The United States and its allies came together in 1944 to establish the fundamental wiring and plumbing of the global economic system that has largely remained in place ever since.
This Bretton Woods system of economic rules led to the US dollar becoming the global reserve currency and inspired the foundation of powerful new institutions like the International Monetary Fund (IMF) and World Bank headquartered in Washington DC. Both institutions and the wider regulation of the international monetary system have historically been dominated by the United States, helping it to maintain its longstanding position as the undisputed economic heavyweight of the world.
Despite low expectations for the meeting, the November 15 face-to-face talks between Presidents Biden and Xi on the sidelines of the Asia Pacific Economic Conference could nonetheless set in motion an unstoppable chain of events to unravel all of this. If the world’s two great powers cannot reach an accommodation following five months of preparatory talks, there is a real risk of both countries permanently diverging, resulting in profound and negative consequences.
There is no shortage of issues where the two are at odds, not least China’s brazen theft of cutting-edge Western intellectual property and its highly confrontational work to colonize the South China Sea through the creation of manmade military islands.
But it is the issue of Taiwan that poses the greatest risk to the international economic system. The United States has long maintained a position of strategic ambiguity over its potential response to a Chinese invasion of Taiwan. With possible Chinese interference threatening to impact January’s presidential elections in Taiwan, such ambiguity no longer seems to hold, with China looking to force the issue to a head through increasingly menacing military posturing.
President Biden continues to play down talk of a new cold war, ostensibly preferring to de-risk than decouple from China. From the US perspective, the distinction between the two appears to center on removing those critical dependencies, strategic industries, and supply chains currently dominated by China. The enormous shock of such a decoupling would likely force everyone else to pick sides, with the two superpowers pulling into their Jupiter-sized economic orbits the entire remaining 190-plus countries on planet Earth.
The outstanding question remains whether Biden’s current de-risking approach inevitably transitions to economic decoupling in the event of a Chinese military invasion of Taiwan. Xi publicly rejects any distinction between the two approaches, despite embarking on a similar strategy himself. This is what makes the talks potentially so significant.
The technologically indispensable island of Taiwan hangs over the world’s most important bilateral relationship like a black cloud. At its heart is China’s fundamental unwillingness to budge from its demand for sovereignty over Taiwan. As President Xi himself puts it, the issue represents the “very core of China’s core interests”, which leaves very little wriggle room to shift this reddest of red lines.
If China does decide to throw caution to the wind, there is already an established model of what might happen. Look at the West’s decoupling from Russia following its invasion of Ukraine, and multiply this by at least a factor of 10 to account for the differing size of their economies.
Countries are still reeling from the global pandemic, and higher energy prices following Russian aggression as well as universally higher interest rates. All of which ought to be a major concern to every G20 nation experiencing enormous (and rising) levels of debt-to-GDP. The world economy can ill afford yet another major shock.
Aside from precipitating near-certain global economic chaos, a Chinese invasion of Taiwan and subsequent decoupling would likely define the course of 21st-century political history. President Xi has ordered his military to be ready to invade Taiwan by 2027 and time is fast running out to alter the trajectory of the ever-deteriorating US-China relationship.
A near-breakdown in serious diplomatic engagement in recent years with only limited back-channel lines of communication remaining open (something that China continues to resist) poses a severe existential risk to the global political and economic order.
The Biden administration is rightly focused on boosting the resilience of US critical supply chains to mitigate some of the worst consequences of a de-facto economic cold war. Rare earth processing aligned with domestic semiconductor production and a strategy for winning the AI race should all be absolutes for this administration and any that might succeed it.
Whatever leading Republican challenger, Donald Trump’s, eventual Chinese engagement strategy might be, it is unlikely to inject a greater sense of stability into the relationship. That is unless such stability mirrors Xi’s desire to see a new era of American isolationism, in which it raises the drawbridge and cedes defense of Taiwan in the event of a Chinese invasion.
It is easy to begin sounding the alarm. We appear to be entering a hugely challenging period over the next five to 10 years that will likely witness a profound realignment of current global economic realities. China is the top trading partner for over 120 countries, far more than the US can boast. Biden says the US is well-positioned to continue its domination of the global economy, but that remains to be seen.
Just about the only thing both leaders seem to agree on is the importance of bringing as many international partners with them as possible. If a Russia-like decoupling with China does indeed happen, then whichever side maintains greater access to world markets will ultimately win (despite such a victory representing a huge net loss for the global economy.)
That is why it is vitally important for both countries to exhaust all diplomatic efforts to avoid greater strategic divergence and deteriorating relations.
Yet Taiwan remains key and it seems neither side is willing to back down. Indeed, it is likely that China will sooner or later test US resolve and initiate a military and economic crisis over Taiwan.
How countries then choose to align represents the biggest political and economic question of our times. Biden and Xi’s meeting later this week could yet provide the first glimpse of this uncertain future.
Joel Hickman is a Non-resident Fellow with the Transatlantic Defense and Security program at the Center for European Policy Analysis (CEPA). He has previously worked as a British diplomat covering a range of national security issues, including counter-terrorism, hostile states, and military operations. Between 2014-15, he was posted to NATO where he led multilateral negotiations on key transatlantic defense priorities ranging from technology and capacity building to security assistance for Ukraine.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.