The Breakdown - The Economic Conflict That Will Shape The Next Century

Episode Date: July 26, 2020

This week on Long Reads Sunday, our selection is “Whose Century?” by Adam Tooze in the London Review of Books.  Nominally a review of four recent scholarly works on the conflict between the US and China, Tooze main argument is that the central problem with viewing this as a new Cold War is the idea that it is new.  Instead, we need to understand that, contra Fukiyama’s famous essay, history didn’t end in 1989 - at least not for the Chinese. What’s more, the narrative of having “won” the Cold War fails to take into account our spectacular failures in Asia.  Only by reframing our understanding can we make sense of the most important geopolitical conflict of the coming century. 

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. What's going on, guys? It is Sunday, July 26, and this is Longreed Sunday. Today's selection is by economist and historian Adam Too's, who wrote a piece for the London review of books called Who's Century? It is, in some ways, a book review of four books that all have a similar topic.

Those books are Schism, China, America, and the fracturing of the global trading system by Paul Blustin, Superpower Showdown, How the Battle Between Trump and Sheet threatens a new Cold War by Bob Davis and Lingling Way, trade wars are class wars. how rising inequality distorts the global economy and threatens international peace, by Matthew C. Klein and Michael Pettus, and the new class war, saving democracy from the metropolitan elite by Michael Lind. Adam is an extremely interesting thinker, and as I mentioned, he brings to his economic analysis a historical perspective, which I find incredibly relevant. So let's dive into this piece by Adam Too's in the London Review of Books, Who's Century?

What Eric Hobbsbaum called the short 20th century is supposed to have ended in 1989, with the United States winning the Cold War. Yet today, America faces a powerful and assertive China, a one-party state with an official ideology it calls 21st century Marxism, which is busy building a powerful military on the back of an economy set to become the world's biggest in the foreseeable future. This development has shaken the assumptions that have underpinned economic and national security decision-making in Washington for the last 30. 30 years. The change in circumstances has been dramatic. In 2001, after years of painful negotiation, the U.S. managed China's ascension to the recently established World Trade Organization,

which sets the world's trading rules. With this, the WTO became a truly global organization, incorporating the vast majority of the world's population. The hope, as expressed by President Bush's trade representative Bob Zellick, was that China would become a responsible stakeholder in the global system. 20 years later, it is the second largest national economy in the world. world. The U.S. and China are deeply interconnected through traded investment. Yet they are locked in a conflict which, according to President Trump, may yet result in a complete, quote, uncoupling of the two economies. The Trump administration, meanwhile, is doing its best to sabotage the WTO in large part because it has failed to tame China's rise. The COVID-19 crisis has

pushed into the background the smoldering trade war between the U.S. and China, but it has not prevented their economic rivalry morphing into a dramatic grand strategic standoff. The financial hub of Hong Kong has become a political battleground. The U.S. has launched an all-out campaign against Huawei, China's leading tech firm, and both sides have announced sanctions against senior politicians. The movement of people between the two countries, previously in the millions, has reduced to a trickle. Whether it will resume when the COVID-19 crisis passes is anyone's guess. What's more, the conflict is spreading to America's allies, including Australia, Canada, France, and the UK. It is hard to escape the impression that we have reached a point of historic rupture, and that is

the feeling conveyed by this recent crop of books on Sino-American tensions. Not only do they offer a chronicle of mounting tension, but, though some of them were just completed a few months ago, they seem to speak from a world we have lost. The questions they ask are still urgent, but in our current situation, they are being reframed with each passing day. On the American side, the reassessment of U.S.-China relations began nearly 10 years ago during Obama's first term, when Hillary Clinton was Secretary of State. Clinton had taken a close interest in Chinese affairs as far back as the 1990s when she was First Lady. In 2011, as Secretary of State, she initiated the pivot to Asia of the Navy's carrier groups, the most conspicuous weapons in the U.S. strategic arsenal.

The Trans-Pacific Partnership, TPP, an obscure trade pact in which America had shown little interest, was refashioned as a tool for containing China. If Clinton had been elected president in 2016, the relationship with China would doubtless have been at the heart of her foreign policy. She would have personified continuity in the U.S. position. But under any administration, the remarkable growth of China's economy would have warranted a new strategic response, as would President Xi's regime, which since 2012 has promoted the preeminence of the Chinese Communist Party, an intolerance of ideological pluralism, a forceful assertion of Chinese sovereignty, and a capacious new view of China's role in the world.

