China and the United States: Trade Conflict and Systemic Competition (Draft Paper)

The current trade conflict between the United States and China, important as it is, obscures the more fundamental issue between the two countries: their contest for leadership of the global economic system in the 21st century. Resolution of the current confrontation will require addressing critical systemic questions, especially concerning the role of governments in economic policy, as they affect such issues as trade and investment protection, subsides, state-owned enterprises (SOEs), technology transfer, intellectual property rights (IPR), and currency manipulation. Conversely, resolution of the present problems will have an important bearing on the ultimate outcome of the systemic competition.

The rise to global economic superpower status of China, with its distinct national characteristics, inherently poses a challenge to the international economic order and to its incumbent leader, the United States. History suggests the real possibility of inevitable conflict between rising and incumbent powers, the so-called Thucydides trap. Germany's challenge to Great Britain in the late 19th century was associated with the end of the first era of globalization and the descent toward the First World War. The confrontation of a rising Japan by the newly powerful United States in the 1930s contributed importantly to the onset of the Second World War.

Transition periods in global leadership also lead to major economic disruption. Economic historian Charles Kindleberger blamed the Great Depression largely on the unwillingness of the newly powerful United States to replace the traditional but faltering leader, the United Kingdom, in providing global public goods that were essential to head off the spread of that calamity: open markets for trade, adequate lending to debtor countries, and provision of needed liquidity in the face of financial crises. Such a "Kindleberger trap" could occur today if the United States were no longer willing or able to exercise such leadership and if China were not yet able or willing to do so.