As the US-China rivalry intensifies, the growing emphasis on national security will undermine global trade and investment, leaving fewer resources to fund social policies, tackle inequality and tackle climate change.
HONG KONG – By disrupting the interconnected economic, social and geopolitical spheres of the world, the COVID-19 crisis has revealed just how fragile and inequitable the institutions that govern them truly are. He also highlighted how difficult it is to address systemic fragility and inequalities in the face of escalating threats to national security.
In 2007, Harvard’s Dani Rodrik proposed an “impossibility theorem” for the world economy, according to which democracy, national sovereignty and global economic integration are fundamentally incompatible. “We can combine two of the three, but never all three simultaneously and in full. “
To see how social, economic and national security policies are entangled in this trilemma, consider the Hong Kong experience. Since British colonial rule, a policy of “positive non-interventionism” has enabled the city’s economic growth. Hong Kong’s colonial administrators knew that a relatively small market, manufacturing sector, and trade volume meant a commitment to openness, rather than a focused development strategy, was the surest route to prosperity.
They were right. Today Hong Kong has one of the busiest ports in the world and has long allowed capital, information and people to flow freely. Near-zero tariffs and ultra-low taxes have enabled the city to become a global financial hub and one of the world’s largest markets for equity and debt financing. And, from the start, China’s “reform and open” process included deeper economic engagement with Hong Kong, which made the city more vibrant.
Yet, as in advanced economies, the economic boom fueled by globalization masked worsening social problems. As manufacturing moved to mainland China, many jobs were lost, not only in the factory, but also in logistics and back office services. The result was a hollowing out of the middle class. Today, the territory’s Gini coefficient – in which zero represents maximum equality and one represents maximum inequality – stands at 0.539, compared with 0.411 in the United States (the highest among major developed countries).
There was a time when Hong Kong’s hands-off economic approach was accompanied by a similar social policy of non-intervention. But the riots of 1967 – a labor dispute that turned into large-scale protests against British rule – forced the government to build low-cost social housing to alleviate worker discontent. The approach, however, was flawed. Today, nearly 45% of Hong Kong residents live in public or subsidized rental housing. In China, on the other hand, 90% of households own at least one home.
Tackling these social problems will not be easy, especially given the growing risks to national security. Hong Kong’s economic development has been made possible by near-zero national security costs, a byproduct of Sino-US peaceful engagement. That started to change with the terrorist attacks of September 11, 2001, which highlighted the asymmetry between low-cost weapons and high-cost counterterrorism defenses – and the need to implement such defenses, anyway. .
The risks posed by the more recent proliferation of digital technologies are marked by a similar asymmetry. Cyber attacks are cheap to mount, but they can overthrow entire financial, information or defense systems.
As Rodrik’s trilemma suggests, such risks force governments to compromise. National security concerns must shape economic policy. But the outcome will not necessarily advance the imperative of providing the resources needed to tackle social inequalities.
When economic policy fails to ensure reasonable social equity, reflected, for example, in large-scale home ownership and quality jobs, internal security risks increase. And, indeed, in Hong Kong, as in the United States and other democracies, many workers and young people have rejected the political establishment, embraced localist and populist ideologies, and protested against state institutions. Such tendencies often lead to chaos and violence, calling for forceful actions to restore order.
The challenge is all the more complicated for Hong Kong, given its position as the increasingly hostile financial gateway between China and the United States. As Rodrik noted, the Sino-American rivalry is largely shaped by national security concerns, to the point that the economy risks becoming “hostage” to geopolitics or, worse, strengthening and amplifying the economy. strategic rivalry.
America’s militarization of finance illustrates this risk. Since the start of the so-called War on Terror, the United States has taken advantage of the private sector and banks to isolate particular players from the international financial system. In recent years, the United States has relied so heavily on secondary sanctions that even France and Germany have considered how to get around their financial dominance, including creating an alternative global payments system or a European fund that could allow continued trade with the sanctioned United States. countries.
As the United States has imposed financial sanctions on a growing number of Chinese companies and individuals, China has worried that Hong Kong could serve as a sort of Trojan horse, that the United States could use to destabilize Chinese politics, including its national security initiatives. After all, the national security strategy of the United States is explicitly aimed not only at protecting Americans and their way of life, but also at advancing “American influence in the world.”
China’s fears could come true. The United States recently passed the Hong Kong Autonomy Act, which allows for the imposition of sanctions “against foreigners involved in the erosion of certain obligations of China to Hong Kong, and to d ‘other purposes’. In other words, the United States is using the financial system to punish Chinese officials involved in the new security law imposed on Hong Kong.
The administration of US President Donald Trump has also considered undermining the peg of the Hong Kong currency to the US dollar. Luckily, America’s leaders have given more thought to this idea, because given Hong Kong’s position as the world’s fourth largest foreign exchange mall, it could threaten the entire U.S. dollar payment system.
But this decision is hardly comforting, given the trajectory of the US-China rivalry. The growing emphasis on national security will further undermine global trade and investment, leaving fewer resources to finance social policies, tackle inequalities and tackle climate change. This is a global tragedy of the commons, and there is no guarantee that its recognition will change the outcome.
Andrew Sheng is Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Board on Sustainable Finance. Xiao Geng, President of the Hong Kong Institution for International Finance, is Professor and Director of the Research Institute of Maritime Silk-Road at Peking University HSBC Business School.
Copyright: Project Syndicate, 2020.