The April US-China summit is suddenly in question. Beijing wants to talk politics rather than trade and believes it has the upper hand. And there is a bigger calculation
The April summit between US President Donald Trump and Chinese President Xi Jinping may never occur. Beijing has warned that US arms sales to Taiwan (the island, de facto independent, claimed by the People’s Republic of China, PRC) could jeopardize Trump’s April visit (see here). About a week ago, China showcased its latest fighter jet, the J-20, in Tehran (see here). In the late 1990s, Zhang Xiaodong, writing in the Chinese Journal Strategy and Management, suggested that China should bargain with the US by pitting Iran against Taiwan. Beijing would give up support for Iran if the US delivered the island to the PRC. Apparently, Beijing is now thinking along those lines. If the US sells weapons to Taiwan, China will sell them to Iran (which the US seems poised to attack). In these circumstances, the April summit will be about politics, not trade.
In theory, within 40-50 days, the US could pull off the miracle of solving the Iranian problem, as it did with Venezuela. But what are the chances? Tehran is much closer (in every sense) to Russia and China and much stronger than Venezuela. China might not be able to sell its fighters for many technical reasons, but the Ukrainian war shows it can buttress a failing regime like Russia, and thus it could do the same with Iran.
Trump has just launched his Board of Peace. If something goes wrong with Iran, his board could take a major hit.
It’s unclear how Trump will play this game. In any event, this development spins the summit in a new direction, very political and not business-oriented, as I anticipated (see here). China is playing brinkmanship and hardball to get concessions on Taiwan, which it knows how to do. It’s a risky game, but Xi apparently thinks he has the upper hand, and for no foolish reasons. To explore this, we need a brief detour.
Chinese setbacks
China is stumbling amid a series of unexpected international setbacks. It apparently got it wrong on Russia (thinking it would win in two weeks in Ukraine), Gaza (thinking Israel would be thrashed), Venezuela (thinking the US would be bogged down for years), Iran (thinking its nuclear program was unreachable), and may get it wrong on North Korea (with a 13-year-old now next to nuclear warheads, see here).
Perhaps the root of these miscalculations lies in the shift in the international atmosphere. For about 50 years, the United States provided China with a special atmosphere in which to live in the world; it helped China with international relations and interpretations of reality. However, first slowly, then more rapidly, the US has been sucking oxygen out of the Chinese atmosphere. China enjoyed a special status because the United States provided oxygen, i.e., special relations with the rest of the world. Now that the United States is no longer providing this oxygen, everything around China has changed; China should have realized and adapted, but it didn’t, and it’s failing.
China, to counter this, is trying to produce its own oxygen, its own atmosphere, its own set of rules, and its own international culture. Only this will take quite some time to create a sustainable environment. How long is a question mark? In the meantime, it can be all confusing and suffocating. Yet, China has forfeited the old rules; it doesn’t believe in or trust them; it trusts its own vision, which is not mature, often naïve, and in any case, isn’t widely accepted. Therefore, the miscalculations.
For example, after the Hamas October 7 attack, China believed what Russia, Iran, and many Arab states said and what Beijing wanted to believe – that Israel was isolated and would soon be overwhelmed. It overlooked that almost all Muslim states, despite paying lip service to the Palestinian cause, were very supportive of Israel’s crushing of Hamas. Beijing also overlooked that, despite official friction with Israel, Turkey was supportive of Israel’s offensive against Iranian proxies in the region, and that Tehran was politically isolated in the area. China didn’t see that, despite many concerns among Israeli Palestinians, they would rather be ruled by a right-wing Israeli government than by Hamas.
This is not simply bad intelligence. It’s deeper. It reflects a lack of deep knowledge of the region.
The US is at the center of the international order because it has inherited centuries of experience from the British, the French, and others. The US may make intelligence mistakes, but they are just that, mistakes, not the blurred vision of China.
Moreover, China may not consider the worldviews of Russia and Iran aren’t entirely aligned with its own. They have their own worldview, often clashing with China’s, and they have joined with China only because of short-term anti-American interests.
The United States has its global position, in part because it managed to inherit a built-up atmosphere after 500 years of growing Western dominance worldwide. China is trying to create and impose its own atmosphere in 10-15 years, which is very short.
Is it then impossible for it to succeed and topple American dominance? In theory, it’s not.
Can China re-Qin?
In the 3rd century BC, the Qin Emperor did something that everyone thought was impossible in the central plains around the Yellow River. He conducted a continuous campaign against all other states and annihilated them one by one. He did so because he, for the first time, organized and established a perfect supply chain and logistics.
Now, China has an unparalleled advantage that no country can dent: it has a complete industrial chain that produces everything. It has a virtual monopoly on processed rare earths and on most other processed minerals. It has a unique advantage in the price-quality ratio for the production of almost all consumer and capital goods. It could thus have a chokehold on the global economy overnight, although this would mean certain suicide.
To counter China, the United States should build an alternative industrial supply chain to replace Chinese products. The effort may only be starting now (see here). Nobody is clear how long it will take the United States to build this alternative supply chain, and it’s not clear whether China will have enough time to expand its own “environment” wide enough to survive a possible American siege of this kind.
It’s a matter of time, organization, and global trust in one (the US) or the other (China). Many elements are up in the air, and the final result is uncertain. The United States is the incumbent power. It can enjoy a rentier position, but this can also be a disadvantage. The US could be complacent, thereby ignoring the many challenges of maintaining its dominance. It could be bossy, thereby breaking the seams of the alliances that hold its power and the world together. There are signs that in the first years of his administration, Trump did both.
