China and USA- Are we living in a bipolar world ?

USA and China are today entering into a phase where they can be safely regarded as Siamese twins of a new world order that is significantly changing. In some ways, they complement each other perfectly: China is a manufacturing driven economy while USA is the consumption powerhouse of the world. In fact, US-China trade is today valued at 536 billion USD, the highest ever between any two nations in modern history. How are the two countries going to fare together in future?
China, home to 1.4 billion people, has seen unprecedented double digit growth in the last 30 years. However along with growth, number of challenges have also taken centre stage in the Chinese economy. The Chinese growth model is driven by huge investments in fixed assets- which has raised questions over the sustainability of the model. In addition to this, China follows a Hukou rule which does not permit migrant workers to purchase property in the cities. Unequal growth between the eastern coast and the western part of the mainland is another major cause for concern and a subject for regular protests.

USA, on the other hand, has only a quarter of China’s population and is the largest economy in the world. The slowdown post 2008 and the ongoing quantitative easing implies it is on the path to recovery. The recent results have been encouraging especially in the automobile sector with Ford Motors indicating its plans to hire this year, though the overall picture still appears to be gloomy.
But what really sets the stage is not that both are huge economies, it’s the situation each is facing individually. USA is today the world’s largest debtor while China is the largest creditor: China holds American debt in its reserves and hence can easily dictate the terms of trade despite being regularly accused of being a currency manipulator. However, let’s look at it this way- If US starts manufacturing every item that it presently is sourcing from China, can it match the effectiveness in terms of price that Chinese goods enjoy? It is only going to weaken the situation of the US consumer who will have to pay more especially when they face increasing pressures due to high unemployment.
The other major bone of contention between these two powers are international relations and cyber-attacks for which the PLA has been accused by US. There has been a marked improvement in the regime of Barack Obama to avoid confrontation with China in South-east Asia and both the sides have often shown the intent to hear each other out. However the recent spurt in cyber-attacks on US websites has definitely dented the trust factor between the two nations.
America has reasonable basis to be wary of China’s growing influence. In the coming decade, US will reduce its dependence on the middle-east for meeting its energy requirements and naturally its military presence in the region will also reduce. The void that will be created will be filled by China. In the book “Eclipse” by Prof. Arvind Subramanian, the author has predicted that Chinese Renminbi will replace USD as the reserve currency of the world by 2021. In fact, the author compares the rise in the Renminbi with the situation 50 years back when Dollar replaced the British Pound as the premier currency. However, this time, it might not yet be the end for USD.
USA is blessed with the world’s largest shale gas reserves and it is only a matter of time before it shifts into a gas based economy which will bring down its manufacturing costs making its exports competitive once again. In addition to this, US will become the most price effective gas exporter to its biggest customer- China, thereby changing the current account deficit into a surplus in the future. China, on its part, is bound to increase its influence in the word by spreading its soft loans and strengthening Renminbi in Latin America and emerging Africa and increasing its military presence. Overall we are going to witness an interesting showdown between two great nations in near future if it happens that way.
The situation today, is reminiscent of the battle for supremacy between the erstwhile Soviet Union and USA. China has merely filled the gap left behind after the demise of Soviet Union in the last two decades. Perhaps, it is time to give China its rightful place in the world order and it is in the best interest of all that we recognise we are living in an increasingly bipolar world. It will be fascinating and intriguing to witness how China reacts when it eventually replaces the US as the world’s largest economy and possibly the USD as well: Will it emerge as a soft law abiding power or a hard negotiator that only understands power? For the moment, it is important to bring China to the negotiation table. China believes in doing business and US believes in business driven state, this perhaps is the match made in heaven! Point is, can these two nations accept it along with each other’s concerns? This answer perhaps holds the key to great many things to come!

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