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He Yafei: The Crisis of Capitalism and the Evolution of China-US Relations


By He Yafei    Source: China Focus    Published: 2019-1-18

From the Brexit referendum of 2016 to the US general elections the same year, and from the recent “Yellow Vest” protest in France to the forming of rightwing and leftwing governments in Europe and Latin America, the systemic crisis of capitalism has made its way from North America to Europe and other parts of the world. No one knows how long the crisis is going to last and how extensive or profound its impact will be to the political and economic order of the world. This is what people often call “the world of enormous uncertainty”. This is what President Xi Jinping has reminded us time and again that “our world is undergoing profound changes unseen in a century”. So, what is the origin of this crisis? And how deeply will it affect China-US relations?

When talking about the “profound changes unseen in a century”, we should look at the hard fact that since the dawn of the 21st century and in the last decade in particular, capitalism, as a political and economic system, and as an ideology, has suffered a series of big blows. Clashes between capital and labor have intensified and emerged as the principal contradiction in capitalist societies. American scholar Francis Fukuyama pointed out years ago that the country's political system had entered a state of “decay”. In his recent book “Identity Politics”, he described Donald Trump not only as the product of such decay but also the catalyst to the process. It is the systemic decay, in his view, that gives rise to populism, similar to the populist tsunami that put Franklin D. Roosevelt in the White House in 1932 and influenced American politics for two generations thereafter.

The serious gravity of the crisis can be illustrated in two ways. On the one hand, with identity politics dominating the election-centered politics, political parties in the US have ceased making policies in accordance with national or even partisan considerations which leads to “vetocracy” that gridlocks the normal functioning of government. On the other hand, with the wealth gap widening as owners of capital and new technologies keep the bulk of resources under their control, income stops growing, the labor to GDP ratio dwindles, and society slides further down the road of disunity. As a 2016 poll found, more than half of American youth no longer “supported” capitalism. The “Great Moderation” that lasted several decades has come to an end, and capitalist societies in general will enter a new period characterized by turmoil, transformation, and adjustment.

According to the Economist, as of 1997, a high degree of monopoly prevailed inside the US, making up 10% of the US economy, and the top four companies of each industry took up two thirds of the market share. The monopoly of capital led to a staggering extra profit totaling $660 billion, over two thirds of which going to US-based corporations and one third to technology companies, such as Google and Facebook.

The crisis of capitalism, first and foremost, threatens global economic growth. The capitalist model of development is in trouble. Many countries introduced structural reforms after the 2008 financial tsunami to address their mounting institutional and cyclical difficulties, resulting in widespread slowdown, rising protectionism and sometimes trade wars caused by sentiments like “America First”. China and the US now face an unpredictable future on trade, which casts a dark shadow over the world economy. Capital's profit-seeking instinct also stokes financial risks and asset bubbles. The U.S. dollar, as the principal international reserve currency simultaneously, is neglected on its latter role. The U.S. monetary policy differs greatly from those of other major countries. These have lead to serious distortions to the direction of global trade and investment. The new-tech revolution galvanizes capital flow to new technologies, thus depressing labor earnings in manufacturing jobs. Technological advancement, while enhancing overall productivity, cuts demands for employment in the traditional manufacturing sector. The unpredictable capital flow makes commodity prices, particularly those of crude oil, fluctuate violently, having a major impact on resource-based economies and greater economic uncertainty for resource-consuming countries.

Secondly, the crisis of capitalism undermines existing international system and systems of global governance, put in place by the capitalist countries themselves. The plight of the World Trade Organization is a case in point. Thanks to rising populism, many countries have embraced identity politics, realigned their interest groups and given free rein to political extremism and tribalism. From Britain, where citizens face a tough choice on Brexit, to Hungary, Italy, Mexico, Brazil, and France, where populism has risen to the level of national will, popular sentiments against globalization, immigrants, and free trade are still on the rise, globalization and rule-based global governance is severely tested. People's ability to address climate change, wild fluctuation of energy prices, rising financial risks, and other global challenges is also handicapped. What happened to President Macron not only means a more volatile France but also a more ominous future for Europe's integration and the Euro's sustainability. If Brexit turns out to be a “hard” one, it will do immeasurable damage to British and European economies as well as to the health of the global financial system.

