Shifting Hegemony

US-China Relations and the future of the ‘Pax Americana’

2018.08

Shifting Hegemony: US-China Relations and the future of the ‘Pax Americana’
Shifting Hegemony
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I. Pax Americana, the powerful hegemony constructed by the United States after WWII

In the postwar period the United States used its unmatched economic and military power to construct a hegemony of ‘peace’ for the sake of reconstruction and prosperity.

  • The United States, having industrialized to surpass the nations of Western Europe in economic development between the French Revolution and World War I, took the lead in the Versailles peace agreement because it was a creditor nation to England and France. While the United States failed to sign the Treaty of Versailles because it wanted to avoid the burden of hegemony, England and France signed the treaty but were dissatisfied with it and wary of the United States’ excessive development, and after parts of the treaty were cancelled or violated, World War II broke out.
  • During World War II, the United States accounted for fifty percent of global GDP and led the allied powers to victory with superior weapons produced in its factories. After the war, the United States acted to prevent another war by constructing a postwar world order as the guardian of democracy and the new hegemon. In accordance with the Breton-Woods Agreement the dollar became the global currency, and the United States continues to operate more than eight hundred military bases in around seventy countries in order to maintain world peace.
  • The Pax Americana declared by President Kennedy in 1963 was a “genuine peace, the kind of peace that makes life on earth worth living, the kind that enables men and nations to grow and to hope and to build a better life for their children.” This hegemony brought about peace and prosperity across East Asia, Japan, and Western Europe, which had been completely destroyed after the war. The United States’ overwhelming military power was a necessary component of this peace and prosperity.

The United States maintained and strengthened its hegemony along three axes, managing financial markets through the dollar and the IMF and IBRD, world security through the UN and NATO, and oil supply through intervention in the Middle East.

  • The Great Depression that began in the United States in 1929 came together with the gold standard to deal a serious shock to the world economy, and the economic protectionism prevalent in many countries around the world at the time worsened national economic situations. Chronic recessions spread across the whole world and eventually became the seed for WWII. After the war, the United States and the Allied Nations created a new world order founded on open markets and the expansion of basic social welfare in order to avoid another economic crisis like the one that had caused the war.
  • In accordance with the Breton Woods agreement, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were established. The IMF fixed the value of the dollar to gold, and fixed other countries’ currencies to the dollar, thereby enacting a new gold exchange standard in order to increase the stability of the world financial market. The IMF and the IBRD not only support the development of nations around the world but also serve to mitigate shock in the case of economic crises.
  • The United States and the Allied Nations, having noticed the difficulty of coming to a consensus amongst many nations during the war, created the UN, a new international alliance which gave veto power to five permanent member countries. However the United States soon realized that the Soviet Union’s veto power prevented smooth consensus, and founded the North Atlantic Treaty Organization(NATO) with Canada and ten European Countries. After NATO was founded, it cooperated with other regional organizations led by the United States to maintain world security and reduce the influence of the Soviet Union and communism across Eurasia.
  • After the war experience, the United States realized that a stable supply of oil, the most important strategic natural resource, was necessary to maintaining peace. The United States received a guarantee of steady oil supply from Saudi Arabia in exchange for a guarantee of military security. Afterwards the United States continued its military interventions in the Middle East in order to manage the stability of the price and supply of oil.
  • The new world order established by the United States made national reconstruction and economic development possible in Japan and Western Europe. The United States not only provided liquidity through the dollar supply in a sacrifice of a portion of its own economy, but also took on the role of import and consumption market for products from allies who chose protectionist trade policies for the sake of economic development, like Korea, Japan, and Germany.
  • Moreover, the strength of the United States’ navy guaranteed freedom of navigation for commercial ships from any nation on most of the world’s seas, and this, together with the new free trade order disseminated by the IMF, made the rapid development of the world economy possible.


II. China, having achieved military and economic development, now appears on the global stage as a new hegemon.

Starting with Deng Xiaoping, China underwent forty years of government-led industrialization to achieve blinding economic development and social reforms.

