Financial Cold War. James A. Fok
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international ambitions have been seen as a threat to the US, particularly as Xi's administration appears to be centralising more power within the CCP.
Since the Trump Administration launched its trade war with China in January 2018, the scope of the conflict has been widened from a pure focus on trade and tariffs. Sanctions have been applied against Chinese technology companies. US allies have been pressured to remove Chinese manufactured components from their telecommunications networks on national security grounds. Further, Chinese companies from sensitive sectors have been denied access to US capital markets. Officials from both countries have recently hurled incendiary accusations at each other and engaged in an unseemly war of words over the origins of the Covid-19 pandemic and interference in Hong Kong affairs.18 Some commentators believe that the US and China have entered – or are entering – into a ‘New Cold War’ or ‘Cold War II’.19 Some have even gone so far as to suggest that there are reasons to welcome this, believing that multidimensional Great Power competition will provide an impetus for human progress and help the US confront its recent political dysfunction.20
The Financial Roots of Sino-US Conflict
This book rejects the notion that the current Sino-US conflict is a New Cold War for three reasons.
First, there is a critical difference in the factors underlying tensions between China and the US today and those that precipitated the 20th century Cold War. In the late 1940s, there was no meaningful trade or investment between the US and the Soviet Union that could give rise to frictions. The primary driver of the Cold War was ideological, whereas financial factors have played a major role in stoking current Sino-US tensions. While it is undeniable that there are significant ideological differences between China and the US, far from seeking the overthrow of global capitalism, China has adopted significant aspects of the capitalist economic model and, although it has not fully embraced America's brand of free market ideology, it is today no more socialist than a great many European social democracies. These hardly present a threat to America's capitalist way of life.
Second, the Cold War was characterised to a great extent by strategic disengagement between the two principal protagonists, as both worked in parallel to demonstrate the superiority of their respective economic models. Since there was virtually no economic relationship to begin with, there was little to lose. In contrast, given the high level of economic interdependence between China and America today, disengagement – or ‘decoupling’, as some would have it – would be highly damaging to both nations’ prosperity. That is even if complete disengagement were actually possible. Globalisation has interwoven and integrated economies and supply chains around the world to an extent that would make a decoupling between China and the US not only economically damaging but also quite likely to lead to a cascading set of conflicts with other countries. Australia, against which America runs balance of payments surpluses, can afford to pay for US imports due, in large part, to the surpluses it runs versus China.21 Ironically, therefore, Sino-US disengagement could compound existing economic stresses and elevate the risk of hostilities ratcheting up.
Third, to the extent that a state of ‘Cold War’ exists today, it is hardly ‘new’. A central theme of this book is that widening wealth and income inequality in both countries has been a major factor underlying current Sino-US tensions. At the root of rising inequality are the cumulative imbalances created by the structure of the global financial system and national economic policies, which have built up over many decades. That is not to say that there are not other sources of tensions between the two countries. Great Power relations are inextricably tied to historical contexts and are influenced by numerous internal and external factors, as well as the characters of political leaders. Some focus on a schism between America's liberal democracy and China's one-party state. However, while this difference in political models is a determinant of how the two societies individually operate and can be mobilised, it is not in itself an inherent source of conflict. Instead, throughout the history of human civilisation, the division of material wealth and resources between and within societies has repeatedly been found at the heart of major clashes, and this is the dimension of Sino-US relations on which this book is focused.
Tracing back to the end of WW2, as the Cold War was getting under way, the world was unwittingly entering into a Financial Cold War, in which it has been engaged ever since. The opening shot of this war was the Bretton Woods Agreement of 1944, which lodged the US dollar at the centre of the global monetary system. Financial systems, like all ecosystems, thrive on equilibrium. The dollar's centrality in the financial order created by Bretton Woods spawned an imbalance that has since grown and multiplied. The Financial Cold War has played out over two key battlefronts.
The first has been the division of resources between countries. The dollar-centric global financial system has created international demand for dollars that has provided the US with low-cost capital without any currency mis-match risk. Other countries, notably emerging markets that have needed to insure against periodic dollar exchange rate volatility, have borne a high cost for this. However, to keep the world supplied with sufficient dollar liquidity, the US was required to run continual balance of payments deficits. The lack of any structural mechanism for revaluing the currencies of countries with persistent large balance of payments surpluses has forced America to become the world's ‘consumer of last resort’. This has transferred productive capacity to other countries and, unless the US is able to constantly expand its economy faster than its cumulative balance of payments deficits, the rising debt burden will drag on future growth. It was fortuitous that America's lead in the information technology revolution allowed it to maintain strong growth with low inflation for a quarter of a century. However, in recent years, rapidly rising public debt has given rise to concerns over America's long-term financial stability, exacerbated global financial imbalances, and created tensions with large foreign holders of US public debt, including China, due to the risk of monetary inflation.
The second battlefront has been over the distribution of wealth within countries. The billionaire Warren Buffett candidly told a CNN interviewer in 2011 that ‘there's been class warfare going on for the last 20 years, and my class has won’.22 He was right. Structural overvaluation of the dollar due to the level of foreign demand for the currency has weakened the competitiveness of American exports in international markets. The wealthy have benefited disproportionately from the migration of manufacturing to lower-cost centres of production, while US workers have paid the price. This is not just a matter of monetary policy, however. Extreme ideological leanings towards free market policies since the 1980s have benefited wealthy and corporate interests through a range of policies, including lower taxation and less rigorous antitrust enforcement. The negative social impacts have been far-reaching. Rising wealth concentration has dragged on American economic vibrancy and undermined the legitimacy of the political system.
China's rapid growth over the past four decades, and the consequent improvement in living standards, has insulated it from this second battlefront so far. In unleashing this growth, a number of highly talented statesmen have had to balance a great many conflicting interests. However, as it has pursued market-oriented reforms, growing wealth inequality in China is also generating greater social tensions. As economic growth slows from the heady rates of earlier years and demographic pressures from the country's aging population continue to rise, these tensions will only grow more acute. China's governance structure and economic model, credited with fostering the country's development during the early years of its economic transformation, may now be holding it back from adapting to new realities.
At its most fundamental level, therefore, the Financial Cold War is the invisible conflict, embedded in national financial policies and the structure of international financial markets, over the distribution of wealth. Worryingly, however, this has been spilling over into wider conflicts.