There is the old notion, attributed to Lu Xun, perhaps China’s most celebrated modern writer, which the Chinese consider foreigners to be either superior or inferior, but never equal. It is fair to say that however China’s leaders assessed their country’s relative capabilities during its long economic and military overhaul, they do not now lack for confidence.
U.S. policies toward China over the past 40 years have largely been predicated on the theory that if we help China unlock its vast economic potential, China will eventually look more like us: capitalist and republican. In fact, China’s leadership took the opposite lesson from China’s success: the People’s Republic became wealthy and strong by not tilting westward.
It is time for us as a country, public and private sector alike, to respect China fully for the global political, economic and military force it has again become. It will disrupt the status quo more than any other nation. We should discard outmoded ideas that the U.S. can counter, contain, or manage China, and instead advance a positive, proactive agenda that lays out clearly what we want from the global reordering China has precipitated.
Two key areas must be addressed: currency policy and freedom of navigation.
China often appears in our news feed for actions that contest U.S. economic or military leadership even though U.S.-China economic and cultural ties are vast, including beneficial trade and the fact that the largest population of people of Chinese descent outside of Asia lives in the United States. The Sino-American relations are intertwined with complex Asian regional dynamics and shifting global power equations, and China’s internal economic and environmental challenges are well-documented, yet we rightly take note when China’s state media calls for a de-dollarized world or when China engages in “land reclamation” in the South China Sea.
China will disrupt the status quo for three reasons.
First, this is an inflection point. It is unprecedented that the country with the second largest economy and largest military does not see its treasure appropriately reflected in global finance, and still seeks monopoly of force over everything it deems its territory. China still relies on the U.S. Federal Reserve to protect its stores of value and on U.S. forces to provide overarching security for global commerce. U.S. forces still have freedom of manoeuvre in some areas China considers sovereign. But these conditions will change.
Second, China’s political system is incompatible with Americans something often glossed over until problems arise. The government’s role in the economy colours the “rules of the road” for fair competition.
Lastly, China still grapples with the effects of foreign interventions over the past 200 years that, alongside internal divisions, left the country weakened. By dint of history, the U.S. is implicated in many questions that China’s leadership says must be resolved to complete China’s “rejuvenation.” We should not mistake tactical patience for flexibility. On the spectrum from cooperation to confrontation, coordination or de-confliction may often be the maximal outcome when our interests overlap. If the U.S. is not clear in its aims, and ignores or misreads China’s, there will be conflicts.
The dollar’s reserve currency status is central to U.S power. It guarantees that Washington has nearly unlimited liquidity and access to capital, ensures others are vested in American success, gives sanctions teeth, and provides unparalleled flexibility in monetary policy. China does not have these advantages. Its currency is loosely pegged to the dollar, trading against a basket of currencies in a controlled band. The global financial crisis underscored for China that it could little influence U.S. policy decisions that affected its assets.
More than any other currency, the renminbi will disrupt the dollar’s reserve status. China has taken steps toward floating the renminbi, which the American government has encouraged to rebalance trade. China proceeds cautiously to avoid negative short-term consequences to its export-driven economy.
However, it has discussed with the International Monetary Fund adding the renminbi to the Special Drawing Rights currency basket, perhaps in tandem with full convertibility. As the world shifts holdings from the dollar (and other currencies) to the renminbi, and more transactions are closed in renminbi, pressure will rise for a new global currency regime that more accurately reflects China’s stature as the second largest economy.
Complacency is not an option. The U.S. should conceive a new currency regime that ensures Washington retains optimal monetary flexibility. It should actively consult with major trade partners on a new arrangement. The alternative is that China takes bold steps, in coordination with others, and the US will react to changed circumstances rather than frame the discourse.
Likewise, U.S. power relies on global force projection to protect U.S. interests, though the U.S. often resists the role of world policeman. As China asserts itself and its blue-water navy comes online, China may not grant, or will impose costs for, access to places where the U.S. now enjoys freedom of manoeuvre. The U.S. must address what security posture best guarantees that it continues to benefit from global trade: what access is really needed, where and why.
The U.S. Pacific Command leader testified recently that China as a “net provider of security” could be beneficial, but cautioned China’s initiatives often “complicate” Pacific security. There is also this complication: while America spent years hunting terrorists, China built capabilities to defeat America militarily, both through asymmetric and conventional means.
As the U.S. has grown more reliant on digital communication, China has worked on cyber warfare. Matched against China’s economies of scale in conventional capabilities, the U.S. should no longer assume it has clear military superiority. In Asia, allies will play an important role in the regional security architecture, but beyond Asia, the U.S. must decide what the next iteration of the Pax Americana should look like. China will be in many places and work with many partners the US doesn’t expect.
It is time to re-conceptualize the global currency regime and the bottom-line objectives of the U.S security umbrella for global trade.
-By Dante Paradiso, Current Analyst