America and China contest for economic leadership

Well before the eruption of COVID-19, Beijing and Washington were busy contributing in different ways to erosion of the existing global economic regime. China’s economic model does not really fit into the Western-designed rules-based trading system and America under Trump is demolishing the system the United States helped create by prioritizing bilateral trade agreements over multilateral trade regimes and imposing economic sanctions against allies and enemies alike. In combination, both countries are contributing toward undermining the post-war trading system by weakening adherence to the rules and norms that have contributed to the system’s success. If nothing fundamentally changes, trade wars and increased protectionism could become the rule, rather than the exception.

The economic costs to the global economy could be considerable if countries and businesses lose confidence in the enforcement of trade rules, resulting in a loss of perceived legitimacy. Although China’s economic system in some ways undermines the rules-based trade order, Beijing is additionally incentivized to promote it because China gets to continue to be a member of various trade agreements while remaining outside the scope of their intended method of operation, which suits Beijing just fine. For example, when Trump withdrew from the Trans-pacific Partnership, Beijing wasted no time doubling down on becoming its leading advocate, picking up where America left off.

America’s view of the trade war is that China has been raking the US over the coals on trade and getting away with whatever it can for decades. The record is demonstrable, clear, and undeniable. However, America has itself to blame for ensuring that China became the epicentre of global manufacturing by joining the rest of the world in rushing to set up manufacturing operations there and agreeing to legal, regulatory, and judicial conditions that no foreign investor in its right mind would ever agree to somewhere else. American companies’ pursuit of profit appears to have blinded them to the many risks associated with doing what they were doing in China. China’s perspective is that no one forced any foreign company to make China the global epicentre of manufacturing, nor any country, business, or consumer to purchase their products, nor any of the companies operating there to stay.

There are at least three potential scenarios for the evolution of global economic leadership over the next decade. The first and most likely outcome is a systemic stalemate that emerges without effective leadership from either America, China, or any other country. The continuation of this “G-zero” world could have deleterious consequences. The danger is that the world falls into the “Kindleberger trap” of the 1930s, which deepened the impact of the Great Depression when the declining UK no longer had the capability to lead, and the rising US did not yet have the will to do so. No country provided the open markets, lending, and liquidity needed to avoid international economic conflict or a downward spiral.

The second scenario envisages the continued rise of China to eventually lead a new economic system. Many believe that a gradual assumption of global leadership by China is inevitable. China has been in the habit of confounding predictions regarding when it will hit conservative time benchmarks (for example, not long ago, the prevailing view was that China may become the world’s largest economy by 2030. Some economists now see that occurring early in this decade). Every indication from the past decade of US administrations has led to the conclusion that, whatever the timing, the US will not walk away quietly. Could this clash of the titans lead to a “Thucydides Trap” for the global economic order— wherein a rising power generates fear and tension with the established power, which can escalate toward war? That appears to be unlikely.

The third, and likeliest scenario, may be that the US regains its footing, restores its alliances, and reinvigorates its economic dynamism—implying a lengthier transition period, but with China snapping at its heels on an ongoing basis. While this may seem to some a less likely prospect at this juncture, multipolar leadership has proven to be successful several times in recent modern history. One example of this was during the late 19th century and the early interwar period when either the UK, France, the

US, or a combination of them provided the foundation for global economic stability and prosperity. In the postwar era, the EU and US effectively functioned as a “G-2”, managing the global and monetary trading system for prolonged periods, but that arrangement is coming to an end. In the current decade, an American and Chinese-led world would function within the existing multipolar and institutional framework, but be more fully influenced by China.

China will remain an easy target for criticism on a whole host of issues, but it should not be forgotten that as a nation, it is doing what many other nations do to project its power and enhance its influence. Beijing just goes about doing so somewhat differently than most other countries do. Should it only be criticized for that, particularly if some good comes of it? China is in a unique position to influence the global economy and the future course of globalization. The question is, whether it will do so responsibly, and at what cost for other countries?

Both China and America stand to learn a lot from each other as this slugfest continues. The Chinese government is already in the process of pivoting, but the same can be said for the US government, which continues to wait for China to change its behaviour rather than casting an eye toward the future and focusing on the demands that will be required of it to remain competitive. It is easy to criticize China’s Five-year Plans as little more than an exercise in centralized state planning, but to achieve and implement such Plans, a great amount of effort and ability to execute must be demonstrated. That kind of discipline is going to be required for America to remain an effective competitor going forward.

Daniel Wagner is CEO of Country Risk Solutions and author of the new book The Americachina Divide. This is an excerpt from the book.

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