Is a military confrontation between the United States and China possible?

Definitely. In fact, we have dedicated an entire article to the Thucydides trap dimension, more specifically Harvard professor Graham Allison’s observation that historically and statistically speaking, a confrontation between an emerging power (China, in our case) and the dominant one (the United States, in our case) is not just possible but downright likely, having occurred in 75% of such cases throughout history.

However, we have argued that as we come closer to the present, Graham Allison’s approach may very well stop making as much sense because new variables emerge, more specifically the “Mutually Assured Destruction” concept (the idea that in a nuclear war, there can be no winners, only losers) which acted as the number one deterrent when it comes to let’s say direct military confrontation between the US and USSR.

Fast-forward to the present and here at ChinaFund.com, we have coined the term “Mutually Assured Economic Destruction” given the deeply interconnected nature of today’s worldwide economy or if you will, the idea that peace represents the way to go, if only for financial reasons (to conveniently modify a Woody Allen quote).

Possible?

Yes.

Likely?

No.

In a nutshell, these two questions and answers tend to describe the attitude of the ChinaFund.com team with respect to the military confrontation scenario. We consider it quite likely that the US and China can remain adversarial in many respects without there being a need for direct military confrontation and on the contrary, with them even collaborating in certain key instances, when doing so makes sense for both parties involved.

That being stated, we owe it to our readers to at least take the possibility seriously and as such, have also analyzed the military dimension of Sino-American relations by dedicating an entire article to China’s military sector on the one hand and on the other hand, dedicating one to China’s military capabilities. As both articles allude to, despite the fact that impressive progress has been made in China (just like with most other sectors), a hypothetical military confrontation would be rather clearly in “asymmetric warfare” territory for the simple reason that there is a severe difference between the two players when it comes to anything from military capabilities to overall strategies.

Yes, it is true that China:

1. Is now the worldwide leader in terms of total artillery
2. Occupies position two in terms of aircraft fighters, self-propelled artillery, aircraft attack, armored fighting vehicles and combat tanks
3. Occupies position three in terms of total aircraft strength, total helicopter strength and attack helicopters as well as rocket projectors
4. Has the infrastructure dimension going for it, anything from roughly 4 million kilometres in terms of roadway coverage and 86,000 kilometres in terms of railway coverage to 16 major ports and over 500 airports

However, there is more to the military equation than the quantitative dimension and as we move on to the qualitative one (anything from cutting edge technology to geopolitical influence), the US is still in a more than comfortable enough lead for us to state that, again, a hypothetical military confrontation between the two entities would be firmly in “asymmetric warfare” territory.

As such, China’s attitude cannot help but be rather similar to Russia’s in terms of approaches, an attitude that revolves more so around hybrid warfare (conducting cyber attacks, defending itself against cyber attacks, launching informational warfare campaigns such as fake news distribution, basic online propaganda and the list could go on and on) than around a direct military confrontation.

While it is true that both China and Russia are already engaging in various more or less subtle forms of hybrid warfare, it would be a stretch to conclude that one entity or the other is “at war” (hot war, that is) with the United States. At best, a “Cold War 2.0” narrative would make more sense and not because adversarial tendencies are nowhere to be found (on the contrary) but rather due to a combination between geopolitical realism (China as well as Russia realizing that they are nowhere near parity with the United States militarily speaking), Mutually Assured Destruction as well as Mutually Assured Economic Destruction.

This hybrid warfare dynamic once again makes it clear that potential conflicts between the United States and either China or Russia (perhaps both) need to be seen through an asymmetric warfare lens. Even with the impressive progress of China on pretty much all fronts correlated with the fact that the United States has arguably made several steps back on the international scene on the one hand and has its share of endogenous problems on the other (anything from unemployment issues to social unrest), it would be nothing short of ludicrous to paint the picture of parity when comparing the US and China.

As a conclusion, for the reasons outlines throughout this article and many more, the asymmetry between the United States and China tends to be far more pronounced than headline statistics indicate. As such, “asymmetric warfare” is the name of the game when analyzing various scenarios, with the important remark that just like during the Cold War, Thucydides Trap-related arguments may very well once again be invalidated (we certainly hope so, in light of the fact that large-scale conflicts between combatants such as these two entities cannot possibly end well for humanity as a whole, realistically speaking) for reasons pertaining to Mutually Assured Destruction as well as Mutually Assured Economic Destruction.

