Economic Outlook (October 2019).
The United States and some other IMF members, however, will undoubtedly insist on negotiating the terms of that shift to make sure that China would faithfully implement all fundamental IMF requirements, as they negotiated for 15 years on China’s entry to the WTO and are now seeking to negotiate changes in China’s trade policies before according it the promised “market economy status.” To avoid the cost and inconvenience of actually moving headquarters, China could of course ask for some other major recognition of its status, such as the selection of a Chinese national as Managing Director (De Gregorio et al. 2018). Other alternatives can also be envisaged, such as the proposal in the text (chapter 10) that the quotas of China and the United States converge to equal levels over time, to recognize the rough equivalency that is likely to characterize their economic relationship in the decades ahead. Another possibility would be for China, if it continues to lead the world in providing development finance, to take the top spot at the World Bank while the United States stayed at no. 1 at the IMF (or vice versa).
A possible complication is the position of the eurozone. The 19 members of the euro area now have a combined quota much larger than the United States and would have a claim to become the new host “country” (Frankfurt? Brussels? Paris?) if they could agree to consolidate their representation and speak with a single voice (although the IMF charter refers to “member countries” and it is unclear whether a currency area would qualify). China’s projected growth path would not place it beyond the eurozone before 2050 if its growth rate were to drop to 4 percent after 2030 and 3 percent after 2040, so the “rough equivalency” formulation could apply to the zone as well as to the United States and China.
The trade war between the United States and China has obscured the more fundamental competition between the two countries for global economic leadership. History shows that conflict between rising China and incumbent power United States is a real possibility; there is clearly a risk of an economic variant (at least) of the “Thucydides trap” (Allison 2018). Power transition theory suggests that risk is greatest during the decade or two when the newcomer is approaching and reaching the level of the previous leader, which is right now and the years immediately ahead. Former Australian Prime Minister Kevin Rudd, a China expert, calls this “the decade of living dangerously” (Rudd 2021).
The trade, investment, and technology wars of the last few years confirm that these risks are very real. US efforts so far have failed to restrain China or induce changes in Chinese policies that are needed to ease the conflicts. This competition is likely to be one of the most sustained, as well as most important, features of the world economy (and world politics more broadly) for the foreseeable future.
The Rise of China
China is likely to continue growing at least twice as fast as the United States and the other high-income countries for at least another couple of decades. As chapter 3 will show, it would then become at least roughly equivalent to the United States on most counts well before the middle of the century. Its catch-up pace accelerated with the coronavirus pandemic as its growth was curtailed much less than that of the United States and the other high-income countries.
China has become the largest engine of growth for the world economy. It replaced the United States in that role well over a decade ago, before the global financial crisis of 2008–9, but especially since. It has accounted for 25–30 percent of total world expansion over this period. It has already achieved global economic leadership in this important respect.
Size is, of course, not the only determinant of international economic power and leadership potential. China remains, on average, a relatively poor country with per capita incomes only one quarter that of the United States. On a “power index” that combines overall and per capita GDP, as described in chapter 3, China only reaches US levels toward the end of the century. American wealth far exceeds Chinese wealth. China has little soft power, and its authoritarian values, disregard for human rights, and relentless focus on the primacy of the Communist Party are not widely admired around the world. It enjoys no alliances with economically important countries, in contrast to America’s traditionally extensive networks.
But China is catching up rapidly or passing the United States on most of the economic metrics, enhancing its capabilities for global economic leadership. Its centralized political system enables it to mobilize the country’s vast resources effectively in support of agreed policy objectives. Neither China nor the United States can dictate to the other, as the currency negotiations of 2005–13 and the trade negotiations of 2017–20 so clearly revealed. Each can impede most of the other’s initiatives.
The United States and China together are likely to account for more than half the world economy by mid-century. Their cooperation is required to successfully resolve virtually all major international economic problems, from global growth to climate change. Their failure to cooperate will doom most such efforts.
The relative economic positions of China and the United States differ from issue to issue (Johnston 2019a). The dollar remains the world’s key currency and the United States maintains considerable monetary power, though China’s huge foreign exchange reserves and international creditor status enable it to wield sizable financial leverage as well. China’s huge market and prodigious competitiveness place it at or near the top on the macroeconomic and trade side. China has become the world’s largest donor of foreign aid, through its state policy banks and the massive Belt and Road Initiative (BRI), and has attracted much support from poorer countries with its “develop economically and preserve your independence” mantra. The United States retains overall military primacy but China has caught up impressively, especially at the regional level. Technology is increasingly closely contested, especially with respect to cybersecurity and the Internet. The two economic superpowers have different capacities to lead the world in different issue areas.