Donald Trump's unexpected election victory changed the debate by putting the spotlight back on the U.S. The Trump presidency is a Roershack blot onto which analysis project their diagnosis of a crisis that it's as much American as Sino-American. Self-critical American liberals see the Trump presidency as the result of the derailment of U.S. globalization policy, above all in relation to China. Blue-collar resentment stoked by unbalanced trade put Trump in office. Meanwhile, Trump and his team put the blame for the China crisis on their predecessors in the Obama, Bush, and Clinton administrations. For Hawks, such as U.S. trade representative Robert Lighthizer and Trump's favorite economic advisor, Peter Navarro, the question is why the effort to enroll China in a world economy was undertaken in the

first place, and who benefited from an experiment that has gone so badly wrong? The crude Trumpian take, which is perhaps also the kindest, is that the U.S. negotiators of the 1990s and early 2000s were chumps, suckered by the Chinese. The more sophisticated version is that Bill Clinton's team were too committed to the kind of modernization theory Francis Fukuyama spun in his end-of-history essay in 1989. They believed the liberal story that as China's economy matured, it would inevitably develop a need for the rule of law and representative democracy. If the communist regime refused this logic and clung to its own ways, the laws of social science would condemn it to economic stagnation. Either way, America had nothing to fear. In his cool-headed history schism, Paul Blustin

takes issues with both these interpretations. So, too, do Bob Davis and Ling Ling Wei in their more journalistic account superpower showdown. With hindsight, it is clear that the policymakers of the 1990s and early 2000s did get some things wrong. They didn't anticipate Xi's restorationist personality-driven model of CCP leadership, but neither did plenty of Xi's rivals in Beijing. She is a transformative leader of a conservative kind. What cannot reasonably be said is that the Clinton or Bush administrations were naive about the ease of convergence with China. The terms of its accession to the WTO were demanding. Thousands of Chinese laws had to be brought into compliance.

As Blistine recounts, Zhu Rongji, the Chinese premier who negotiated the deal, faced widespread denunciation at home for selling out to America. The terms of Chinese WTO ascension were, one senior Communist Party official blurted out, no better than the infamous 21 points which Imperial Japan had tried to for on the Chinese Republic in 1915. The boom in China's exports in the new century wasn't the result of a sweetheart deal, but of the extraordinary mobilization of labor and capital that began in the 1990s. And in that process, Western Capital played a key role. The question asked by the American left, as well as more hard-nosed right-wingers, is not whether the U.S. negotiators were naive

and incompetent, but whose interests were they representing? Were they negotiating on behalf of the average American or American businesses? As Davis and Wei show, U.S. economic policymakers were committed to advancing the interests of American business, more or less as business articulated those interests to them. U.S. manufacturers such as Boeing, GE, and Pepsi, banks at Goldman Sachs, Morgan, and J.P. Morgan, and the insurance giant AIG, all wanted the new market, and they wanted the cheap labor. From 1994, when the Clinton administration abandoned its hard line on the legacies of Tiananmen, the thrust of policy was to open up new markets and opportunities for investment, even in the face of strong objections from American trade unions.

To get approval for the deal in Congress, American businesses mounted the most expensive lobbying effort ever. So eager were American firms to be seen as the chief advocate for China, they had to form a committee to make sure they didn't fall over each other. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top financial institutions. BitStamp is built on professional grade trading technology. Their platform is powered by a NASDAQ matching engine, and their APIs are recognized as the best in the industry. Download the BitStamp app from the App Store or Google Play, or visit BitStamp.net slash pro to learn more and start trading today.

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lost interest in their own country. Coming from Bernie Sanders, that question wouldn't be surprising. But it was remarkable to hear William Barr, Trump's Attorney General, describe American business as, quote, part of the problem, because its corporate leaders are too focused on their stock options and have lost sight of the national view, and the need to ensure that, quote, the next century remains a Western one. He warns corporate executives lobbying for China that they may be treated as foreign agents. This is all a long way from the 1990s when America's corporate leaders could confidently assume that their way of seeing the world was so deeply entrenched in the U.S. political system that their desired version of integration with China would go unchallenged

whatever the cost it imposed on American society. They folded China into their corporate planning, as though all that was involved were private business decisions, not a wholesale rewiring of the global order. Today, that wager on the world as a playground of corporate strategy is unraveling. The first miscalculation was to underestimate the capacity of the Chinese regime to retain control. As Beijing coolly points out when faced with complaints from the Americans, no one forces Boeing GE or GM to invest in the Chinese market. They do it for profit. If American trade negotiators return year after year to ask for further concessions from China and modifications to its economic system, it is because they want more security and transparency, which will inevitably be

