The U.S.-China Cold War: Towards a bipolar global economy

Vincent Kolo, chinaworker.info

There’s no floor under the U.S.-China relationship. We keep finding new lows,” says author and China expert Richard McGregor.

The conflict between the two biggest imperialist powers is escalating at dizzying speed. In July, the U.S. ordered the closure of China’s consulate in Houston, which was followed immediately by the closure of the U.S. consulate in Chengdu. Disingenuously, the U.S. government declared the Houston consulate to be a “spying hub,” as if that would have been the first such case in world history. In Chengdu, a crowd of several thousands pumped up on government propaganda gathered to watch the U.S. consular staff being evicted. Both governments have announced measures to blacklist each other’s companies and expel journalists, with the threat of more serious reprisals in the pipeline.

In a speech staking out Washington’s Cold War agenda, U.S. Secretary of State Mike Pompeo said the world faced a choice “between freedom and tyranny” and in a thinly veiled dig at Germany’s Angela Merkel, called on the world’s so-called democracies not to “bend the knee” to the Chinese Communist Party (CCP). From China, the tone has shifted even more sharply, with last year’s relatively restrained responses giving way to “wolf warrior” diplomacy (named after a popular Chinese war movie). China has described Pompeo as an “enemy of humankind,” a view many Americans would probably agree with. Foreign minister Wang Yi complained to his Russian counterpart that the U.S. has “lost its mind, morals and credibility.”

In an article in the first issue of Socialist World one year ago, we argued that Trump’s trade war with China was not a “one-off dispute” and that rather we were at the start of “a prolonged and increasingly rancorous struggle with potentially serious global effects economically, politically, and even militarily.” Since that time, the conflict has escalated dramatically.Covid-19 has once again acted as the great accelerator. As shown by recent tremors, even the stock markets, gorging on unprecedented amounts of state-backed credit, have begun to wake up to the fact that the Cold War is now a reality.

Covid-19 Accelerates Conflict

The pandemic has caused a complete breakdown in already tense U.S.-China relations. The Chinese regime fears, with good reason, that the U.S. is exploiting the pandemic to mobilize global opinion against China. At times, the U.S. government’s verbal attacks have dredged the gutter, with the repeated use of the term “Wuhan virus” and even the openly racist “Kung Flu.” Demands for economic compensation from China for the pandemic — a form of “war reparations” — have gained a wide echo, for example being taken up by debtor governments in Africa who are desperate for Beijing to offer debt forgiveness — China is the biggest creditor to Africa accounting for one-fifth of the continent’s government debt.

Xi Jinping’s repressive rule bears a huge responsibility for the spread of the virus in its initial phase. Infections could have been limited by 95 percent in Wuhan and the surrounding region, according to a study by Dr Shengjie Lai of the University of Southampton, if Beijing had acted three weeks earlier to impose the measures that were eventually announced on 23 January. Xi’s regime dithered while its ruthless censorship machine arrested and silenced medical whistle-blowers. These criminal errors were however supplemented by the staggering ignorance of Trump’s administration, with the president tweeting about his full confidence in the Chinese regime’s pandemic response on no fewer than fifteen occasions. On 24 January, for example, Trump tweeted: “In particular, on behalf of the American People, I want to thank President Xi!”

Trump’s later move to pull the U.S. out of the World Health Organization, accusing it of being a “puppet of China”, was a brazen form of proxy warfare. The WHO, an arm of the United Nations, is a bureaucratic and primarily political agency, rather than a medical one. Nevertheless, in the absence of a genuine global health agency under democratic control and management, Trump’s campaign to sabotage the WHO can create serious disruption in the fight against the virus in poor countries that, under the yoke of imperialism, lack even basic healthcare infrastructure.

The geopolitical struggle between U.S. and Chinese imperialism is a multi-front contest for global hegemony. The main feature of this conflict is economic rather than military warfare.

