Financial Cold War: A View of Sino-US Relations from the Financial Markets

James Fok takes readers on a journey through the high-stakes rivalry between the United States and China as the world’s two economic superpowers engage in a financial market focused standoff, with interdependence fueling growing tensions that could trigger a financial crisis. He depicts the potential consequences of failure in this story of ambition and power in the modern global economy that arise as neither side seems willing to give up the allure of financial power. The book’s thesis claims that the global monetary system, dominated by the US dollar, influential figures throughout history, and economic decisions made by these individuals, has influenced and heightened the geopolitical tensions between the two biggest economies in the world — the US and China. By looking through the lens of financial markets and examining the interdependence with both economies, James Fok argues that addressing these tensions and challenges is pivotal in preventing a “Financial Cold War” between the US and China. However, even though the book provides a well-layered historical perspective, the questions relevant to today’s situation are not totally unaddressed but remain virtually unanswered.

The US dollar has influenced economic dynamics, trade relationships, and geopolitical tensions between global powerhouses, as highlighted in “The Colour of Money Turns Green”, where Fok talks about how the dollar took over the world and how the world moved away from the gold standard. Tracing the establishment of the dollar as the global reserve currency, the dollar system was put in place after the second world war under the Bretton Woods System. It provided many benefits, as its centrality and provision as a common unit benefitted international trade and investment, and acted as a source of US power. However, in a chapter titled, “Whose Problem?” Fok moves on to discuss the differing perspectives surrounding the challenges that countries faced with the dollar. The dollar based international monetary system has put the US at the center of the financial system in which all other nations operate. This has given the rest of the world a profound interest in US’s financial and economic policy, because every move made by US financial policy makers has the potential to affect their economies and people. The rest of the world’s need for dollar liquidity, interdependency, and a lack of constraints has led to serious policy errors and imbalances that have affected many countries. US Treasury Secretary John Connally said, “The dollar may be our currency, but it is your problem” (1) when talking to G10 counterparts in a conference in Rome. His treasury department recommended that due to these imbalances the US should seek: 1) a lasting improvement in the balance of payments position, 2) a more equitable sharing of responsibilities for world security and economic progress, and 3) a basic reform of the international monetary system. Half a century later, my assessment is that these recommendations are eerily similar to demands made by US administrations with respect to China and the EU, and the dollar is still a problem for the rest of the world. However, it has now become an even bigger problem for America. In order to support the growth in trade and investment around the world, the US has had to continually supply dollars to the rest of the world, leading to what is known as the Triffin Dilemma — if America stopped running balance of payments deficits, other countries would lose their main source of additions to reserves. In other words, for the dollar to be the main currency used around the world, America is forced to run a trade deficit, and this comes with all sorts of issues like reduced global competitiveness. This was all well and good while the US economy was growing at least as fast as the rest of the world, but for many years now, through catch up and their own technological advances, other countries have been growing quite a lot faster.

By looking at some of the most important events and decisions throughout history, Fok is able to showcase how geopolitical tensions have escalated. An example of this is when he discusses the 2003 US invasion of Iraq. UN weapons inspectors had suspicions that Saddam Hussain may have been developing weapons of mass destruction, and Hussain did nothing to alleviate these suspicions because he thought that if the truth were known, it would have weakened his regime versus both Iran and domestic opponents. There was skepticism about intelligence information, and nations around the world condemned America’s threat of action, but they still sent forces to invade Iraq. After nothing was found, these series of events were met with serious backlash and added to widespread condemnation of the US over human rights abuse committed during the War on Terror. America’s moral standing was reduced, and history may look back on what Fok refers to as the US’s “Unipolar Moment” as the beginning of its slide toward imperial overstretch. More immediately, the huge financial burden of the war, and how that burden has been shared between the different segments of US society, exacerbated simmering domestic social tensions. The direct financial cost of the War on Terror (post 9/11) is estimated to have been $8 trillion.(2) This begged the question — if the US government had not had such an unconstrained ability to borrow, would it have pursued such a costly war? The “Unipolar Moment”, an instant where American military power appeared seemingly unchallenged, reduced the US’s moral standing in the eyes of many countries, including China. China opposed the US’s unilateral use of force and advocated for a diplomatic solution through the UN. As a result, Sino-US tensions worsened and this event has since become a source of friction between the two countries. Another historical event that Fok mentions is the 1989 Tiananmen Square massacre, in which the Chinese government’s violent suppression of pro-democracy student protests sparked global outrage. In response, the US suspended military sales and raised concerns over human rights, which quickly developed into a major source of tension between China and the US.

