Digital renmimbi and the US-China competition

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J. Soedradjad Djiwandono Emeritus Professor of Economics, Faculty of Economics and Business, University of Indonesia

IO – Recent news that the People’s Bank of China (PBOC), the nation’s central bank, was about to embark on a trial run of Renminbi in digital form (e-RMB), as an official Central Bank Digital Currency (CBDC), is an interesting development in monetary economic and finance – let alone the universe of crypto currencies, which in fact only dates from 2009, with the introduction of Bitcoin. A digital currency is generically defined as a technique of money creation by way of computer algorithms, in what is known as a “blockchain”. I have discussed the general notion and significance of these instruments, and their implications in monetary and payment systems, in several essays, including ones published in this journal. 

There is in fact another aspect that is no less interesting, i.e., its implication in regard to ongoing issues of cooperation and competition between the two biggest global powers, namely, the US as an established superpower for more than one hundred years and the People’s Republic of China, as the emerging one. This second aspect is the one I will be addressing in this paper. 

The latest update on the trade war 

Bilateral relations between the US and China have experienced numerous ups and downs in terms of both cooperation and competition, since the historic reconciliation of the two nations in 1972: agreements in politics, social relations, trade and economics, defense and technology. In 2018 relations turned sour when the US, under President Trump, launched a trade war, as the Trump administration accused the People’s Republic of China of unfair trade practices which put the US at a disadvantage, resulting in the Americans suffering huge deficits in their bilateral trade. In an effort to correct this trade imbalance, President Trump raised tariffs against imports from China, starting with two manufactured goods: washing machines and solar panels, followed by steel and steel products. Among the unfair Chinese trade practices pointed out by President Trump were subsidies of China’s exports to the US, the erection of non-tariff barriers as well as wholesale theft of proprietary trade secrets. The US even accused China of practicing currency manipulation, to boost its exports. In the beginning, the increased tariffs only involving some USD 35 billion worth of imports. As they escalated, various tariff increases shot this up to USD 500 billion worth of US imports from China. 

China retaliated for these punitive tariff increases with a similar response, i.e., raising tariffs on China’s imports from the US, although the amount never reached a comparable figure, since China imports so much less in terms of goods and services: commodities like soybeans (the export market of which is critical for American farmers in states known to be Trump supporters). Over time, the coverage of tariff increases expanded, which also signified higher and higher dollar amounts on both sides – thus flaming up into a trade war. 

The most recent status of these bilateral tensions was reported in January 2020, after several sessions of negotiations between delegations of the two countries came up with an agreement known as “Phase One, US-China Trade Agreement” signed in Washington DC between President Trump and Vice Premier Liu He on January 15, 2020. Even more recently, on May 8, following a phone call between Vice Premier Liu He and Secretary of Treasury Mnuchin, together with USTR Robert Lighthizer, the two sides affirmed their respective commitments to the Phase One trade deal, which had come into effect on February 14. 

As reported by Neal Kimberley in South China Morning Post (SCMP) of May 12, 2020, the US would basically cut half of the 15% tariffs on USD 120 billion worth of imports from China, while those with 25% tariffs would remain, subject to negotiation in a second phase. The 25% in tariffs slapped on Chinese goods last December 15, including cell phones, laptop computers, toys and clothing would be suspended indefinitely. Meanwhile, China pledges to purchase more American agricultural, energy and manufactured goods, while addressing certain US complaints about unethical intellectual property practices. China also promises to open China’s financial services market to US companies, including banking, insurance, securities and credit-rating services. The two countries also agreed to resolve differences over how the deal is implemented, through bilateral consultations. 

These latest moves to resolve the trade war, as described above, look all right on paper, and signify positive moves toward renewed cooperation between the two economic powerhouses. But it should be realized that even with optimal outcomes, meaning that all the points of agreement would materialize, conditions would still not be the same as they were before the instigation of a trade war: average tariff rates would still be higher than previously, since some of the punitive impositions would only be cut into half, from 15% to 7.5%. There are also concerns that the Chinese promise to boost imports of US goods and services, as well as its farm products, might not materialize in full. The reality is that China had already revised its import strategies by locking in agreements to purchase from other countries, such as importing soybeans from Brazil. And secondly, with the sharp economic slowdown deriving from the adverse impact of the Coronavirus pandemic, China will encounter difficulties keeping their promise to import more goods and services from the US, as stipulated in the trade deal. 