This perspective is, however, quite short-sighted.

Why?

Primarily because it (conveniently) overlooks what China gave the West in return. More specifically and as ironic as it may seem, many of the Westerners who are complaining about China’s alleged free ride by for example publishing social media posts are doing so from their ultra-affordable phones and/or laptops, technology which wouldn’t have been nearly as accessible to the general public (and certainly not at today’s low costs) in the absence of “spoiled children” such as China.

To put it differently, the idea that the globalization-facilitated arrangement is one-sided, with China perpetually on the receiving end of benefits and the overly generous West on the giving end is childish at best and ignorant at worst.

As a bit of a creativity exercise, let us simplify an economic talking point and try to view things from the perspective of someone who believes the exact opposite, that the West is on the receiving end much more so than China. That person would most likely point out that China is getting a most peculiar deal in light of the fact that it exports actual products, whereas the West exports… well, inflation. In other words, China exports tangible products that make the lives of Westerners easier as well as more pleasant and receives pieces of paper or numbers on a screen in return (fiat currency that can be printed out of thin air or even easier yet, made available after a few clicks by central banks such as the Federal Reserve).

Of course, this perspective is just as short-sighted as that of Westerners who complain about China being the spoiled child of globalization. In reality, these “pieces of paper” and “numbers on a screen” enabled China to escape international isolation and tap into a huge worldwide market. Furthermore, this “worthless fiat currency” (that can indeed be created out of thin air but for which, and therein lies the key to understanding the equation, there is incredible demand) enabled China to invest in its modernization, anything from infrastructure to education and fast-forward to the present, China now has financially potent enough consumers so as to embrace an economic growth model that revolves much more so than in the past around internal consumption.

As many of you most likely suspect, the question which constitutes the title of this article is intentionally misleading and provocative. The answer tends to revolve around the idea that picking a “winner” represents an economic thinking mistake right from the beginning and that in reality, the answer is simple: both. China needs the West and the West needs China, with many choosing to paint an adversarial picture where there isn’t one.

Make no mistake, there will most likely never be an ideological love story between China and the West for the simple reason that political values are light years apart. However, love it or hate it, today’s globalization-facilitated economic interconnectedness is most likely the best scenario we have from a wide range of perspectives, from economic growth to geopolitical stability and ultimately world peace.

As mentioned in other articles as well, “Mutually Assured Economic Destruction” can be just as effective when it comes to conflict prevention as the nuclear weaponry-related “Mutually Assured Destruction” principle that governed the Cold War. In other words, just like the devastating effect of nuclear weapons make it clear to all potential combatants that a nuclear war would result in catastrophic outcomes for all parties involved (there are no “winners” in a Mutually Assured Destruction scenario, as the name makes clear), the effects of moving away from today’s economic interconnectedness would be so game-changingly dire that the parties involved have no choice but to act responsibly.

Yes, depending on the political climate/context, one political actor or another will make a negative statement about globalization every now and then. But the political actors in question have economic consultants and a decent enough basic understanding of Mutually Assured Economic Destruction to ensure that leaving political theatrics aside, there is a survival-related commitment across the board when it comes to maintaining the globalization status quo.

Not because there is a globalization love story one could refer to, because there isn’t, but rather because globalization doesn’t have to be perfect to survive: it simply needs to be better than the alternatives and it would be difficult to envision a workable economic model which revolves around completely abandoning globalization.

Of course, this doesn’t mean there will not be changes along the way. For example, it’s quite likely that after the COVID-19 disaster from a supply chain perspective, governments will be far more eager to encourage completely domestic supply chains when it comes to products that are perceived as relevant to national security (for example masks and medical equipment in the context of pandemics, with the same principle being valid when it comes to other threats) but it is extremely difficult to believe that these changes will threaten globalization at its core.

