Greek Business File, June-July-August 2020, No 126

By Vasilis Trigkas


The End of Liberal Hegemony: America and China on the verge of a new Cold War

After 3 decades of peaceful economic interdependence, US and China will be fast moving towards a new Cold War in the age of social media and big data. Proxy wars for political and ideological influence are possible. Vasilis Trigkas, Onassis Scholar and Research Fellow at the Belt and Road Strategy Institute at Tsinghua University gives his opinion.

In 1998, during a public speech at the prestigious Peking University in China, the US president Bill Clinton categorically asserted that China was on the wrong side of history and that the world’s most populous nation would have no choice but to join America on the “right side of history” as “the struggle for individual freedom is the struggle for the nation’s freedom”. By the dawn of the new millennium, Clinton was even more confi dent that China would liberalize its economy. This time, the president asserted that free trade would do the job. “By joining the World Trade Organization,” Clinton declared, “China is agreeing to import one of democracy’s most cherished values: economic freedom. The more China liberalizes its economy, the more fully it will liberate the potential of its people”. With the freedom of goods established, the freedom of ideas would soon follow, and democracy would hence triumph.

More than two decades have passed and Clinton’s assertions have been disproved by history. Not only China has not become a liberal democracy in America’s image but what Columbia University’s professor Andrew Nathan has called “resilient authoritarianism” has defied teleological arguments about the liberal democratic “end of history”. What is most important, however, is that the United States itself has for the first time since 1991 officially abandoned liberal arguments on modernization and democratization. As the 2017 US national security strategy report puts it, “after being dismissed as a phenomenon of an earlier century, great power competition has returned”. How did we reach that point, what has gone wrong and where are things going?

The Fallacies of Liberalism

At the core of liberal wishful thinking for the past 3 decades has been the belief that US and Chinese economic interdependence would ensure a peaceful hegemonic transition. According to this argument, as both Washington and Beijing engage in a positive sum economic relationship and enhance their material position ad infinitum, the Gates of Janus will be sealed by two prosperous societies who prefer commerce to conquest; consumption to cannons; goods to gunboats; and welfare to warfare. Neither US nor China will dominate the 21st century, the liberals ardently declare. Instead, “Chimerica” –a hybrid state– governed by the invisible hand of the market or by the very visible hands of cosmopolitan business elites (see Wall Street financiers or McKinsey consultants) will ensure perpetual prosperity and peace. Realists like University of Chicago’s professor John Mearsheimer have long challenged this liberal orthodoxy. China and the US are on a collision course, they argue, and both states engage in comprehensive balancing – economic, military, technological and diplomatic.

The Chinese Market

Capital follows returns. When China opened up its market to foreign capital under Deng Xiaoping, US multinationals followed their animal instincts and invested in the world’s most populous country. Thirty-five years later, the Chinese market shows steady growth, yet for the US companies that have invested in it, returns have underperformed other markets.

According to The Economist’s annual Sinodependency index, for recent years, returns on investments outside China have outperformed returns on investments within China. While this may not be a long-term trend, the significance of opportunity costs in the decision making of large multinationals could lead many of them to change their focus away from the Chinese market. More importantly, according to the Sinodependency index, the three US companies that are most dependent on the Chinese market are all high-tech companies (Apple, Intel, IBM). Those companies will most probably see their shares in China undermined by the increasing indigenous competition, as Chinese companies climb the value ladder. Such value evolution from the assembled-in-China model to the designed-in-China model will certainly erode the big market margins of US tech giants and even inspire global competition for market shares.

In addition to the “natural” evolution of competition, partly in response to National Security concerns and its eff ort to support national self-sufficiency in core technologies (See project Made in China 2025) the Chinese government has also enacted policies that support its domestic techno-industrial ecosystem. Beijing has already excluded Microsoft from its public procurement activities and has directed multibillion-dollar packages of state support to developing an indigenous comprehensive operating system and other technologies like microchips, where US companies hold a significant lead. If the preference of China’s top university graduates is any indicator of China’s trend toward indigenous innovation, the omens for US companies are poor. While, only fi ve years ago, Tsinghua and Peking University Science & Engineering graduates looked to US tech firms for graduate jobs in China, now the majority aim for recruitment in one of China’s Big 5: Baidu, Ali Baba, Xiaomi, Huawei and Tencent.

Labor Costs, National Security and Supply Chains

Free trade leads to the eventual convergence of real wages among trade partners. As China enjoys enormous trade surpluses, its firms demand more labor, pushing wages higher. Across the Pacific, as the US deals with high-trade deficits and low aggregate demand, real wages tend to stagnate. Eventually, the factor price equalization law has it, China and the US will tend to converge, hence repleting China’s low-cost advantage. To be sure, the average Chinese wage today is still lower than that of the US, but the trend has been one of convergence.

