The US vs China ideological battle, challenge for liberal democracies and an opportunity for India (Part II of two-part series)

China is also aware of India joining the US camp if driven too hard, apart from the increasing realisation that India is no longer a soft state and will stand resolutely and be prepared to fight when its core national interests are threatened, writes Lt Gen P R Kumar (retd) for South Asia Monitor

Lt Gen P R Kumar (retd) Aug 26, 2020
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In part I, we examined the indicators which suggested that the USA is in a declining mode which is irreversible, and only the pace is uncertain. The majority who hold this view, take as a given that the US share of global economic output has been decreasing for the last decade and that she has either already lost her status as the world’s largest economy to China or is fated to lose it within the next ten to 15 years. From these assumptions flow recommendations for resizing US foreign policy to fit Washington’s shrinking power, accept the loss of primacy, adapt to regional spheres of influence led by China and Russia, and work to avoid the wars that could erupt between a declining empire such as the United States and a rising one such as China. 

The chaos of the coronavirus pandemic engulfing the world these days is only exposing and accelerating what was already happening for years. On public health, trade, human rights, and the environment, governments seem to have lost faith in the value of working together. Washington seems to be settling in for a protracted struggle for dominance with China, Russia, and other rival powers. This fractured world, the thinking goes, will offer little space for multilateralism and cooperation. Instead, US grand strategy will be defined by what international relations theorists call 'the problems of anarchy': hegemonic struggles, power transitions, competition for security, spheres of influence, and reactionary nationalism. But this future is not inevitable, and it is certainly not desirable. 

Comeback nation

Stating the obvious first, the US has by far the most powerful, technologically advanced military in the world with the most effective power projection capabilities. The US has always faced the cyclical churn of the global economy resolutely and come back stronger. It boomed in the 60s, faded amidst stagflation and oil crisis of the 70s, boomed again with the rise of Silicon Valley in the 90s, only to face the dot-com bust of 2000. During the 2010s, the US not only staged a comeback as an economic superpower but reached new heights as a financial empire, driven by its relatively young population, its open door to immigration, and investment pouring into Silicon Valley. Defying all odds, (many think tanks predicted in 2010 that China would overtake the United States by 2020), the US actually expanded its share of global GDP during the 2010s, from 23 percent to 25 percent. Today, the US stock market has fallen less than most other stock markets, and investors have bid up the dollar given its safe-haven status. In short, the United States’ share of global economic power has essentially held steady for four decades. Over this period, the European Union saw its share fall from 35 to 21 percent, Japan’s share slipped from ten to six percent, and Russia’s dropped from three to two percent. 

Meanwhile, China’s share swelled during that time from two to 16 percent. So, it is true that as China has risen, other major powers have declined, but the US is not one of them. The country is now facing new economic challenges as a result of the novel coronavirus. But no country was prepared for the pandemic, and there is no reason to believe the downturn will change the United States’ standing among world economies.

Dollar and technology dominance

Lifted by the strong performance of American technology companies, the US stock market rose by 250 percent in the 2010s, nearly four times the average gain in other national stock markets. The biggest underperformers were in Europe, and emerging markets, which suffered their worst decade of returns since the 1930s. China’s stock market rose by a mere 70 percent over the course of the decade, relatively slow growth for an emerging market. By 2019, the United States accounted for 56 percent of global stock market capitalization, up from 42 percent in 2010. The value relative to all others was at a 100-year high before the novel coronavirus hit and maintained this historic lead in the subsequent initial market crash. The 2010s saw the rise of a global “superstar economy,” in which huge corporations increasingly dominated small ones, monopolising market share and investment flows. Today, seven of the world’s ten largest companies by total stock market value are American, up from three in 2010. Global markets reflect the collective mind of millions of investors, and market prices capture their estimate of the relative strength of the world’s leading economies and companies. 

If the markets had one voice, it would not be singing the chorus of “American Decline.” US banks today dominate global finance to a greater degree than they did ten years ago, in part because debt troubles have dogged banks in China, Japan, and the EU even more persistently. Close to 90 percent of global financial transactions conducted through banks use the dollar, even if the deal does not involve an American party. When China or South Korea sells phones to Brazil, it generally asks to be paid in dollars, because sellers everywhere prefer to hold the world’s favorite legal tender. The share of countries that use the dollar as their anchor currency, the currency against which they measure and stabilize the value of their own currencies, has risen from around 30 percent in 1950 to about 60 percent today. Those countries collectively account for some 60 percent of global GDP. China is one of them. When the Fed moves interest rates, every other central bank (including the People’s Bank of China) faces heavy pressure to move in the same direction, or face destabilizing capital outflows.

