America and China

Biden’s new China doctrine

Its protectionism and its us-or-them rhetoric will hurt America and put off allies

Optimists long hoped that welcoming China into the global economy would make it a “responsible stakeholder”, and bring about political reform. 

As president, Donald Trump blasted that as weak. 

Now Joe Biden is converting Trumpian bombast into a doctrine that pits America against China, a struggle between rival political systems which, he says, can have only one winner. 

Between them, Mr Trump and Mr Biden have engineered the most dramatic break in American foreign policy in the five decades since Richard Nixon went to China.

Mr Biden and his team base their doctrine on the belief that China is “less interested in coexistence and more interested in dominance”. 

The task of American policy is to blunt Chinese ambitions. 

America will work with China in areas of common interest, like climate change, but counter its ambitions elsewhere. 

That means building up the strength at home and working abroad with allies that can supplement its economic, technological, diplomatic, military and moral heft.

Much about Mr Biden’s new doctrine makes sense. 

The optimistic case for engagement has crumbled under the realities of Chinese power. 

Led by President Xi Jinping, China has garrisoned the South China Sea, imposed party rule on Hong Kong, threatened Taiwan, skirmished with India and has tried to subvert Western values in international bodies. 

Many countries are alarmed by China’s “wolf warrior” diplomacy.

But the details of the Biden doctrine contain much to worry about—not least that it is unlikely to work. 

One problem is how Mr Biden defines the threat. 

Because politics in Washington is broken, he seems to feel that he needs the spirit of Pearl Harbour to help rekindle a sense of national purpose. 

That is a miscalculation.

It is true that Republicans jump on anything they can portray as soft on China (even though every time they say that the presidential election was stolen, they do the work of Chinese propagandists). 

However, Republicans are unlikely to start backing Mr Biden’s domestic agenda just because it has the word “China” stamped on the cover.

Worse, the more Mr Biden uses strident rhetoric to galvanise Americans, the harder he makes his task of galvanising allies and big emerging powers like India and Indonesia. 

By framing the relationship as a zero-sum contest, he is presenting them with a Manichean struggle between democracy and autocracy, rather than the search for co-existence. 

Alas, in this he is overestimating America’s influence and underestimating how much potential allies have to lose by turning their back on China.

By many economic measures China will become a dominant force, whatever America does. 

It will have the world’s biggest economy and it is already the largest trading goods partner of almost twice as many countries as America. 

Germany, Europe’s export powerhouse, aims to sustain commercial links with China even as political links buckle. 

In South-East Asia many countries look to America for their security and China for their prosperity. 

If forced to choose between the superpowers, some may pick China.

Rather than imposing a decision on other countries today, Mr Biden needs to win them around. 

And his best chance of that is for America to demonstrate that it can thrive at home and be the leader of a successful and open world economy.

Here, too, the details of Mr Biden’s scheme are troubling. 

Rather than build on America’s strengths as the champion of global rules, the administration is using the threat of China to further its domestic agenda. 

Its doctrine is full of industrial policy, government intervention, planning and controls. 

It is uncomfortably like the decoupling being pursued by China itself.

For a glimpse of what this could entail, look at the administration’s report on four crucial supply chains—for semiconductors, batteries, rare earths and vital pharmaceutical ingredients—published last month. 

The report does not just make the national-security case for government intervention in these industries. 

It also embraces union representation, social justice and pretty much everything else. 

More such reports will come later. 

If this one is a guide, Mr Biden will propose to use subsidies and regulation to ensure that jobs and production remain within America’s borders.

Inevitably, Mr Biden’s plans have trade-offs. Central to his attack on China is its abuse of human rights, especially of the Uyghurs, subject to internment and forced labour in Xinjiang. 

Central to his policy on climate change is to shift to renewables. 

Yet the two are entangled, at least in the short term, because Xinjiang is the origin of 45% of the silicon used in generating solar power.

A more fundamental problem is the China doctrine’s soft protectionism. 

This favours incumbents over competitors and is likely to weigh down the economy rather than supercharge it. 

The country’s new Moon programme is popular largely as a way to show that America has an edge over China. 

Yet it is vibrant precisely to the degree that it allows the sort of competition in which private firms such as SpaceX and Blue Origin can shine.

A third problem is that Mr Biden’s doctrine will make America’s allies even more wary. 

If the purpose of cutting ties with China is to create good union jobs in America, allies will ask themselves what is in it for them.

Mr Biden’s plan is a missed opportunity. 

If America wants to stop China from rebuilding the global order in its image, it should defend the sort of globalisation that always served it well. 

At the centre of such an approach would be trade and the multilateral system, embodying the faith that openness and the free flow of ideas will create an edge in innovation.

If America really wanted to counter China in Asia, it would join the pan-Asian trade deal it walked away from in 2016. 

That is highly unlikely now, but it could seek fresh agreements on the environment and digital trade. 

