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. Last Updated: 07/27/2016

Crisis in China Could Devastate the U.S.

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China's rapid economic development is the most amazing story of the past decade -- just as the collapse of the Soviet Union and Russia's slide into irrelevance was the main historical event of the previous 10 years.

Until the mid-1980s, Russia and China vied for the supremacy of their respective brands of communism. Then, in the early 1990s, the focus of the rivalry shifted to the best model for transition to the free market.

After the Russian default in 1998, it became accepted wisdom that the Soviet Union should have delayed democratization, reforming its economy along Chinese lines first. The rollback of democracy and reassertion of the role of the state under President Vladimir Putin can be seen in this light as a shift toward the Chinese model.

As recently as at the turn of the century, Russia still seemed to be in the running. Even now, Chinese gross domestic product remains low on a per capita basis, and many Russians retain a sense of superiority toward everything Chinese, from goods to people. But the race for economic supremacy is over. After 25 years of annual growth averaging nearly 10 percent, China's economy on a purchasing-power-parity basis is approaching $10 trillion, gaining inexorably on that of the United States. Its annual exports have increased sixfold in the past decade alone and measure close to $1 trillion.

China is not just an enormous producer of manufactured goods. In accordance with the Marxist law of transformation of quantity into quality, its global weight has increased substantially. It is now a linchpin of the East Asian manufacturing network. With its trade surplus breaking records, and its stock of direct foreign investment approaching half a trillion dollars and central bank reserves hitting $1 trillion, China is also a pivotal player in the global financial system.

Writing recently in The Economist from a Chita region penal colony, former Yukos CEO Mikhail Khodorkovsky envisioned the creation of a new bipolar world in which some nations would gravitate toward the West and be anchored by Washington, and others would form a loose new nonaligned movement centered on Beijing.

But bipolarity implies some form of division. Today, China has become fully integrated into the global economy, becoming indispensable for the functioning of the U.S. economy as well. In two decades, imports from China grew to 25 percent of the U.S. total, from 2 percent. Chinese exports to the United States make up almost 5 percent of the global exports of goods, services and commodities measured by value. Given the significant bilateral trade imbalance, China's willingness to hold U.S. Treasury bonds to a large extent finances the ongoing economic expansion in the United States, props up the dollar and helps keep Treasury bond yields -- and U.S. mortgage rates -- at low levels.

Although it has gone largely unnoticed, the global political and economic order has undergone a seismic change over the past five years. Two recent articles illustrate this. The first is a commentary on www.antiwar.com, a U.S. web site that, although conservative, is deeply critical of Washington's involvement in Iraq. The author mockingly suggests that creating chaos in Iraq has been the U.S. strategy all along. Now Washington can plausibly threaten to bring the murderous Iraqi mess to Iran, Syria, North Korea and other rogue states.

James Traub wrote the second for The New York Times Magazine. It describes China's growing investment and economic presence in Africa.

A decade ago, even a tongue-in-cheek reference to the United States trying to destabilize a region -- especially one as crucial to the global economy as the Middle East -- would have been unthinkable. After World War II, Washington was a staunch guardian of the international status quo. Its Cold War policy of containment consisted of trying to keep the Soviet Union from expanding its sphere of influence. Attempts to roll back communist conquests were limited to its own backyard, in places such as Cuba, Chile, Grenada and Nicaragua, whereas pleas for assistance from Berlin, Budapest, Prague and Gdansk invariably fell on deaf ears.

There is considerable irony that no sooner had the policy of containment gained the upper hand in the Cold War than the United States adopted the failed Soviet strategy of trying to export its system at gunpoint. Beyond chaos, the result in Iraq has been remarkably similar to what the Soviets wrought in the Baltic states and Central Europe -- namely, death, destruction, emigration and poverty.

The sad truth is that aside from the freedom spearheaded by its Marines, Bradley fighting vehicles and Abu Ghraib torturers, the United States finds it has little to export. Instead, it is China that is building a global commercial empire. What it is doing in Africa -- as well as in Asia and Latin America -- is ensuring a steady supply of oil, industrial commodities and foodstuffs, while solidifying future markets for its manufactured products.

Communist China, which propped up Pyongyang in the Korean War, supported guerrillas in Indochina and armed various insurgency groups elsewhere, is now keenly interested in international political and economic stability. Chinese leaders have been careful not to rock the boat. Despite vociferous criticism of the "unipolar," U.S.-dominated world, Beijing has been careful not to rock the international economic and financial system. It has been content to accept U.S. dollars for its exports and to lend them back to Americans, financing U.S. demand for its goods.

Chinese leaders have been even more obsessive about stability at home. So far, China has avoided the kind of financial crises and political upheavals that have repeatedly blindsided smaller exporting nations around the Pacific Rim over the past two decades. The Beijing government has used carrots and sticks to keep its vast and rapidly changing society quiescent.

Past success, however, does not mean that China will be able to keep the lid on this cauldron forever. Economic growth has unleashed tremendous energy and creativity in the Chinese population. But it has also created severe pressures -- social, political, economic and demographic. Hundreds of millions of peasants have abandoned their centuries-old way of life and migrated to urban centers. The gap between the rich and the poor has widened. The Communist Party retains a monopoly on political power, while its apparatchiks and their families are notoriously corrupt. Sizeable industrial investment, which continues despite government efforts to slow it down, is creating excess capacity. These pressures -- or other problems that cannot be currently predicted -- could plunge China into a crisis that could be quite severe.

During the Cold War, the Soviet Union could annihilate the United States with its nuclear weapons -- and face instant annihilation in return -- but it could not make a serious impact on its economy. China has emerged as probably the only nation in the world that can single-handedly undermine the U.S. economy. If China suffers an economic or political crisis, the United States will likely be plunged into a severe recession -- if not an outright depression.

This scenario is ominously similar to that of the Great Depression of the 1930s, which was largely a U.S. crisis taking place after a decade of breakneck economic growth. The stock market crash occurred on Wall Street, but its shockwaves promptly spread around the world. Ultimately, the Depression marked the demise of British economic dominance and the end of the pound as a global currency. While the next global economic crisis is likely to originate in China, it will almost certainly mark the end of the dollar as the linchpin of the global financial system and a substantial diminution of the central role of the United States.

Alexei Bayer, a native Muscovite, is a New York-based economist.