Owning the indispensable currency also gives the US tremendous geopolitical leverage. In 2018, when US President Donald Trump imposed financial sanctions on Iran after pulling the United States out of the nuclear deal that his predecessor, along with other major powers, had negotiated with the Islamic Republic, reluctant European governments ultimately decided they had no choice but to go along because they could not risk losing access to US banks. When the United States and the EU sanctioned Russia for invading Ukraine in 2014, the Kremlin turned inward and gave up on promoting economic growth in favor of saving money so as to reduce its vulnerability to foreign creditors and sanctions threats. For all its aggression on the world stage, Russia is currently growing at half the pace of the United States and fading as a global economic power. India too had to reluctantly stop buying oil from Iran. 

Becoming the global currency is every big nation’s dream; China had similar hopes for the renminbi and in the early 2010s took steps to make its currency more readily convertible and easier to trade. Then, in 2015, millions of Chinese rushed out of this opening door. Faced with a stock market crash in Shanghai and a looming debt crisis, they began shipping renminbi to safe havens abroad, in amounts equal to hundreds of billions of dollars a month. In response, the authorities imposed capital controls that remain in place today, putting China’s hopes of challenging the dollar’s supremacy on hold indefinitely. What the rest of the world wants in a reserve currency is a vast, liquid market in which people are free to buy and sell without fear that the government will suddenly change the rules. For now, they see this safe haven only in the US dollar, which, as a result, has so far appreciated against most other currencies during the coronavirus shock. Global elites may not trust the current US president, but they trust her institutions (so far).

Even believers in middle-class decline should not conflate it with a broader American decline, because the same conversation about the loss of middle-class jobs and wages is going on all over the world, from India, to Japan, to the countries of the EU. No evidence yet that the pandemic will depress the economy or economic confidence in the US more than in other major powers. Before the United States, five countries had held reserve currency status: Portugal, Spain, the Netherlands, France, and the UK. On average, each lasted 94 years in the leading role. Today, the dollar’s run as a reserve currency is 100 years old. One reason it is likely to endure even a pandemic-induced recession is the absence of viable national rivals, but in the void, new contenders are emerging, including gold and cryptocurrencies. Facebook is trying to launch a global currency, Libra. Nothing lasts forever!

China’s economy in trouble 

Beyond the next five to ten years, no forecast is better than a random guess, because too much can change in the intervening years, as the cycles of economics, politics, and technology turn. The long-run is a myth. The declinist narrative reaches its denouement when the United States loses its place as the world’s largest economy to China. Often, this story is couched in historical inevitability, evoking its phenomenal growth story decade after decade. Ironically, even China admits it was only possible because of US magnanimity of providing a stable security environment in Asia. Declinists often exaggerate how soon China could overtake the United States by assuming that it can maintain overstated growth rates indefinitely and never once suffer a financial crisis or a recession. Statisticians and economists reckon that if both US and China maintain current growth rate, China would catch up around 2050, and since all developing nations slow down inevitably like South Korea, Taiwan, Japan, even one percent drop of growth in China, the catch up would be in 2090. The current geo-political-economic headwinds are hitting China harder than the US. 

What is more, China’s debt now amounts to nearly 270 percent of GDP (the comparable figure in the United States is 250 percent), and it is much harder for a middle-income country such as China to grow with a debt that high. Zombies account for ten percent of corporate debt in China, so unlike in 2008, when its debt was much lower, China is now highly vulnerable to a global financial crisis. Moreover, the United States is the battle-tested survivor of 12 recessions and a Great Depression over the last century. China has not suffered a recession since its economic boom began four decades ago, and its leaders now respond to any hint of a downturn by pumping more debt into the economy. The most important driver of any economy is the working-age population, which is still growing in the United States but started shrinking in China five years ago. Historically, countries with a shrinking workforce have had virtually no chance of sustaining rapid economic growth for even one decade. The Chinese economy has been fueled by a credit bubble of epic proportions and as per IMF (International Monetary Fund) which is unprecedented and unsustainable. For example, China has created an estimated sixty-five million Chinese unoccupied apartments, numerous ghost towns, and a massive amount of excess industrial capacity. Post COVID increased credit growth to kick-start the economy will further inflate the Chinese credit bubble, which will further mortgage the country’s future economic growth potential. China’s growth story is based on exports, which is already badly hit due to reasons of a global slowdown and negative COVID reactions internationally, leading to further stagnation.

