US-China Competition: It’s the Economy, Thucydides

Harvard University political scientist Graham Allison chose an appropriate time to float his ambitious “Thucydides trap” thesis in analyzing China’s rise as a challenger to the global hegemony and leadership of the United States. With the mounting US-China friction over Covid-19 and the blame game between them, Allison’s thesis has taken a new twist. Given Allison’s prediction of the propensity for war, the global community is hanging on a political edge concerned about whether the accusations and counter-accusations over the pandemic will speed up a probable conflict between the two global hegemons. With many countries around the world domestically demoralized, politically in disarray and economically at their lowest point, there are only speculative sounds about a new world order: Will Covid-19 be the trigger for the creation of a Chinese world order and a new geopolitical reality?

The weaponizing of geopolitics: A lid on global wars   

Allison’s Thucydides Trap – the proposition that when a rising power, in this case Beijing, threatens to eclipse an established hegemon, Washington, armed conflict is more likely than not – is focused on global military competition. But over the century the world has transformed. After World War II, when several countries joined the nuclear club, the threat of war has diminished. Weapons of mass destruction reined in the powerful hegemons. For 40 years the US and the Soviet Union muted their global competition in a Cold War, fanning proxy wars around the world.

Following a Monroe-Doctrine-style framework of maintaining separate spheres of influence, the US and the Soviet Union carved out their own geopolitical jurisdictions. In 1962, the Cuban Missile Crisis, brought on by the Soviet Union’s challenging what the US considered its sphere – in this case, the Caribbean – pushed the world to the brink of a nuclear war. The winner of the Cold War was neither the US nor the Soviet Union. In 1992, US Senator Paul Tsongas called it: “The Cold War is over, and both Japan and Germany have won”.

The economic competition: The capitalist alternative

Tsongas’ declaration underscored the important economic changeover in the global power game. Under the patronage of the US defense umbrella, both Japan and Germany rose out of the ashes of defeat in World War II and became global economic winners. By the 1970s, the US had largely lost its position as an industrial power and become a consumer society, a change that severely undermined its economic balance of trade with other producing countries.

Japan became the second-most-powerful economic power and by 1985, Harvard University Asia specialist and social scientist Ezra Vogel believed Japan would be the global leader in a “Pacific century”. Worried about Japanese economic influence, the West bullied Tokyo into signing the Plaza Accord in 1985, which led to a fixed exchange rate of 120 yen to the US dollar in 1988, three times its 1971 value.

In 1989, the Berlin Wall collapsed, the Soviet Union disintegrated, democracy triumphed, and capitalism vanquished the Marxist command-economy system. The breakthrough of liberal democracy and capitalism in the bastions of Marxist states led Francis Fukuyama, in his 1992 book The End of History and the Last Man, to question whether the Hegelian concept of history had ended.

Enter China, the game changer

In the same decade, Deng Xiaoping, then China’s paramount leader, launched a reboot of its communist system in favor of “socialism with Chinese characteristics”, a brand of state-centered capitalism, as the road for China’s economic development. The floodgates opened to foreign investment. China engaged the world and its gross domestic product grew from US$174.94 billion in 1977 to US$13.28 trillion in 2018. The rising dragon was the darling of investors in the developed world, economically feted, coaxed and pampered, leading to it becoming the factory of the world.

With China’s turning and the demise of the Soviet system, the world essentially began operating on one universal economic system – capitalism. The US dollar was further entrenched as a global currency of transaction thanks to the petrodollar system, under which oil is priced in US dollars, creating surpluses of greenback reserves among oil-producing countries, which are then invested in dollar-denominated assets. The current concept of globalization began to evolve from the 1970s, capitalism underwriting its appeal as a promising framework for the development of the global economy.

