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Foreign Policy

How Can China Avoid “Kindleberger Trap”?

Feb 13 , 2017
  • Li Wei

    Senior Fellow, Pangoal Institution

With Donald Trump assuming the US presidency, the global economic governance regime is stepping into a dangerous “Kindleberger Trap”. In the 1920s, Great Britain, which had suffered a heavy blow during WWI and was showing signs of decline in production, trade, finance and military capability, was no longer capable of exercising the kind of hegemonic leadership of the international economic system like a century earlier. The newly risen US, on the other hand, was not ready to lead the world either psychologically or technically. The 1919 Paris Peace Conference exposed inadequacy of US leadership capacity. Ten years later, the world’s main countries were at their wits’ end in the face of the most serious economic crisis of the 20th century, and completely unable to organize any meaningful collective actions, resulting in “trade war” and “forex war”, totally bringing down the already fragile global economic system. Famous Harvard economic historian Charles Kindleberger elaborated that period of history in great detail in the 1970s, and put forward the “theory of hegemonic stability”, which has had a profound impact on international political economics ever since. His thesis, in brief, is that an international economic system without a strong leader will face difficulties in governance, and that a stable international economic system is highly dependent on the public goods provided by a country in the leadership role, including an open market, credible international currency, and its identity as ultimate creditor.

Joseph Nye.jpg

Harvard international relations scholar Joseph Nye employs the“Kindleberger Trap”, along with the “Thucydides Trap”, in describing the severe dilemma facing the global economic governance regime.

Today, Harvard international relations scholar Joseph Nye employs the“Kindleberger Trap”, along with the “Thucydides Trap”, in describing the severe dilemma facing the global economic governance regime, making them two defining features of the crisis upsetting the present-day world order.

Trump has openly pledged to take America back to an isolationist, protectionist, and nativist era. In Trump’s world outlook, the US president must put “America first”, rather than international responsibilities. The liberalist international order that the US has been bent on building since 1944 is in danger of collapse in the face of Trump’s challenges.

China is approaching the center stage of global governance with big strides. But with the Trump-era US possibly pulling back from the global governance regime in 2017, China, as an important player in global governance, faces a difficult strategic choice: To dance to the US’ tune and reply with similar national egoism, or to contribute more public goods to global governance in fields where the US withdraws.

In the past 30 years, China has always been a participant in the existing global governance regime, in which the country accomplished the twin strategic goals of rising economically and preserving security. Despite the various inequalities in the present regime, China has always insisted reform of the system should be pursued and carried out in a step-by-step manner, rather than destroying it and replacing it with something brand-new. Especially since the financial crisis broke out in the US in 2008, China has participated in global governance in a more active manner, seeking to reform the global governance regime, and thus playing a more proactive leadership role.

China’s constructive functions in global governance have spanned three stages – from capital supply to mechanism building to concept innovation. Starting in 2008, China has been contributing more funds for global governance, from financing multilateralization of the Chiang Mai Initiative to injecting funds into the IMF and World Bank to proposing the “road and belt” initiative. The hallmark of Chinese contributions to global governance in mechanism building was the founding of the AIIB in 2014. Since 2016, particularly at the G20 summit in Hangzhou, China has been contributing ideas to global governance. Step by step, China has been growing into a mature and responsible power.

China needs to emphasize open, inclusive, shared and green development in global governance, which is not completely contrary to the global governance regime the US has advocated on the basis of freedom, democracy, human rights and rule of law. They are actually mutually complementary, and the Chinese outlook, while inheriting some elements of Washington’s, embodies plenty of innovative ideas that originated from China.

Opening up, however, is not a Chinese invention. Openness as a dominant global development idea was a significant British contribution to the international community. Great Britain promoted the Manchester School’s idea of open economy worldwide, and built an open global economic system in the 19th century by means of both diplomacy and force, leading to the rapid spread of the technological and ideological achievements of the Industrial Revolution all over the world. The concept was inherited by the US in the 20th century. Today, however, under the dual pressures of immigration and free-flow of commodities, the US and Europe are drifting back to self-isolation. Against such a background, China needs to unequivocally stress openness in politics, economy, culture and science and technologies. One hand, China’s development badly needs the resources and market an open world offers; on the other hand, the world also needs the huge human and intellectual resources an open China provides.

Being inclusive means the global governance regime needs to incorporate as many countries as possible, and avoid exclusive, small-clique governance models. In the wake of the 2008 financial crisis, the core platform of global governance has shifted from G7 to G20, which was a significant step toward greater inclusiveness. Yet exclusive thinking remains alive and well in present-day global governance. The TPP and TTIP the Obama administration had advocated as well as US-led alliances indicate the deep-rooted exclusiveness and antagonism in economic and security fields on the US’ part. The partnership network China advocates, on the other hand, represents inclusive diplomacy.

Sharing means to let all stratums, countries, and regions benefit in the process of globalization. The strong should help the weak. This also iconforms with the ideological traditions of traditional Chinese collectivism and socialism. Since the 1990s, the US has been promoting the idea of liberal development based on the “Washington consensus”. Such a concept has enabled unprecedented high growth worldwide, but it also acerbated development gaps. At the international level, development gaps between countries have widened; at domestic levels, gaps between different groups and regions have been broadened conspicuously. To a certain extent, this consequence of globalization is the root cause of the “Trump phenomenon”.

Green means a development philosophy that proposes resource conservation, and overall environment-friendliness. Nowadays, China’s development faces the most severe environmental pressures worldwide. Development at the price of environmental degradation is unsustainable. Blazing a trail of green development will be the greatest contribution China can make to the world.

The Trump administration may withdraw US support for clean energy and for addressing climate change. But Beijing must not follow in the US’ footprints if Washington goes back to fossil fuels. On the contrary, China should resolutely increase input in new energy sources, and realize green development through innovative endeavors.

China must draw lessons from US experience while contributing “Chinese ideas” and “Chinese solutions”, i.e., to respect the actual conditions of different countries and avoid promoting its own values in compulsory ways. The US has resorted to high-pressure approaches in exporting the liberalist American development model via the IMF and World Bank. China needs to build its own exemplary role and image in global governance with outstanding performance in domestic governance, and lead the world to avoid the “Kindleberger Trap”. From this perspective, China’s role in global governance rests ultimately on its achievements in domestic governance. The governance philosophy of a government that is capable of effectively managing a country of 1.3 billion will certainly set an example for others to follow.

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