Whither US hegemony

Having seen both sides of the coin, it would be fair to say that the US has lost its superpower status of the 80s and 90s, but still remains the most powerful global power for some time to come, depending on its geo-political-economic-strategic-security related policies and actions. The US influence has never been premised on power alone, but also depends on an ability to offer others a set of ideas and institutional frameworks for mutual gain. The key question which concerns US watchers is how far the decline will spread? Will core allies decouple from the US hegemonic system? How long, and to what extent, can the US maintain financial and monetary dominance? Remember, even at the peak of the unipolar moment, Washington did not always get its way. As long as the core of the US hegemonic system, remains robust, and the US, EU (and allies like Japan, South Korea, Australia, India) can leverage its combined economic and military might to their advantage, the US will remain the major player in international geopolitics, strategy, and security affairs. Undoubtedly, Washington will have to get used to an increasingly contested and complex international order. There is no easy fix for this. No amount of military spending can reverse the processes. To sum up, the US currently leads the strongest military and economic coalition in a world of multiple centers of power. Smart statecraft will allow a great power to navigate a world defined by competing interests and shifting alliances.

US policymakers must plan for the world after global hegemony. For the US political and economic model to retain considerable appeal, she has to first get its own house in order. China will face its own obstacles in producing an alternative system; Beijing may irk partners and clients with its pressure tactics and its opaque and often corrupt deals. A reinvigorated US foreign policy apparatus should be able to exercise significant influence on international order even in the absence of global hegemony. But to succeed, Washington must recognize and adapt to the new world order. It will be impossible to secure the commitment of some countries to US visions of international order. Many of those governments have come to view the US-led order as a threat to their autonomy, if not their survival. And some governments that still welcome a US-led liberal order, now contend with populist and other illiberal movements that oppose it. As China’s presence around the world grows, the US should avoid a tendency that was all too common during the Cold War: to see third countries only in terms of their relationship to China. The United States lacks both the will and the resources to consistently outbid China and other emerging powers for the allegiance of governments.

US-China strategic play

There are no easy answers; the moderates preach coexistence on terms favorable to the US interests and values.  Such coexistence would involve elements of competition, cooperation, and occasional confrontation, geared toward securing those favorable terms. This might mean considerable friction in the near term which must be addressed to achieve favorable end-state, unlike earlier when it was an objective unto itself; the hawks naturally want a robust confrontationist approach because they believe that coexistence is not feasible in this ‘realpolitik’ world. Given the historical precedence of China story, its phenomenal economic growth coupled with a modern multi-domain military, and ever-increasing diplomatic, political and influencing heft, China is unlikely to accept coexistence and challenge the US for domination initially of Asia and subsequently the world. Cold war or increasing animosity between USA and China is very worrying indeed. Unlike with Russia where CBMs and Crisis Management Protocols (hotlines, codes of conduct, arms control agreement) existed to avert a crisis/disaster the United States and China lack similar instruments to manage crises at a time when new domains of potential conflict, such as space and cyberspace, have increased the risk of escalation. Even an astrologer would hesitate to hazard a guess on how this competition/confrontation would shape out, which leaves the rest of the world wondering about their moves for strategic balancing, to retain their strategic freedom to achieve their national aims and objectives. India cherishes her dream of becoming a global power has many challenges ahead of her in the coming months.  

Chinese perception of USA-India relations 

Nothing is simple in geo-politics-strategy, and China naturally views India’s relations with the US, more from the US perspective. Some view US-India relations as an attempt by the US to contain China’s rise, and others who are less concerned and see some of the contradictions in the relationship as inhibiting long-term strategic cooperation. The moderates point to obvious contradictions where the US wants to include India in its network, while Delhi seeks to maintain stability with China and wants to avoid open confrontation/conflict. They perceive areas of significant trade disagreements that constrain bilateral ties and point out external constraints such as India’s close ties with Russia and America’s relations with Pakistan which hamper total alignment. Ironically, this is exactly India’s dilemma including President Trump's vacillating foreign policy moves, and uncertainty post-Trump (though there appears to be bi-partisan support for India given the current environment). 

There is also the matter of having different stands on many geo-political-strategic issues like Palestine, Middle East, WTO, climate change, environment, etc, and importantly different strategic ideas as well as perceptions on defence and security cooperation. The hawks within China want to keep balance in the US-China-India triangle and continue building CNP and ensure presence in the region especially the Indian Ocean Region. The festering border dispute between China and India is cited as a source of resentment that makes India an ideal partner for a US containment strategy. Most watchers see US-India ties through the security and containment prism and are powerful voices. Meanwhile, India and the USA have been slowly and laboriously getting their strategic relationship closer. Some important agreements are General Security of Mil Information Agreement 2002 (GSOMIA); New Framework for Def Coop (2005), renewed in 2015; Logistic Exchange Memorandum of Agreement (LEMOA, 2016) which is essential for military ties; Communications Compatibility and Security Agreement (COMCASA, 2018)  facilitates the sharing of intelligence and increases interoperability.  Annual Military exercises, including multi-services exercises, are being conducted. Politically apart from Presidential/PM level meetings, the annual meeting of USA-India 2+2 Ministerial Dialogue (US Secretary of State and Defence Secretary with Indian External Affairs and Finance Minister) will provide a fillip to the strategic partnership.