  • Faced with the threat of a military clash with the Soviet Union, Mao Zedong brought the situation to a turning point when he attempted to recover China’s relationship with the United States, which had turned hostile after China’s communization. After President Nixon’s historic visit to China, the United States lifted its trade embargo on China and provided support so that China could achieve rapid economic development under Deng Xiaoping’s regime. US-China relations have since undergone a series of incidents that drew them back and forth between hostility and amity.
  • After the failure of the Great Leap Forward, which brought about the deaths of thirty to forty million and destroyed the foundation of the economy, China’s new leader Deng Xiaoping focused on economic development under the slogan ‘hide our light and nurture our strength,’ and over the next forty years China achieved a rate of economic development unlikely to be seen again in history.
  • In 1980 China introduced limited market economies in order to improve the productivity of rural areas, where ninety percent of its population resided, allowing surplus products to be traded privately. As a result, the productivity of rural areas doubled in a span of three years, and Chinese agricultural production reached a state of self-sufficiency.
  • Deng Xiaoping allowed regional socialist enterprises engaged in light industry to sell surplus products in the market if they had fulfilled government targets. In addition, in 1992 China arranged a space for synergy between inexpensive Chinese labor and foreign capital by creating special economic zones and allowing foreign investment in these areas. Finally China continues to improve its industrial character by privatizing public enterprises that have been groaning under lack of competition and low profitability.
  • Taking power in 1993, President Jiang Zemin lowered trade barriers and accelerated investments of foreign capital, thereby leading China to more rapid development. In 2001, after fifteen years of negotiation, China entered the WTO on the prerequisites of strengthening free trade, making Chinese law more transparent, and encouraging foreign corporations’ expansion into China, thus beginning to display its existence on the international stage for the first time.
  • After entrance into the WTO China loosened some restrictions on the flow of capital through the Qualified Foreign Institutional Investor (QFII) program and the Qualified Domestic Institutional Investor (QDII) program. Now China is loosening regulations on capital markets stages, for instance by allowing trade between the Shanghai and Hong Kong stock markets via the Shanghai-Hong Kong Stock Connect.
  • China is working toward a continuous inflow of advanced technology and foreign capital not only by expanding its free trade zones but also by instituting a negative-list policy in these areas and allowing free movement of capital across national borders and free establishment of financial organizations.

China is directly threatening the three pillars that support American hegemony by proliferating payments in yuan, establishing the AIIB/RCEP, and enacting the Belt and Road Initiative.

  • After Xi Jinping came to power, China led the establishment of the Asian Infrastructure Investment Bank (AIIB). The AIIB is part of China’s Belt and Road Initiative and its plans to make the yuan a global currency, and it is providing funds to various large infrastructure and resource-development investment projects which link neighboring regions of Asia to China both economically and physically. Through the Belt and Road Initiative, China focuses on expanding its influence on essential resources such as petroleum, minerals, and grain.
  • Through the Belt and Road Initiative, China hopes to remedy its weak point on the seas, which the US Navy controls, by completely reforming colonial-era communications infrastructure and land transport in the Asia/Africa region. China’s goal is to create an enormous economic region which uses the yuan in all of its trade and investments, thereby making the yuan a global currency that can stand shoulder to shoulder with the dollar.
  • In order to make the yuan a global currency, China is working to increase the proportion of yuan in foreign exchange reserves around the world, for instance by entering into currency swap agreements with twelve countries beginning in 2008, and by agreeing in 2010 to trade with Russia in rubles and yuan rather than dollars. In this way China is ultimately shrinking the role of the IMF, which manages the financial order of the world under US leadership.
  • China is also clashing with the United States in matters of political and military interest. After Japan’s loss in WWII, the United States acted as a powerful deterrent in East Asia and the Western Pacific. In order to defend its allies in the region, the United States participated in the Korean and Vietnam Wars, and maintained a competing system with the Soviet Union throughout the Cold War. Moreover, when the British Military left the Straits of Malacca in the 1970s, the United States stepped in to maintain the safety of this maritime trade route, through which twenty percent of the world’s oil passes. However, in 2015 China published a defense white paper which defined US military presence there as a threat and declared the need for action to protect its interests and safety.
  • China views United States military bases in the East Asia/Western Pacific region as a product of imperialism, and President Xi Jinping wants to solve this problem within his term of office. China is facing territory conflicts with Japan, and its clash of opinions with South Korea over both trade and North Korea continues. In the South China Sea there is another continuing conflict with Vietnam, the Philippines, Malaysia, and Indonesia over maritime borders and the region’s significant underground natural resources. China continues to take issue with the United States’ Freedom of Navigation Operations in this area, through which twenty percent of world goods pass, and neighboring nations, in preparation for the US military’s shrinking role in the region following the inauguration of US President Donald Trump, are strengthening their military forces.
  • In order to check China’s expanding influence in the East Asia/Western Pacific region, the United States put forth the Trans-Pacific Partnership (TPP), starting during George W. Bush’s presidency. President Barack Obama pushed through the TPP with twelve countries, not including China, writing that, “When it comes to Asia, one of the world’s fastest-growing regions, the rulebook is up for grabs. And if we don’t pass this agreement — if America doesn’t write those rules — then countries like China will. And that would only threaten American jobs and workers and undermine American leadership around the world.” The United States thus intended to force China to follow its rules by including China only after it had set the standard in the areas of labor, the environment, intellectual property, and so on.
  • In 2012, China resisted the US-led TTP by putting forward the Regional Comprehensive Economic Partnership (RCEP) with the ten countries of the Association of Southeast Asian Nations (ASEAN). After President Donald Trump came to power and the United States pulled out of the TPP, China established the RCEP and took on the role of designing the Asia-Pacific region’s free trade.