By delving into how China went from a third world to a first world nation, Fok argues how the structural problems of China’s economy have caused unbalanced, uncoordinated, unsteady, and unsustainable development. Given China’s integration into the global system and the huge size of its economy today, it can no longer look at its domestic policy in isolation of its impact on the rest of the world. Distortions in the Chinese market have had significant consequences for other countries. The challenges facing China are therefore global challenges, and the Chinese government must anticipate that its policies will draw international responses. China has undergone the most dramatic “Growth Miracle” of any economy in history, in terms of scale, speed, and duration, and this has increased tensions with other countries, particularly the US. In this US-centric global monetary system, China has been able to turbocharge investment by suppressing domestic consumption growth. They did this through low wages, an altered government land policy, and financial repression (that is, of interest rates paid by the state controlled banking sector to depository institutions and the channeling of loans to fund enterprises or projects supported by the government). This unsustainable growth strategy has led to internal imbalances, most notably of which are the wealth disparities between regions and classes. Their current growth model has been characterized by high levels of investment, restricted consumption, exports, and government intervention, but Fok argues that this strategy is now reaching its limits.

Fok believes that domestic policies significantly influence the economies of both the US and China. He argues that they have paved the way for deeply lopsided growth in both countries, and have failed to avoid excessive income and wealth inequality. These include fiscal, monetary, and regressive tax policies that favor bigger corporations and wealthy elites. This inequality that is present in both countries has led to a rise in nationalist backlash, and the political polarization that has arisen as a result, as seen under the Trump presidency’s trade war, has contributed to the geopolitical tensions between the US and China.

Given this complex history between the US and China, Fok believes that the current trajectory is not set in stone, and war is not a foregone conclusion. There is no inevitability that the set of circumstances we are faced with today should lead to a continual increase in tensions resulting in a war, nor is there any guarantee that such an outcome will be avoided. Ultimately, much will come down to individual decisions taken by political leaders. For instance, Fok argues that one of the factors that is driving the two countries towards conflict is the increase in wealth and income disparities within each nation. Unfortunately, leaders on both sides have yet to take affirmative action to address the underlying root causes of these disparities.

Reflecting a human tendency to hue to our most recent historic anchors, many view current Sino-US tensions as a new Cold War because the parallels with the 20th century soviet conflict are obvious: capitalism vs. communism, and liberal democracy vs. authoritarianism. Although he doesn’t explicitly define it, by using the term “cold war” in his book, Fok is able to effectively highlight these similarities. However, while the Soviet-US Cold War is able to provide many lessons that contemporary leaders can learn from, it would be risky to blindly follow the playbook of the past, as today’s circumstances differ in certain important ways.