This involves the increasing use of state capitalist and nationalist economic policies, especially by China, and the weaponization of trade, finance, and technology, especially by the U.S.

Military clashes, especially in the form of proxy wars that involve third parties, are a heightened danger in this situation. The first fatal battle in almost 60 years between the world’s second and third largest armies, China and India, is one example of such proxy conflicts. The U.S. has pushed Modi’s government to fortify its northern border, offering India increased military support and backing its bid for permanent membership of the UN Security Council. U.S. military exports to India have increased from zero in 2008 to over $20 billion in 2020.

In the South China Sea, both the U.S. and China have significantly stepped up their naval drills as the struggle escalates between them and six smaller countries, with competing claims to some of the island groups in this strategic waterway. In July, the U.S. raised the stakes significantly with a new policy declaring all China’s territorial claims to be “illegal”. The U.S. previously feigned “neutrality” towards all competing claims. The sudden back-flip by the Philippines government in June, to suspend cancellation of a key military treaty with the U.S., the Visiting Forces Agreement (VFA), owing to “political and other developments in the region”, represents an important win for the U.S. and a new setback for China’s regional diplomacy.

This current contest is not a re-run of the previous Cold War, from 1945–89, which was fought between two different socioeconomic systems. China today, like the U.S., is a capitalist economy. The former Maoist-Stalinist dictatorship has mutated into an ultra-repressive, nationalist and racist (Han supremacist) police state. China plays a much bigger role in the global economy than the Stalinist U.S.S.R. ever did. At its peak, the U.S.S.R’s foreign trade accounted for four percent of its GDP, mostly conducted outside the capitalist world with fellow “socialist” countries.

By comparison, China’s foreign trade accounts for 36% of its GDP. Of equal or greater importance, China’s global financial footprint is huge. It has the world’s third-biggest bond and securities market and the second biggest stock of overseas foreign direct investment ($1.8 trillion by the end of 2017). This makes the conflict today more complex and potentially much more damaging in economic terms.

According to Wang Jisi, president of the Institute of International and Strategic Studies at Peking University, “China-U.S. ties today may be even worse than the Soviet-U.S. relationship because the latter was at least ‘cold’… Those two superpowers were separate from each other politically, economically, and socially, and were actually unable to influence each other’s domestic affairs.”

Two Superpowers in Crisis

Adding to current volatility, the governments of both superpowers are in deep crisis. Therefore, as we predicted, the new Cold War and the global crisis is more likely to weaken and destabilize both regimes than to produce a clear winner. Trump, cutting an increasingly bewildered figure, could be heading for one of the worst electoral defeats of any incumbent president. His government’s calamitous mismanagement of the Covid-19 pandemic has also dealt a savage blow to U.S. imperialism’s global standing and authority. Capitalist commentators bemoan a global leadership “void” in sharp distinction to the crisis of 2008–09.

This of course has been a factor in the political calculations of Xi Jinping’s regime — to profit from the disarray in the U.S. in order to blunt its anti-China agenda. But relying heavily on nationalism, militarism, and threats of economic coercion, Beijing’s foreign policy has been largely counterproductive, to the point that it has even allowed U.S. imperialism to overcome its “Trump problem” and pull other countries closer to its side.

This is the case with Xi’s demonstrative military deployments, from incursions into Taiwanese airspace to pushing territorial claims on the Indian border and the South China Sea. In Hong Kong, Xi resorted to the legal equivalent of a missile strike, stripping away the territory’s autonomy with a draconian and far-reaching national security law. “Their aim is to govern Hong Kong through fear from this point forward,” commented Joshua Rosenzweig of Amnesty International.

Numerous other conflicts have flared in recent months, bringing Beijing into collision with Japan, Australia, Canada, Britain, Indonesia and Vietnam. Of course, the U.S. government has a hand in all these conflicts. That China’s response has been so ham-fisted, as if deliberately designed to provoke, and has therefore only served to undermine its wider international interests, seems incomprehensible unless we understand what is happening on the inside.

