China’s Quiet Challenge to the US And Its Dollar-Based Hegemony

There appears to be a general consensus that the USA’s standing in the world has diminished since 2008. Some would blame the loss of power and prestige on President Obama’s uncertain handling of foreign policy. That does not seem entirely fair. It is not difficult to think of other US leaders who, if they had been occupying the White House in Mr Obama’s stead, might have guided the ship of state into even more dangerous waters.

There is probably more justice in recognising that, after the disasters of the ‘noughties, the USA’s influence would have waned, whoever had been in charge. For decades, US global hegemony had rested on the twin pillars of military and financial power. US military dominance remains, despite gruelling engagements in Afghanistan and Iraq. At least, if we take defence expenditure as a true guide to strength, the USA more than matches the next nine highest-spending nations combined, according to estimates compiled by the Institute for Strategic Studies.

The problem, though, as the ‘war on terror’ illustrated, is that military preponderance does not guarantee political outcomes favourable to the nation that exercises it.

The financial meltdown raised questions about US world governance

As for the financial pillar, that was fatally weakened in 2008 when the results of previous excesses could no longer be contained. It is true that repairs to the US banking system were more effective than those undertaken in Europe. But it is not in Europe that the threat to the dollar-based financial world order arises.

Leaders in the larger emerging nations were, for the most part, unimpressed with a US approach to finance that had brought the world economy to its direst state in more than seventy years. They also resented the way in which the Federal Reserve conducted its monetary policy in the wake of the crisis, apparently without regard for the impact a weak dollar would have on their own economies. The financial meltdown also raised questions about world economic governance.

Decision-making appeared to be weighted in favour of the USA which, for example, continued alone to enjoy a blocking minority in the counsels of the IMF. In 2010, IMF members agreed reforms, to go into effect on ratification by national legislatures, which would shift more than 6% of quotas from over-represented, largely European, countries to under-represented emerging countries. Though the USA would retain its blocking power, the US Congress was so much overdue in approving the changes that leaders of the BRIC nations last year decided to take their own initiative is establishing a new world economic order.

In July last year, under strong urging from China, a BRIC meeting agreed to set up a multi-national lending institution, the Asian Infrastructure Investment Bank, to support the economic development of Asian countries. It might also provide loans to other developing countries that wished to join.

The AIIB could serve China’s political interests  

The Chinese government proposed that the new bank should have financial backing of $50 billion. This is not a large sum compared with the $165 billion capital base of the Asian Development Bank, which is part of the existing network of international lending bodies centred on the IMF and World Bank. The point is, though, that the AIIB will not necessarily be attaching the strings to its lending that the existing multi-national lenders are wont to do.

To be sure, it is not at all clear what conditions will be attached to AIIB lending but they seem unlikely to reflect the neo-liberal economic precepts that, under US influence, have hitherto controlled the lending policies of the World Bank and its regional associates. Indeed, it could primarily serve China’s political interests in what looks increasingly like an attempt to establish a global economic and financial system to rival the long-established dollar-based regime. That, at least, appears to be Washington’s concern as US leaders have sought to dissuade their allies from any involvement with the AIIB.

It is not surprising that many nations in East Asia have embraced the AIIB project. They were virtually bound to accede to the plans of their powerful and capital-rich Chinese neighbour. Thus, US allies in the region, such as Thailand and the Philippines, acceded to the AIIB from the signing ceremony setting up the institution in October 2014. But Japan stood aside, as did South Korea and Taiwan. None of the original signatories were outside Asia.

However, Beijing’s plans did not exclude non-Asian members from the AIIB; broader participation, indeed, promised to strengthen the institution. But for several months it seemed that US suspicion of the AIIB would deter many countries that had an economic interest in participating from taking part. The logjam broke on 13 March when, less than three weeks before the 31 March deadline for commitments, George Osborne declared that the UK would join the new lending institution. This unusual show of foreign policy independence quite probably reflected expectations of economic advantages to flow from being ‘first mover’ in rendering the AIIB’s membership truly global in range (though New Zealand had indicated its support as long ago as last November).

The UK government acted in this important economic matter without reference to the EU authorities, as did the governments in France, Germany and Italy when, on 17 March, they fell in behind the UK lead. This was one key matter where, in practice, national governments reserved to themselves the right to act in the national interest. The Australian government, which had previously indicated it was under strong US political pressure to stay away from the new bank, this week declared it would sign a memorandum of understanding to begin negotiations on entering the AIIB.

In breaking ranks with the USA on this issue, these governments, and especially the UK’s, may be risking US retaliation. They evidently believe it is worth taking this risk to curry favour with Beijing. That, at least, is the most obvious interpretation of AIIB developments over the past two weeks. An alternative view might be that the Obama Administration has recognised that the old economic order is no longer tenable and that a climb-down from the tough anti-AIIB stance it took last year is inevitable. This week the ADB sought discussion with the AIIB over policy co-ordination.

More about the author

About the author

Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.

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