After the Chinese Communist party’s celebratory 19th congress, which ended last week, some observers proclaimed Xi Jinping a new emperor. Mr Xi, for his part, called China a “great and strong” power and touted his Belt and Road infrastructure initiative to promote Chinese economic and political power around the world.
The US used to be the world’s largest trading nation and its largest bilateral lender. Today nearly 100 countries count China as their largest trading partner, compared to 57 that have such a relationship with the US. China plans to lend more than $1tn for infrastructure projects over the next decade, while the US is cutting back aid programmes and its contributions to the World Bank. Are the alarmists right that China is winning the geopolitical card game with a declining US?
Imagine a visitor from Mars looking at the cards each player holds. Contrary to the conventional wisdom, our Martian would be wise to bet on the US. It holds four aces that are likely to outlast the Trump administration.
One of the high cards is geography. The US is surrounded by oceans and neighbours that are likely to remain friendly, despite Donald Trump’s mistaken policy of undercutting the North American Free Trade Agreement. China has borders with 14 countries and has territorial disputes with India, Japan, Vietnam that set limits on its soft power.
Energy is another American ace. A decade ago, the US seemed hopelessly dependent on imported energy. Now the shale revolution has transformed it from an energy importer to exporter, and the International Energy Agency projects that North America may be self-sufficient in the coming decade. At the same time, China is becoming more dependent on energy imports from the Middle East, and much of the oil it imports is transported through the South China Sea, where the US maintains a significant naval presence.
This vulnerability presents China with three options: avoid naval conflict with the US that would disrupt these supply lines; increase dependence on natural gas pipelines from Russia; reduce dependence on fossil fuels by switching to renewables and banning the internal combustion engine. China is investing in the second and third options, but eliminating vulnerability will take decades.
A third high card is trade. High levels of economic interdependence encourage prudence in the US’s relationship of “mutual assured economic destruction” with China. A trade war, such as the Trump administration has threatened, could do grave damage to both countries. But if prudence fails, China is more dependent and has more to lose than the US. For example, the Rand Corporation has estimated that a non-nuclear war in the Pacific would cost the US about 5 per cent of gross domestic product, but would cost China about 25 per cent.
Finally, the US dollar is an American hole card. Of the foreign reserves held by the world’s governments, just 1.1 per cent are in renminbi, compared with 64 per cent for the dollar. A year ago, with great nationalist flourish, China announced that the renminbi had become the fifth currency used by the International Monetary Fund to calculate special drawing rights.
Many saw this as a sign that the Chinese currency was beginning to overtake the dollar. But in fact its share of international payments has slipped from 2.8 per cent in 2015 to 1.9 per cent today. A credible reserve currency depends on deep capital markets, honest government and the rule of law — all lacking in China.
Of course, a reckless player can misplay a strong hand. But these four cards are likely to survive the Trump administration. And those who proclaim Pax Sinica and the end of the American era should take such underlying power factors into account.