Power Struggle in China

For Xi’s regime, which is grappling with a crisis arguably even more serious than the one facing the U.S. ruling class, the struggle to keep control of Chinese society is always primary.

The first half of 2020 saw China’s per capita income fall by 1.3%. In urban areas, surprisingly, the fall is even sharper, 2%. Nothing like this has happened in China for 40 years. Unofficial estimates put the real unemployment rate at 20%, in a society where less than 10% of the labor force have unemployment insurance. Recruitment agency Zhaopin reported that as a result of the pandemic one in three white collar workers has been laid off and that 38%of workers under 30 years of age have been forced to take pay cuts. So, reports of a Chinese “V-shaped recovery” should be taken with a large pinch of salt.

Beijing’s foreign policy of course serves China’s growing global interests, but here there is a growing contradiction. The pressure upon Xi’s regime to shore up its domestic position takes precedence. Facing serious challenges at home, Xi has upped the ante with a series of hard-line militaristic and nationalistic foreign policy moves that are primarily intended for domestic consumption. The purpose is to reinforce his image as a “strong” and “uncompromising” leader.

China analyst Jayadeva Ranade, a former official with India’s Cabinet Secretariat, offered this view:

I have no doubt that this tougher [foreign policy] line has come about because of the perception domestically that the two centenary goals as they call it, the China Dream and catching up if not surpassing the U.S. by 2049, are slipping out of the grasp of the leadership. The continuing protests in Hong Kong for slightly over a year was one factor, the manner in which Taiwan was making its critical comments about China was the second factor. So I think this perception among the Chinese people, that the leadership was no longer that effective, it didn’t have a firm grip of the situation, is one of the real key factors why Xi Jinping has opted for a much tougher line.

A renewed power struggle within the regime is partly fuelled by the growing apprehension of sections of the Chinese elite that Xi’s “wolf warrior” doctrine is reckless and is actually boosting U.S. efforts to isolate China. The anti-Xi factional groupings would prefer to see greater emphasis on “fixing the economy” and a lowering of China’s military profile.

In April, China’s Ministry of State Security presented a secret report explaining that anti-China sentiment internationally was at its highest level since 1989, after the Tiananmen Square Massacre. This report was leaked by a Beijing insider to Reuters, a sure sign of factional discord. Among other findings, it warned that China should prepare for armed confrontations with the U.S. as a worst-case scenario.

Also in April, Xi established yet another top-level committee, this time to oversee “political stability.” Clearly, there is a sense of existential crisis at the top with Xi himself weighing up his options in the unfolding power struggle. The mission of the new committee, led by one of Xi’s right hand men, Politburo member Guo Shengkun, is to identify threats and protect “the safety of the political system.”

In May, PLA Daily (influential mouthpiece of the armed forces) carried a report warning that socio-economic pressures in China have reached a “high explosive point.” It warned that (unnamed) foreign powers could exploit the economic crisis to cause a recession in China in order to stoke social upheaval.

Coup in Hong Kong

The inherent conflict between Xi’s increasingly hard-line policies and a more pragmatic strategy to blunt the U.S. Cold War agenda is shown by his political coup in Hong Kong. This raised the stakes in the U.S.-China conflict and opened a potential Pandora’s box of political and economic ramifications. One consequence is the possible destruction of Hong Kong’s position as a global financial center, especially if financial decoupling follows the supply chain decoupling that is already underway. This could result in U.S. and other Western banks and corporations disengaging from Hong Kong, replaced by mainland Chinese financial institutions, with Hong Kong’s financial and equity markets completely “mainlandized.” In this case, China’s ruling elite would lose what has been a crucial conduit to access foreign capital.

A process in which economies and financial markets are forcibly separated would be extremely disruptive and chaotic. It poses the risk of a wider systemic crisis.

