How Can America Challenge China’s Political Ambitions in an Age of Deglobalisation?

LSE IDEAS Strategic Update by Dimitri Zabelin

A New Hegemon, a New World Order

Following the Second World War, the United States effectively dethroned the United Kingdom as the global hegemon and began to create the foundation for a new world order. The Bretton Woods Conference established the International Monetary Fund (IMF), the World Bank, and set the standard for international dollar-gold conversions. Initially, renowned economist John Maynard Keynes proposed using the Bancor, a nationless medium of exchange, as the global reserve currency. However, the US rejected the measure, and successfully argued to make the US Dollar the global reserve currency which could in turn be redeemed for gold. The US was then at the epicentre of a new financial and economic world, and embedded itself at the heart of these new institutions.

The Great Recession and a Crisis of Faith

The 2008 recession was not only a financial cataclysm that subsequently plunged the global economy into a recession, but also the start of a general erosion of trust. Blind belief in the system back then, created an underlying complacency. As Oaktree Capital Management Co-Founder Howard Marks put it (quoting Peter Kaufman); ‘as any system grows toward its maximum or peak efficiency, it will develop the very internal contradictions and weaknesses that bring about its eventual decay and demise’.4 In other words, the stability and efficiency of the system itself, ironically created the circumstances for its own collapse. Confidence led to arrogance, then complacency, and in this subdued state policymakers and Wall Street executives let go of the wheel and drove the economy into an abyss. This behavioural change was also evidenced in the cycle of market ‘booms and busts’; strong economic times lead to confidence, strengthened optimism leads to higher risk-taking behaviour, due-diligence protocols are relaxed until the fantasy wears off and the reality is undeniable.

The Triumph of Trump

If globalisation could be thought of as a ball of yarn, the 2008 recession would be the first tug, and the election of Donald Trump would mark the great unravelling. One risk of implementing globalisation policies, is their homogenising nature. If executed poorly, it can create the seeds of resentment that would later bloom into its undoing; or at the very least, cause a temporary regression. Mr. Trump tapped into this widespread sentiment and used that, along with phrases such as ‘America First’, to ascend to power. This inward-facing nationalism, outdated economic policies, firebrand politics and unilateralism all diminished Washington’s influence and credibility. As I wrote in a piece one year ago, ‘the acidic nature of unilateralism rusts away the institutional foundations of a rules-based system’, leaving doubt and uncertainty in its void.6

Dragons Still Breathe Fire

In a globalised world of economic interconnectedness, the cost of political unilateralism has a multi-iterated ripple effect. It is structurally designed to reduce incentive for states to go rogue and not act with the global moral, economic and political gradient. With this in mind, combined with the isolating effects of the trade war, China has taken measures to partially remove itself from this interconnected system. By widely and deeply integrating into Asia, China becomes more insulated from the external costs incurred from its bold regional endeavours. This also makes China less exposed to outside pressure from the US and its allies as well as Western institutions.

The Black Swan: COVID-19

The COVID-19 pandemic inflamed cross-continental geopolitical tensions, and further widened the US-China rift which was already under strain. Disrupted supply chains and asymmetrical information further magnified the already-fracturing global economy from the trade war. It also stoked the conversation of how dependent the US is on China and to what degree economic interconnectedness is feasible when political interests are diametrically opposed.

Globalisation: Finished or Paused?

The arc of history has generally bent towards greater integration with interims of pushback before a reversion to the political-secular mean takes place. The rise of isolating-nationalism over the past few years can be seen as nothing more than the reassertion of a particular identity against what they view as encroaching universalism. In these circumstances, the strength of international institutions are put into doubt and their power to maintain the global status quo erodes at a commensurate rate. The result is economic, financial and political uncertainty that creates a cyclical compounding force of reinforcement until it exhausts itself and reverses course. This is assuming that the perceived validity of these institutions is able to survive a turbulent period of doubt. They almost certainly will, but their repair will take years of rebuilding trust and unwavering commitment on the part of the United States to preserve their influence and integrity.

About the Author

Dimitri Zabelin is an Associate at LSE IDEAS, having studied political economy at the University of California, Berkeley for both his undergraduate and masters. He received additional training at LSE and is a member of the UC Consortium network. He then transferred his expertise to the world of foreign exchange where he authored reports on optimizing trading strategies for geopolitical risks. Dimitri has appeared in numerous publications and media outlets including BBC News, The Diplomat among many others that have translated his work in Asia, Latina America and Europe. He currently works in data policy.

Endnotes

1 Parag Khanna, The Future is Asian (New York: Simon & chuster, 2019), 140

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LSE IDEAS is LSE’s foreign policy think tank. We connect academic knowledge of diplomacy and strategy with the people who use it.

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LSE IDEAS

LSE IDEAS is LSE’s foreign policy think tank. We connect academic knowledge of diplomacy and strategy with the people who use it.