at the expense of the sovereign discretion of the Chinese regime, and they want to limit the ability of Chinese business to acquire American expertise and work their way up the value chain. Leaders in Europe and the U.S. are increasingly concerned about the ferocious competition from Chinese firms, and the many ways in which Chinese subsidizes its own producers to compete both in domestic markets and abroad. As Trump's trade warriors point out, the range of instruments that China deploys in industrial competition make a nonsense of trade policy as defined by the WTO. Complexity and opacity are key to the success of China, Inc. As Blestine shows in an illuminating cameo about tractor tires, the network for state support for Chinese industry extends

from central and local government grants and tax exemptions to subsidize land deals, cheap electric power, and a raft of subsidized low-interest loans, from the government as well as public and private banks. When rubber prices surged in the early 2000s, Beijing devised a scheme to supply it at a reduced price and gave a set of inducements to rubber producers. The arrangements are all-encompassing, yet almost entirely deniable,

as the American lawyers retained by Chinese firms demonstrated when they faced unpleasant questions from the U.S. Department of Commerce. But, as Matthew Klein and Michael Peddine, argue in their brilliant polemic, trade wars or class wars, industrial policy instruments are only part of the story. The more fundamental reason for the Sino-American trade imbalance is macroeconomic. When we look at the world economy as a whole, the dollar is the hegemon. The U.S. economy is still the largest. U.S. capital is the most profitable. The U.S. elite is the most prosperous. And it was the U.S. elite that pushed for China to be admitted to the WTO. But when we look

instead at the flow of money and goods around the world, it is clear that non-American actors have always played a key part in shaping them. Using the dollar system as their anchor, mercantilist export-driven economies have repeatedly remade the pattern of world trade. After 1945, it was the resurgent West European economies. In the 70s and 80s, it was Japan and the Asian Tigers. As Klein and Pettish show, since the 1990s, it has been Germany and China. For both, 1989 was a turning point. With the lifting of the iron curtain, Germany's manufacturing firms gained access to the labor markets of Eastern Europe. Beijing's fearsome repression of dissent to Tiananmen set the stage for a huge export drive based on holding down wage costs, shedding 70 million jobs from inefficient state-owned enterprises,

and suppressing domestic competition. Both China and Germany have seen dramatic increases in pre-tax inequality since the 1990s. Though the incomes of virtually all households in China have made a huge leap forward, household consumption as a share of GDP fell as low as 36%, on a par with the Soviet industrialization jives of the 1930s. Saving surge, despite interest rates so low they amounted to a form of taxation, which made space for huge volumes of investment and export. This export drive on the backs of the Chinese working class is one aspect of what Klein and Pettus described as a class war. The result of this deliberate stunting of domestic purchasing power was a restriction of imports and a surge of exports which has delivered cheap

goods to the rest of the world. This export-driven growth engine has raised hundreds of millions out of poverty in China and in Germany has secured the future of Europe's preeminent manufacturing powerhouse. neighboring low-cost economies such as Hungary and Slovakia in Eastern Europe or Vietnam and East Asia have been recruited to add capacity to the main manufacturing hubs. Suppliers of raw materials such as Brazil and Australia have benefited from the Bonanza. At the same time, America's vast consumer markets have been flooded with cheap manufactured goods. The blow to its blue-collar workers is sometimes referred to as the China shock. This is the second aspect of Klein and Pettus' class war. The remedy, some American conservatives argue, is for the U.S. to put its

fiscal house in order. If the U.S. reduced its government deficit and adapted austerity, its economy would be less overheated. Its firms would be more competitive and its trade deficit would disappear. But as Klein and Pettus show, this is not borne out by the data. When the U.S. has shrunk its government deficit in the past, its trade deficit hasn't always fallen. This is because it isn't the government account alone that decides the balance of savings and investment in the economy, but America's households and businesses and government taken together, and effects in these fears largely cancel each other out. What accounts for the fluctuations in America's balance with the world is above all, inflow of capital from abroad. This is driven by export surplus countries,

notably China, investing their export earnings in safe American assets, above all American government debt. By 2013, Chinese dollar holdings had risen to more than $3 trillion, driving up the dollar and crowding out American manufacturing. An imaginative American policymaker might have decided to treat this inflow-like proceeds from oil wells, directing it into a ring-fellings. sovereign wealth fund, which could have been used to fund much-needed infrastructure projects or an industrial policy to match those of China and Germany. Instead, it was Wall Street that profited in its role as the chief conduit of global finance, opening a third front in the class war. Clearly, this system, if one can call it that, delivers significant benefits for some parties.