A key assumption made by those advocating a new cold war is that the US would win. America’s economy was far larger than that of the USSR at the end of WWII, and its military dominance was backed by a nuclear monopoly. Today, the Chinese economy is already larger than that of the US on the basis of Purchasing Power Parity,(3) and in sharp contrast to the Soviet Union economic model, China has driven rapid economic growth by harnessing components of both major enterprise and state planning. Chinese citizens have enjoyed rising prosperity in living standards for decades, and the country’s economic strength means that China has been able to invest in state of the art technologies, as well as to modernize militarily. Meanwhile, the US has recently been ridden by deep social division and the country’s domestic infrastructure is deteriorating. If there could be said to be a winner in an emerging conflict, there is no guarantee that it would be the US. Equally, there is a risk that China’s incredible success over the past four decades has brought about over confidence among its leaders, and a sense that the country’s continued economic ascendency is preordained. This risks blinding them to the limitations of the Chinese development model, which as Fok stated earlier, is unsustainable and was only achieved through deep reforms and through the support of other nations. China’s structural and institutional challenges are considerable — unless the country continues to adapt to changes in its internal and external environments, there is no guarantee that China’s economic success can be continued. Additionally, trade and financial investment have created deep linkages between China and the US that never existed between the USSR and the US. Given their tight economic links, a clash would be highly damaging economically to both sides, but that is no reason for complacency. In the early twentieth century, economic links between European countries were tight too — Great Britain and Germany were important trading partners and London provided services to German businesses. The German Marine fleet was insured through Lloyds Bank in London.(4) Therefore, through an appeal to history, mutual economic dependency is not a guarantee that nations will not go to war. All it guarantees is that war will be that much more damaging.

James Fok is intellectually ambitious, expertly tackles complex issues, and aims high with big ideas. However, I think that this becomes problematic because his arguments lack well grounded, credible evidence and statistical evaluation. As readers, we need more verification to support the connections between contemporary problems and historical events. For example, Fok blames a contemporary problem like America’s income inequality on historical events like the Bretton Woods system and the Triffin dilemma, but this doesn’t provide any proof. Fok also has missing links in his work and gaps in his chains of reasoning (partly stemming because of the lack of evidence) that make his arguments less cogent overall. For example, he talks about China’s reliance on the US dollar and the pressures that the Chinese Communist Party (CCP) face because of it, but misses the key link as to how this reliance leads to these pressures.

Fok’s rich presentation of historical data often allows readers to connect the dots themselves. In the above case, Fok states that throughout their history, China has been cautious in opening up its financial markets to international flows and influences, because they want to maintain complete control over their economy and financial stability. He also states that this has changed since 1979, as China has changed its policies to promote increased foreign trade and investment. In 1949, Mao Zedong established the People’s Republic of China, and since then, the CCP has governed China. I would argue that China’s recent focus on investment and exports, rather than domestic consumption, has created a reliance on the US dollar and this reliance means that China’s economy is closely tied to US economic policies. This therefore puts pressure on the CCP because they decided to open China’s doors to the rest of the world, and as a result China no longer has complete authority over its own financial stability.

After writing about the problems at hand, Fok is also able to provide potential solutions. For example, he proposes the establishment of a new global reserve currency, or the rebalancing of reserve holdings to reduce the role of the US dollar. However, there isn’t a fully developed plan of action for his ideas. In other words, he doesn’t explain how these potential solutions of his can actually be implemented. Instead of providing a clear administration plan, Fok leaves it up to the reader to think about and come up with their own ideas that are based on the information and arguments put forward in the book. This becomes problematic because, linking back to my previous point, how can we do this if the book is missing key evidence and fully established chains of reasoning? It is unrealistic to think that after reading this book one has the tools necessary to solve the most consequential power relationship of the 21st century.

Although Fok makes it clear at the beginning that this book is designed to be more analytical than prescriptive (and provides creative efforts at examining how policymakers’ norms and procedures have developed over time, in order to shed a helpful light on the histories that apprise contemporary key players in their decision-making process) isn’t the million-dollar question, how do we get out of this mess? Although he addresses this question by providing the potential solutions I mentioned earlier, he ultimately fails to answer it because he doesn’t explain how they can be realistically implemented. Furthermore, the prevailing narrative and overall message of the book is not one of offering a clear solution to the problem at hand. An answer to this question is even more important in today’s geopolitical climate, because of factors like the Russia-Ukraine conflict, trade wars, the pandemic, rising tensions in the Taiwan Strait and South China Sea, and expanding technology competition.

