US-China Economic and Military Competition and the Flight of Capital from Emerging Economies – Jörg Nowak, Ekrem Ekici

In the last issue, we have made two statements in our text on the national imperialist state: First, that a trade war between the US and China is not in sight, and second, that the national reorientation of the mightiest imperialist countries will increase the contradictions between emerging economies and the imperialist countries. As it stands now in November 2018, we were wrong about the trade war that has started to unfold, and is starting to depress growth and trade. And we were right about the effects of the policies of the Trump administration on emerging economies like Turkey, Mexico, Brazil, Argentina, India, Indonesia etc.: the rise in interest rates of the Fed and the temporary spike of the oil price during spring and summer 2018 led to popular unrest, currency crises, the outflow of investment from emerging economies and a renewed focus on debt in emerging economies.

The current situation is impregnated by two tendencies: 1. The competition between the US and China in a technological-military-economic race, accompanied by Japan and the EU as secondary competitors. 2. The subordination of emerging economies (excluding China) in the current scenario of higher interest rates in imperialist core countries.

We will start to outline the second phenomenon and then relate it back to the first one.

1. From emerging to stagnating economies

The mid term tendency in the relationship between imperialist economies and emerging economies is expressed in a change in the monetary policy: the end of quantitative easing in the US and the EU, and thus the end of the hyperliquidity flowing to emerging economies, accompanied by a tendency to higher interest rates in imperialist economies, most importantly the interest rate rises by the US Fed. This change in monetary policy is not the content of the reorientation at stake, but its instrument: the short term effect is an outflow of liquidity in dollars from the emerging economies, and ensuing currency crises, leading in the mid-term to a cementing of the subaltern position of emerging economies like Indonesia, Turkey, South Africa, the Philippines, India, Brazil and Argentina. For example, in May and June 2018 investors withdrew 14 billion dollar from EM bonds and equities (IIF 2018). Several currencies went down significantly in relation to the US dollar since November 2017, headed by the Argentine peso that fell about 50 % in one year, followed by the Turkish Lira that fell one third against the dollar, while other countries saw lighter but still quite significant depreciation of their national currencies: 10 % devaluation of the Brazilian Real in comparison with the US dollar, 10 % of the Indonesian Rupiah, 10 % of the Phillippine Peso, 12 % for the Indian Rupee and only 5 % for the Mexican Peso. The South African Rand is at the same level as one year ago compared to the dollar, but had dropped 10 % lower in August and September 2018. If one adjusts to inflation, emerging market currencies are at its lowest since the 1980s (Johnson 2018), the time of debt and currency crises, and the first major structural adjustment programs. The JPMorgan EM currency index is 11 per cent down compared to one year earlier, in early September 2018 it was even 14 per cent down since January 2018 (Allen 2018).

While the crises of currencies of emerging economies are not as serious as in the 1980s, high debt of the private corporate sector in emerging economies and current account deficits of those countries are the basis for the currency crisis. In countries like India and the Philippines with a dependence on oil imports the rising oil price increases the strain, while the governments of Brazil and Argentina faced pressure to abandon world market prices of petrol on their internal markets in the wake of popular pressure, expressed in the mighty truck drivers strike in Brazil in May 2018.

The mid-term tendency of those emerging economies will be rather that of “stagnating economies” – while they will still play a significant role for resource extraction, the absorption of consumer products, and low-wage industrial production, they will remain stuck in the middle-income trap – i.e. a large part of the population is poor, and the relatively small middle classes will not be able to catch up with their Western counterparts in terms of income, social security, public infrastructure etc. The most important issue is that those currency crises come with increased dependency on imperialist countries with higher costs for technological inputs (i.e. fertilizer, production machines), higher costs of imported consumer products, higher inflation and higher external debt. The effect highlighted by Heiner Flassbeck of a more competitive position for exports e.g. for Turkey1 due to the depreciation of the Turkish currency will not outweigh the costs for the working class and producers in those countries with inflation and higher prices for imported goods. Thus, the short to mid-term effect of what Flassbeck wrongly termed ‘currency crises’ will be a severe limitation of the level of reproduction of working classes in emerging economies.

The slowdown of exports of emerging markets is not primarily an effect of the trade war and its tariffs, as it went down already between February and May 2018 from a 6.5 per cent year-on-year rate to 1.8 per cent according to the CPB Netherlands Bureau for Policy Analysis, and similar data have been provided by consultancy Capital Economics. Causes can be found in low growth in the Eurozone, China and emerging economies. With the depreciation of the Renminbi (down 10 % since February 2018 in comparison with the US dollar), China will increasingly compete with emerging economies in Southeast Asia in the area of manufacturing (Sender 2018).

While the high debt in many emerging economies – it increased about 40 trillion US dollars since 2008 due to the Institute of International Finance – raises the risk of banking crashes or a default of a national economy, the main tendency will be a halt of the forward march of emerging economies in increasing their share of the world market in trade and exports: the looming debt crisis will serve to dump wages and contain the ‘rise of the South’ in the context of world market participation.

