Joel Slawotsky on "Digital currencies and great power rivalry: China as a disseminator in the digital age"

 

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Joel Slawotsky has just published a fascinating article:  "Digital currencies and great power rivalry: China as a disseminator in the digital age," Asia Pacific Law Review. The abstract nicely describes the object:

The United States reign as global hegemon has been empowered by massive structural power over key international economic, technological and ideological networks. As chief disseminator during the era of emerging computer technology and communications, the U.S. became a rules-maker, empowered to shape international governance in its favour. However, a new era of digitalized assets, transactions and networks will provide an opportunity for Central Bank Digital Currencies (‘CBDCs’) to constitute the technological-financial-business bones of the developing digitalized global economy. CBDCs will exert massive influence on the international economic, technological and ideological orders. Moreover, all of these impacts are inextricably connected to the hegemonic rivalry between the United States and China. Astutely, China has been developing the digital Yuan and is the first major economy to distribute a CBDC. If China’s CBDC successfully migrates to external usage, and depending upon the degree of crucial Chinese domestic reforms, the digital Yuan may offer an opportunity for China to be a disseminator in the digital age. Chinese influence over global networks and governance frameworks would vest China with advantageous structural power in the economic, technological and ideological spheres – the fulcrums of the U.S.-China hegemonic rivalry.

And, indeed, what appears to be a reactionary turn in both political and bureaucratic elite politics in the United States--the backwards looking stubborn insistence that golden age narratives and suppositions still apply now twenty or more years after the collapse (by the hand of its creators) of that world--has produced substantial challenges for confronting contemporary challenges. That is the great potential tragedy of the United States in the New Era; an America that insists on building back better (Brief Refections on Emerging Global Trade Empires: From Trans Pacific Partnership to “Building Back Better” (B3W) in the Shadow of China's Belt & Road Initiative) rather than building forward. Professor Slawotsky well examines the dangers of this emerging governance culture for the foundations on which U.S. dominance is based. Digitalization within the public space, generally, and digitalized currency are critical components  of future economic activity.  The private sector understands this well within the liberal democratic camp and in the United States. The American public policy caste less so it seems. The opportunity it presents is real; and states like China will not hesitate to exploit faltering leadership to advance its own interests.  

The Introduction follows below.  The entire article is worth a careful read.  Whether one agrees with the details of digitalization; the reality is that absent some crisis of tragic proportion, currency digitalization is the future.  The United States,  to paraphrase Lee Iacocca now famous quip (“You lead, follow or get out of the way”), will by its actions choose to lead, follow or be pushed out of the way.

Digital currencies and great power rivalry: China as a disseminator in the digital age

Joel Slawotsky
Radzyner School of Law, Reichman University (IDC), Herzliya, Israel

The United States is the principal global disseminator of the technetronic revolution. It is American society that is currently having the greatest impact on all other societies, prompt- ing a far reaching cumulative transformation in their outlook and mores.1

I. Introduction

China’s ascendancy, long acknowledged but conceptualized as ‘an amorphous eventual’ risk to U.S. hegemony, has arrived.2 Perceived by the U.S. to constitute a dire national security threat, the tectonic shift in relations was driven by two fundamental factors.3 One, China did not reform its political-economic governance to kowtow to the U.S.-centric order.4 Two, rather than conform, China astutely ensconced herself in global governance while simultaneously establishing stratagems which could erode U.S. dominance. The Asia Infrastructure Investment Bank (‘AIIB’), Belt and Road Initiative (‘BRI’), the promotion of Yuan internationalization, and trade leadership as exemplified in the Regional Comprehensive Economic Partnership (‘RCEP’), are all exemplars of Chinese ambitions. China’s transformation into an economic powerhouse wielding the second largest economy in nominal GDP terms (largest in Purchasing Power Parity terms), China’s centrality in world trade, and expertise in emerging technologies such as AI, Central Bank Digital Currencies (‘CBDCs’), landing on the Far Side of the Moon and hypersonic missile capabilities, have led to U.S. concern that American supremacy is being challenged.

