components of global economic leadership. As developed in chapter 9, it would need to be informal, and even unannounced, to avoid antagonizing other important countries, whose supportive participation in systemic affairs would still be essential. It would rely heavily on consultation by the two superpowers with other key countries and would seek to strengthen, through their cooperative leadership, the existing international institutions, both formal (IMF, WTO) and informal (G-20, APEC). It would ideally operate via a series of concentric circles, radiating out from the G-2 through a G-3/4 that brought in Europe and Japan, and then the G-20 (and maybe G-7/8), and ultimately the formal international institutions (IMF, WTO). It could evolve over time through a period of more modest conditional competitive cooperation, through which trust could be rebuilt and confidence restored, before reaching the G-2 stage. But conditional competitive cooperation could proceed without a G-2.
Acceptance by the United States of China’s legitimate leadership aspirations would have to be conditioned on fully reciprocal behavior by China. Provision of equal voting rights at the IMF, for example, would be contingent on Chinese commitments to binding constraints on currency manipulation and provision of fully transparent data. Extension of market economy status in the WTO could ensue only if China accepted binding disciplines on subsidies to SOEs, protection of intellectual property rights (IPR) and prohibition of forced technology transfers. US participation in such China-led ventures as the AIIB and BRI could be matched by Chinese participation in Western institutions such as the International Energy Agency (IEA) (and maybe the full OECD) and the Paris Club of creditor countries. Domestic political realities in both countries require that true systemic cooperation would have to be premised on resolution of America’s grievances over China’s economic policies, and of China’s grievances over its inadequate role in the global governance system.
The rough power equivalence between China and the United States, which is likely to prevail over the coming decades, suggests that both countries will be able to block initiatives of the other, but that neither country would be able to force the other to adopt policies that it does not deem in its national interest. China should thus join the United States to seek to preserve a relatively open international economic order, with a considerably larger role for China itself, at least by intervening to support the system whenever its sustainability is at risk – as China has already done on several occasions. In terms of the systemic alternatives described above, it could produce either a G-0 or a G-2 – depending on how far China and the United States were able to carry the cooperative component of the strategy.
At the same time, China and the United States – and their two very different economic systems – will continue to compete vigorously across the range of international trade, investment, technology, and perhaps currency domains. Their relationship could thus function differently at the two levels of international economic exchange: competitively in the context of day-to-day transactions, and cooperatively in managing the global economic order. This is not so different from the historical “G-2” relationship between the United States and the Europeans, who successfully defended both the international trade and monetary systems for several decades together, while competing vigorously with each other in both trade and finance. But only a strategy of conditional competitive cooperation that aims to sustain a G-0s in the short run and a G-2 over the longer run can reconcile the overwhelming economic and foreign policy interests of the United States in an effective international economic order with the realities of global geopolitics in the first half of the twenty-first century.
The Domestic Front
Whatever approach it chooses directly toward China, the United States will have to greatly improve its domestic economic and social performance to strengthen its capacity for effective global economic leadership. Steps must especially be taken to address the legitimate concerns of those who lose from globalization (and from dynamic economic change more broadly), in terms of lost jobs and lower incomes, to re-create a viable domestic political foundation for open trade policies – let alone pro-active systemic leadership. Examples include greatly strengthening unemployment insurance, wage insurance, tax credits for lifetime learning opportunities, and Trade Adjustment Assistance; such measures will be addressed in chapter 10.
The United States will also have to put its overall economic house in order. Tax, education, and other policies must reduce income inequality and overcome wage stagnation. The fiscal outlook must be stabilized for the longer run. The credibility of the Federal Reserve in maintaining price stability must be preserved. The rapid build-up of the world’s largest foreign debt must be tempered. Infrastructure must be sharply improved. The external challenge from China should reinforce American resolve to address these problems, as the Sputnik shock from the Soviet Union galvanized so much internal progress in the early postwar period.
Even more profound domestic changes will also be necessary, however, to restore America’s capacity for global economic leadership in the face of the challenge from China. The country’s extreme political polarization, as dramatized in the 2020 elections and their aftermath, has generated widespread disillusion around the world, as it has at home. So have the identity politics, and racial and ethnic tensions, that cause and derive from this polarization. The dysfunction of the US political system has led to sharp declines in international confidence in the United States. Both its economic and political systems, while still widely admired, face greater scrutiny – and, indeed, skepticism – than at any time since its systemic dominance commenced. The basic institutions that have provided the backbone of American greatness, from the Congress to the judicial system and even the legitimacy of the election process, are suffering from crises of confidence that undermine the country’s international stature.
In the midst of all this anxiety and uncertainty about the future of the United States both at home and abroad, the rise of China has generated a unique bipartisan and widespread consensus in the body politic: that this new challenge must be met by a strong and effective response on a variety of policy fronts. Both parties and both houses of Congress came together in 2021 to consider an initial suite of new measures for this specific purpose. Worries about China galvanized additional support for legislation that was proposed primarily for domestic purposes, as on infrastructure.
To its great credit, the Biden Administration entered office with this approach very much in mind. It resolved to address many of America’s domestic problems as an essential forerunner to restoring the country’s international role, including its global economic leadership. But it faced four major and interrelated uncertainties of its own: would the Congress, and the American public more broadly, support enough domestic change to make that restoration possible? Would the traditional allies concur on a strategy of conditional competitive cooperation and give it sufficient priority to enable it to succeed? Would China cooperate sufficiently to enable such a balanced approach to succeed, including by generating enough domestic political support in the United States for it to be sustained by the Biden and successor Administrations? And what should be done if the answers to any of those questions turns out to be negative?
Recognition of the problem is, of course, only the first step in the process of response. Despite the initial steps already taken, no overarching strategy has yet been devised and there is no agreement on specific measures that would advance US and global interests. There remains a major divide between those who would maintain the containment approach of the Trump presidency, presumably in a less crude and more skillful manner, and those (like this author) who would seek a more balanced strategy that includes major components of cooperation and healthy competition as well as confrontation.
China represents a major challenge both to the international economic order, which has been vital to world peace and prosperity for the past 75 years, and to the global position of the United States. It could lead to instability and disruption on a global scale, and to extreme discomfort in the United States with the new environment in which it finds itself. But there are policy choices that could avoid such calamities, and