China, which we qualified as one of the main imperialist countries in the last issue, plays the part of a global power stuck between the status of an emerging economy and a global superpower. It has features of both, and its potential to get rid of the features of an emerging economy is one of the drivers of the restructuring of the global capitalist system undertaken at the moment. We do not consider China as an emerging market, but as an upcoming power able to compete with other imperialist powers to some extent, while it does not have the same status, both in geopolitical differences with the imperialist bloc of the US, Germany, Japan and the UK, and in per capita income of its population. Thus, it is not a country that forms part of the imperialist core, but assumes an independent leading position, and aims to build alliances with states like Russia, Pakistan and other smaller states. We will turn now to the competition between China and the US on the economic and military plane.

2. Economic and military competition between US and China

In this section we will look at the effects of the changing China-US relation. Both China and the US are grappling with slow growth – China’s growth is still around 6 per cent this year but is clearly on a slow downward trajectory since the Xi government aims to decrease financial bubbles and to diminish debt. While US growth seems steady, there is not much substance to it: non-financial profits remain below the levels of 2014 and once the effect of the tax cuts in the US has subsided, numbers will look different (Roberts 2018). And both countries grapple with a lot of corporate debt. This is the background scenario for the current economic and military competition between the still hegemonic US and the still emerging People’s Republic of China.

The national reorientation of parts of the US ruling class is based to a large extent on the interests of the military-industrial complex that aims to draw a demarcation line regarding which types of production are outsourced to China and other countries, for the fear of losing control over strategic intelligence and war technology. Due to the new type of productive forces in which production machines and war machines increasingly overlap (artificial intelligence, drones, satellites and other computer technology), the current form of outsourcing and arms-length manufacturing risks losing the upper hand in military technology and access to intelligence information. This is the essential interest behind the Trump strategy, and it is not possible to divide this into an economic and a military interest since both are essentially intertwined. In other words: If Wal-Mart produces clothes in Bangladesh or Ethiopia it is not of relevance for the military-industrial complex. If important lines of high-tech electronic communication products are partly produced in China, or Silicon valley startups are founded by Chinese capital, it is highly relevant (Foroohar 2018). Between 10 and 16 % of venture capital in Silicon Valley was financed by Chinese capital between 2015 and 2017 and 25 per cent of graduate students in relevant subjects in the US are Chinese citizens. So there is much cooperation in the AI sector between Chinese and US commerce and research which will be difficult to disentangle. One example is the artificial intelligence lab of Chinese tech giant Baidu in Silicon Valley — Baidu announced in 2018 a cooperation with state-owned China Electronics Technology Group (CETC) which develops electronic war technology for the People’s Liberation Army. At the same time, CETC cooperates with the University of Technology in Sydney on projects related to AI (Hille/Waters 2018).

The US government decided on first measures for a disentanglement: a broader mandate for the Committee on Foreign Investment that could block further Chinese investment in Silicon Valley; the Export Control Reform Act, legislated in August 2018, with stricter requirements for exports. A corresponding list that will serve as criteria for export controls is being put together and might be released in 2019. Nonetheless, a strict separation between civil and military use of electronics will be difficult to implement and would at least require close cooperation of the US with countries like Germany and Japan if crucial technologies i.e. hardware like precision tool makers for semiconductors and software for machine learning are about to be sealed off from Chinese companies. The Chinese economy is obviously lacking behind in the research and development capacity compared with the US (King 2014). But recent initiatives at least try to fill this gap: the Chinese government funded private companies who work on potential military technology with 55 billion US dollar (Feng 2018) and the Chinese private company DJI already is global market leader for commercial drones, and China is already the third largest exporter for military drones after the US and Israel (Hille 2018).

The ideological excess that comes with every political strategy led the Trump administration to go way beyond crucial technology and expand trade tariffs to a number of irrelevant goods like washing machines, solar panels etc. The main complaint by US think-thanks and government figures is that Chinese scientists may spy in other countries for the Chinese government, a practice that is only legitimate in the eyes of Western governments if they themselves use it. The trade war itself has until now mainly led to a slowdown of economic activity in general. Orders for US soybeans from China went down considerably, and the US trade deficit with China went up about 4 % in September 2018 – this can be a result of stockpiling in the face of a coming trade war, but could probably persist since consumer goods companies in the US rely heavily on Chinese imports (Tett 2018).

A second aspect of geopolitical competition between China and the US is about influence on third countries. China has set up the One Belt One Road Initiative as a massive infrastructure program, based on debt financing. It is significant that the US recently restructured its development agency, renamed as International Development Finance Corporation in order to systematically support US investments with a volume of 60 billion dollars. This move is clearly a response to the global Chinese strategy.

Another form to impose conditions on poorer countries is the Trump way of bilateral negotiations, under the threat of tariffs on exported goods, which aims to create favourable conditions for US capital, a newly packaged form of blackmail which ran as demands for ‘free trade’ since the 19th century, and now comes under the more honest label ‘America first’. One specific feature of Trump’s variant is that it is openly debated and not negotiated behind closed doors, often combined with hostilities and public attacks, and mixed up with strictly political agendas as in the case of the US pastor in Turkey, the border wall that Trump wants to build against Mexican immigration, and the personal attacks against the Canadian prime minister after the G 7 meeting.