Intriguingly, the question of whether China can eventually overtake the U.S. takes place within the context of a world between two ages – from the technetronic age to the new era of data-driven digitalization.5 The prospect of China ultimately becoming a hegemon is enhanced in the age of global digitalization since revolutionary technologies offer opportunities to transfer dominance from one State to a competitor. Digitalization can also expedite the ‘Beijing Effect’ which has already embedded Chinese technological infrastructure in many States.6 The ‘Beijing Effect’ is strengthened by China’s unique market power, a staggering percentage of humanity resides in China. Market power should not be under-estimated, indeed in the context of trade and global finance China has already ‘effectively began using its market power to set the global rules for competition along its own preferred lines’.7 China’s enormous market power constitutes an important factor which confers competitive advantage.8

As explained in this Article, global digitalization provides an opening for China to lever- age its CBDC to erode the already narrowed disparities between herself and the U.S. with respect to the crucial levers of hegemonic power – economic, technological and ideological – potentially reversing the gap. In contrast to a prior (and defeated) U.S. rival’s technological lag,9 by changing the narrative from U.S.-led Western technological leader- ship to Chinese data-driven digital dominance,10 China might ultimately emerge as the principal global disseminator of the digital revolution – the State with the most influence on other societies.11

Furthermore, while the U.S.-led order holds, the incipient digitalization of economies intersects with trends of economic nationalism and increasing doubt with respect to liberal economic internationalization, potentially creating conditions favourable to a China-centric order going forward.

We also must consider the possibility that a knowledge economy enclosed within one large authoritarian country might enjoy better prospects than a system of globally distributed pro- duction and worldwide consumption held together by the institutions of liberal internation- alism. We may be heading toward a second-best world of increasingly national markets supported by technological accomplishments that make managing an illiberal state easier. If international cooperation fails because of the deep conflicts that the knowledge economy spawns, advanced capitalism in one country might prevail. This is to say that the twenty-first century might be China’s.12

Thus, a critical mass of technological and political-economic developments suggests that the existing global order might be subject to a degree of modification not witnessed since the end of World War Two.

The focus of this paper is on CBDCs and their enormous potential for shifting current interdependencies and creating new networks.13 Currently, there is no single CBDC design model, but the launch of digital currencies by central banks is likely to radically restructure monetary and payments systems thereby remodelling finance at the domestic, regional and international levels. While there is a developing vanguard of scholar- ship on CBDCs from various perspectives: global economic;14 financial access and democratization;15 and even the nature of money,16 there is a dearth of literature analyz- ing how CBDCs can influence the U.S.-China strategic rivalry. This Article contributes to the literature by analyzing CBDCs within the context of economic, technological and ideo- logical power levers and the potential impacts on law, finance, trade and global governance.

The Article opines that global digitalization presents an opportunity for China to capitalize on this new technology via successful cross-border usage of a digital Yuan potentially vesting China with a strengthened role in global governance. To be sure, for the digital Yuan to be accepted internationally to a degree similar to the U.S. Dollar, China’s CBDC will need to overcome several obstacles such as a repu- tational hurdle with respect to data privacy;17 perceptions surrounding Chinese courts’ independence;18 and crucially, enacting further reforms on capital controls, allowing the Yuan to float according to market forces and continued development of capital markets. However, China’s determination should not be under-estimated and when conditions are met, domestic governance reforms can take place expedi- tiously.19 Furthermore, the need for capital control reform might not be as proble- matic as conventionally believed; conceivably, the digital Yuan can be designed to be stored in a wallet anywhere and transferrable to a wallet, exchangeable for another CBDC (or other asset) outside of China. An unfettered ability to hold and exchange the digital Yuan outside of China on a wallet to wallet basis, may reduce the capital control problem. Accordingly, the argument that the Yuan can never be internationalized or replace the U.S. Dollar, or it will take many decades to do so, may constitute hubris rather than objective analysis.

The Article proceeds as follows: Part II provides a background of the hegemonic rivalry, explores how rules-making is an integral aspect of hegemonic power and discusses CBDCs both generally and the digital Yuan specifically. Part III discusses how CBDCs can impact economic, technological and ideological power levers. Part IV provides dis- cusses the prospect of a more Chinese-centric order as well as hurdles that China will need to overcome to promote global usage of the digital Yuan. 

