Published on The Guardian, by Martin Jacques, 13 February 2009.
The key relationship for any global recovery is between the US and China. By the same token, any serious deterioration in their relationship would propel the world towards a second Great Depression. The Chinese citizen has funded the credit-driven American consumer boom: or, to put it another way, China’s government has enabled the US to run an enormous current account deficit by buying huge quantities of US treasury bills. If China stops this, the value of the US dollar would plunge, and a bitter trade war, engulfing the rest of the world, would ensue …
… China’s premier, Wen Jiabao, made this point forcibly at Davos when he called for a new world economic order. But simplistic demands for a recapitalisation of the IMF demonstrate that western minds are still living in the past: any refinancing depends primarily on China, and Wen has made it crystal-clear that China will not provide any funds for the IMF until there is a wholesale reform of the organisation. While it is dominated by the US and Europe, China does not regard it as the kind of global institution it can support in the only way that counts – with its huge resources.
Bretton Woods is on a life-support machine. Any global recovery depends on a new financial architecture that acknowledges the decline of developed countries and the rise of the developing world, notably China. This will require a new kind of humility on the part of the US and a recognition that it must share power with a range of new stakeholders, especially China. Instead, Geithner makes a demagogic attack on China, playing to a domestic audience that, as in Europe, is becoming increasingly protectionist-minded.
If the US goes down this road, the result will be growing protectionism, a trade war and the second Great Depression. The key to any solution is not simply a continuation of the positive relationship between China and the US, but a new kind of accord in which the US recognises China as an equal partner, and the need for a new global financial architecture based on that principle. (full long text).
(Martin Jacques’s book When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World will be published in June).