Various countries will become a playground for this bidding for influence. While Western countries are still clearly ahead of Chinese influence in Africa, there are some countries in Latin America where Chinese investment exceeds US investment if not in some cases all Western imperialist investment altogether. This is why the political turn to the right in Brazil with its immense resource reserves in agriculture, iron, bauxit and above all petroleum was such a decisive manoeuvre. While Mexico with an incoming leftist president will probably balance between Chinese and US influence, Bolsonaro in Brazil can be expected to limit Chinese economic and political influence as much as possible. Given that a large part of Brazilian agrobusiness – Bolsonaro’s main power base – is competing mainly with US agrobusiness and is delivering the largest chunk of soy and other goods to China, it will be interesting to see how this contradiction will be managed on the ideological level.

3. The inability of capital to end the crisis

The phenomenon at the base of this form of economic restructuring is the inability of capital to end the current crisis. According to the theory of crisis of Japanese Marxist Uno Kozo, every crisis is an opportunity for capital to get rid of old capital equipment (via bankruptcies, downscaling etc.), and the crisis ends as soon as the productive capacities have been renewed with more updated technology (Walker/Kawashima 2018; Uno). Given the ongoing slump in labour productivity that we have pointed at in our contribution to the last issue, we witness the inability to update technology in those companies that are not major TNCs with an amount of 10-15 % zombie companies in the core capitalist countries. The subordination of emerging economies and the depreciation of their currencies is thus a displacement of this crisis since this will ease profit rates momentarily through access to cheaper goods in the face of lower currency rates, and increased access to raw materials and formerly state-owned enterprises or public sectors. The electoral victory of far-right Jair Bolsonaro in Brazil demonstrates this well: The privatisation of the education system, the postal service, further parts of state-owned energy companies like Eletrobras and Petrobras, and enhanced access to Brazilian oilfields and other mineral resources are the core agenda of the new incoming government. Thus, we are facing the mighty return of forms of the comprador bourgeoisie in Latin America, and possibly in other countries, trying to leverage both with the US and China (and Japan, Canada, Australia and EU countries) as investors and buyers, and without much scope for an independent national development. The illusion that emerging markets and the BRICS could delink from the imperialist core of capitalism was a short one. Thus, the alternative to a recovery of productivity growth — which capital seems unable to succeed with in the mid-term — is a more violent imperialism, and stricter subordination of emerging economies.

At the same time, the two leading economies, China and the US will continue to engage in a competitive struggle to get hold of high-tech technologies, both as productive and military capacity. The main aim of the US government is to stop the Chinese economy and government to catch up to the US in both areas, while a significant amount of Chinese economic sectors, like retail and fast food, remains under control of US companies (Starrs 2018). Both economies have their own zombie sectors that they struggle to get rid of and a high level of corporate debt. The way how China and the US will balance out between advances in the high-tech sector, the managing of debt bubbles and bankruptcies of SMEs, and the ability to increase or at least maintain wage levels of workers will be decisive in the coming year, and any major imbalance can lead to a new financial crisis as the volatile stock markets in late summer 2018 have shown.


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Feng, Emily, 2018: China pours money into private sector military technology. Financial Times. November 11.

Foroohar, Rana, 2018: Globalised business is a US security issue. Financial Times, July 15.

Hille, Katrin, 2018: China’s drone makers zero in on armed forces. Financial Times, November 9.

Hille, Kathrin and Richard Waters, 2018: Washington unnerved by China’s ‘military-civil fusion’, Financial Times, November 8.

Institute of International Finance, Global Debt Monitor – July 2018. July 9.

Johnson, Steve, 2018: Emerging market currencies at ‘multi-decade lows’. EM FX may be at its cheapest since the 1980s in inflation-adjusted terms. Financial Times, November 1.

King, Samuel, 2014: Lenin’s theory of imperialism: a defence of its relevance in the 21st century. Marxist Left Review, No. 8.

Kozo, Uno, Theory of Crisis, trans. Ken Kawashima, Leiden: Brill, forthcoming.

Roberts, Michael, 2018. America’s halfway house. 7 November.

Sender, Henny, 2018: China can no longer be counted on for EM growth. Financial Times, 7 November.

Starrs, Sean Kenji (2018):  Can China Unmake the American Making of Global Capitalism? in Leo Panitch and Greg Albo, eds. Socialist Register 2019: A World Turned Upside Down? London: Merlin Press; New York: Monthly Review Press.

Tett, Gillian, 2018: China is winning the trade war with America for now. Financial Times, 15 November.

Walker, Gavin and Ken Kawashima, 2018: Surplus alongside excess: Uno Kozo, Imperialism, and the Theory of Crisis. Viewpoint Magazine No. 6,

Weatley, Jonathan, 2018: Rising debt leaves emerging markets at epicentre of worries, Financial Times, July 14.

1 See Heiner Flassbeck and Ekrem Ekici on the crisis in Turkey here: