The United States of ... China?

From Foreign Policy magazine:

In the Great Depression, as in the current economic crisis, the downturn was particularly severe because of a lack of leadership in the international order. The dominant financial power of the 19th century, Britain, was financially exhausted by the First World War. The new major creditor, the United States, had emerged as a strong economic player, but did not yet have leadership committed to the maintenance of an open international economic order. The simple diagnosis was that Britain was unable to lead, and the United States unwilling.

If the scenario sounds familiar, it should. The story from the Great Depression has an uncanny echo in current debates about international economic leadership, with the United States playing the role of Britain -- the exhausted debtor economy -- and China taking the place of the United States as the world's largest creditor. But if China is the America of this century, can it do a better job than the United States did in the 1930s? The way in which the emerging superpower takes to this role will determine in large part how the world will emerge from the downturn and the shape of the new global economic order that will follow.

Charles Kindleberger, the late economist, argued that the United States should have acted as a lender of last resort in the early 1930s, continuing to keep its financial markets open to investment and its market open to foreign goods, rather than heading down the path of protectionism. It should also have stimulated the world economy through countercyclical fiscal policy.

But at the time of the Great Depression, there were all kinds of convincing reasons why Americans did not want to take on the burden of a worldwide rescue. Sending more money to Europe was seen as pouring money down the drain, and after all, Europeans had fought the world war that had been the root cause of the financial mess. Economically, helping Europe would have made a great deal of sense from a long-term perspective, but politically it was a non-starter with no short-term payoff.

In the middle of the current financial crisis, a deep-pocketed China faces the same dilemma: swallow its pique and help save the same countries that got us into this situation, or look to its own short-term interests first. Today, there are increasing demands that China contribute more to internationally coordinated rescue packages through a reformed International Monetary Fund (IMF). China is also one of the few economies still growing in 2009, though most economists have reduced their estimates of growth rates. Finally, China and the United States are the only countries that are large enough, and have sufficiently well-ordered government finances, to launch major efforts at fiscal stimulation.
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China thus has plenty of reasons why it might want to close itself off to the forces of globalization, as the United States did in the interwar years. This thinking will be reinforced by the structure and character of the international order. Again, an interwar analogy is appropriate. The United States felt uncomfortable with the international institutions of the interwar period, in part because they were aligned with the interests of the old hegemonic power, Britain. The League of Nations looked as if it was an instrument of British power. Similarly, in the modern context China worries about whether it is adequately represented in U.S.-dominated international institutions. Its influence in the IMF and World Trade Organization clearly does not correspond to its real position in the world economy and to the role that China could play in economic stabilization. Reforming international institutions is thus a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and disruptive, or whether a more gradual and peaceful path of adjustment can be achieved.

Just before the Asia-Europe meeting last October, President Hu Jintao stated that China would behave "with a sense of responsibility." It remains to be seen what stake China really has in the survival of the global economy. As in 1931, the political arguments are all against a rescue. Only the farsighted will see that the economic case for such an operation is compelling. Much depends on the extent of China's voice in an altered international institutional architecture.

But that voice will make demands that are increasingly difficult for the old world to accommodate, including demands for a guarantee of China's U.S. asset holdings and suggestions for an alteration of the world's reserve management. In proposing a global reserve currency to replace the dollar, the Chinese central bank president recently followed in the footsteps of Charles de Gaulle in the 1960s. But unlike France, China is in a much stronger position to assert its preferences for international monetary reordering.

In other words, the world may be asked to transition from an American to a Chinese model of capitalism, and as in the 1930s, that won't be an easy switch for any of us. ...

Article here. Those who think that the United States cannot lose its dominance on the world stage need to wake up. If we continue to screw up, there is at least one world power -- China -- willing (and more importantly, financially able) to challenge that dominance.

Of course, China's export-driven economy has hit a wall, as global demand and demand from their number one customer (that would be us) has fallen off the proverbial cliff. John Robb of Global Guerrillas thinks China will have bigger worries at home than challenging U.S. dominance:

So, what happens when China's high performance, globally connected capitalist economy which is flying at dangerously high speeds hits the inevitable speed bump? The answer is: it will derail (hollow out and fragment). The chaos it will produce in SE Asia is the real threat we have to deal with. Predicting the black swan that kicks off the death spiral is impossible, but as we have seen in other export-oriented Asian economies the shock will likely be economic. At that point, the dream of upward ascent and rising expectations, reinforced by global media, will be seen as a lie.

In anticipation of this, the Chinese government is following the lead of many other nations by radically improving the capabilities of its paramilitary force for domestic security (to the tune of one million men). However, this many not be enough. Global guerrilla theory indicates that the endemic corruption will combine with the same forces of anti-state guerrilla action we have seen in other places in an attempt to disconnect portions of China from the central government... (it will work).

As the ancient Chinese curse goes: May you live in interesting times.