This is why, despite calls from the hard-right fringe in Congress, the U.S. administration has backed away from launching an attack on the Hong Kong dollar peg, which has tied the city’s currency to the U.S. dollar since 1983. Theoretically, the U.S. has the power to squeeze Hong Kong’s access to dollars, rendering the dollar peg unworkable. But in so doing, it could detonate a global financial and currency crisis.

Increasingly, both Washington and Beijing are working to assemble new diplomatic and economic blocs to freeze out the other: a “D10” (of ten “democratic” capitalist states — South Korea, Australia and India plus the G7 countries) has been mooted by the Trump administration. China’s Premier Li Keqiang says it might apply to join the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), which is the leftovers of the U.S.-designed TPP, abandoned by Trump on his first day in office. China’s main foreign policy track to circumvent the U.S.-led containment drive remains the Belt and Road Initiative (BRI), to which 130 governments have signed up. This gargantuan scheme, however, is also in deep trouble.

All these diplomatic maneuvers reinforce the seemingly unstoppable pressure, driven by both governments, to “decouple” from each other. This marks the rise of “geo-economics” displacing neoliberal globalization as the main trend within the global economy. In the course of 2020, positions have hardened. For key sections of the U.S. ruling class, decoupling from China has evolved into “hard decoupling,” with a reciprocal shift on the Chinese side. Also new this year is the growing number of governments in Europe and the Asia-Pacific region that are embracing the decoupling ethos. “A bipolar world is starting to take shape,” notes James Kynge in the Financial Times, adding that, “the west is rapidly erecting a great wall of opposition” to China’s global ambitions.

Huawei Decoupled

A clear example is Huawei, the Chinese tech giant whose world-leading 5G technologies have become the target of an unprecedented U.S.-led shutdown campaign. While this campaign appeared to be in trouble last year, undermined by Trump’s ability to alienate even staunchly pro-U.S. regimes, it has acquired a new dynamic in the shadow of Covid-19 and Western capitalism’s more urgent push for a common front against Chinese capitalism. “The tide has turned against Huawei in the international 5G markets,” noted the South China Morning Post, citing the British government’s 5G U-turn in July as a decisive blow for China and Huawei. The French government followed suit soon afterwards, also overturning an earlier decision to buy from Huawei. In addition to Huawei, the U.S. Commerce Department has blacklisted over 70 Chinese tech companies.

Britain’s decision to exclude Huawei could cost $2.5 billion and delay the country’s 5G rollout by two years. But right-wing and populist politicians are increasingly immune to arguments about cost and competitiveness, with anti-China rhetoric seemingly popular among voters on the back of the pandemic. In a July poll in Britain, 83% of respondents said they distrusted China. A Pew poll in the U.S. in July showed 73% have an “unfavorable view” of China, a rise of 26 percentage points since 2018.

It now seems fairly certain that Huawei’s 5G equipment will be banned from most European and North American markets, as well as Japan, Australia and probably India. Even in Southeast Asia, formerly regarded as a safe bet for Huawei, the company’s position is under threat. Singapore and Vietnam have already excluded Huawei in favor of its European rivals. U.S.-China decoupling, and the wider process of de-globalization (shift towards economic nationalism), is fraught with problems and huge costs as Britain’s Huawei somersault shows. But despite this, the direction is clear.

State Interventions

The increasing recourse to state interventionist measures, pointing in a state capitalist direction, by major capitalist governments since the onset of the Covid-19 crisis is another feature of the same process. State capitalist policies and interventions are not possible without a state. By definition therefore this is a national policy, one that is bound up with and constrained by the limits of the nation state. Such policies inevitably involve a turn away from the global capitalist market. This inward turn violates one of the driving forces of capitalist economic development: for increased productivity based on the worldwide division of labor.

This is an undeniable contradiction in which the political needs of the capitalist class in a given period can conflict with the economic needs of their system for more profits. Trotsky explained this contradiction during the Great Depression of the 1930s, also a period of retreat into state capitalist policies:

“… [S]tate capitalism strives to tear the economy away from the worldwide division of labor; to adapt the productive forces to the Procrustean bed of the national state; to constrict production artificially in some branches and to create just as artificially other branches by means of enormous unprofitable expenditures.”

