Ray Dalio, a successful macro hedge fund manager, recently followed up his ‘Changing World Order’ thesis (also a book) where China challenges the US as the new world power, with this blog on the ‘Tribute system’. The authors of this piece in the Foreign Affairs begin with the idea: “Following the back-to-back state visits to China in May by U.S. President Donald Trump and Russian President Vladimir Putin, many U.S. and European commentators noted that the summit meetings yielded little of real substance. But from a Chinese perspective, that didn’t matter. What mattered were the visuals, broadcast in the Chinese state media: like the emperors of old, Chinese leader Xi Jinping was receiving tribute missions from the most important foreign potentates. In symbolic terms, the visits reinforced Beijing’s narrative that China has overtaken its rivals and is once again at the center of the world.”
But the authors argue, China might be risking its rise by walking all over the western systems which helped its rise in the first place: “ Underlying this triumphant vision is the Chinese claim that where the Soviets mismanaged socialism and the Americans corrupted capitalism, only China has discovered the formula capable of reconciling state authority with market dynamism and restoring international harmony. But this nationalist story risks obscuring a fundamental historical reality: China’s rise has not happened outside the systems its rivals built, but through Beijing’s skillful exploitation of them. In its early decades, Communist China relied on the Soviet Union to help construct its foundations. And ever since Deng Xiaoping’s “reform and opening” policies connected China to the world economy in the late 1970s, China has used its access to Western markets to forge itself into an economic and military superpower.”
Central to the west’s issue with China has been its inability to tilt its economy towards domestic consumption, letting it unleash its excess capacity on the rest of the world instead. But the aithors argue that there is only so much that the world can take and hence China should think before flexing. “Growing frustration with China is already prompting the United States and Europe to take stringent countermeasures to protect their industries. Beijing is thus overlooking the defining paradox of its own success: China’s rise remains tied to the openness of the economies it hopes to surpass. Its road to a post-Western order still runs through the West.”
The authors go on to give an account of the history of Chinese rise and instances where it has shown its efforts to regain its central place in the world order: “Beijing therefore embraced a dual strategy: exploiting the openness of the existing order while gradually eroding its foundation. Under Xi, this tendency became even more explicit. Take the Belt and Road Initiative, the enormous international economic development and infrastructure program launched by Beijing in 2013 and now extending to more than 150 countries. By connecting developing and advanced economies—including some in Europe—through a vast China-centered network, underpinned by Chinese standards, supply chains, and financial networks, Beijing has sought to shift the center of gravity of the international economy away from the institutions that have underpinned U.S. leadership since World War II.”
And the west, and in particular the US under Trump have helped the Chinese cause: “Indeed, this argument has gained some traction across the non-Western world, in countries as dissimilar as Cambodia, Zimbabwe, Iran, and even Saudi Arabia, where some political elites have portrayed Western liberalism as intrusive, hypocritical, or exhausted while presenting China as a partner of stability, sovereignty, and development.
…In Beijing’s view, China can supplant the U.S.-led order not by direct confrontation but by outlasting and out-adapting the United States, and, over time, persuading a growing number of states that Chinese leadership offers a more legitimate basis for international order. In Xi’s strategic calculus, the so-called Thucydides Trap can be avoided precisely because the United States is expected to weaken internally before any catastrophic conflict becomes unavoidable.”
The authors argue that the lopsided Chinese economy of weak domestic consumption and excessive reliance on exports resulting in weakening industries and employment in its biggest markets of US and Europe is facing an inevitable backlash: “Beijing’s approach has accelerated protectionist responses from both the United States and Europe. In Washington, a bipartisan consensus has emerged around the need to reduce dependence on Chinese supply chains and to counter the effects of Chinese subsidized overcapacity. And in Brussels, the European Commission has decreed the current state of EU-China economic relations as “unsustainable.” Europe is now mulling sweeping coordinated measures, aimed at addressing China’s challenge in systemic terms.”
Nor is it allowing other emerging economies to take its spot: “China continues also to aggressively support low- and mid-tech Chinese manufacturing, constraining the growth of countries like Brazil, India, Indonesia, and Turkey. This has already led to policy responses, with India expanding trade-defense instruments and investment screening mechanisms vis-à-vis Chinese firms, and Brazil and Turkey intensifying anti-dumping investigations and debating safeguards for strategic industrial sectors.”
The authors present their thoughts on how China can change its model creating more balance between domestic consumption and exports, failing which they warn: “Since 1949, the Chinese Communist Party’s anti-hegemonic strategy has been remarkably successful in reshaping the international environment and creating space for China’s extraordinary rise—an achievement rooted above all in the hard work, discipline, and resilience of the Chinese people. Yet history offers a cautionary lesson. Great powers encounter danger when they cease to view success as the product of contingency and effort and begin to view it instead as the expression of historical destiny. If Beijing falls into this trap, and refuses to heed Western warnings, it will trigger a vicious trade war that will leave the world much worse off, and the dream of China’s national rejuvenation in tatters.”
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