The regime in China can claim the legitimacy that comes from having improved the material circumstance of hundreds of millions of people. It has also created a wealthy business class and an army of prosperous professionals, many of whom have been enrolled into the ranks of the party. Foreign manufacturers that use Chinese labor, Apple is the most prominent example, reach huge profits from low-cost assembly operations. Bankers around the world take a cut of every transaction. Hong Kong boomed on the back of the capital flow in and out of China, becoming, after Wall Street in London, the third great center for dollar-based finance and one of the world's least affordable places to live. Consumers around the world, meanwhile, benefited from

abundant, cheap imports. The situation has continued for as long as it has because enough powerful people have an interest in its continuing, but driven to extremes, as it has been lately, it requires some delicate handling. In recent years, China has allowed its exchange rate to appreciate. Wages have risen strongly. She has added unceasingly celebration of the Chinese dream, positive energy, and when those aren't enough, repression. Germany presided over a near disaster in the Eurozone, but at least at home, the welfare and tax system affects a significant redistribution, such that despite rising pre-tax inequality, the disparity in post-tax incomes is substantially moderated. If the jerry-rigged global economic system is in jeopardy, it is because of the

spectacular failure of the American political establishment. Not every part of the American government machine has failed. The world economy relies on the dollar as a common currency, and the Fed has been essential to sustaining the system in the face of a series of shocks. Other central banks, the ECB, the People's Bank of China, the Bank of Japan, as well as smaller banks like the Bank of England and the Swiss National Bank have played their part. The gigantic quantities of liquidity supplied by the central banks keep the engine running. If the central banks declined to act, the world economy would be threatened by a sudden heart attack. What that might look like was starkly illustrated by the ruinous financial crisis in the Eurozone between 2010 and 2012,

brought on by the conservative brinksmanship of the European Central Bank. Faced with the COVID-19 crisis, even the ECB appears to have learned its lesson. Yet pivotal though it is to the world economy, the Fed's role is limited to technocratic crisis fighting. It has no more than indirect influence over domestic labor markets and welfare arrangements. It has no influence at all on trade policy, let alone over the political process. And this is where the failure of American elites lies. All right, guys, I'm going to skip a big part in the middle just because this thing is like 7,000 words, and it would be an hour long, and I'm going to move to the end to the kind of

the conclusion section. The reevaluation is now moving beyond foreign policy. If this is a new Cold War, as the conservative historian Hal Brand says, then America needs to rally the home front. It must become a better version of itself. The prolific and unorthodox conservative Michael Lind in the new class war mounts a critique of what he calls the overclass, and its creeping marginalization of the American working class that might just as easily have come from the Sanders camp. He goes on to demand a new democratic pluralism, which would institutionalize the voice of the working class, and give it leverage as tripartite corporatist negotiations between

labor unions, employees, and governments once did. Inverting the quiescent version of Klein's and Pettus, Lin sees the new Cold War with China as an opportunity to relaunch the American government as an engine of economic development. Not domestic reform as a means of diffusing international tension, but international tension as a driver of domestic transformation. There are plenty of historical examples of external crises being used this way in the U.S., from Alexander Hamilton to Roosevelt to Reagan. But to infer that any international crisis affords such an opportunity is to put the cart before the horse. The progressive potential of such a moment depends on whether or or not, there are countervailing institutions that can channel its energies in the direction of reform.

In the mid-20th century, that meant organized labor in the institutions of grassroots democratic politics. Those are massively weakened today. The current situation is encapsulated in the fact that multi-billion dollar packages to fund a military industrial confrontation with China are passing through Congress at the same time as the Republican leader of the Senate, Mitch McConnell, openly floats the idea of states and cities filing for bankruptcy if they are unable to meet the cost of COVID-19. Among the most active sponsors of anti-China legislation is Senator Tom Cotton of Arkansas, who on June 3rd in the New York Times called for the U.S. Army to be deployed on the streets of America's cities to repress the Black Lives Matters protests. As the president and his secretary of defense

discussed dominating the battle zone of Washington, D.C., America was saved from the disaster of a military deployment in its own capital only by opposition from the generals. In circumstances like this, the idea of using a great power confrontation to leverage domestic reform risks further ratcheting up the militarization of policy and politics. One has to wonder whether the advocates of a new Cold War have taken the measure of the challenge posed by a 21st century China. For Americans, part of the appeal of allusions to Cold War 2.0 is that they think they know how the first one ended.