Political and security imperatives have exacerbated this trend. In the old liberal world of comparative advantage, security risks did not enter the strategic function. Since 2017 and particularly now that the Covid-19 pandemic has uncovered the severe dependence of the United States on China for basic medical supply, a radical shift of the global supply network is underway. Cost minimization will be complemented if not subordinated to supply chain security. Already CEOs have begun to look for new production networks either back in the United States or in ASEAN. Apple for the first time ever is prepared to shift its complete production of headphones out of China to Vietnam, and Samsung has since last year moved its production out of China completely.

CPC’s Political and Ideological Resilience

“Proletarians of the world unite!” Marx and Engels declared in their communist manifesto: There are no nation-states nor are there intrinsic cultural and historical forces that classify people other than the ownership of the means of production and the material conditions. Surprisingly, capitalists and liberal intellectuals have adopted the same naive and simplistic thinking. A banker in Shanghai overlooking the Pudong from a luxurious office on the 100th floor of the World Trade Center is little different from a Wall Street banker overlooking Brooklyn from the Freedom Tower. Both believe in one god: Mammon.

Money in a liberal democracy buys influence; in the United States it arguably even buys the White House. Had a similar scenario held for China –that is, had business elites been able to pick the general secretary of the CPC– then perhaps liberal and cosmopolitan elites in China and America could achieve Chimerica and perpetuate the status quo of globalization and inequality.

However, it is now clear that the CPC is an “adaptable” organization and China’s polity gives no weight to business elites when it comes to setting policies. While Jiang Zemin’s “three represents” reforms ensure that businesspeople can participate in the collective decision making of the CPC, the ultimate “grand strategy” of China is shaped by the powerful standing committee of the Politburo if not by president Xi Jinping himself. The CPC’s ultimate end is China’s national rejuvenation, and the state, not the entrepreneur, is seen as the ultimate arbitrator of how this will be achieved.

The New Cold War: Deglobalization and Selective Decoupling

The dream of Hegelian unity has been at the core of visionary leaders throughout history. All of them –from Alexander the Great to Augustus, to Darius, to Napoleon, to Liu Bang, to the Tang and Ming emperors–, without a single exception, chose hegemony and subjugation to pursue that dream. Eventually they built on culture and ideology to keep the system harmoniously united.

Liberalism instead saw in the market a sui-generis non-hegemonic force that melts nations into an ecumene managed by the invisible hand of profit optimization. The idea that China and the United States were marching on perpetual paths of peace was born out of this belief, enhanced by the hubris of the era of US hyperpower and the end-of-history mentality. The liberal global order that ensued and the declaration by US presidents since 1991 that the liberal democratic end of human civilization is irreversible now sounds utterly hubristic.

In the years ahead, the world will be moving towards a new bipolar structure with the United States and China vying for global supremacy. This competition will be based on zero-sum mentality, meaning that relative instead of absolute gains will shape strategic calculations. Trade and investments will be further securitized and the bilateral competition on the technology frontier will accelerate. What we see now in 5G will soon encompass a wide range of dual-use technologies in biotech, AI, nanotech and ICT. To be sure, unlike the US-Soviet Cold war, when Moscow and Washington had created two distinct bounded orders (the Warsaw pact and the Western alliance with the addition of Japan), this time the boundaries may be less defined.

Some states will have no choice but to choose sides, yet as Tsinghua University’s distinguished professor Yan Xuetong has put it, most states will be able to “selectively” side with either China or the United States based on their priorities on specific issues. In that environment, it is still possible, however, that the Sino-US rivalry could escalate into proxy wars for political and ideological influence. Both China and the United States could engage in covert action to replace regimes let alone overtly sanction those that defy the superpowers’ interests. Nonetheless, unlike the guerrilla warfare of the Cold War era, perhaps this time, in the age of social media and big data, covert action would be much more subtle. Portable stinger missiles (a game changer against the Soviet invasion of Afghanistan in the 80s) could well be replaced by AI bots hurling disinformation bolts.

After almost 30 years of liberal euphoria, realists seem to be winning the argument. Still, as the great European psychologist-polymath Karl Jaspers once put it: “Anyone who regards an impending war as certain is helping on its occurrence, precisely through his certainty. Anyone who regards peace as certain grows carefree and unintentionally impels us into war. Only he who sees the peril and does not for one instant forget it, is able to behave in a rational fashion and to do what is possible to exorcise it.” The memory of the perils of the last Cold War and the mental pain we experience when we compare its cost with the marvelous adornments of peace can at least incentivize us to look for means to lessen the intensity of great power competition. The tragedy is that we can hardly avert it.