Will US hegemony survive pandemic?

Donald Trump’s decision to withdraw United States funding for the World Health Organisation symbolises how the coronavirus pandemic has been dominated by national responses to what is a global problem.

The US isn’t alone in this. The European Union has, quite typically, reacted in a shambolic, internally divided, and self?obsessed way.

But other capitalist states have traditionally relied on US leadership to manage international crises. 

As recently as the Global Financial Crisis of 2007-9, the administrations of George W Bush and Barack Obama did offer this leadership. But Trump has no interest in playing this role, and no other state is capable of replacing the US.

This includes China—the US’s only serious rival. The pandemic has had a contradictory effect on China’s global standing. On one hand, the slow initial response of local authorities in the province of Hubei, where Covid-19 originated, and their attempts to impose a cover-up were very damaging.

On the other, the central government’s belated but determined imposition of a lockdown backed up by tracing and testing got the pandemic under control. We don’t know how much Beijing was involved in the cover-up, but its overall handling of the crisis compares favourably with the callous bungling of Trump and Boris Johnson. 

The official Chinese propaganda machine is busy playing up this contrast. Meanwhile, China has been exporting medical supplies worldwide, thereby demonstrating what a good global citizen it is. This has helped to provoke the Trump administration and its allies, such as the British and Australian governments, into a blame game, demanding an official inquiry into the origins of the pandemic.

Will historians in retrospect argue that Covid-19 was the moment when China began to displace the US as the hegemonic capitalist state? I don’t think so.

Dollar

The two foundations of US hegemony are the dollar and the Pentagon. In the present context it’s the dollar that matters.

The US remains the centre of the global financial system. Its huge banks dominate the global financial markets, which are driven by borrowing in dollars. It is this that makes sanctions such an effective weapon in the US’s toolkit, since they deny targeted states and their businesses access to credit.

And this credit is mainly in dollars. Both the global financial crisis and the panic provoked by the pandemic were characterised by a flight to dollars. Firms and states hung on to the dollars they need to purchase imports and repay debt. And they sold assets—even ultra-secure US Treasury bonds—in order to get hold of more dollars.

And in both crises the US state—in the shape of the central bank, the Federal Reserve and the Treasury—stepped in to provide these dollars. In March the Fed extended the swap lines it had provided for five major central banks, allowing them to exchange their own currencies for dollars, to another nine central banks. 

But the People’s Bank of China didn’t ask for, and wasn’t offered a swap line. This isn’t because China doesn’t need dollars. The Chinese government reacted to the global financial crisis by ordering the state-owned banks to increase lending hugely. The result was massive over-investment and a property bubble that left big state-owned enterprises and local governments loaded with debt. 

Beijing has been trying gradually to squeeze the bad debt out. This is one reason why it has reacted to the pandemic with a much more modest fiscal stimulus than some Western governments. 

But this debt is in dollars as well as renminbi (or yuan). According to the South China Morning Post, “Chinese companies have been borrowing US dollar debt for their overseas expansion as well as bringing proceeds back to China to convert into yuan for domestic purposes.” 

In 2021 £88.5 billion of US dollar debt falls due. 

So, despite Trump, the US financial apparatus is still in charge globally. But this isn’t a stable situation. 

As the Beijing?based economist Michael Pettis puts it, “As the US share of the world economy contracts, it will become increasingly difficult for the US to carry the exorbitant burden of central banking to the world.”