The United States may already be at war with China. It’s not a conventional shooting war, of course, and hopefully it never will be, but the rising tit-for-tat animosity between the world’s two leading economies is every bit as real as the Cold War was, and the implications could be just as profound.
In fact, this multi-faceted struggle may be the blueprint of how great powers do battle in the modern era, when the consequences of combat are too awful to imagine. It’s a commodity war, evidenced by China hungrily scouring the globe for resource companies and partnerships that will supply it with the raw materials needed to fuel its rapid expansion. This is particularly evident in its thirst for oil and its focus on extremely rare strategic materials used in high-tech industries. It’s also a diplomatic tussle, being played out in international forums like the United Nations, where China frustrates efforts to sanction Iran and Sudan — no doubt because they are major oil suppliers to the Middle Kingdom. And now, it is a currency war which has massively complicated efforts to revive the U.S. jobs market.
All of this, in one way or another, comes back to a conflict over the future shape of the global economy and the balance of power therein. And for a long time, this incredibly delicate balance has been kept in check by a critical interdependence: China relies heavily on selling into the U.S. export market, and the U.S. relies equally on China as a buyer of treasury bonds to finance its astronomical debt. Think of this as the economic equivalent of a mutual nuclear deterrent.
But the balance is now looking increasingly unstable. China’s massive trade surplus and its economic ascent are predicated largely on the artificially low value it attaches to its currency. Even China tacitly acknowledges as much. And in Washington, this is increasingly seen as a form of financial aggression. Chinese hoarding of U.S. dollars over the past five years helped fuel the massive imbalances and debt frenzy that triggered the crash of 2008, and now China is refusing to shoulder its share of the resulting pain. “Whether it realizes it or not, China has emerged as a leader of the world,” billionaire financier George Soros wrote recently in the Financial Times. “If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it.”
But China wants to enjoy the spoils of mega-growth and new-found global clout without accepting that level of responsibility, and it has been busily shooting down all this talk of economic superpower status lately. Last month, China’s ambassador to Canada wrote a very humble piece in The Globe and Mail, saying that “China is and will remain a developing country for many years to come.” In other words, don’t look to us to help solve the world’s problems.
China’s leaders live in fear of losing all that they’ve gained in the past 20 years, and those fears are not unfounded. The country is a powder keg of social unrest, and the only things keeping it intact are the oppressive power of the state and roaring economic growth. A few million layoffs in the industrial heartland could be all it takes to bring the whole dance to a crashing halt.
Nevertheless, egged on by Congress and star economists like Paul Krugman, Washington is taking a hard line. If this is financial warfare, 15 million unemployed Americans are the casualties, and the White House can’t take that lying down. Thus, interest rates are slashed to zero, and the money presses are cranked up, openly courting inflation to drive down the U.S. dollar to spite the Chinese, which will spur domestic consumption, close the trade gap, erode the size of the U.S. national debt and export economic misery around the world.
All this puts Canada in an awkward spot. The U.S. is our closest ally and biggest trade partner. But any prolonged effort to sink the greenback also puts pressure on Canadian exporters. Little surprise then to see Stephen Harper last week reaching out to China, calling for a mutually beneficial relationship in spite of our differences on human rights. When poke turns to punch, there’s no doubt which side we will be on. But America’s tendency toward isolationism, and lectures on our oilsands industry make the U.S. a difficult partner, and argue for hedging our bets while we can.
This game has entered a dangerous phase, and the consequences of escalation are huge. There’s no stopping an avalanche once it gets moving, and there’s no way to predict the damage.
If peace is still possible, it means there is a path out of disaster for the global economy. If this is war, it means inflation, protectionism and a gut-wrenching loss of the benefits of globalization.
Give peace a chance.