It should also put money and clout behind new ideas that reinforce the Western order, such as a vaccine programme for future pandemics, digital payment systems, cyber-security and an infrastructure scheme to compete with China’s Belt and Road Initiative. 

Rather than copying China’s techno-nationalism, a more confident America should affirm what made the West strong. 

The G20 has failed to meet its challenges

Lack of a truly global response to the pandemic augurs badly for common action on climate change

Martin Wolf

© James Ferguson

Humanity has outsmarted itself. 

With its ingenuity, this tribal ape has created a world its tribalism cannot manage. 

Intellectually, we know this: it is why we created institutions like the UN, the IMF and the G20. 

But we do not know it in our bones. 

In our bones, we know that each tribe is out for itself and the devil take the hindmost. 

In our bones, we think people who feel otherwise are “globalists”, which is synonymous with “traitors”.

We meet, fail and promise to do better next time. 

But then we fail again. 

We do not fail altogether. 

But we fail on the big things. 

It is not good enough. 

We know that. 

But the knowledge is not enough.

That is the story of last weekend’s meeting of G20 finance ministers and central bank governors in Venice, a glorious city sinking under rising seas. 

The G20 contains 63 per cent of the world’s people and 87 per cent of its output (at market prices). 

It contains the world’s most powerful countries and ones from every continent. 

It is our best chance for global economic governance. (See charts.)

Moreover, the return of the US to sane government has made a big difference. 

It was impossible to achieve any progress on global challenges under a government as incompetent and narcissistic as Trump’s. 

The intermission may prove brief. 

But the fact that someone as decent and intelligent as Janet Yellen represented the US at the Venice meeting lifts one’s heart.

It has also allowed progress. 

Indeed, the G20 communiqué offers a long list of achievements. 

In her summary, Kristalina Georgieva, the IMF’s managing director, commends the G20 on the “historic agreement” on a minimum corporate tax rate. 

She stresses the G20’s recognition of the role of carbon pricing in responding to climate change.

She notes, too, the excellent report of the high-level independent panel on “pandemic preparedness and response” and the G20’s recognition of the need for an enhanced global capacity to respond to health threats. 

She stresses not least her “profound appreciation” for the G20’s “support for a new SDR (Special Drawing Right) allocation of $650bn — the largest in IMF history and a shot in the arm for the world”. 

If the new SDRs are channelled in the right way, they can be transformative for the poorest and hardest-hit countries.

Moreover, mainly because of the success of the scientists, vaccines have turned the economic tide of the Covid-19 disaster more quickly than expected. 

The IMF forecasts global growth of 6 per cent this year, led by the two superpowers, China and the US. 

Yet, notes Georgieva, “the divergence across economies is intensifying. 

Essentially, the world is facing a two-track recovery.” 

Worse, it is the rich — among countries and within them — whose economic recovery is fastest. 

Not for the first time, to those who have it is given.

Yet, given the genuine achievements, why am I so critical? 

The answer is that humanity confronts two global challenges: escaping from this pandemic (and future pandemics); and climate change. 

Next to these, the agreements on corporate taxation and even SDRs, welcome though they are, are just not that important. 

The question is whether we can co-operate where we must.

On the pandemic, the task is to vaccinate the entire world and keep revaccinating it, if necessary. 

This is the only way to gain secure control over Covid-19 and its many variants. 

As Georgieva notes, the aim should at the least be to cover 40 per cent of the population in every country by the end of 2021, and 60 per cent by the middle of 2022. 

She notes, too, that “by providing faster access to vaccines to high-risk populations, more than half a million lives could be saved this year. 

And a normal return to activity everywhere could add $9tn to the global economy through 2025 — the $50bn cost of this pandemic plan pales by comparison.”

Indeed, it does. 

Yet, so far, it is the action that pales. 

The shortfall of funding for the Access to Covid-19 Tools Accelerator — the global partnership for delivering treatments and vaccines — for 2021 was $16.8bn in late June. 

This is 0.1 per cent of the public resources spent on fighting the results of Covid-19. 

Shamefully, the G20 has failed to resolve this. 

It looks now as if the children of high-income countries will be vaccinated before most of the rest of the world. 

This is a crime and a blunder.

Even against such a self-evidently global threat, where the costs are huge and immediate, we seem unable to act with essential urgency. 

The inability to co-operate in such an emergency makes one wonder whether the high-priority need for a hugely enhanced global capacity to recognise and respond to health threats will be achieved.

Given this signal failure, it is impossible to imagine we will do much more than fiddle while the planet burns. 

On climate, the challenge is more remote, the required changes in behaviour much larger and the co-operation needed more difficult. 

I would be delighted if COP26, the conference to be held in November in Glasgow, proves me wrong. 

I would also be surprised. 

Yellen pointed to the fact that the US will be providing $5.7bn in annual climate finance for developing countries by 2024. 