In conclusion, understanding that China and the West need one another is not a matter of generosity but rather one of self-preservation for all (geo)political actors involved. As such, while concessions will need to be made for political reasons whenever the proper context emerges, few decision-makers are truly committed to embracing models that revolve around abandoning the core pillars of globalization and status quo international relations.

Therefore, as borderline delusional as it may be to believe globalization will disappear completely from the international landscape, it would be borderline ignorant to assume the status quo can persist indefinitely or to put it differently, the idea that globalization will remain unchanged is not exactly something the ChinaFund.com team agrees with.

Why?

Simple game theory.

There is more to life than economics and aspects such as political implications need to therefore be taken into consideration as well so as to reach realistic conclusions. As an extremely eloquent example to that effect, many economists expressed grave concern with respect to the Treaty of Versailles and the stipulations pertaining to the reparations Germany was forced to pay. Thinkers including John Maynard Keynes himself made it clear that despite the fact that things were “watered down” (with a significant part of those 132 billion gold marks being nothing more than let’s call them accounting fabrications) compared to some of the more aggressive expectations among victors, the reparations in question were still devastating enough to essentially bring Germany to its knees and lead to a buildup of anything from frustration to socio-political movements that ultimately disrupted the (vulnerable) European peace status.

However, game theory kicks in and the general public in victorious nations wanted Germany to pay, both literally and figuratively. As such, stipulations perceived as too timid would have come with significant negative political consequences back home and as such, many politicians were essentially “mandated” to be more aggressive than economic common sense would have dictated. Not for economic reasons, not for historical reasons but simply for political ones. As it was, the Treaty was hardly generating enthusiasm in victorious and revenge-seeking countries such as France, with politicians most likely feeling that toning it down even a notch further would have been politically unacceptable.

The same principle is valid in 2020 and beyond.

Once again, any economist worth his salt is most likely more than eager to point out that throwing globalization into the dust bin of history and paving the way for fragmentation or even (for the more utopic of citizens) some form of autarky would be extremely counter-intuitive, to the point of yet again jeopardizing the climate of peace between at least major economic superpowers.

In a nutshell, globalization currently contributes to the “Mutually Assured Economic Destruction” conflict deterrent dimension, just like the “Mutually Assured (Nuclear) Destruction” concept acted as a major direct military conflict deterrent during the Cold War. To be more precise, given the ultra-interconnected nature of worldwide economies in a globalization framework, pretty much any even remotely knowledgeable market participant can and will state that something along the lines of a military confrontation would result in lose-lose situations that are simply unacceptable.

Once again, these are anything but controversial thoughts.

At the same time, however, politics can and will also get in the way, for the simple reason that globalization is certainly not perfect. Therefore, just like there have been (many) winners, there are also losers. For example, a relatively low-skilled United States worker who used to have impressive job security during the let’s say fifties and earned enough to support a large family on just one income now most likely finds himself in a climate he neither understands nor likes. Job security is hardly a given these days and on the contrary, chances are that many such individuals are currently switching from one low-paying service sector job to another in a manner that inevitably leads to a massive build-up of frustration.

“Why have so many jobs left the United States?”

“Why should I suffer just so that multinational corporations can enjoy massive profits?”

“Why should my life be turned upside-down by all this insecurity compared to the days when my father and grandfather worked at the same factory throughout their entire careers?”

These are just three questions that millions upon millions of people in the United States alone are asking themselves, individuals who are anything but happy with the status quo and more than eager to find a third party to blame, with the usual suspect being… you’ve guessed it, China. As mentioned at the very beginning of this post, the idea that China can keep thriving as the proverbial spoiled child of globalization is optimistic at best for political rather than economic reasons… citizens in more developed nations are simply no longer willing to silently tolerate this phenomenon.

This represents yet another reason why China has embraced a “new paradigm” in terms of economic growth, one that revolves around accepting lower and definitely single-digit yearly GDP growth rates on the one hand and on the other hand, one which revolves to a much more significant degree on internal consumption. Fortunately for them, as explained in another article, a stronger and stronger middle class has proven to be ready to take over and the transition to this new system has started quite a while ago, for reasons that revolve around more than simply “globalization fatigue” for lack of a better term.