[Trotsky, “The Class Nature of the Soviet State,” 1933]

In the 1930s, this process acquired its clearest expression in the fascist regimes, especially in Hitler’s Germany. While the economic depression of today may even exceed the depth of its 1930s forerunner, the shift towards state capitalist policies is not yet on a comparable scale. But we are at the beginnings of a change in direction internationally, shown most clearly in the economic policies of the two major imperialist powers. How far this process goes remains to be seen, but its effects are already significant and unmistakable.

We are at the beginnings of a change in direction internationally, shown most clearly in the economic policies of the two major imperialist powers. How far this process goes remains to be seen, but its effects are already significant and unmistakable.

In his writings on economic nationalism in the 1930s, Trotsky also explained that the rise of nationalist and state capitalist policies would inevitably prepare for a new and violent “leap” by imperialism, a perspective that was confirmed by the Second World War. The current imperialist conflict and the global balance of forces are different today and the current phase of capitalist de-globalization can last longer.

In China, with the dictatorship of Xi Jinping reeling from internal and external pressures, an economic “inward shift” has been announced. Xi has revived Mao’s slogan of Zili Gengsheng, or “self-reliance,” stressing the need to speed up China’s development of next-generation technologies, including the microchips that feed its tech industry, and also to fast-track the creation of a digital yuan as one of several ways to circumvent de facto U.S. control of the global financial system.

Deposing the Dollar

The role of the U.S. dollar within the global financial system has been strengthened, paradoxically, since the global crisis of 2008, despite its origins on Wall Street. This gives U.S. imperialism a powerful weapon, which it has used with increasing frequency to punish geopolitical rivals with financial sanctions. China has now joined Russia, Iran, and North Korea as the target of U.S. sanctions, although in China’s cases the Trump administration has gone back and forth over implementation.

Beijing has been pursuing a program of “yuan internationalization” for over a decade as a strategy to break the U.S. monopoly, but this has so far produced only meager results. Last year, the yuan’s share of international currency transactions was only 4.3%, compared to 88% for the U.S. dollar, according to the Bank for International Settlements. More than 61% of all foreign bank reserves are denominated in U.S. dollars.

The yuan’s limited role is due to China’s capital and exchange control regime, which it cannot dispense with without risking massive capital flight and a banking crash. The global financial system is driven by the “animal spirits” of parasitic speculation. The demand for dollars, which are freely exchangeable, has grown as the economy has become more parasitic. China’s efforts to tempt more countries and financial institutions to increase their yuan holdings (which cannot be freely traded) have therefore fallen on barren soil.

The dollar’s leading position, like other pillars of today’s global capitalist economy, could be toppled by the effects of the new crisis. The U.S. government’s unprecedented debt-financed bailout programs to save capitalism (over $6 trillion so far this year) could eventually bring about a day of reckoning for the U.S. currency as the anchor of the global financial system. U.S. imperialism’s increasing use of financial sanctions as a geopolitical police measure can only hasten this process.

The Chinese regime’s shift towards more state capitalist controls began at the time of the 2008 financial crisis. This has been a very clear and widely debated phenomenon: Guo jin min tui, meaning “the state enterprises advance, the private sector retreats.” But while this has a special dynamic in China — because control over key sectors of the economy is bound up with maintaining the dictatorship in power — the increasing resort to state interventions has been a global trend, not a uniquely Chinese one. Other capitalist governments, even with impeccable “free market” pedigrees, are turning to state interventionist measures on a significant scale.

The U.S.-led decoupling agenda leaves Xi’s regime with little choice but to try to fast-track the growth of its internal market. But attempts to develop China’s domestic consumption have historically fallen short, due to the CCP’s destruction of the rudimentary welfare system of the planned economy period. The lack of a social safety net forces Chinese people to maintain exceptionally high levels of savings to budget for “emergencies” like serious illness or having children.

