China Ascendancy, Trade War, Global Order


The historical context

After winning World War II by aiding and leading its allies, the USA successfully set global rules on the economy by promoting and founding the Bretton Woods Institutions (the International Monetary Fund (IMF), the World Bank and later the General Agreement on Tariff and Trade (GATT), later turned into the World Trade Organisation (WTO)). Even President Truman‘s 1950 strategic NSC-681 (https://fas.org/irp/offdocs/nsc-hst/nsc-68-cr.htm) document detailing the military, political and economic needs to maintain US domination, effectively starting the Korean War as a precursor of the Cold War, relied on international cooperation, the formation of alliances and the support of allies in the „free world“ to safeguard US dominance.

In the field of economics, the rules set by the Bretton Woods Institutions, the UN Economic Institutions, the Organisation for Economic Cooperation and Development (originally OEEC, then OECD) thus were designed by US policy makers and economists, and managed to establish a free market paradigm across much of the globe. All this needs to be seen as a counter-model to the Soviet Union‘s state dominated command economy.

In all the global and international discussions over the next 70 years, the USA exerted their considerable influence over the dominant economic model, as the world‘s largest economy, the strongest military power and the technologically most advanced nation. The demise of the Soviet model in the late 1980s led to observers stating that „the end of history“ had arrived, since the market dominated economic model no longer had a challenger2.

What went missing, also as a result of this Western „triumphalism“ about „having won“ was the economic ascendancy of a significant number of countries, (the so-called „emerging countries“), like China, India, Brazil, Indonesia, Turkey, Mexico and others, who mainly ignored by the West had expanded their economies quickly, frequently based on economic development models different from those propagated by the West. Earlier, during the 1970s and 1980, a number of US allies in Asia had gained developed country status by combining market-economy paradigms with strong state intervention (foremost Japan, South Korea, Taiwan: all supported by the US as a means to „contain“3 Communist expansion.

New geo-politics

Today‘s reality is that China has the second largest country-economy of the world (around 10 trillion $ GDP, versus 17 trillion $ EU and 16 trillion $ USA), that industrial countries‘s total share in the global economy has fallen from 2/3 twenty years ago to below one half today. For more than 15 years emerging countries have attempted to have their ascendancy also recognized in the voting shares and board representations of IMF and World Bank, but the US and Europe so far have agreed only to minor changes and held on to their blocking share (US) and their out-of-proportion share of board seats (Europe). Thus, emerging countries have begun to establish their own institutions (AIIB4, Brics Bank5, CRA6 and others), in order to be able to pursue their own interests, and, importantly, to establish their own rules on loan and credit arrangements.

Breaking up the established global „order“

Before this background which shows the importance of cooperative behavior in global economic policy matters, be it by the „West“ or the emerging countries, the recent activities by the US President aim to „go it alone“, to sideline global agreements and attempts at a joint global governance. His withdrawal from the Paris Climate Agreement, his cancellation of US participation in the US-initiated Trans-Pacific-Partnership (TPP) with 11 Asian countries, his threats to cancel NAFTA (trade agreement with Canada and Mexico), his renewed sanctions on Iran and international companies dealing with Iran, his non-chalant proposal to the French President to withdraw from the European Union, his support of Brexit – all these show his disdain for a world order. And, most recently, this is topped by his imposition of tariffs, first on aluminum and steel, then on significant numbers of industrial products on both competitors and allies.

Two lines of arguments seem to lie behind these: Firstly, a battle about hegemony in high-tech developments with China is raging. China has for years flaunted WTO rules (it has been a member since 2001), has stolen intellectual property, has forced companies investing in China to hand over significant technology and know-how to its Chinese partners. While US and European companies have been complaining about this, they still have accepted it, seeing the market potential of 2 billion Chines customers. China has invested in the West, mainly in high-tech companies and in its „Made in China 2025“7 lays out a strategy to become world leader in the most important future sectors of the economy: artificial intelligence, genetics, automation, airospace, maritime technologies, etc. While also market-dominated countries have developed such strategies (see e.g. Germany‘s Industry 4.0), the fear in the West is that the heavy ownership and domination of the Chinese state (at all levels of government) in Chinese companies provides not only subsidized loans to these companies, but make them also instruments of future political domination.

Vis-à-vis Europe, President Trump sees its export surplus (in goods) as the result of unfair competition“, of the market fules being rigged against the US. His imposition of tariffs, if met by equivalent retaliation, will trigger a veritable massive trade war, with detrimental outcomes for the world economy.

A way forward: Who makes which rules?

It has been argued convincingly, that apart from these geo-political dimensions, the existing trade developments („globalization“) while increasing GDP growth rates, have produced heavy losses in terms of income and labor conditions for major population groups, the social sector in many countries and the environment. These effects may be responsible for a surge in political support for right-wing populist parties and politicians, the increasing loss of social cohesion in many countries and have revived memories of the disastrous developments between the two world wars.

Ideally, the present turmoil in global trade non-governance could result in a joint effort by „the willing“ to devise new rules for world trade, both in goods and in services. These could lead to considerations of how much trade is good for the well-being of citizens and the environment, on how to distribute the gains from trade more fairly between profits and wages, between different wage groups, they could create compensatory mechanisms for the losers from trade to include them into the gains by training, by providing social infrastructure, by spreading the benefits of global technologies more evenly, and others more.

If the USA are no longer willing to participate in such global cooperative efforts, let along lead them, the European Union (as the largest trading block in the world) should take the lead together with other countries willing to adopt and adhere to new rules, in order to provide an institutional framework for a global trade and investment order. The counterfactual is an all-out trade war which first of all vicitmizes the small and weak countries and population groups at the expense of the gains of the powerful, but in the medium run will also tear the strong and powerful apart.

With the unilateral behavior of the United States global world domination by the West has come to an end. It is still time, before an all-out trade war takes effect, that a coalition of the Willing, lead by the European Union and a reformed China prevent further social disintegration, trade war and a deep world depression. The Austrian EU Presidency is committed to further increase citizens‘ well-being. They should include the above into their agenda.

2 Fukuyama, Francis (1989). “The End of History?”. The National Interest (16): 3–18. ISSN 0884-9382

3It was the US foreign policy expert George Kennan who coined the „containment strategy“ of the Soviet Union.

4Asian Infrastructure Investment Bank, led by China

5Development Bank founded by Brazil, Russia, India, China, South Africa

6Contingent Reserve Arrangement, a Brics country-led competitor to the IMF

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