While many argue that, in spite of its rapid development, China will not attempt to replace the United States or create a new hegemony, the trade war between the US and China has sparked new signs of conflict between the two nations.

  • In October of 2017 Xi Jinping, the most powerful Chinese leader since Mao Zedong, declared that “China’s development will not threaten any nation. No matter what stage of development China reaches, it will not seek dominance.” However, with predictions that the scale of China’s economy will surpass the United States in the near future, China is already a more important trading partner and investor than the United States to many countries.
  • Against this backdrop, conflict between the United States and China is growing and changing shape as a result of the trade war between the two nations. The trade war began with the United States’ first serious attempts to contain China following the announcement of China’s “Made in China 2025 Roadmap,” which focuses on China’s tech industry and makes clear its goal to “surpass the United States by 2049, on the hundredth anniversary of the nation’s founding.” the Made in China 2025 Roadmap declared a departure from Deng Xiaoping’s “Hide our light and nurture our strength” policy and revealed a pivot towards Xi Jinping’s new decision “not to just sit by and watch when damage is done to China.”
  • The trade war began in earnest in March of 2018, when President Donald Trump placed tariffs on Chinese steel and aluminum, to which China responded with tariffs of up to twenty-five percent on American goods. The trade war then gradually intensified, with the United States announcing tariffs on 50 billion dollars-worth of Chinese electronics, and China announcing tariffs on 50 billion dollars of US goods including beans, cars, and chemical products. The United States then imposed retaliatory tariffs on 200 billion dollars-worth of Chinese products and declared an additional 200 billion dollars in tariffs in the case of Chinese retaliation.
  • In 2017, Chinese exports to the United States came to 500 billion dollars, and of these exports, 450 billion dollars-worth are either now or soon to be subject to tariffs, meaning that only 50 billion dollars of Chinese exports will be able to avoid tariffs. Chinese imports from the United States amounted to 130 billion dollars, and 50 billion dollars-worth of these exports are now subject to retaliatory tariffs. Thus, there are only 80 billion dollars-worth of import goods remaining as potential targets for retaliatory Chinese tariffs. Chinese manufacturing’s reliance on United States manufacturing for high tech goods is also a problem. For example, this past June, the Chinese telecommunications corporation ZTE was banned from purchasing microchips from American companies for seven years in return for violation of the Iran sanctions, and their stock plummeted sixty percent, having recorded the lower price limit for eight times.
  • China’s heavy reliance on United States agricultural products is also a serious crisis. China imports 14 million tons of beans from the United States a year. In order to achieve self-sufficiency at this rate of consumption, China would have to use a third of its agricultural land for bean cultivation, but this is realistically impossible. Moreover, China’s economic development was carried out under the dollar system, international crude oil trade is still carried out within the dollar system, and the dollars that China earns through exports are largely saved in the form of United States debt. Considering China’s high reliance on the United States, there is a limit to Chinese retaliation in a trade war.
  • China does have some cards left to play in a limited response to the United States’ retaliatory tariffs in that limits on bean imports can have a direct effect on Trump’s support base in the US South, and that it can sell US debt. However, although a large sale of US debt would cause a fall in the price of US debt and a sudden rise in interest rates, which would be a hit to the US economy, China would also be hurt by falls in the price of Chinese government and civilian assets represented in dollars, so this would be a difficult card to play.
  • In spite of fears about supporters leaving as a result of Chinese import limits on US agricultural goods and rises in production and consumer prices resulting from American import limits and tariffs on Chinese products, President Trump is pushing ahead with the trade war. President Trump is clear in his position that the trade imbalance that began in the postwar period when the United States was working towards the reconstruction of the allied nations is over.
  • President Xi Jinping cannot easily back down from this trade war because his absolute authority is based on his ability to actualize the “chinese dream” and create a “rising china,” manage the communist party, and maintain the economic achievements that have justified his seizure of long term power.


