America's next big test: The new era of economic statecraft | DW News

Key Concepts

• Economic Statecraft: The use of economic policy instruments (e.g., foreign aid, sanctions, trade agreements) to achieve foreign policy objectives and influence other countries' behavior.
• Geopolitical Competition: Intense rivalry between major global powers, characterized by strategic maneuvering and competition for influence.
• Mutually Assured Destruction (MAD): The doctrine that a full-scale use of nuclear weapons by two or more opposing sides would cause the complete annihilation of both the attacker and the defender. This is seen as channeling conflict into economic arenas.
• Critical Minerals and Rare Earths: Strategic resources essential for modern technologies, where China holds dominant market share, creating vulnerabilities for Western economies.
• Supply Chain Diversification: The strategy of building resilient supply chains by reducing overdependence on single countries or regions.
• De-dollarization: The process of reducing the dominance of the US dollar in international trade and finance, with some countries exploring alternatives like the Chinese Renminbi.
• Capital Controls: Government restrictions on the movement of capital into or out of a country, which China imposes on the Renminbi.
• Decoupling: The process of reducing economic interdependence between countries, particularly between the US and China.
• Sanctions: Economic or political penalties imposed by one country or group of countries on another, typically to achieve a foreign policy objective.
• Network Effects: A phenomenon where the value or utility of a product or service increases as more people use it. This is a key factor in the dollar's dominance.
• Exorbitant Privilege: The unique advantages enjoyed by the issuer of a dominant reserve currency, such as the US dollar, including lower borrowing costs and greater financial flexibility.

The Shifting Global Economic Order and the Rise of Economic Statecraft

The post-Cold War unipolar moment is over, and the global landscape is increasingly defined by intense geopolitical competition, with Russia and China actively seeking to challenge and disrupt the Western-led order. Both nations possess the capacity to do so, especially when coordinating their efforts. This shift is driven by the reality that direct military conflict between great powers, deterred by the risk of mutually assured destruction (MAD) due to nuclear capabilities, is increasingly being channeled into the economic theater. While economic confrontation is not existential, it is far from costless.

Key Points:

• Russia and China's Ambitions: Both countries have openly expressed a desire to reshape the global economic order.
• Hedging by Swing States: A growing number of geopolitical "swing states" are adopting a non-aligned path, hedging their bets and reducing the scope for cross-border cooperation on global risks.
• Economic Tools as Primary Weapons: In this new era, economic tools have become the policy tool of first resort, replacing direct military confrontation between major powers.

China's Dominance in Strategic Sectors and the Need for Western Resilience

China has amassed decades of dominant scale in a range of strategic sectors, including ships, cars, drones, batteries, pharmaceuticals, solar panels, and electrolyzers. China accounts for approximately one-third of global manufacturing value-added, double the share of the US. This dominance poses a significant vulnerability for the US and its allies, particularly concerning critical minerals and rare earths.

Strategies for Western Resilience:

1. Increase Productive Capacity: Western countries need to boost their own manufacturing capabilities, though fiscal burdens can be a constraint.
2. Strategic Partnerships: Countries playing by the same rules should grant each other access to their productive capacity and purchasing power.
3. Collective Barrier Raising: For countries that distort competition by flooding markets, a collective approach to raising barriers is necessary to rebalance the terms of competition towards innovation, talent attraction, and alliance formation.

The Unrealistic Prospect of De-dollarization and the Renminbi's Limitations

Despite discussions about de-dollarization and a shift towards the Chinese Renminbi (RMB), its widespread adoption is considered unrealistic due to China's capital controls on the yuan.

Reasons for RMB's Limited Global Role:

• Trust and Protections: Placing savings in a currency requires trust, which is built on protections, rule of law, an independent central bank, and free capital flows.
• China's Reluctance for Market Reforms: China's leadership appears unwilling to implement the necessary market-oriented reforms that would grant more control to market forces, thus limiting the RMB's global economic weight.

US-China Trade Relations: Geopolitical Theater and the Search for a Truce

Recent strong rhetoric from US Treasury Secretary Scott Bessant, including the mention of "decoupling" and describing China's top trade negotiator as "unhinged," is characterized as geopolitical theater. This posturing is seen as a prelude to a potential leader summit, with both sides aiming to enter talks from a position of strength.

Perspectives on US-China Trade:

• US (President Trump): Seeks a "Nixon goes to China" moment and a Nobel Prize, recognizing he doesn't hold most of the cards in the relationship.
• China (President Xi): Needs a truce to address its own domestic economic challenges, including debt burden, deflation, deleveraging, and demographic issues, to avoid further hits to economic growth from an uncontrolled escalation with the US.
• Outcome: A truce is likely to put a floor under the risks in the relationship after the summit, but fundamental incompatibilities between the US and Chinese economic models will remain a source of ongoing friction. The challenge lies in managing this friction responsibly to avoid broader global economic fallout.

The Efficacy and Dangers of Sanctions

Sanctions have become a primary policy tool in the current contested and fragmented global environment. However, their effectiveness is debated, and their overuse can lead to resistance, akin to antibiotics.

Advice on Sanctions:

• Not Effective Alone: Sanctions are not an effective strategy on their own.
• Complementary Strategy: They are most effective when used in conjunction with military and diplomatic strategies to change the calculus of an autocrat.
• Need for Staying Power and Coalition: Successful sanctions require sustained commitment and a broad coalition of countries.
• Understanding Limits: It's crucial to understand the limitations of sanctions and avoid a "race to the bottom" in their application.
• Doctrine of Economic Statecraft: There is a need for a "Geneva Convention-type" doctrine to govern the use of economic weaponry, preventing the breakdown of the global economy into autarky and catastrophic outcomes.

The Dollar's Dominance Amidst Domestic Pressures

Despite a significant slump in its value (7% on a trade-weighted basis since January, its worst start to the year since 1973), the US dollar remains dominant in global finance.

Dollar's Enduring Strength:

• Network Effects: The dollar benefits from incredibly powerful network effects, similar to Microsoft's operating system in computing.
• Lack of Comparable Alternatives: No other currency, digital asset, or even gold offers comparable depth and liquidity.

Threats to Dollar Primacy:

• Erosion of Institutional Strengths: Questions are being raised about the continued integrity of US institutional strengths, including the rule of law, due process, checks and balances, a professional civil service, independent institutions, and a free press.
• Trust and Predictability: The perception of the US as a reliable and predictable partner is being questioned globally, impacting its ability to attract talent and ideas.
• Psychological Tipping Points: Like any network, the dollar's value can decline slowly and then suddenly if these perceived strengths are not shored up.

Call to Action:

• Shore Up Strengths: The US must reinforce the institutional strengths that underpin the dollar's primacy.
• Balance of Economic Tools: Economic tools should be used not just to punish and coerce, but also to attract, inspire, and create, striking a better balance.

Conclusion:

The global economic order is undergoing a profound transformation, marked by increased geopolitical competition and the ascendant role of economic statecraft. While China's dominance in strategic sectors and the US dollar's enduring strength present complex challenges, the path forward requires strategic partnerships, resilience-building, and a responsible approach to economic tools like sanctions. The US, in particular, must reinforce its institutional strengths to maintain the dollar's global standing and ensure a stable international economic environment. The ultimate message is to leverage economic tools for creation and inspiration, not solely for punishment and coercion.