 

 NOTES

 CONTACT Joel Slawotsky jslawotsky@idc.ac.il

1Zbigniew Brzezinski, Between Two Ages: America’s Role in the Technetronic Era (1970) 15 (Defining the technetronic era as ‘shaped culturally, psychologically, socially, and economically by the impact of technology and electronics—particularly in the area of computers and communications.’) Ibid, 10.

2Ibid, 74 (‘China’s power will probably grow in the years to come, and with it China’s capacity to threaten its neighbors and eventually even the United States’).

 3The dramatic conversion is exemplified by U.S. National Security Strategy (‘NSS’) documents. Compare the 2002 NSS, https://georgewbush-whitehouse.archives.gov/nsc/nss/2002/ (‘In time, China will find that social and political freedom is the only source of [national] greatness.) and the 2006 NSS, https://georgewbush-whitehouse.archives. gov/nsc/nss/2006/ (‘China’s leaders ... cannot let their population increasingly experience the freedoms to buy, sell, and produce, while denying them the rights to assemble, speak, and worship.) with the 2017 NSS, https://www. whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905.pdf (‘China seeks to displace the United States in the Indo-Pacific region, expand the reaches of its state-driven economic model, and reorder the region in its favor’.)

4See Ming Du, ‘China’s State Capitalism and World Trade Law’ (2014) 63 Int’l & Comp. L.Q. 409 (Notwithstanding decades of economic reforms, China retains its state-centric economic model). See also Xun Pang, Lida Liu and Stephanie Ma, ‘China’s Network Strategy for Seeking Great Power Status’ (2017) 10 Chinese Journal of International Politics 13 (‘China’s integration into the world trade system has not created a shared identity with its most important trade partners, namely the United States, Japan, and Germany. On the contrary, China emphasizes its identity as a developing country and does not shrink from stating political differences with its Western trade partners.’).

5The precise timing of the start of a specific era such as the technetronic or digital age is imprecise. Brzezinski (n 1) 9 (‘Eras are historical abstractions. ... It is a matter of arbitrary judgment when one era ends and a new one begins; neither the end nor the beginning can be clearly and sharply defined.’)

6See Matthew S. Erie and Thomas Streinz, ‘The Beijing Effect: China’s Digital Silk Road as Transnational Data Governance’ (2022) 54 NYU Journal of International Law and Politics 1, 11 (‘[T]he PRC increasingly shapes data governance trans- nationally through the Beijing Effect.’)

7Anton Malkin, ‘The Made in China Challenge to US Structural Power: Industrial Policy, Intellectual Property and Multi- national Corporations’ (2020) Review of International Political Economy 24.

8Paul B. Stephan, The World Crisis and International Law – The Knowledge Economy and the Battle for the Future (CUP, forthcoming 2022) 254 (discussing China’s potential to wield competitive advantage from ‘scaling knowledge-based innovation, even if it can’t fully scale internationally.’) 

 9Brzezinski (n 1) 63 (’The Soviet lag is unmistakable in computers, transistors, lasers, pulsars, and plastics.’)

10Malkin (n 7) 20 (‘Over the past half-century, technological standard setting was dominated by the US, the EU and Japan.’).

11Brzezinski (n 1) 15.

12Stephan (n 8) 15–16. For an excellent analysis of the current global power shifts in the context of crisis in Western political-economic governance; political science; and history, see ibid.

13Current developments of CBDCs are at the incipient stage and without agreement on standards or inter-operability, it impossible to forecast with certainty how CBDCs will impact governance. Yet, as analyzed in this paper, the potential absolutely exists.

14Carol R. Goforth, ‘What Does the Decline in the U.S. Dollar’s Global Role Mean for Cryptocurrencies?’ (2022) 66 St. Louis University Law Journal 249.

15CBDCs: an opportunity for the monetary system, https://www.bis.org/publ/arpdf/ar2021e3.htm.

16Kimberly Houser and Colleen M. Baker, ‘Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money’ (2022) 18 NYU Journal of Law & Business 527.