The rule-based global governance system, whose unimpeded operation is badly needed in our world today, is nonetheless caught in the middle of a struggle between two powerful forces. Namely, the force of globalization that promotes multilateralism and global order, and the force of anti-globalization that indulges in unilateralism while putting one's selfish interests above everything else. The struggle has already left the global governance system fragmented and disorganized, denying it the ability to effectively address and respond to major international challenges. What's more, the systemic crisis in major Western countries has weakened their ability to reach needed consensus for cooperation, resulting in a prolonged state of “no governance” or “no effective governance”, a worsening external environment at the global level and increased difficulty for many countries to meet their domestic agendas.

How will the crisis of capitalism, particularly the systemic decay of US capitalism, affect China-US relations? After all, China-US relations play such a pivotal role in the shaping of international relations in the 21st century.

First, China-US relations are in need of readjustment, which will make them even more uncertain. Since US capitalism has entered an extended period of turmoil and overhaul, the government is more inclined to play hardball in dealing with other countries. And since the US has already defined China as a “strategic competitor”, the two countries will also take an extended period to feel out each other strategically.

The telephone conversation by the two heads of state towards the end of 2018 was an important step in promoting progress in bilateral trade negotiations. Rhetoric from the two sides sounds more upbeat. But many still draw conclusions from Vice President Mike Pence's October speech that the ongoing brawl in China-US relations meant more than just trade friction. Perhaps it is the beginning of a cold war. Still some likened China-US relations to the pre-WWI world, convinced that the “Thucydides Trap” is inevitable. Ancient Greek historian Thucydides blamed the Peloponnesian War on Athens' “rise” and the “fear” it caused in the Spartans. In reality, history cannot repeat itself and such comparisons can only misguide. The evolution of China-US relations as we know them reflects nothing more than international changes since WWII, particularly the shifting dynamics of the global system.

Second, US capitalism has entered a new period characterized by a “combination of financial capital and technology monopoly”. It cannot resolve the inherent contradiction between capital and labor, resulting in convoluted problems that include the widening wealth gap, disintegration of the social fabric, and growing opposition between the elite and broad sections of people. China, on the other hand, has leapfrogged in development over the decades by acting within the existing international system and taking full advantage of globalization. The success of the Chinese path has increased the “strategic anxiety” of the US and dampened its self-confidence. It is quite logical for the US to go out looking for “foes” or “adversaries” to rally troops and restore morale. Therefore, future China-US relations will witness more ups and downs.

Third, though the problems in China-US relations are significant, it does not mean that the two countries are destined to fall into the “Thucydides Trap”. The highly integrated interests and interdependence from globalization have brought the two countries closely together. China commits to reform, opening up, and peaceful development, and the US desires to address its problems from capitalism. The US may borrow a page from China's success story when it comes to reducing poverty, closing the wealth gap, and bringing about greater fairness in society. How could it be feasible for the US to “decouple” from China as Mr. Pence advocated? How many American constituencies can he bring on his bandwagon? Will state governments get along with the federal government? Can extreme conservatives convince Americans from other social strata and backgrounds of their argument? The Cold War is long gone. Building an “iron curtain” around China and preventing it from integrating into the world can only be a pipedream.

As far as China-US relations are concerned, we should be neither blindly optimistic nor overly pessimistic. Bilateral trade is about to hit $600 billion. Some 350,000 Chinese students are studying in the US. And every year, over 3 million Chinese tourists visit the US. A recently conducted survey by Pew shows that 38% of Americans think favorably about China, slightly lower than the 44% figure of 2017 when trade friction just got started and the 40% figure of 2012. What is more, numbers recorded amongst young Americans are noticeably higher.

As far as global governance is concerned, both China and the US face global challenges. Maintaining the rule-based global governance and rebuilding a new multilateral regime, including a trade system, will be elusive without their cooperation. In future, the success in fulfilling such big jobs as WTO reform, building Asian and world security architecture, and reconstructing world order largely depend on the level of strategic interaction between China and the US and their policy alternatives. This writer is convinced that the two countries are capable of replacing the current pattern of “cooperating competitors” with one of “cooperation of competitors”.

The author is director of the Global Governance Research Center and senior fellow of Chongyang Institute for Financial Studies, Renmin University of China, and former vice minister of China`s Ministry of Foreign Affairs.

Key Words: Brexit   Capitalism   China-US   He Yafei  

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