But China presents the first real challenge to American economic supremacy since the United States became the world’s premier economy over a century ago. The Soviet Union was a formidable military rival throughout the Cold War, and forced a bipolar security configuration, but was never a serious economic player. Japan became a tough economic competitor but had less than half the population of the United States and depended on America for its national security. The European Union (EU) is as large as the United States economically but only acts together on a limited range of issues. China’s rise creates both a new bipolar foundation for the world economy and an unprecedented rival for the United States.
Like any rising power, China wishes and expects to become a respected global leader – whether or not it exhibits responsible leadership characteristics. Like any country, its international goals are rooted in its domestic imperatives. In this case, China wants the world to remain safe for the continued dominance of the Chinese Communist Party (CCP) in Beijing, above all. It resists external pressures and values that could threaten that supremacy. It increasingly projects its own pressures and values on other countries.
Chapter 4 addresses the central systemic question of whether China is satisfied or dissatisfied with the current international economic order. The answer is mixed and nuanced. China has benefited enormously from the open system created and nurtured by the United States and its allies, and recognizes as much. China consciously opted to engage with that system, including membership in all of the major international economic institutions, as an integral part of its development strategy. The payoff has been spectacular in terms of China’s economic growth and globalization. China is quite satisfied with these results.
However, China is now emphasizing domestic rather than international drivers of growth. It is seeking to reduce its dependence on outside forces, for security as well as economic reasons. The external share of its economy, though still substantial, has dropped dramatically over the past 15 years. It has embraced a degree of government intervention and state guidance that were not anticipated a decade ago. Hence, China’s reliance on an open world economy, and its interest in maintaining that regime, may be declining – although they remain sizable.
China is increasingly distinguishing between the United States and the rest of the world. It is clearly decoupling to some extent from America, in response to the trade war and broader deterioration of relations. It is continuing to expand its economic ties with most other countries. An exception as of this writing is Australia, with which China is engaged in a mini-confrontation.
China dislikes some of the key rules and norms that underpin the current system: market forces rather than state control of the economy, democracy and rule of law rather than authoritarian politics. These features differ profoundly from China’s own preferences. It also believes that it should be playing a much larger role in that system.
China is thus partially dissatisfied, as well as partially satisfied, with the system. To date, it has mainly sought to increase its role within the existing order and institutions, rather than to overthrow or even radically reform them. It has behaved as a revisionist, rather than a revolutionary superpower.
China has also, however, flouted key rules and norms of the traditional system even while loudly proclaiming support for it. Its massive currency manipulation in the first decade or so of the new century totaled several trillion dollars and destroyed millions of jobs in the United States and other countries (Bergsten and Gagnon 2017). Its subsidies, theft of intellectual property and forced transfers of technology cost other countries tens or even hundreds of billions of dollars annually; Schadlow (2020) reports that “experts estimate that since 2013 the United States has suffered over $1.2 trillion in economic damage as a result of China’s egregious abuses.” China has helped to defend the open international economic order on several crucial occasions but has also undermined it severely, as its growing importance heightened the impact of its pervasive cheating and the growing backlash against it from other countries.
China has also led the creation of new institutions that magnify its clout, some of which (like the Asian Infrastructure Investment Bank [AIIB]) fit well into the extant order, and some of which (like the BRI) may not. It is pushing to establish new international rules in domains where none now exist – such as the Internet, and cybersecurity more broadly – that would favor its state-centric preferences rather than the traditional market-oriented approach of the West. It is seeking opportunistically to enhance its role, and to alter the rules and norms in directions more to its liking, with an eye to protecting the CCP and eventually catching up (at least) with the United States. It could make a “dash for dominance,” as will be discussed in chapters 4 and 8.
China appears to believe that it is getting the best of both worlds from the present international economic order. It gains hugely from the order’s openness while cheating on the rules – without eliciting much pushback before President Trump’s (ineffectual) tariffs – when it sees advantage in doing so. The basic systemic question is whether China believes it can continue to get away with this strategy without undermining the system itself, which it risks through generating backlash against its practices from the United States and other countries that both defend the system and suffer from China’s exploitation of it. To modify its behavior sufficiently to alleviate this threat to systemic stability (and thus to its own interests), China will have to be persuaded – preferably through its internal debates and by Asian neighbors, rather than by the United States or close US allies – to accept key principles of the regime.
The United States as Incumbent Power
The United States is not a declining power in any generalized sense, as will be seen in chapter 5. It has in fact grown faster than most of the other high-income countries over the three decades since the end of the Cold War, and thus expanded its economic lead over them. Its share of the world economy has obviously declined sharply from the early postwar period, when most countries were still recovering from the Second World War, but remains about where it was in 1990. Any US decline is only against China and a very few other emerging markets, and is a reflection of their rise against everybody rather than its own demise.
For all its many problems, and the need to greatly improve its performance across a wide range of issues – from productivity growth to fiscal sustainability to better income distribution to political dysfunction – the United States seems likely to continue growing at a respectable pace for the foreseeable future when measured against both its own historical record and the prospects for other industrialized nations. It has the capability to maintain a major share of global economic leadership as far ahead as the eye can see. China’s relative rise has been mainly at the expense of countries other than the United States.
Moreover, US leadership has traditionally been strongly supported by a powerful set of reliable allies – the “hegemonic coalition.” The group has included all of Western Europe (and, since the end of the Cold War, most of Eastern Europe), Japan, South Korea, Canada, Australia, New Zealand, and indeed most of the OECD (Organisation for Economic Co-operation and Development) club of high-income nations. The GDPs of these countries, taken together, roughly equal that of the United States and thus double the global weight of the coalition. We will see in Part II of this book that they extend the “US lead” over China by several decades on many of the relevant metrics of international economic capability.
The rise of China makes it more important than ever for the United States to maintain the support of these countries. China fears isolation and is much more likely to alter its policies when faced by a strong international coalition than by unilateral pressure, even from the powerful United States: “Beijing views the Biden Administration’s forays into exclusive multilateralism – issue based coalitions in opposition to China – as the most serious external threat to its political security and the biggest obstacle to its national rejuvenation” (Yan 2021). Perhaps the greatest of all the errors of the Trump presidency was to alienate, rather than coalesce with, the traditional US allies, forgoing the potential for mounting multilateral support in the effort to induce the substantial Chinese reforms that will be necessary to alleviate the main international economic tensions.
But the will of the United States to exercise global economic leadership, in Administrations and Congress and the public more broadly, as described in chapters 2 and 6, has been declining for about 25 years. Domestic hostility to globalization, and especially the “China shock,” has risen sharply because of their (greatly overstated) roles in generating wage stagnation and income inequality, and thus in much of the political polarization and dysfunction that now characterize American society. At the same time, the end of the Cold War eliminated the historical security rationale for such leadership.
Under President Trump, this decline was accelerated as America largely abdicated its traditional leadership role. His Administration itself violated fundamental rules and norms of the international economic order (and of its domestic order as well). It adopted blatantly protectionist trade, investment, and technology policies. It trashed the international institutions – both formal like the World Trade Organization (WTO) and World Health Organization (WHO), and informal like the G-7 and G-20 – that have fostered cooperative governance of the world economy. It attacked its allies as well as its adversaries, isolating itself from the rest of the world rather than leading, and producing “America alone” rather than “America first.” It utterly failed to promote any significant US interests, while inflicting severe damage on the global system. It got China’s attention, but was totally unable to achieve its goal of suppressing China’s rise or even to alter Chinese policies in meaningful ways. Its erratic and counterproductive behavior during the coronavirus pandemic further tarnished America’s standing around the world, and China’s respect for the United States has declined further.
The global leadership competition and the world economy will be crucially, perhaps decisively, affected by US policy under President Biden and his successors. Even a partial return to America’s traditional global economic leadership would roll back at least the most extreme costs of the Trump abdication. But continued United States slippage in the face of China’s continuing rise, even if conducted in more civil tones, would confirm that the problem was not simply President Trump but rather a more deeply rooted bipartisan tendency that the rest of the world would have to recognize was long-lasting. The possible future return of Trumpism, or even of President Trump himself, adds to such possibilities.1
The allies, of course, will have to accept a return of US leadership if that leadership is to be restored. Some of the allies have disagreed mildly with some US leadership, and disagreed strongly on a few occasions. Some Europeans talk frequently about “strategic autonomy” and fending more for themselves (but have done little to move in that direction and hence have subjected themselves to constant US hectoring to contribute more, not less). But most are probably inclined to repair the hegemonic coalition, at least to where it stood prior to the Trump Administration. A particularly key role in Asia will be played by the Quad – the United States, India, Japan, and Australia – that resides closest to China, which has been denounced by Beijing, and held its first summit (virtually) at the outset of the Biden Administration.
Once burned, however, twice shy. Any US return to global economic leadership must be credible and sustained if it is to be believed and accepted by the other key countries, in both Europe and Asia. This will require, among other things, domestic US reforms to strengthen US leadership capabilities, and especially to rebuild a sustainable domestic political foundation that will support such leadership, as will be outlined in chapters 5 and 10. This is particularly necessary because US leadership had already been eroding for some time, as we will see in chapters 2 and 6, and because some echoes of even the more extreme Trumpian proclivities – especially with respect to China – can be expected to reappear with some regularity. The initial Chinese reaction to President Biden has been disappointment – i.e., he continues to take a hard line toward them (Wang 2021; Yan 2021). President Trump will then have left a lingering, if not permanent, impact on US policy in this domain.
At a minimum, this means that any restoration of US global economic leadership will have to continue beyond President Biden, and probably across at least one Administration of each party. Skeptics will be on the lookout for Trumpian deviation on these issues, especially by non-Trumpian governments. Under the best of circumstances, it will thus take considerable time to restore anything like the alliance solidarity that was so crucial in supporting US global economic leadership over the past seven decades.
The Systemic Alternatives
The world economy is thus threatened by two potentially mutually reinforcing pressures: the rising capability of a new superpower, and the declining will of its traditional leader. The resulting leadership vacuum eerily inverts that of the early 1930s, when incumbent Great Britain no longer had the capacity to lead and rising America was not yet willing. That unique juxtaposition converted the national recessions of the day, via a downward spiral of trade and capital flows, into the Great Depression (Kindleberger 1973).
On this occasion, the incumbent power is still capable but may be losing its will, while the rising power does not yet have full capacity (and may not want to assert true leadership either). The world economy could thus succumb again to a “Kindleberger trap,” especially if faced with another shock like the global financial crisis of 2008–9 or the deep recession triggered by the coronavirus pandemic in 2020. At the same time, China – United States confrontation could presage a “Thucydides trap” conflict between the two superpowers.
There are several possible paths for future systemic evolution. As chapter 7 will show, the leaderless non-system could prove sustainable (G-0s) for at least a while if the key middle powers – notably, Europe and Japan – and the existing international institutions prove able to hold it together. This would be true especially if China would help to do so, which it should as it espouses multi-polarity and such an evolution would contribute to a reduction of American hegemony. But an unstable G-0u could also prevail if it turns out that a single dedicated leader is in fact required to produce systemic success.
China could make a dash for dominance to exploit the US abdication and seize leadership (G-1), as posited in chapter 8. This would require it to adopt important policy reforms and the rest of the world to accept at least some of its very different values. The United States could seek to reassert its traditional role, though it cannot restore dominance due to the rise of China. It is unlikely to try anyway, due to the underlying anti-globalization swing in its domestic politics and the lingering impact of Trumpism.
Or China and the United States could resolve to work together, at least on issues of sufficient importance to sustain the system, to provide effective co-leadership through what I will call conditional competitive cooperation. The strong form of this alternative would be a G-2 through which the two economic superpowers would exercise joint leadership of the world economy, radiating out through concentric circles of other countries (G-3/4, G-7/20, the formal multilateral institutions), as outlined in chapter 9.
The Current System
Before addressing these alternative systemic futures, we need to assess the record of the past and current international economic order, and the role that leadership or lack thereof has played in its successes and failures. The liberal order has been a centerpiece of the global peace and prosperity that has prevailed over the 75-year period since the end of the Second World War. Along with the military power of the United States and its allies that secured the peace, it has enabled an era of economic growth and poverty reduction that is unprecedented in history. This has in turn supported sufficient political stability, both within and across countries, to prevent the great-power conflicts that devastated the previous thirty years (and much of the previous centuries). The economic system played an important role in ending the Cold War (Ikenberry 2008).
The economic order was created in 1944 explicitly to avoid a replication of the chaos of the interwar period, whose competitive currency devaluations and trade wars (due, importantly, to the Kindleberger trap) played a central role in bringing on the Great Depression and the Second World War. It rested on several key principles. The most fundamental were the avoidance of beggar-thy-neighbor policies, the primacy of markets, the rule of law, and cooperative institutions to support them. The economics of the system were guided largely by the price mechanism and private enterprises, with extensive trade and (increasingly) investment liberalization among at least the major countries. Constitutions and legal systems provided assurances that these economic principles would be implemented in practice, generating confidence that the order would be sustainable and successful. A wide range of supportive international institutions were put in place and nurtured to maintain and further build that confidence. Democracy reinforced the economic and legal foundations in most – though not all – countries. It was no coincidence that these principles and their implementation corresponded closely with values held, if not always practiced perfectly, by the United States and its main allies.
The United States has a vital national interest in the stability and prosperity of the world economy, for both security and economic reasons. Maintenance of the global economic order has been a centerpiece of its foreign policy, and indeed national security policy, since the Second World War. The international order was dominated by the United States and its friends and allies, initially in Western Europe (also Canada and Australia) but increasingly in Asia as well (most notably Japan and, later, South Korea).
Much of the system’s rules and governance was carried out through multilateral institutions. Some were formal and highly legalized structures – notably, the Bretton Woods twins (the IMF and the World Bank) and the General Agreement on Tariffs and Trade (GATT) / WTO. Some were informal but occasionally powerful, such as the “Gs” that provided the main steering mechanisms (now the G-20 and G-7). Some function at the regional level – most importantly, the European Union and the eurozone, but also other regional trading arrangements (NAFTA/USMCA, now CPTPP and RCEP, etc.) and the regional development banks. Most include both the United States and China, but a few exclude China (OECD, G-7, Paris Club) and a few exclude the United States (AIIB, BRI, NDB).
The system, of course, revealed many shortcomings. Some countries, and indeed whole regions (such as the Middle East and Africa), fared poorly for prolonged periods. Crises became increasingly frequent and severe. Income distribution has regressed within numerous countries, including the United States and China. Wages have been stagnant in some, including the United States. Domestic opposition to features of the system – most notably the backlash against globalization in the United States itself dating from the middle 1990s – arose on numerous occasions in numerous quarters.
The overall record, however, is a stunning success. Per capita incomes have risen six-fold over the postwar period. Across the globe, income is more equal than it has been in centuries (the Gini coefficient improved from 0.60 in 1990 to 0.47 in 2013, though it is still much too high) as poor people in China and other poor countries advanced rapidly. More than three dozen countries have graduated from developing to high-income or middle-income status. A billion people have escaped extreme poverty in the last two decades; the share of the global population living in extreme poverty fell from 40 percent in 1980 to less than 10 percent in 2015 (prior to the coronavirus pandemic). Far fewer people than ever go hungry; the share of the world’s population that is malnourished has fallen from 50 percent to 13 percent since the 1960s. Advances in technology have been breathtaking and occur at an accelerating pace.
Both the United States and China have benefited enormously from the postwar order. The US economy is $2 trillion richer per year as a result of the globalization of the past 75 years (Hufbauer and Lu 2017). Though it started late, entering the world economy only with its reforms of the late 1970s, China has been by far the greatest single beneficiary of the global system: its nominal economy grew by 37 times from 1978 to 2018, its average standard of living multiplied by a factor of 26, its share of the world economy rose from less than 2 percent to 16 percent, and its per capita incomes expanded from one fifth of the world average in 1949 to that average itself (Yang 2020).
The system also succeeded in heading off the risk of a second Great Depression in 2008–9. The contrast with the 1930s could not have been greater. Better national policies were of course a central reason, but so was international cooperation to avoid the trade barriers and competitive devaluations that were so devastating in the earlier period. Those outcomes, including the improved national policies, were fostered by international cooperation via the G-20 and through the IMF and WTO.
The system passed its most critical stress test with fairly flying colors (Drezner 2016). It can certainly be improved, but there can be no doubt that it is worth preserving. Ikenberry (2020) summarizes the verdict nicely: “Despite its faults, no other organizing principle currently under debate comes close to liberal internationalism in making the case for a decent and cooperative world order that encourages the enlightened pursuit of national interests.”
The China Challenge
There can also be no doubt that China is challenging the existing order and will do so increasingly over the years and decades ahead. The official Chinese narrative is that its rise to its current and prospective global status is simply a restoration of the country’s historical position. China was the largest economy in the world, at least until 1750, or perhaps even 1850, when the Industrial Revolution enabled Great Britain and Europe, and the West more generally, to supersede it.
The “century of humiliation,” from the Opium Wars until the Communist revolution, deepened China’s demise and instilled a yearning for recovery (and even revenge) that infuses the country’s thinking today. President Xi Jinping importuned President Trump with the Treaty of Versailles, in which the victorious allies of the First World War gave a Chinese province occupied by defeated Germany to Japan, rather than back to China (Bolton 2020). At a minimum, China clearly wants to regain the respect, and preferably deference, that it received during the long era when the Middle Kingdom reigned supreme.