Yet our certainty on that point is precisely what the rise of China ought to put in question. The simple fact is that the US did not prevail in the Cold War in Asia. Korea was divided by a stalemate. Vietnam was a humiliating failure. It was to find a way out of that debacle that Nixon and Kissinger turned to Beijing and inaugurated a new era of Sino-American relations. America's ability to tilt the balance against the Soviet Union was linked to its success in playing the Chinese off against the Soviets. The Tiananmen Square massacre was not an incidental blot on the liberal landscape of 1989. It was the Communist Party of China's answer to the Berlin-centered end of history and narrative. The mistake in thinking that we

in a new Cold War is in thinking of it as new. In putting a full stop after 1989, we prematurely declared a Western victory. From Beijing's point of view, there was no end of history, but a continuity, not unbroken, needless to say, and requiring constant reinterpretation, as any live political tradition does, but a continuity nevertheless. Although American hawks have only a crude understanding of China's ideology, on this particular matter they have grasped the right end of the stick. We also have to take seriously the CCP's sense of mission. We should be We should not comfort ourselves with the thought that because nationalism is the main mode of Chinese politics today, Xi's administration is nothing more than a nationalist regime.

China under the control of the CCP is, indeed, involved in a gigantic and novel social and political experiment enrolling one-sixth of humanity, a historic project that dwarfs that of democratic capitalism in the North Atlantic. But to acknowledge that there are real ideological stakes is not automatically to accept that the U.S. and its allies should gird themselves for victorious confrontation with the communist foe. Even the Trump administration's own strategic statements on China sensibly stopped short of any talk of regime change. Having recognized what ought to have been obvious all along, that China's regime is serious about maintaining and expanding its power, and conceives of itself as having a world-historic

mission to rival anything in the history of the West, the question is how rapidly we can move to detente, meaning long-term coexistence with a regime radically different from our own, a long-term attitude of live and let live, short of assumptions of the world. about eventual convergence and the inevitable historical triumph of the West's economic, social, and political system. It would be a long-term coexistence in which, over time, the U.S. may well find that it has become the junior partner, or, at best, the leader of a coalition of smaller powers balancing the massive weight of China. Given the entanglement between nations and economies produced by globalization in recent decades, this new detente must involve a settlement of issues

of trade. That does depend, as Klein and Pettus and Lind all insist, on deep questions of domestic social economic balance both in the U.S. and China. But it cannot be a matter of trade alone. There is no way back to the 1990s when economic growth under the sign of U.S. hegemony could be treated as geopolitically neutral. That era has gone, along with it, unipolarity. Instead, we have learned or relearned that economic growth and trade determine the balance of power and generate tensions that ultimately require international political resolution. The new detente must therefore directly address issues of geopolitics and security. But we must go beyond that. In the 19th century, in the In 1970s, it was the existential threat posed by nuclear weapons that ultimately led to detente.

In the 21st century, we face the existential challenge of the Anthropocene. COVID-19 is the first comprehensive crisis of this new era, despite copious warnings it has taken us by surprise, and the verdict it has delivered on the governmental capacities of Europe and the U.S. is disheartening. Meanwhile, the climate crisis is looming. It is not a matter, as in the 1970s, of diffusing a nuclear standoff, or, as before 1914, a geoeconomic rivalry of the kind analyzed by Hobson. While we must do both these things,

the novel challenge we face is how to disarm economic growth as a planetary threat. Even now, as China crafts its 14th five-year plan, Beijing is wearing the merits of a generation of power stations that will decide a large part of the climate future. The infrastructure projects of One Belt One Road will shape the energy future of many of the major emerging markets. India is weighing its energy options. The EU is struggling to add meat to the bones of the Green Deal.

With good reason, the U.S. is currently preoccupied by the legacy of racial hierarchy in the last half century of widening inequality. But as it attends to the challenge of domestic reconstruction, its political class faces another question. Can it fashion a domestic political bargain to enable the U.S. to become what it is currently not? A competent and cooperative partner in the management of the collective risks of the Anthropocene. This is what the Green New Deal promised, after the shock of COVID-19 is more urgent than ever.