China and the United States: The Contest for Global Economic Leadership

• Date: 01 September 2018
• Published date: 01 September 2018
• Author: C. Fred Bergsten
• DOI: http://doi.org/10.1111/cwe.12254

©Peterson Institute for International Economics, reproduced by permission from PIIE

China & World Economy / 12–37, Vol. 26, No. 5, 2018

12

China and the United States: The Contest

for Global Economic Leadership

C. Fred Bergsten*

Abstract

This paper considers whether there is a “Thucydides trap” in the world economy,

referring to the inherent conict between incumbent and challenger. It assesses the impact

of President Trump’s alienation of traditional US allies, which threatens to splinter the

“hegemonic coalition” and even push China and Europe together, and his convergence

toward some Chinese norms on trade and even politics. It outlines three possible systemic

scenarios: a “G0” in which the US is no longer willing to lead but China is not yet able

or willing, and whether such a (likely) regime will be stable or unstable; a new “G1,”

sooner or later, led by China; and a cooperative “G2” in which the US and China agree

to share leadership. It traces the evolution of actual leadership initiatives of the two

countries in recent years. It compares US and Chinese attitudes on key systemic issues

and concludes with an appraisal of “an international economic order with Chinese

characteristics,” a world in which the state plays a greater role relative to market

economics, the rule of law defers increasingly to voluntary arrangements, and politics tilt

toward central government control more than democracy.

Key words: G2, global leadership, hegemonic coalition, trade war

JEL codes: F1, F4, F5, P5

I. Introduction

The current trade conict between China and the US obscures the more fundamental

and much more important issue between them: the long-term systemic contest for

leadership of the world economy. This contest has numerous dimensions. The economic

policy, and to an important extent, the ideological dimension, will determine whether

the Washington Consensus of market economics or the “Beijing Consensus” centered

on state capitalism turns out to be more successful and more likely to be adopted by

others. The “values dimension” will inuence the ongoing struggle between democratic

*C. Fred Bergsten, Senior Fellow and Director Emeritus, Peterson Institute for International Economics, USA.

Email: fbergsten@piie.com. Research assistance was provided by Fredrick Toohey. Funding support was

provided by the Smith Richardson Foundation.

©Peterson Institute for International Economics, reproduced by permission from PIIE

The Contest for Global Economic Leadership 13

and autocratic systems of governance. The “security dimension” will affect whether the

world tilts toward continued peace or increased conict. The “power dimension” will

determine which country is more able to assert its inuence, or even impose its will, on

the rest of the world or at least block developments it does not support. The “political

dimension” turns importantly on the acute distrust between the two countries, with

China believing that the US is trying to retard its ascent and the US believing that China

wants to push it out of East Asia and perhaps out of its world role more broadly.

Traditionally, there have been important differences between China and the US

on all of these variables. The US has sought to lead the world economy toward open

markets, relatively free trade and investment, trade agreements that expand those norms,

flexible exchange rates (since the early 1970s) and robust international economic

institutions that seek to inuence national behavior and feature governance structures

that give voice to at least the other signicant economies. It did so partly from a sense

of global responsibility, particularly in the early days of the Bretton Woods negotiations

and the Marshall Plan, but always with a consensus view that international prosperity

and stability were crucially important for the national economic and security interests of

the US itself and were enhanced by such rules and institutions.

China has emphasized the role of the state, direct and indirect government

intervention in key sectors and markets, the fixing of most key prices (interest rates,

exchange rates, energy prices), domestic political control and rejection of external

intervention in domestic decisions. The traditional differences can be proxied by

contrasting the leading international economic initiatives of each of these countries in

recent years: China’s Belt and Road Initiative (BRI); and the Trans-Pacic Partnership

(TPP), originally negotiated under the leadership of the US (and modeled on its free

trade agreement, FTA, with Korea), and continued after US departure by the rest of the

group. The BRI is a transactions-based program with few rules and dispute settlement

mechanisms (DSMs) that is largely funded, and implicitly dictated, by the Chinese

government. The TPP, even after the departure of the US, is a rules-based initiative

that liberalizes trade and some behind-the-border policies with a standard DSM that is

equally available to all members.

China appeared to be moving toward the market and globalization, including its

primary institutions like the World Trade Organization (WTO) and the International

Monetary Fund (IMF), and thus the environment promoted by the US from the outset

of its economic reforms in the late 1970s until the global financial crisis of 2008.

However, China seems to have reversed course over the last decade, apparently

convinced that the global nancial crisis represented a watershed that undermined US

credibility and greatly strengthened its own standing, and perhaps that a revision of its