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Writing The Rules Of The Global Economy: The Tussle Between The US And China

16/03/2016 8:15 AM IST | Updated 15/07/2016 8:26 AM IST
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Flags of the People's Republic of China and the United States flutter jontly at lamp post of Tiananmen Square, State visit by President Bush, November 2005, Beijing China

For some years now, I have been reviewing the rise of China and India as potential lead players in the global economy by 2050. In 2011, I had predicted in a joint study that by 2030, China would overtake the US as the lead global economic super-power. This would result in growing competition between the US and China over which among them would write the rules of the global economy. I had speculated in a piece in 2011 on how India could become the lead country in the international system. Today, just five years later, the battle for rule-writing for the global economy has begun - 14 years sooner that I had predicted.

China's rise has equipped the country with not only economic wealth, but also with a growing political will to establish alternative economic mechanisms led by it.

China and India: Challenging the West

It all started with the Chinese economy enjoying an exponential leap since it liberalized in 1978. With an annual GDP growth rate of 9-10%, China jumped to second place by 2014. In GDP Purchasing Power Parity (PPP) terms, the measure which most economists tell us is what really counts, the International Monetary Fund (IMF) indicated that China was at USD 12.3 trillion, while the US was at USD 16.2 trillion in 2014. In a futures study conducted by PricewaterhouseCoopers in February 2015, China is predicted to overtake the US as the lead economic superpower as early as 2028, and not far out to 2050, both in PPP and Market Exchange Rate (MER) terms. The PwC report predicted that India has the potential to become the second largest economy in PPP terms and third in MER terms by 2050.

China's rise has equipped the country with not only economic wealth, but also with a growing political will to establish alternative economic mechanisms led by it. China and India have long protested against the discriminatory behaviour of the IMF and the World Bank, both established at the end of the Second World War and dominated by Western nations. Given their growing wealth, both China and India have expressed their aspiration to no longer just be receivers of international economic rules set by the West, but to be a part of the rule setting.

China and India [aspire] to no longer just be receivers of international economic rules set by the West, but to be a part of the rule setting.

Given the growing deadlock within the IMF and the World Bank to reform, resisted by both the US and Europe for fear of losing influence, China especially has kick-started a process of establishing alternative financial institutions. In 2013, as part of the "China Dream" project, President Xi Jinping mooted the idea of a USD 100 billion Asian Infrastructure Investment Bank (AIIB), followed by the Free Trade Area for the Asia Pacific, and the Silk Road Economic belt or the One Belt, One Road (OBOR) initiative.

The China Dream envisions establishing China as the foremost country in Asia and the world, one to whom all others would look up to. In return, China would be at the forefront of infrastructure development, connecting remote corners of Asia to one another, and offer finance for energy generation, transportation and other initiatives. This move by China has practical implications as well as its first-world infrastructure is met by weak infrastructure in some of its neighbours. It is noteworthy that in July 2014, the BRICS nations also established the New Development Bank as well as the Contingent Reserve Arrangement. Incidentally, the OBOR's core connecting dots are based on the ancient Silk Road connecting Asia to Africa and Europe. Included in this is also the idea of a maritime Silk Road. The AIIB will fund the OBOR; China hopes this will facilitate the easy movement of goods, people and services across borders.

The China Dream envisions establishing China as the foremost country in Asia and the world... In return, China would be at the forefront of infrastructure development...

The significance of the TPP in the battle for supremacy

In a classic case of Great Power struggle, President Barack Obama proposed the idea of the Trans-Pacific Partnership (TPP), a free trade agreement that aims to reduce tariffs between the US, Singapore, New Zealand, Australia, Japan, Malaysia, Vietnam, Brunei, Canada, Mexico, Chile and Peru. The TPP, signed in October 2015, excludes China.

The idea behind the TPP, as stated by Obama, is to ensure that it is the US, and not China, that should be in a position to write the rules of the global economy. The TPP is an American framework for global economic transactions that offers the US and the other signatories a competitive edge vis-à-vis China. Surprisingly though, a global initiative like the TPP is geared to promote "made-in-America exports, grow the American economy, support well-paying American jobs, and strengthen the American middle class" in its official website. While the TPP is yet to be ratified by the US Congress, it clearly demonstrates the global competition between the US and China for greater power influence.