In the past decade, China’s household debt level has also exploded, drawing close to the levels in advanced capitalist countries. Chinese households added $4.6 trillion in debt in the five years from 2015 to 2019, compared to a $5.1 trillion expansion in U.S. household debt from 2003 to 2008. The pandemic is now combining with the debt overhang to seriously crimp Chinese consumption.

The inward shift in China’s economic policy does not mean a return to autarky, any more than this will be posed in other countries. But China’s export machine will face increasing barriers especially in western markets. Competition for markets in Asia, Africa, and South America is set to intensify.

The national economy becomes the decisive focus for Xi’s regime, alongside an international strategy to more closely integrate Russia, Southeast Asia, parts of Africa, and Eastern Europe, into a China-led bloc as a counterweight to the high pressure strategy of a U.S.-led counterpart. For both Washington and Beijing, the new wave of bloc building is fraught with complications and incipient crises.

This is indicated by the problems plaguing China’s BRI program: increasing debt distress (16% of all projects are deemed to be in default), economic gains are more meager than anticipated, while Beijing also risks being sucked further into geopolitical quagmires that impose new strains on its economy. China’s recent clashes with India are in many ways a corollary of its BRI ambitions in Pakistan, with key projects running close to the disputed border.

A Biden Victory?

The U.S. elections in November could feasibly offer a breathing space and even an attempt to de-escalate the U.S.-China conflict. But this is not the most likely scenario, regardless of whether Trump or Biden wins. Although the Cold War policy of U.S. imperialism was launched on Trump’s watch, he has not been the central figure in this process, and at times his own policy choices have made him rather peripheral to the main strategic line of the U.S. ruling class.

This was shown by his decision to reprieve Chinese tech giant ZTE in May 2019 as a “favor” to Xi. And again by his decision in June 2020, to postpone implementing sanctions against CCP officials in Xinjiang in exchange for Chinese assurances to boost imports of U.S. agricultural products in a deal designed to boost Trump’s re-election chances.

Beijing believes Trump can be induced to make deals, for the right price, whereas a Biden administration looks to be even more hawkish and “ideological,” and perhaps more skilful in implementing its anti-China agenda and re-building damaged alliances with traditional pro-U.S. governments. This explains the CCP regime’s preference for a Trump victory. We know this to be the case not only from John Bolton’s revelations, but also from some prominent CCP sources.

A Biden victory, which is the most likely outcome, is unlikely to lead to any cessation of the conflict. Further escalation is more likely. One possible variant on this perspective is that a Biden presidency could offer a “reset” in the U.S.-China relationship to open negotiations on a wide spectrum of contentious issues. Some concessions could be offered by the U.S., such as the lifting of Trump’s tariffs, which are controversial even within the U.S. capitalist class.

But any concessions would be in exchange for probably an even tougher set of U.S. demands over economic policies, technology, investment rules, but also on sensitive geopolitical issues including the BRI, Hong Kong and the South China Sea. In China’s case, ceding to U.S. pressure in most of these areas would be almost unthinkable under Xi Jinping, because of the loss of personal authority that would involve. Therefore, even if a shaky process of détente could develop, its chances of achieving an end to the current conflict are remote.

The Chinese regime has nothing whatsoever to do with communism, socialism, or the cause of labor. It is the dictatorship of a capitalist oligarchy. It is unable to appeal for global solidarity to mobilize opinion on its behalf and instead relies on poisonous right-wing nationalism and increasing military power. The U.S. and its allies among the advanced capitalist countries can partially hide their rapacious imperialist policies behind a “democratic” mask, albeit one that is slipping more and more as the capitalist crisis triggers wave after wave of state repression in the “democracies.” Socialists oppose both U.S. and Chinese imperialism, which are endangering the future of the planet. We stand for building solidarity between workers and oppressed, east and west, to rid the world of capitalism and imperialism altogether.