On the other hand, China could be driven to build a new set of values, a new set of trust that could effectively draw in disgruntled countries.
China has objective advantages: 50% of global industrial capacity and 20% of the world’s population. It has a major disadvantage: it lacks a credible financial center, whereas Wall Street draws about 70% of the world’s capital. Still, perceived corruption in Wall Street and the United States, and the personal advantages sought by politicians and financiers in the Western world, could be undermining Wall Street’s respectability and objectivity.
This is not the whole picture. The rise of an “Iron Lady” leading Japan, Sanae Takaichi, could spin things in yet another direction. Japan has long been skeptical of China’s rise and has been preparing for it. Moreover, Japan has now adopted a new paradigm similar to China’s recent approach: it is willing to sacrifice economic benefits for political interests. (see here)
The Japanese public elected Premier Sanae Takaichi despite Chinese sanctions that hit the Japanese economy by almost 0.4% of its GDP. This paradigm could spread to other Asian countries, which are chafing under China’s growing assertiveness and are unwilling to see Beijing dominate the region.
At the same time, these countries are growing increasingly skeptical of US zigzags, changes of heart, and perceived unreliability, as agendas constantly shift. These countries could rally around Japan, which they trust much more than China, and believe that memories of World War II no longer count.
Another wild card is the role of an American Pope reaching out to people in the United States and in the Americas, Africa, and Asia. Can this Pope play a role in this complex environment? One thing is for sure: the financial world is the new battlefield.
The RMB Bet
The Chinese are apparently betting that some countries may stop trusting free markets, that is, they may stop trusting freely exchangeable currencies. This can be because they are too volatile, moving up and down and making it all confusing; because they depend on volatile governments fooling around in the world; or because they are no longer free (tampered with by local political power imposing monetary policies on central banks).
Moreover, China is gaining leverage: countries have so much trade with China that China can twist your arm and say, “We’d better use my currency.”
Plus, sheer political trust: I believe that a China-centered financial order, with a long-term, trustworthy Beijing, is preferable to one that relies on Wall Street’s whims and Washington’s sudden twists. Some people in China may claim that this is already happening.
If it works, it would destroy the liberal capitalist world that has driven change and progress over the past few centuries. At the end of the day, nobody really wants to go back to the Middle Ages. But failures of the capitalist world can give China ample room to maneuver and foster widespread global delusions. It already happened during the Cold War with communist ideology.
Still, there are practical problems in working with the RMB, particularly for China.
About a decade ago, one could exchange HK dollars, Singapore dollars, Ringgit, or Baht into RMB at value exchange offices around the world. As a result, the RMB had two exchange rates: one internal, fixed by the government, and one external, fluctuating and market-determined. The external RMB thus dragged the internal RMB. Beijing was no longer in complete control of its currency. Beijing grew scared and drew almost all external RMB out of circulation.
Can even a limited internationalization of the RMB be achieved without falling into the same trap: a foreign RMB and an internal RMB with exchange rates that are not fully aligned and thus not fully controlled by Beijing? Is Beijing willing to tolerate a limited market-driven RMB?
What seems possible is that Beijing keeps accounts in RMB but settles them in another currency, or that it moves to a gradual full exchange mode. But allowing the RMB to become a secondary currency of exchange, like the Yen or the Swiss franc or even the Baht or Ringgit, exposes China to the old risk – two rates for the same currency. It might be worse than a fully convertible currency. At least with a fully convertible RMB, there’s a market one can monitor and intervene in. With the partially market-driven RMB, external circulation is murkier and market intervention harder.
Currently, it seems that the RMB is used as an account unit, but eventually all accounts are settled in different currencies, and no or very little RMB circulates outside China.
The Chinese leadership understands the strategic and political importance of an international RMB and that, as Xi said in Qiushi (see here), it is a double-edged sword. So they want to get there as safely as possible. Seemingly, they haven’t figured out all the steps to get there. Also, full convertibility means money flows in and out.
Political reform?
If it suddenly flows out, there’s a financial crisis, followed by a social crisis and, eventually, a political crisis. This sequence toppled the Indonesian dictatorship in 1998, as the Chinese are fully aware. Therefore, they know that full convertibility is linked to political reforms. If Xi speaks of opening the financial system and of a “double-edged sword,” is he thinking of political reforms and how to get there? Perhaps yes, especially now that the PLA purge has eliminated another limit to his power.
It could be a bumpy road, but not impossible over time. China may believe it has time, and this belief may drive many of its choices. It can see a deepening transatlantic rift between the US and Europe and the growing isolation of Trump’s America. There is the sound of civil war drums in the United States around the midterm elections.
One scenario is that Trump would be defeated in the midterm elections, leaving the President paralyzed for two years. Another scenario suggests that before this possibility, Trump could try to stage protests, stir up armed militias, move the National Guard to invalidate the vote, or stop it. This could cripple the US and divert it from any foreign political issue. The January 6 tumult is an eerie precedent and shows that future pro-Trump violent protests can’t be discounted.
In all of this, China has no interest in reaching an agreement before the midterm elections, and possibly even before the next president is in place and the US finds a broad national consensus again. By then, China could have an even stronger bargaining position, have made further inroads in shaping the world as it wishes, and become even more disillusioned with American ways.
Despite the snags, Xi could have gotten the main direction right. If he got it wrong, the US would have to turn first, and China could turn as well. The play is on, and the April summit could be its rehearsal. The ball is in the American court. It should decide what game to play and how to play it. But it’s a long game. Xi is ready.