Impacts of the Coronavirus 

Even if the ongoing trade war between the US and China may be resolved to some extent, as noted above, I suggest that it is an unnecessary confrontation that will prove to be damaging, not simply for the two giant economies, but for others as well. 

Even before we see whether Phase One of the trade deal has actually been implemented by both sides, the Coronavirus pandemic initially reported in Wuhan, China at the end of December 2019 was officially declared a pandemic by the WHO; by mid- March 2020 it had spread globally, and was officially referred to as “COVID-19” for “Coronavirus disease of 2019”. It is also known as 2019-nCOV (“n” for “novel” or “new”). 

In a recent column on the topic, Stephen Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, declared that the Coronavirus crisis has in fact sunk the US-China relationship (SCMP, 29/04/2020). He wrote that after 48 years of painstaking progress, a major rupture of the relationship is at hand, wherein these two countries are trapped in a blame game, with no easy way out. 

Stephen Roach observed that both the American public and its counterpart in China are becoming antagonistic toward each other. According to a new poll by Pew Research Center, 66% of US citizens view China unfavorably. Similarly, the Chinese are also becoming irate at the US, not simply because President Trump and Secretary Pompeo (as well as White House Economic Advisor Peter Navarro) keep insisting on calling the global pandemic “the Chinese virus”, but also their linking the outbreak of Covid-19 to suspicious activities at the Wuhan National Biosafety Laboratory.

There are other aspects in US-China bilateral relations that could potentially contribute to the increasing tension and animosity that some even theorize could result in the US unilaterally cancelling its debt obligation to China – which currently holds USD 1.1 trillion in US Treasury securities. This does however seem to be highly unlikely, since doing so would imply the US is going bankrupt. Other moves would include newly-decreed policies restricting trade in the technology sector, which the US might resorting to in its export of microchips to China. 

Poking the Thucydides’ Trap 

It is very tempting at this juncture to go back to the question raised by Professor Graham Alisson, one that is also the subtitle of his seminal book Destined for War; Can America and China Escape War. This term was in fact reported in a paid opinion advertorial in The New York Times of April 6, 2017, on the occasion of U.S. President Donald Trump’s meeting with Chinese President Xi Jinping, declaring “Both major players in the region share a moral obligation to steer away from Thucydides’ Trap”. 

In Prof. Allison’s projection, the “trap” referred to is the theory that “When one great power threatens to displace another, war is almost always the result”. This is Prof Alisson’s interpretation of what Thucydides, a historian in ancient Greece, theorized concerning the root cause of the war between Athens and Sparta. Athens had become a stronger and more powerful emerging city-state, arousing alarm among the Spartans, as their city-state was a major regional power. Sparta thus feared Athens would threaten their supremacy. Competition resulted in the famed Peloponnesian War, a conflict that resulted in their mutual destruction. Professor Alisson went on to list 16 cases of historically-similar power struggles, 12 of which ended in a confrontation and conflict, thus becoming a “trap”. 

We recall how Minister of Defense Prabowo Subianto referred to another quote from Thucydides on numerous occasions, as part and parcel of what a power struggle could inexorably lead to. Basically, Minister Prabowo reminded us all of the importance of building national self-reliance, and defending the Republic against any domination by foreign powers. He emphasized his point by quoting Thucydides: “The strong do what they can while the weak suffer what they must”. In my understanding, the modern-day relevance of this dictum about the balance of power has become the base of the concept of “realpolitik” in international relations. 

Reverting to our discussion, following the spats and tensions between the US and China since the start of the trade war, my concern is that their relations are veering deeper toward competition than cooperation, with the COVID-19 pandemic now at a high point of the “blame game”. 

Such an attitude does not simply impair efforts toward cooperation, a sine qua non to coming to a quick resolution of the pandemic, for the benefit of both countries (and, for that matter, globally). This is even heading more dangerously toward a negative answer to the question cited above: “Can America and China escape a war?”. Even a Cold War would be destructive enough.