The United States was sharply critical of Germany’s energy dependence on Russia, imposing sanctions on the construction of pipelines carrying Russian gas beneath the Baltic Sea to Germany (if not, as a now-refuted report by investigative journalist Seymour Hersh recently claimed, getting its navy divers to blow them up).

However, the US’s economic dependence on China runs far deeper, and severing the link—for example, in the event of conflict between the two nations—would be far more disruptive.

A provocative report by economist and former Greek finance minister Yanis Varoufakis suggests China could more easily break free of the relationship of mutual dependence than the US.

Varoufakis relates that a Chinese official described to him the ‘dark deal’ China struck in the 1970s under which its manufacturers would send their excess production (that is, their output beyond China’s domestic needs) to the US and reinvest the bulk of their US-dollar profits into America’s ‘FIRE’, or finance, insurance and real estate sectors.

‘It ensured that the dollar’s supremacy was just as functional to the interests of US rentiers as it was to Chinese capitalists,’ he says. Of course, the losers in the transaction were the US domestic manufacturers (and their workers) who went out of business under the pressure of Chinese competition.

Varoufakis says the dominance of the US dollar in international finance is a function of the huge US trade deficits, which mean there’s a constant outflow of the currency into world markets. The ability of the US to continue running such large deficits turns on the willingness of its suppliers to accept US dollars and to recycle them.

His insight is that the recycling has been to the enormous benefit of the politically influential US financial and real estate sectors. The recycling goes far beyond the more generally understood Chinese purchase of US Treasury bonds.

‘Without the dollar’s global reign, America’s de-industrialization would not have accelerated, and Chinese capitalists would not have been able to extract colossal surplus value from Chinese workers and stash it in America’s rentier sector.’

Amid the deteriorating political relationship between the two nations, China has been increasingly concerned about its exposure to US assets. Chinese authorities were shocked by the seizure of the Russian central bank’s foreign exchange reserves following the invasion of Ukraine. In the event of a Sino-American conflict, Chinese assets would similarly be vulnerable to expropriation.

The most contentious element of Varoufakis’s analysis is his assertion that the size and sophistication of China’s ‘fintech’ sector could enable it to break free of its addiction to US dollars.

‘As America’s new cold war threatens to squeeze Chinese conventional capitalism, China could end the Dark Deal that keeps it tied to US hegemony by mobilizing its homegrown cloud finance and pursuing a growth model that no longer relies on the US trade deficit.’

The idea is that China would redirect manufacturing towards its domestic market instead of the US and shift the source of demand in its economy away from business investment and towards domestic consumption.

‘Globally, China’s decoupling from the US trade deficit would permit its cloud finance, ably assisted by the People’s Bank of China’s own digital currency, to offer the rest of the world a renminbi-denominated, cloud-based payment system that bypasses fully the currently dominant dollar-denominated and US-policed payment system.’

As Varoufakis admits, such a shift would involve ‘ditching the industrial model at the heart of China’s economic miracle, incurring the wrath of China’s traditional capitalists, who crave access to the US trade deficit and to dollars’.

For the US, there is no clear path to resurrect its domestic manufacturing. US firms such as Apple, with manufacturing centred in China, would have no good options.

University of Peking finance professor Michael Pettis commented on Twitter that while Varoufakis’s analysis was one of the ‘more thoughtful’ pieces on China’s role in the global trading system, he disagreed that such a shift in Chinese policy would raise the profile of the renminbi as a global currency.

For the renminbi to become a global currency, China would have to be willing, as part of its reform, to run large trade deficits. Pettis notes that in the early 1990s there were expectations that Japanese yen would become a global currency, but it didn’t happen because the economic adjustment required to run a deficit, with a sharp fall in domestic savings, would have been too great.

China has greatly reduced the importance of exports in its economy over the past 15 years. Exports peaked at a massive 36% of GDP in 2006, but were down to 20% by 2021. China’s exports have continued growing, but not as fast as its economy. China has gone much further in ‘deglobalising’ than any other nation.

However, the ‘dual circulation’ economic model of President Xi Jinping still includes an important role for exports. In a key speech on economic priorities in December, he said exports should continue to play a vital role. ‘We must accelerate the building of a strong trading nation,’ he said.

The US relationship with China has become increasingly adversarial over the administrations of Donald Trump and Joe Biden; however, Varoufakis’s ‘dark deal’ has continued to shape the course of trade between the two countries.

The Trump administration’s efforts to narrow the US deficit by imposing steep tariffs on imports from China and negotiating a deal under which China promised to lift its purchases from the US had little effect, either at the time or subsequently. The trade has enabled China to become manufacturer to the world, responsible for around a third of global manufacturing output.

US imports from China reached US$537 billion last year, almost matching their 2018 record and up by more than US$100 billion from 2020 levels. US imports from China are more than three times greater than US exports in the other direction.

While Beijing asserted the dominance of the Chinese Communist Party over the private sector throughout 2022 with tougher regulatory controls on sectors including technology, real estate, education and video games, it has never seriously upset the earnings of the export sector or tackled the far-reaching reform that would be required to shift resources from the business to the household sector.

However, in the event that conflict deepens between the two superpowers, Varoufakis’s analysis suggests that China may have more options than the United States.