May 122020

Hat tip to Gideon Rachman, chief foreign-affairs columnist of the Financial Times, for providing a plausible answer to the question (Has China won?) I wrote about in the previous post.

Easy to understand, argues Rachman, why China might be feeling its oats. It is opening up its economy after having “almost completely suppressed domestic transmission” of the Covid-19 virus. From the outside, China looks relatively stable.

Meanwhile, the virus has targeted America’s weakness. The U.S. still has the most powerful military machine in the world, but it is “not much use against a virus.” The American economy, in the meantime, is in the worst slump since the Great Depression. U.S. politics are unsettled. Both political parties “suspect the other side will use the pandemic to try and rig the upcoming presidential election.” Writes Rachman:

Combine the relative stabilisation of China, with the threat of a new Great Depression and a deep political crisis in America, and it is clearly possible that Covid-19 will trigger a big shift in power from the US to China. It could even mark the end of American primacy.

Rachman notes that a debate about America’s decline has been going on for decades, and that he has been in the “declinist” camp, believing that the erosion of American hegemony is both real and inevitable. But he writes that he tries to keep in mind two important questions “that serve as a reality check on excessive declinism.”

Question one is: what currency in the world do you most trust? Question two: where, outside your home country, would you most like your children to go to university or to work?

The questions almost answer themselves. On the second question, he notes that for all its economic success, China still struggles to attract even the best Chinese scholars to stay home. Chinese students who have studied in the U.S. are often “dismayed by the political atmosphere at home . . . far more intrusive and threatening than anything they encountered in Donald Trump’s America.”

Meanwhile, the U.S. dollar is unchallenged as the global safe haven and leading currency for trade. Sure, the world’s faith in the dollar could well be tested by the U.S. response to the pandemic. U.S. national debt is surging, as is the Fed’s balance sheet as it prints money to shore up the economy. Were any other country to behave in such a way, writes Rachman, “wise heads in Washington would be warning that a crisis lay just around the corner.”

But the simple fact is that “While many foreign powers resent the dollar’s power, no other country has a currency that commands the same respect.” Certainly not China, which tightly controls its currency. The Euro has its own set of problems.

If the answers to those questions — where do you want to put your money and where outside your own country would you like to see your children as students or workers — remain as they are today, we will continue to live in a uni-polar world. Or, as Rachman puts it, “American primacy will have survived Covid-19.”

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