As a conclusion, no, China cannot keep thriving in a “globalization 1.0” framework and while globalization itself is most definitely not going anywhere, “globalization 2.0” is likely to involve a fair bit more fragmentation than its predecessor.

Still, as also mentioned on our website, there is more to being the number one superpower than being the number one economic superpower in light of the fact that there are a wide range of forces at play rather than simply economic ones: military forces, geopolitical influence forces, cultural forces and the list could go on and on.

Needless to say, China’s ascension to “supremacy” will most likely be anything but straightforward, just like the United States did not exactly have what one would call a smooth path either. Indeed, from civil war to wars with foreign opponents, the road to success of the US has been paved with a wide range of challenges and the same principle is valid when it comes to the United Kingdom and any other past superpower.

Can the transition to supremacy of China be peaceful?

While nothing is impossible, the probability of China’s ascension being peaceful depends on how exactly the term “peaceful” is defined. If we are to define it as uneventful in general or in other words, assume that a peaceful ascension is one where military challenges altogether are completely absent, then the probability of that happening is very (very!) close to zero in our opinion. Simply put, there is no such thing as a historical example involving a superpower having achieved its status in the absence of challenges on the military front as well and while past performance does not guarantee future results, let’s just say we have valid reasons to be skeptical.

If we narrow down the definition of “peaceful” however and limit ourselves to considering the term one which describes the absence of a direct military confrontation between the EXISTING superpower and the EMERGING superpower then yes, the probability goes up quite a bit, especially in light of the nature of 2020’s worldwide economy.

Even so, we need to be aware of the Thucydides Trap dimension (one covered through a dedicated article, available HERE) or in other words, the fact that throughout history, the majority of conflicts between existing superpowers and emerging ones have resulted in direct military confrontations between the two. However, as we get close to the present, the likelihood of the transition in question not involving a direct confrontation between the two entities increases. As an example, we have the fact that the United Kingdom and United States did not engage in a military confrontation while the US was transitioning toward becoming the dominant superpower of the world (of course, if we move further down the road and look at the more distant past, we can easily identify US – UK tension situations but that would be intellectually dishonest in light of our existing conversation due to the fact that at that point, the United States was hardly interested in “branding” itself as a contender with respect to the goal of becoming a superpower) and on the contrary, meaningful cooperation was the norm.

Will the same principle be valid when it comes to the US and China?

This is where things get tricky because needless to say, identifying common denominators in terms of values between the United States and the United Kingdom is multiple orders of magnitude easier than identifying common denominators between the United States and China. Therefore, it would be fairly safe to state that the likelihood of China’s hypothetical transition to supremacy being let’s say uninterrupted by the United States tends to be on the lower side.

Still, we have reasons to be hopeful (in light of the fact that a peaceful resolution is in the best interest of all parties involved, not just the two nations) for reasons which revolve around… well, economics. Simply put, there would be so much to lose in the context of a direct military confrontation between economic superpowers that there are strong (to put it mildly) disincentives associated with endeavors that would lead to that.

In a way, a valid case could be made that just like nuclear war represents a “Mutually Assured Destruction” scenario, any type of direct military confrontation between two remarkably powerful nations represents a “Mutually Assured Economic Destruction” one. Furthermore, these two countries hardly live in bubbles. On the contrary, a lot of thought needs to be given to what happens next and what the various trading partners of the countries in question have to say about the conflict resolution mechanisms between the two. To put it differently, there are also extremely strong forces coming from the direction of trading partners to keep things peaceful because such a conflict would not be in the best interest of the many stakeholders involved.

Is it true that it isn’t difficult to envision scenarios in which a direct military confrontation occurs anyway? Yes, it is, from scenarios revolving around economic collapse situations leading to desperate scapegoat hunts and finger pointing campaigns that ultimately transition into an all-out war to scenarios involving black swan events as Nassim Taleb calls them, unexpected developments which render the past proverbial rules of the game obsolete.

As a conclusion, while it is unlikely that the ascension to supremacy of China can occur in the complete absence of military challenges, the world has valid reasons to be optimistic that a direct confrontation between superpowers can be avoided this time around, while, of course, also understanding that the ascension of China itself to undisputed superpower status is anything but guaranteed.

But is this picture genuinely complete?

