Four big risks in the US-China relationship

Eurasia Group’s Ian Bremmer on the big picture:

“The biggest change is that we have a world economy in which the largest economy is not doing so well. The world’s second largest economy is growing very, very strongly; yet in many ways they have very incompatible economic and political systems.

The ability to manage these relations in a smooth way is going to become an enormous challenge and the relationship cannot work the way it used to. This is largely because the Americans cannot buy what the Chinese produce, because the US Dollar is not what it used to be for the Chinese over the long term, and because the Chinese economy needs to fundamentally rebalance itself. So when you put all of that together it becomes by far the most important issue for everyone.”

And the four big risks in the US-China relationship:

  1. What if a big US industrial company decides to pull out of China? (For example, Boeing or General Electric.) Steve Ballmer from Microsoft said publicly in a  shareholders meeting a while ago that MSFT is making 5% of what it should be in the Chinese market because of piracy and everything else. What if Microsoft withdraws from China? The world’s biggest export market would be gone. Companies would create a big stink about it in the US and suddenly it would touch off this massive debate about how we do business in China.
  2. A massive cyber security incident. Cyber attacks are getting much worse and overwhelmingly the concern is about US-China, and not Russia, rogues or WikiLeaks.
  3. North Korea. The US has one perspective regarding North Korea while the Chinese have another and they are not prepared to play ball with the Americans in a serious way, because when North Korea eventually does go to a new leadership or when it falls apart, the Chinese want to make sure that that country does not move closer to the United States by forming a reunified Korea with nuclear weapons as an ally of the US.
  4. Europe. What happens if there is an actual crisis, a contagion effect in Europe because of the fiscal troubles? No one has a more strategic interest in a strong euro than the Chinese, because they desperately want to hedge away from the dollar as the world’s reserve currency towards something else. In a period of crisis, it is not what Moody’s is going to say, it is what the Chinese are going to say and do that really matters. If the Chinese suddenly decide to move away from the dollar and into the euro, but demand strong conditions, political and economical conditionality in return for bailing Europe out, that could be the end of NATO and certainly the end of the dollar as the world’s reserve currency, and would completely change the way we think about global geopolitics.

Full interview here.

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