Recent border tensions along LAC

China feels that the US is deliberately adding fuel to the fire and wants to ‘profit from the tensions’ and maintain her own hegemony, but they hope India will maintain a neutral position. China is aware that India will act as per its national interest and is capable of making its own decisions. China does not view the US as neutral in the dispute and Trump's offer to mediate has been rejected by China. China is also aware of India joining the US camp if driven too hard, apart from the increasing realisation that India is no longer a soft state and will stand resolutely and be prepared to fight when its core national interests are threatened.  The fact is, many in China till now, did not view India as a challenge to its security interests, but coupled with the USA, especially in the security realm, they see India as a potential geostrategic concern/threat. Concurrently, in India, there is a crucial lack of trust within Indian establishment, its people and strategic thinkers, who see Chinese assertiveness as hegemonistic, threatening the integrity and sovereignty of India which implies that turbulence in relations will continue for the distant future. India must prepare to meet its security and economic challenges alone, and have faith on its policy of remaining strategically independent, and not align itself with any power.

The US will continue to remain the ‘first amongst equals for quite some to come. However, the USA has realized that it needs to carry out strategic balancing to continue its dominance, albeit in a multi-polar world. It would be prudent for Indian policymakers to keep repeating to themselves that nations ‘do not have permanent friends and enemies, only permanent interests’. All emerging powers especially China have understood this clearly, and behave pragmatically based on emerging situations and world opinion. While it suits the USA currently, to cement increasingly closer strategic partnership including a military one with India, we must be very clear that USA-China relations are too closely intertwined, can wax and wane, and we cannot afford to put all our eggs in the US basket, especially given the fickle nature of Trump's actions and uncertain future of the next administration. 

Concurrently, it is reasonable to assess that there exists bipartisan support in the USA and many other nations, to growing, non-hegemonistic, mature, confident, new India. India is not a ‘sudden leap and change alignments’ nation, and has always been cautious, but clear of its necessity to maintain a neutral status in the world. While days of non-alignment is long gone, India must step out its own shadow, and align itself based on issues/crisis situations to attain its national objectives. Currently due to a very real threat posed by China and its allies (Pakistan naturally, Bangladesh, Myanmar and Nepal to some extent), support of the USA and its allies, without ruffling feathers of our other friends, who are not necessarily aligned with the USA (Russia, Iran, OIC countries, CAR) is pragmatic and possible given our reputation of being a responsible power. 

The struggle between the United States and China is ultimately over which country offers a better road to progress. Chinese President Xi Jinping’s great dream (including Belt and Road Initiative) is to define an alternative path, a model of capitalism without liberalism and democracy. The jury is out on whether a totalitarian regime can pull this off, and there is reason to be skeptical. But in the meantime, the best way to respond to this challenge is for liberal democracies to work together to reform and rebuild their own model. India must chart its own path, exploit the geopolitical environment, and enjoy all the characteristics of becoming the balancing power of the world.

(The writer, an Indian Army veteran, was Director-General of Military Operations. The views expressed are personal. He can be contacted at perumo9@gmail.com and prkumarsecurity@wordpress.com)


References:


Innumerable publications, internationally and regionally publish Articles/podcasts on US status as a superpower and its future. Perused Wikipedia, Encyclopedia Brittanica and numerous magazines (including digital) focused on geopolitics, strategy and security. The theme for my study for Part I and II was recurrent, and most articles have expanded on the central theme.

‘How a Great Power Falls Apart: Decline Is Invisible From the Inside’, By Charles King; Foreign  Affairs, June 30, 2020

Consulted from article ‘Is America still the world's only superpower or is China a real rival? Experts aren't so sure anymore’ by Christina Zhou, posted 23 Jun 20, Link - https://www.abc.net.au/news/2019-06-23/united-states-still-the-worlds-only-superpower/11195636.

‘The Comeback Nation: U.S. Economic Supremacy Has Repeatedly Proved Declinists Wrong’ By Ruchir Sharma, Foreign Affairs, May/Jun 2020

‘The Next Liberal Order: The Age of Contagion Demands More Internationalism, Not Less’ By G John. Ikenberry, Foreign Affairs, Jul/Aug 2020

‘Competition Without Catastrophe: How America Can Both Challenge and Coexist With China’ By Kurt M. Campbell and Jake Sullivan, Sep/Oct 2019

‘China’s Ongoing Debates about India and the US’ by Dr Christopher K. Colley in Asia Dispatches Blog Post, 30 Jun 20, Link- www.wilsoncentre.org/blog.

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