For three decades since 1980, China has ridden on the Western capitalist system, and economically grew from strength to strength, dumbfounding skeptical Western politicians with its entrepreneurial prowess. The rivalry between West and East, between China and the US, has not been in military gunmanship. As the dictum goes, it is the economy, stupid. Chinese factories have been producing the products that are commonplace in every American home, from candles to cameras, toys to t-shirts. China has become a global economic power, using its capitalistic muscle as leverage to gain inroads into Western companies and even buy many up.

That is what the Trump strategists think. But China and Russia are trying to decouple the US dollar from its stranglehold on the global economy. China has moved rapidly into e-commerce, financial technology and digital currencies and promoting the yuan as an international reserve currency and renminbi-denominated trade. With the US holding over $16 trillion (much more once all the coronavirus spending is toted up), the greenback has lost its luster. Once countries wean themselves off of using the US dollar as an international currency, America will lose its economic clout. China is rapidly developing the economic muscle to undermine the US dollar and in turn surpass the American economy.

Time will tell how this brewing economic war between the US and China will play out. The economic stakes are high, the political risks are enormous, and the fallout for one or both countries could be costly.

The Covid-19 factor

If the French economist Thomas Piketty is right, the only way deepening inequality in the world can be neutralized is by war or a global catastrophe. Covid-19 could be that shock that resets the global economy to Year Zero of a new dispensation. Even as persistent skeptics wonder whether Beijing’s questionable handling of the outbreak has discredited the Chinese and undone their aspirations, there is no reason to doubt that China will rise from the ashes of the global economy and redouble its claim to a new hegemonic rule.

The irony is that while so much expenditure has been wasted on military arsenals and nuclear weapons, an invisible virus, little understood and uncontained, has brought the world to its knees. It demonstrates that the most lethal weapons of the future might be in biological warfare and the best defense not the military but national health services.

The game change between the US and China – their switching of positions on the global-economic pecking order – seems to be playing out with every daily report of new infections and deaths from Covid-19. It is a dramatic reversal of roles. Trump is breaking American post-war foreign-policy tradition by pursuing an insular, nationalist, xenophobic and anti-multilateralist approach. Meanwhile, his counterpart Xi Jinping is breaking the mold – the age-worn narrative of China’s hiding its strength and biding its time – by adopting a muscular foreign policy (articulated nowadays by plain-speaking “wolf warrior” diplomats), setting out bold economic plans such as the Belt and Road Initiative, and expanding China’s network of relationships across the world.

What could still trigger the trap? 

Allison’s Thucydides trap has set the political scaffolding of the tense global geopolitical competition between China and the US. But a hot war is not automatic. The economic interconnectedness of the world has given leaders new ways to apply political pressure, pursue strategic competition, and strive for fair bilateral relations.

After 70 years of global peace, buffeted by greater global connectivity, even global hegemons are wary of war. While the international community waits to see which major power will buckle first in the psychological war of national wills, the tragedy is that this confrontation is not a zero-sum game. Both hegemons are symbiotically intertwined economically and will bear heavy national political and financial liabilities in an eventual showdown. Neither the US nor China can risk national assets in a costly war.  

Yet with Covid-19, both countries seem to be spoiling for a big fight. Trump is livid that the Covid-19 outbreak could well derail his re-election bid. Time is not on his side. He has lit the China fuse, turbocharging anti-China (and even anti-Chinese) sentiment among the American public. Even if his opponent Joseph Biden should beat him, the antagonism is likely to persist and could still explode into a wider conflict.

But it will take more to trigger a war than just a hegemon and its challenger jostling for global influence and impact. Military conflict may be the ultimate expression when the prevailing power feels it has lost out to the pretender in all the other fields of competition. Both know that the world’s 190 states are not mere bystanders cheering for one side or the other but are active participants with their own national interests. With the pandemic not yet tamed, countries would likely not welcome destabilizing geopolitical shifts in the world order just now unless it yields real benefits. But with the US weakened by its leadership and China spying an opportunity, the Thucydides trap narrative could shift from the economic chapter to the military climax very quickly.