During my reading of the book, I was waiting for Fok to answer this question, but having finished it I realize this may have been a naïve expectation. Considering the ongoing challenges, even though they have instilled a sense of inevitability that the US and China are moving inexorably towards complete economic separation and a devastating military conflict, it seems impractical to expect a single, straightforward solution. Perhaps the “solution” that we are all hoping for is already in place — the continuous efforts from both sides to preserve cooperation and prevent escalation into conflict.

The path that we should be advocating for is one of allyship between the US and China. The argument I present is significant because many readers, including James Fok, know this, but don’t know how to go about it. On top of Fok’s solutions, we should look for a less belligerent approach to our relationship and we should lower dependencies on each other. But once again, we’re missing the “how”. This dilemma means that both countries are pursuing their own interests in an effort to stay on top. Biden added on to Trump’s trade sanctions, and China has developed its technological relationship with Russia. However, even if we were to identify the “how,” would Fok’s proposed solutions be effective in today’s context? Despite their logical coherence, it’s difficult to envision their success. This is primarily because his solutions are grounded in financial market perspectives, whereas the current Sino-US climate is heavily politicized. Even if the role of the US dollar was reduced, the underlying political tensions would still be in play. Furthermore, relations have been trending in a downward spiral for years and tensions are higher than they have ever been. Both the US and China closely monitor each other’s actions, with each nation having a vested interest in the other’s moves. For instance, Beijing pays more attention to Delhi due to the significance Washington places on it.

In conclusion, the relevance of this book on today’s geopolitical landscape cannot be overstated. It is an essential read for policymakers as well as the general public. Both China and the US must cooperate and compromise to rectify the financial imbalances between them, and this requires a radical change in mindset. Fok hasn’t answered the million-dollar question yet, but not many people have. I see the near future of Sino-US relations boiling down to one focal point — Taiwan. With the Democratic Progressive Party securing a third term, resistance to China’s claim will only grow. In a meeting with Lai Ching-te, US lawmakers reaffirmed Washington’s support for Taiwan, and both parties agreed that “although the US and China are in competition, both countries need to prevent (Taiwan) from veering into conflict and confrontation”.(5) This circles back to the thesis of this review, that although it may be mutually costly for China and the US to go to war, that doesn’t mean it won’t happen. We’ve seen it happen before. James Fok’s work is a must-read for anyone seeking to understand the multifaceted interplay of geopolitics, economics, and the two most important world powers in the 21st century.

Works Cited:

(1) “The Dollar Is Our Currency, but It’s Your Problem.” EIU Corporate Network, 6 Sept. 2023, corporatenetwork.com/the-dollar-is-our-currency-but-its-your-problem/#:~:text=As%20far%20back%20as%20the,%2C%20but%20it%27s%20your%20problem.%E2%80%9D.

(2) “The Costs of War.” Watson Institute Brown University, 2024, watson.brown.edu/costsofwar/#:~:text=The%20U.S.%20federal%20price%20tag,wars%20is%20over%20%248%20trillion.

(3) “The World’s Biggest Economy: — America or China?” World Economics, 28 Apr. 2024, www.worldeconomics.com/Thoughts/The-Worlds-Biggest-Economy.aspx#:~:text=In%202022%2C%20the%20IMF%20judged,favour%20of%20China%20at%2016%25.

(4) Morris, Gregory. “A Brief History of Marine Insurance.” Risk & Insurance, 6 Mar. 2018, riskandinsurance.com/brief-history-marine-insurance/#:~:text=In%201799%20the%20economy%20in,insured%20by%20Lloyd%E2%80%99s%20underwriters.

(5) ““Taiwan Independence” an Obstacle to China-US Relations, Says Beijing.” Al Jazeera, Al Jazeera, 27 Jan. 2024, www.aljazeera.com/news/2024/1/27/taiwan-independence-an-obstacle-to-china-us-relations-says-beijing.