III. The Era of Hegemony or a New Multipolar Era?

The economic and military gap between the United States and China continues to shrink.

  • The basis of the United States’ continued economic growth is its bold investment in innovative industries, ability to attract exceptional talent from overseas, and bountiful natural resources. On the other hand, China fosters key industries through state leadership, continuing its historically incomparable development based on the world’s largest domestic markets, an immense trade surplus, and exceptional human resources. Experts differ on when China will become the world’s biggest economy, surpassing the United States but most predict that it will happen.
  • China is also using its massive trade surplus to expand its armaments. China asserts its ownership of islands and submerged rocks in the South China Sea, constructing military bases and working to reduce the United States Navy’s influence there. Moreover, in its relationship to the island nations of the Pacific, which were key military bases for the allied forces during WWII and an important strategic location in stabilizing maritime routes, China is increasing its political and economic influence through continued lending and investment in large infrastructure projects.
  • In spite of China’s rise, the United States still holds overwhelming military power. The United States military is superior to China’s not only in physical power, in the form of air craft carriers, nuclear warheads, ballistic missiles, fighter planes, and so on, but also in soft power and the ability to carry out a war. In 2017 for instance, military expenditures totaled around 620 billion dollars for the United States, but only 230 billion dollars for China. It is not possible for China to reverse the United States’ long-term accumulation of military capabilities in a short period.
  • However, in the past five years China has expanded its military influence in the East Asia/Western Pacific region, quintupling its military spending and completely modernizing its conventional weapons systems. It may take more time than in the realm of the economy, but if the current arms build-up based on that economic power continues, it is predicted that China will steadily close the military gap with the United States.

The clash between the United States and China could be a competition between two hegemonies, or it could signal the start of a new order.

  • Historically no hegemony has maintained power forever. The warning that the United States’ hegemony is weakening or under threat is not new. However, the threat posed by China is stronger and more realistic and systematic than that of the Soviet Union, Europe, or Japan in the past.
  • As greater authority is currently concentrating around President Xi Jinping, many countries are concerned over what Chinese hegemony might mean. The entire world is trying to detect the first tremors of a new Chinese order that departs from American hegemony, which was founded on individual freedom and human rights.
  • Historically, shifts in hegemony have always been accompanied by war. However, an increasingly common prediction is that, considering the current realities of war and the two nations’ powerful militaries, they will probably avoid any competition for hegemony that would lead to a war which could only mean total destruction.


IV. Implications

There are two lessons that can be learned from the US vs. China

Lesson 1: China’s rapid development and Belt and Road Initiative pose a threat to the American hegemony that brought on an era of peace and prosperity in the post war period.

  • After WWII the United States established a world order of free trade, democracy, and capitalism which we now take for granted. The United States used its powerful military to encourage international trade by securing maritime trade routes, stabilizing oil supply, and providing the basis for economic development not only in Europe, the US, and the Commonwealth Nations but in Asia as well. Moreover, the United States established bases at strategic locations, repressed unnecessary local conflicts, and began an era of peace and prosperity.
  • China has made clear its rejection of a competition for hegemony with the United States and denied that it is seeking its own hegemony, but its economic development, along with direct challenges to the three pillars of resources, security, and finance that support US hegemony, pose a threat to American leadership of the world order, and this inevitably has created conflicts with the United States.
  • Recently the trade conflict between the two nations is intensifying, and their competing interests in the Middle East, the Korean Peninsula, and the South China Sea and other regions of conflict have led to an increase in disagreements.

Lesson 2: Hegemony cannot last forever, but also cannot be replaced easily.

  • The seemingly eternal British Empire’s Pax Britannica met its end within a hundred years, and the historically incomparable power of the United States and the Pax Americana is now facing a strong challenge from China.
  • Hegemony is “not only an expression of the understanding of the dominant class, but also an exceedingly integrated and political dominance that forces the subjugated class to accept it as natural or common sense.” Thus the United States’ hegemony, which constructed a world order through rational values based on personal freedom and human rights, will not be easy to replace.

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