Yet, in the context of both the need and the money being spent at home, this is an error term.

Whether we like it or not — clearly, we do not — we have created a global civilisation. 

We all border on one another and all affect one another. 

We may want to continue on our tribal way. 

Indeed, looking at emerging relations between the US and China, it is obvious that we do. 

But it will not work. 

We live in a globalised world on a shared planet. 

Are we capable of acting upon the implications? 

That is the biggest question of the 21st century. 

The answer, I fear, is no.

The Stablecoin Illusion

An obscure corner of the digital sphere that was poorly understood two years ago is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. Unfortunately, more intense scrutiny has not necessarily meant better understanding.

Barry Eichengreen

BERKELEY – The debate over stablecoins has come a long way since Facebook announced the creation of Libra (now rebranded Diem) almost exactly two years ago. 

An obscure corner of the digital sphere that was poorly understood then is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. 

The stakes, including for financial stability, are high. 

Market capitalization, or circulating supply, of the four leading US dollar stablecoins alone exceeds $100 billion.

But more intense scrutiny does not mean better understanding. 

Start with the belief that stablecoins are intrinsically stable because they are “fully collateralized.” 

The question, of course, is: collateralized by what?

Naive investors in dollar-linked coins assume that the collateral takes the form of dollars held in federally insured US banks or their close equivalent. 

But that is only partly correct. 

After being criticized for its opacity, the leading stablecoin issuer, Tether Limited, recently revealed that it held barely a quarter of its reserves in cash, bank accounts, and government securities, while holding nearly half in commercial paper and another tenth in corporate bonds. 

The second leading stablecoin by capitalization, USD Coin, says only that it holds its reserves in insured US depository institutions and other “approved investments.” 

Whatever that means.

Such murkiness creates risks for stablecoins themselves, for their investors and, critically, for the stability of financial markets. 

Lack of transparency about what quality of commercial paper, what kind of corporate bonds, and what other “approved investments” are held as collateral is a source of fragility. 

This kind of information asymmetry, where investors don’t know exactly what has been done with their money, has given rise to bank runs and banking crises through the ages. 

In this setting, a fall in the value of commercial paper or in the corporate bond market could easily spark a stablecoin run. 

And the fact of falling bond prices would mean that the stablecoin issuer lacked the wherewithal to pay off its holders.

In addition, there is the danger of contagion: a run on one stablecoin could spread to others. 

What are the chances that a run on Tether would leave confidence in USD Coin intact? 

The European Central Bank, which knows a thing or two about financial contagion, has warned against just this scenario.

To limit such problems in the banking system, governments insure retail deposits, and central banks act as lenders of last resort to depository institutions. 

Some commentators, such as former Bank of England Governor Mark Carney, have suggested that central banks should provide similar support to stablecoin issuers.

The authorities would agree to this, of course, only if those issuers were subject to stringent supervision designed to limit the incidence of problems. 

Stablecoin purveyors would have to apply for the equivalent of bank charters and be subject to the relevant regulation. 

A stablecoin would then be nothing but a so-called narrow bank, authorized to invest only in Treasury bills and deposits at the central bank, with a Paypal-like payments mechanism built on top.

Alternatively, stablecoins could be regarded as the digital equivalent of prime money market funds, which similarly invest in commercial paper. 

The problem with this model, as we learned during the 2007-08 global financial crisis, is that normally liquid commercial paper can abruptly become illiquid. 

When this happened in 2008, the US government sought to quell the ensuing panic by temporarily guaranteeing all money market funds. 

To prevent that from happening again, the Securities and Exchange Commission then issued rules requiring that funds, rather than maintaining a $1 share price, post floating net asset values as a reminder to investors that money market funds are not without risk. 

It allowed money funds to institute redemption gates, under which they can limit withdrawals and charge temporary fees of up to 2%.

Revealingly, Diem’s latest whitepaper similarly foresees redemption gates and conversion limits to protect the stablecoin against runs. 

But a stablecoin that is redeemable only for a fee or that can’t be redeemed for dollars in unlimited amounts won’t be an attractive alternative to Federal Reserve money, just as shares in money market mutual funds are an imperfect substitute for cash.

The more worrisome financial stability problem is that the market capitalization of the four largest US dollar stablecoins already approaches that of the largest institutional mutual fund, JPMorgan Prime Money Market Fund. 

A panic that forced these coins to liquidate a significant share of their commercial paper and corporate bond holdings would jeopardize the liquidity of those markets. 

And dislocations to short-term money markets can seriously disrupt the operation of the real economy, as we also learned at considerable cost in 2008.

The upshot is that the stability of stablecoins is an illusion. 

They are unlikely to replace Federal Reserve money, unlikely to revolutionize finance, and unlikely to realize the dreams of their libertarian enthusiasts.

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. He is the author of many books, including the forthcoming In Defense of Public Debt.