Comment: Trading places? China, the United States and the evolution of the international political economy

ABSTRACT

The remarkable economic rise of China and the recent turmoil in US financial markets inevitably raises questions about the respective fortunes of both countries. This paper assess the relative standing of the US and China by placing their relationship in historical context. It is suggested that China's accession to the WTO marked the highpoint of US influence and ascendancy. Since then, China's position has been steadily improving, something that the recent emergence of its first sovereign wealth fund and its subsequent role in bailing out distressed US financial institutions has dramatically highlighted. If China's form of ‘state capitalism’ continues to become more influential it will have major consequences for not only the US, but for the extant geopolitical order more generally.

KEYWORDS:

• China
• United States
• WTO
• sovereign wealth funds
• state capitalism

ACKNOWLEDGEMENTS

Thanks to Shaun Breslin, Phil Cerny and RIPE's reviewers for commenting on earlier versions of this paper; the usual caveats apply.

Notes

¹ There is a substantial literature on this issue. Representative samples include Wohlforth (2002) and Kagan (1998).

² Increased levels of foreign ownership in the US are leading some prominent figures to fret about long-term security and autonomy. Larry Summers (2004: 48) argues that ‘in a real sense, the countries that hold US currency and securities in their banks also hold US prosperity in their hands’.

³ Wal-mart alone is China's eighth largest trading partner and its low-cost business strategy would not be as feasible without the China connection. See Hughes (2005: 94).

⁴ There are some widely recognized problems in measuring and/or making sense of trade flows in an environment where trade is often replaced by FDI. See Quinlan and Chandler (2001).

⁵ The details of China's investments are unclear, but it is estimated that in addition to $600 billion of US Treasury bonds, it may have another $100 billion exposure to the US's troubled mortgage-backed securities. See Bradsher (2007).

⁶ Seigniorage refers to the difference between the face value of money and the cost of actually producing it. The US's international seigniorage refers to benefits that accrue from the dollar's cross-border circulation and the fact that such activity effectively generates a subsidized or interest-free loan from abroad. An international shift away from the dollar will erode both this benefit and an important source of US hegemony. See Cohen (1998: 123–25).

⁷ Lyons (2007) suggests that began in the early 1950s in the Middle East. The combined assets of the top 20 SWFs are already estimated to be over $2 trillion, and this figure is expected to rise rapidly.

⁸ Some seasoned observers considered it ‘the worst crisis in 30 years’. See Hutton (2007).

⁹ Only fortunate timing allowed China's Citic Securities to avoid losing money when Bear Stearns collapsed. Attitudes in Asia have subsequently become far more critical as a consequence of Wall Street's problems and the apparent fragility of Western finance, however. See The Economist (2008b).

¹⁰ As Gillian Tett (2008) observed, ‘having stepped into the breach so visibly late last year, some funds are now getting jitters. In China, there are rising complaints that funds are foolish to shovel cash directly into risk-laden US banks when they could be using it in better ways, such as purchasing western commodity or manufacturing groups’.