China poised to claim global pre-eminence

EMPIRES whose power depends on military strength alone rarely maintain their dominance for long. The former Soviet Union is the most recent and conspicuous example of such one-sided suzerainty, but there have been many in world history. In contrast, the United States, which emerged from its Cold War with the Soviet Union as the sole superpower, exercised that power in every sphere: in its global military reach, yes, but also through its many-faceted cultural influence and, above all, because of its economic sway. Since World War II, the US dollar has been the world’s reserve currency and the US economy has been the centre of global production as well as the world’s biggest market. That pre-eminence, however, is fast disappearing.According to projections published by the International Monetary Fund, within five years China will overtake the US in real economic output. It will be the first time in the modern era that any country has done so: the Soviet Union never managed to produce more than one-third as many goods and services as the US, and Japan at its peak never managed more than half. China’s rise, in contrast, has been meteoric: three decades ago it produced just 2.2 per cent of the world’s output but it produces 14 per cent now and is expected to produce more than 18 per cent by 2016. The US share of global output is now 20 per cent but by 2016 it will have sunk below 18 per cent, and the world will have entered a new era. Nominally the US economy will still be the larger, but that will merely reflect the fact that China keeps its currency artificially undervalued and, thereby, its exports competitively cheap.

While Beijing continues to ignore pleas by China’s trading partners to relax the exchange controls that peg the value of the yuan to the US dollar, the latter may stagger on as the world’s reserve currency. But even that prospect is receding. Three years ago, after steep falls in the value of the dollar arising from the Bush administration’s decision to run up the US deficit by cutting taxes while increasing spending on foreign wars, a vice-director of China’s central bank noted tersely that the dollar was ”losing its status as the world’s currency”. China had been holding reserves of about $US1 trillion but lost about $US100 billion as the currency’s value fell. Since then, the Obama administration has encountered its own deficit problems because of the need for stimulatory spending to cushion the impact of the global financial crisis. The US dollar remains weak, and recovery slow and uneven.

All of this means that the US will not be able to deal as confidently and assertively with the new Chinese superpower as it usually did with the Soviet Union. Even US strategic preponderance can be expected to wane: to trim the deficit the administration must start with its massive military budget, and President Barack Obama’s planned withdrawals from Iraq and Afghanistan and refusal to commit ground troops elsewhere do not only derive from a principled reluctance to intervene in other people’s wars. Within China, an enhanced global status is likely to intensify the country’s conflicts. Those who want democracy and open, accountable government will, rightly, insist that political reforms to complement the economic reforms of the past three decades would be the best means of easing the wider world’s apprehensions about Chinese power. The ruling Communist Party’s suppression of dissidents in response to the ”jasmine revolutions” in the Arab world, however, suggests that it is unlikely to heed such arguments from the country’s liberal elites. In this uncertain new world order, countries such as Australia that are US allies but economically dependent on China will be in an especially delicate situation. Like the US, Australia will have to hope that China’s dissidents eventually prevail.

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