China's counters to the TPP

Not to be left far behind, China has been busy with similar economic deals of its own that exclude the US. It has backed negotiations for a free trade initiative termed the Regional Comprehensive Economic Partnership (RCEP) which includes the 10 member states of the Association of Southeast Asian Nations (ASEAN), Australia, India, Japan, New Zealand and South Korea. Significantly, unlike the TPP, the RCEP includes India, predicted to be the second largest global economy by 2050.

Both the RCEP and the AIIB are aimed at establishing alternative economic mechanisms to the Western- led global economy.

The RCEP is a direct counter to the American-led TPP, as it is a fully Chinese-backed initiative. Introduced for the first time in the ASEAN summit in Bali, Indonesia in 2011, the RCEP will bring two free trading zones together, namely, the East Asian Free Trade Agreement, which included ASEAN, China, Japan and South Korea, and the Comprehensive Economic Partnership, which added Australia, India and New Zealand. The RCEP covers trade in goods, services, investment and dispute settlement. The RCEP was signed in November 2015, and is to be implemented this year.

Interestingly, while commentators within China argue that China is fully supportive of free trade as vindicated by the RCEP, commentators within the US argue that the tussle between the RCEP and the TPP is one of geo-political dimensions with the capability to decide whether it is the US or China that would write the rules of the global economy.

The AIIB initiated by China was also signed by 51 Prospective Founding Members in September 2015. It is rather interesting that both the RCEP and the AIIB are aimed at establishing alternative economic mechanisms to the Western- led global economy.

The role of military heft

International relations theories will tell us that with economic wealth, military power follows suit. China's military prowess and its assertion of territorial claims have only increased. In 2014, it started building artificial islands in the South China Sea. This turning of the seas into land has created enormous tensions in the South China Sea. As a consequence, US Defence Secretary, Ashton Carter demanded an immediate halt to the land reclamation activities. China, on the other hand, warned the US that the Pentagon should desist from sending US military ships and aircrafts within 12 nautical miles of the new artificial islands in the Spratlys. Defying that, the US sent its USS Lassen, a guided missile destroyer close to the artificial islands (within 12 nautical miles). So we can see how the US and China are in a tight locked struggle, both in terms of economic rule writing as well as assertion of politico-military power.

Will China's efforts to establish an alternate set of economic rules create conditions for an open conflict with the US?

So the deeply troubling questions this scenario gives rise to are: Will China's efforts to establish an alternate set of economic rules create conditions for an open conflict with the US? Should we worry about an escalatory mode in the South China Sea as well, which is deeply intertwined with global access to Sea Lanes of Communication (SLOCs) and free trade?

china america

Quid pro quo to the rescue?

The answer rests in how global norms and rules are established for the 21st century. Furthermore, there is truth to the statement that existing global economic rules are tilted heavily in favour of the Western-led financial institutions, reflecting the past world order as it was in the 20th century. The 21st century is going to be different and major powers like China and India would want to have not only a say but the lead capability to establish the rules of the game as their populations are deeply affected by it. So, generosity perhaps and a willingness to share in the world's prosperity is the key.

We also should not forget that the US and China are deeply connected by their bilateral trade which has witnessed an exponential leap from USD 2 billion in 1979 to USD 534 billion in 2015. Significantly, the trade deficit between the US and China also shored up to a record high of USD 365.7 billion in 2015.

Perhaps their need for each other [US and China] will tame other wilder competitive instincts. Let's hope so for humankind's sake.

China is the second largest trading partner of the US and tops the imports list to the US. Without Chinese goods making their way into the US market, it is fair to conclude that America may be left with a limited choice of affordable consumer goods. In addition, US firms and companies like Apple and General Motors have invested heavily in low-cost assembly of their products in China, thereby improving their profit margin. Interestingly, China keeps US domestic interest rates low by being the second largest purchaser of US treasury bonds, and by extension buying in US debt. This aspect of the relationship has a direct impact on the US economy which in turn locks in the China-US relationship like no other.

So, perhaps their need for each other will tame other wilder competitive instincts. Let's hope so for humankind's sake.

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