It seems the news has been consistently inundated with details and predictions regarding the ongoing trade war between the U.S. and China. While tensions seem to have faded in the near-term, something more ominous is playing out beneath the surface.
In a two-part interview on the Financial Sense Newshour podcast, Louis Gave, co-author of The Clash of Empires, Currencies and Power in a Multipolar World, discussed China’s growing influence and the shifting balance of power on the world stage.
Brewing Cold War
There’s been an unceasing wave of globalization and for one of the first times we’re seeing a break in that established order of globalization. While those of us in the U.S. tend to think of the current situation with China as a trade war, this is not how the Chinese view the problem, Gave stated.
We’re instead facing what can be called a new Cold War, Gave explained. While tensions began primarily because of trade imbalances, problems have rippled far beyond trade.
For example, both the U.S.’ recent moves against Huawei and Mike Pence’s hawkish anti-China speech at the Hudson Institute highlight the changing nature of the conflict. Ongoing issues with intellectual property rights and violations of human rights are also in play.
This new conflict is economically more significant than the previous Cold War with the Soviet Union, Gave stated, because of China’s importance in global trade.
“China today is obviously the number two GDP in the world,” Gave said. “China is often either the number one or number two trading partner … with almost any Western market. When you look at the economic interactions between China and the rest of the world, the fact that increasingly we're moving into this new Cold War is a dramatic shift in the investment environment.”
Reserve Currency Status
The US dollar’s status as reserve currency for the world is increasingly being challenged, Gave noted. This is a direct result of tensions building with China.
The U.S. trade deficit is almost exclusively with China. In previous recessions, when the Fed would ease, consumption would pick up as U.S. consumers purchased more goods from abroad. This sent dollars to other countries, but normally those countries would reinvest their new dollars back into U.S. assets.
China is not following this pattern by buying back into the American system. Instead, China has made it clear it wants to be free from dependence on the U.S. dollar in the long-term, Gave noted.
As an alternative, they are promoting the Renminbi as a trade and reserve currency. They’re using U.S. dollars to build their system. Current Chinese President Xi Jinping has put this process into hyperdrive, Gave noted, effectively replicating a lot of the institutions that the U.S. put in place post Brenton Woods within Southeast Asia.
In the process, we may be on the cusp of seeing globalization reverse, in some ways. In the future it may not be possible to outsource manufacturing to China on the scale we currently do, Gave stated.
Ultimately, Gave believes we may see multiple reserve currencies develop, with the likely scenario including an Asian, European and American economic zone, each with their own economic systems.