Central Bank Digital Currencies And The U.S./China Great Power Competition

The “Great Power Competition” (GPC) is a termed now commonly used to describe the global affairs between the United States and China. A Central Bank Digital Currency (CBDC) being deployed by China could have immense implications for the role of the Dollar as the global reserve currency and the political stability of the US-Chinese relations.

Tensions heighten between the United States and China amid trade wars, COVID-19, a chaotic presidential election period, disputes over Tibet, and increasing pressure at the Taiwan Strait.

The “Great Power Competition” (GPC) is a termed now commonly used to describe the global affairs between the United States and China. Technology, specifically dual-use technology (which has both military and civil use), plays a critical role within the GPC. The United States has taken steps to secure its advances in dual-use technology, most recently with the ban of exportation of such material to Hong Kong in mid-2020.

Whether you view the dollar primacy since Bretton Woods as an advantage or a burden for the U.S., you may agree that currency control plays a role in the GPC. A Central Bank Digital Currency (CBDC) being deployed by China could have immense implications for the role of the Dollar as the global reserve currency and the political stability of the US-Chinese relations.

In his recent article, “Not A Cold War: China Is Using A Digital Currency Insurgency To Unseat The US Dollar,” Steven Ehrlich wrote that a “Currency Cold War is not the right way to explain recent Chinese behavior regarding the yuan for several reasons. Most notably, there is currently only one actively engaged party in this dynamic,” with this country being China.

Blockchain technology has additional potential applications to military function which only further the importance of this innovation. Therefore, it is important to understand the background of dual-use technology in the context of Great Power Competition while considering the roles of digital currencies and blockchain technology in this modern environment.

China’s Advance In Dual-Use Technology And America’s Race To Catch Back Up

Manufacturing power plays an important role in the GPC. American manufacturing surged to account for 11.39% of total economic output in 2018. However, the steady growth of the People’s Republic of China (PRC) has overshadowed America’s manufacturing decline and sudden resurgence. Over the last forty years, the PRC has emerged as a manufacturing powerhouse. The previously disparaging “Made in China’ moniker used to refer to inexpensive mass-produced goods has gone away, with the term now being a source of pride for products ranging from electronics to heavy industry, a nod to the manufacturing power built by the PRC in recent history. As such, China’s status as “the world’s factory” has catapulted it to be the economic and innovation powerhouse it is today.

In the grand scheme of the Great Power Competition, manufacturing and innovation go hand-in-hand in spurring military transformations. The emergence of Inventions such as global-positioning satellites (GPS), the Internet, and modern mobile phones can be credited to American military interest. Many of these inventions were created in the latter half of the 20th century, with China taking over as the significant military innovator in the early 21st century. Counting numerous advancements in drones, artificial intelligence, and energy, China has emerged as a true global innovator, with many of these new technologies having the capacity to be used in a dual-use capability.

Military-Civil Fusion: Facilitating Innovation In China To Get Ahead

Military-civil fusion (MCF) describes the unique cooperation between military and civilian enterprises in the PRC. With a history of having a centrally planned economy under state-directed conditions, MCF has long been a directive of various PRC leaders dating back to Mao Zedong. Organizations like state-owned enterprises (SOEs) are historically the most-cited example of MCF and exhibit dual-use military and civilian manufacturing lines.

“Military-civil fusion is now particularly prevalent in the context of the Great Power Competition due to China’s vast emphasis on technological development in the civilian realm with military applications. With this in mind, MCF aims to ensure that new innovations simultaneously advance both military and economic development, reinforcing China’s increasing influence throughout the globe,” says Hugh Harsono, an Army Officer most recently assigned to an Asia-based Special Operations Task Force.

China’s economic strength has facilitated many of its technological advancements. The desire for technological advancement runs deep throughout the PRC’s apparatus as indicated through specific government policies. A translation of the “13th Five Year Plan (FYP) for the Economic and Social Development of the People’s Republic of China (2016-2020)” specifically states that “innovation must be placed at the heart of China’s development and advanced in every field, from theory to institutions, science, technology, and culture.” This indicates a national, governmental-driven desire to innovate. The 13th FYP also places into action several key documents indicative of MCF efforts, to include the PRC Military-Civil Integration Development Law (中华人民共和国军民融合发展法), the Military-Civil Fusion Strategy Outline (军民融合战略纲要), and the Opinion on the Integrated Development of Economic Construction and National Defense Construction (2016 Opinion (关于经济建设和国防建设融合发展的意见).

The ‘Made in China 2025’ policy, which seeks to make China dominant in global high-tech manufacturing, explicitly aims to utilize government subsidies, SOEs, and intellectual property acquisition to drive innovation. This further cements the PRC’s position to continually innovate and disrupt the technology sector, with this policy being a key mechanism to mold entire industries to suit future defense needs. In recent years China has imitated military innovation methods from the United States, to established structures for leveraging this technological innovation.

Shenzhen’s success as an innovation hub, for example, energizes the capabilities of the People’s Liberation Army. China’s Defense Innovation Unit was launched in Shenzhen to help utilize commercial tech for military purposes. In a positive feedback loop, state-driven projects further catalyze innovation and manufacturing success in the city. In fact, Forbes contributor Roger Huang’s “Shenzhen’s Rise Shows China Is Centrally Focused On The Digital Yuan” details how the PRC decided to trial its digital yuan efforts by freely distributing traditional Chinese “red envelopes” to the tune of 10 million yuan in digital form.

Recently, some U.S. companies have shown resistance to military cooperation, such as Google’s 2018 decision to not renew their Pentagon contract. There are worries from the U.S. that Chinese companies are simply unable or unwilling to refuse governmental collaboration, as was highlighted this year amid U.S. companies banning employees from using TikTok. If so, this could cause an asymmetric advantage for Chinese dual-use tech. Interestingly, this advantage could be applied to dethroning the dollar, rather than more traditional forms of MCF.

With Bitcoin breaking $13,000, the Bahamas launching the first nation-wide CBDC, and discussions about potential U.S. economic stimulus following the election, all eyes are on the future direction of the global financial system. This is a crucial moment in the Great Power Competition, and the United States’ place in the world.

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