China’s economy will soon become the largest in the world. The trillion-dollar Belt and Road project seeks to establish a global network of economic and political relations centered on Beijing. With double-digit growth in its military budget projected for years to come, China’s military capabilities may eventually rival those of the United States, writes Valdai Club expert Alan W. Cafruny.
Notwithstanding the UN Tribunal ruling of 2016 against China, territorial disputes in the South China Sea persist as China continues to build islands, facilities, and military bases. Yet, aside from symbolic “freedom of navigation” missions, the United States appears powerless to stop such building short of military confrontation.
However, national accounts alone provide a one-dimensional and misleading picture of global economic power in the contemporary era of global production chains. Most of China’s top exporting companies are still foreign-owned, especially in the high-tech sector. US firms continue to hold commanding positions in global supply chains and the highest value aspects of production. The dollar has still not been knocked off its perch. The United States retains considerable underlying structural power.
At the same time, China’s growth model, based on massive public investment, excessive debt, and overcapacity appears to be unsustainable in the long run, as the IMF has once again recently warned: The absence of domestic reform has impeded China’s attempt to establish the yuan as a reserve currency, much less to challenge the dollar. The Belt and Road initiative is in part a reaction to massive overproduction, but it serves to consolidate the existing development model rather than spearhead a new, consumption-based model. The project itself is also generating a host of contradictions and conflicts, not least with the EU, which has begun to impose restrictions on Chinese investments.
None of this is to suggest that American hegemony will last forever. The United States is experiencing acute interlocking political and economic crises and the world economy remains highly unstable. The 4-decade long corporate assault on American labor—greatly intensified by the addition of one billion unprotected workers onto global labor markets resulting from the collapse of communism—has produced de-industrialization, growing inequality, alienation, and an increasingly dysfunctional political order.
Although Trump pledged to “make America great again” by imposing protectionist policies to reduce America’s trade deficit with China, in office he has been compelled to confront the complexities of the global economy and the power of corporate America. American firms have heavily invested in China. General Motors sells more cars in China than it does in the United States. Notwithstanding campaign rhetoric, Trump’s economic team is mostly from Wall Street. Although committed to more assertive trade policies, they remain globalists. Mutual interdependence means that a trade war would almost certainly lead to “mutual assured destruction.” The implication for bilateral trade relations is more paralysis than drama.
In April, Trump and Xi Jinping agreed to a US-China 100 Day Action Plan designed to reduce America’s trade deficit. In fact, little was accomplished. Notwithstanding China’s substantial contribution to global overcapacity in steel, Trump has not (yet?) imposed tariffs, in part because of opposition of US auto manufacturers. China has further opened its markets to US agribusiness, which already has extensive investments in China. One of the goals of the abandoned TPP was to compel China to make concessions on intellectual property and financial services. Concessions are still likely to be pursued through bi-lateral negotiations but China will drive a hard bargain and a trade war would halt the growth of Chinese FDI in the United States. One Chinese automaker is reportedly bidding for Fiat-Chrysler, the Italian-American auto giant.
Trump appears to hope that he can secure China’s support for halting North Korea’s nuclear force development by offering concessions on trade. In early August, he reportedly abandoned plans to launch a serious trade complaint with the WTO concerning China’s theft of intellectual property and proprietary technology. China responded by supporting UN sanctions against North Korea but these have not persuaded North Korea to halt its nuclear programs. Even if China has the power to compel North Korea to freeze its nuclear program it will demand much more from the United States for doing so.
