Niall Ferguson: This is what happens if China wins the new cold war

Russian president Vladimir Putin and Chinese president Xi Jinping. AP


The winter of a new cold war is coming between the US and China, renowned Hoover Institution and Harvard historian Niall Ferguson warned The Australian Financial Review Business Summit this week.

Winning it might decide the 2020 US election. Losing it might be the end of a US dollar-dominated global financial system, if not worse. That’s very scary coming from the man who called the scale of the Soviet communist collapse in 1989 and the US mortgage implosion two years early in 2006.

Ferguson is not strictly in the prediction game. “Most things since 1989 we missed,” he grins. There are no grand patterns or an end to history, certainly not predictable ones. But historians digging about in the past find more about the future than economists and their elegant forecasts, he says. History is non-linear, more like a chaotic pile of sand. Things look stable, then collapse suddenly: a bit like July 1914 out of a clear blue sky, or perhaps a very plausible great fall of China’s economy too.

Ferguson’s biggest call, and the closest he gets to some historical dialectic, is his 2017 book The Square and the Tower. It says that history is marked by disruptive clashes between busy squares of networking innovators, explorers, capitalists, preachers and revolutionaries – and tower-like hierarchies of states, churches and corporations. It’s a perfect metaphor for the hyper-networked social media age too, and the results will not be benign. The Gutenberg Bible spread a liberating network of literacy, he warns, but also brought the misery of the Thirty Years War. ‘The lesson of history is that trusting in networks to run the world is a recipe for anarchy,” the book grimly concludes.Networks are speeding up the demise of Western party politics. Britain’s party system is being broken and remade under the pressures of Brexit. Even the massive party machines of the US, says Ferguson, now seem easily swept along in fads like the socialism of Democrat social media darling Alexandria Ocasio-Cortez.

Yet isn’t China using network tech to reinforce its political towers? Unlike the other economic miracle nations of Asia, China is not getting more liberal as it gets richer. Technology is not redistributing power as it is in Western politics. Instead Beijing is doubling down on Authoritarianism 2.0, using tech to create an Orwellian state of surveillance and social control.

Yes, replies Ferguson. Beijing’s whole purpose is “not to be the Soviet Union”. And it must avoid the swings of China’s own history between spinning apart and pulling back together – as Beijing is working hard to do now.

And those swings of China’s long history were also driven by financial crises, once again too close for comfort. “China cannot reform without slowing down economic growth, and if it slows it fails. So you add more leverage. You will have to do some cleaning of the house, but, of course, Beijing will want to wait until after the trade war. But the leverage is just building up again.” Ferguson’s sparring partner at the Summit, Chinese economics professor Keyu Jin of the LSE, says that Trump’s trade war is secretly the catalyst for the reform that will benefit China. But Ferguson is sceptical that China can wean itself away from more debt. And he thinks that Jin also underplays the tension between China’s dazzling tech giants and the communists in Beijing who didn’t foresee them, don’t really trust them, and still find them unnerving.

But that’s a problem for Western governments too. They have never in modern times had to deal with an authoritarian state that is also a global technology and economic powerhouse – obvious in their confusion over how to handle Huawei.

Ferguson answers that if the US is going to tell people not to use Huawei it will have to provide attractive alternatives. But Ali Baba and Tencent are working on payment systems in emerging economies that Amazon can’t be bothered with. The US takes the view that “we have the dollar and they do not”, which allows them to borrow cheaply and discipline others with sanctions. “But China is building an alternative financial infrastructure by extending its payment platforms to emerging markets.” And China will lead in digital currencies while the US is wedded to its 1970s fiat money of cheque books and credit cards.

This is important, Ferguson says. “To a very large extent, power is a product of financial innovation” – that was a theme of his best-known book The Ascent of Money – “and if China wins the financial innovation race, there starts to be an alternative payment system to the one that revolves around the US dollar”. The fintech front line is the subject of new chapters in the latest edition of that book. “I think the US should be more worried than they are,” he says.

The US is worried about the proximity of China and Russia. Ferguson says China “needs to know a lot of things that Russia knows, and China does a lot of things Russia needs to do”. China can learn much more from Russia on cyber and info wars, he says, perhaps as a new way to undermine Taiwan’s government from a distance.

Indeed, Russia’s ability to use deception, blackmail and brinkmanship threatens more wedges in what is already a weakening transatlantic relationship too. Does Ferguson think that a collective West built around NATO is finished? He says that tariffs will weaken the economic relationship and culturally the two sides diverge over immigration. There is the sanctimoniousness of the German leadership while enjoying an “epic free lunch” on US defence spending. “It seems to me that there is less and less for the US and Europe to co-operate on. And I worry that at some point Putin will judge that he can exploit this rift” – testing the US and NATO in the Baltic states.

What is also different, he says, is that “middle America is awake to the Chinese threat, not just elites”. They have a coherent reason to contain China and a means of doing it: the radicals around Trump want to disengage the US from China, starve it of technology and force it deeper into the middle-income trap it already faces,” he says.

Full article: Niall Ferguson: This is what happens if China wins the new cold war (Financial Review)

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