Furthermore, what are the implications when it comes to the economic recovery dimension? China has indeed proven to be more competent at tackling the issue medically speaking and logistically speaking, but does this also mean it is much better-positioned when it comes to recovery scenarios compared to the West?

The answer to both questions is, unfortunately, no.

When it comes to the first one, it is important to embrace objectivity when analyzing the COVID-19 response and understand that while for example China has without a doubt done a much better job on the containment front, the same cannot be stated about the prevention dimension, especially in the earliest stages. Unfortunately for all stakeholders involved, China has initially downplayed the severity of the threat by a wide margin, with the authorities (in true CPC fashion) choosing to sweep the issue under the rug and punish those who have made coronavirus-related problems public. Furthermore, we need to understand that the post-containment numbers themselves might not necessarily be amazingly accurate but rather on the (very) optimistic side. As such, no, any picture that revolves around the idea that the entire endeavor represents a glorious success of (the Communist Party of) China is most definitely incomplete.

Moving on to the second issue, let’s just say that the economic recovery dimension is multiple orders of magnitude trickier than meets the eye and to understand this, we need to come to terms with the fact that China-related problems represented perhaps the number one reason why the COVID-19 situation was far more problematic in the West.

For the most part, we are referring to supply chain reasons. More specifically, to the fact that extremely wealthy Western nations found themselves dependent on either final product imports or at least imports with respect to vital components as far as much-needed medical equipment was concerned. Had medical equipment been plentiful enough in the West, initial containment would have been multiple orders of magnitude easier, at least from a logistical perspective. Instead, we had images of New York City doctors who earned six figures yearly being forced to wrap plastic garbage bags around their legs in the absence of alternatives, something Western leaders consider unacceptable.

As such, in the opinion of the ChinaFund.com team at least, China’s economic recovery will be hindered not necessarily by the effects related to the shutdown itself (although, of course, those are indeed more than serious as well, with economic shutdowns having dire implications) but rather by the geopolitical implications of the 2020 development.

The idea that Western nations will simply shrug and move on as if nothing happened is childish at best, especially in light of the fact that 2020 is an election year in key jurisdictions such as the United States. What is far more likely to happen is politicians pinpointing China as the main culprit that needs to be punished for the entire situation, for reasons which range from the fact that the virus itself came from China and might have been avoided if the authorities would have been more prudent when it comes to controversial wet markets for example to reasons that revolve around the West’s problematic dependence on Chinese imports.

On the one hand, the West has been enjoying affordable Chinese imports for not years but decades, with businesses also finding it convenient from a bottom line perspective to move at least certain departments to China. However, 2020 revealed more or less ignored problems associated with this reality, problems pertaining to excessively complex supply chains. More specifically, the COVID-19 situation caused major bottlenecks pertaining to China and as a result, just when medical supplies were needed the most, they became either excruciatingly expensive or unavailable altogether. Needless to say, such situations will be considered unacceptable moving forward, with Western decision-makers doing their best to tackle this issue.

And in the spirit of tackling the over-reliance on China issue, it is worth pointing out that a wide range of Western businesses have been so affected by the effects of economic shutdowns that they ended up depending on government assistance. Needless to say, “bailouts” have never been popular and now more than ever, the opportunity emerges for them to come with strings attached. For example, financial aid being conditioned, with the authorities demanding that the companies on the receiving end of various bailouts commit to moving as much in the way of production back home as possible.

Furthermore, we need to understand that China is not yet considered a risk-off jurisdiction. In fact, we have dedicated an entire article to explaining just that, an article which can be accessed by clicking HERE. As such, the market is willing to tolerate far more if you are let’s say the United States (including injections of trillions of dollars into the financial system and this time around, even “real” economy) than if you are China.

For these reasons and quite a few others, we have to be realistic and understand that China’s recovery will be far more complicated than that of Western nations. Does this mean it will be impossible? Of course not, it simply means that those who are either holding Chinese assets or are manifesting interest in gaining exposure to some down the road need to be prepared for a bumpy road. As much potential as there is in China (and, make no mistake, there most definitely is!), the road to long-term sustainability and prosperity will be paved with many challenges and in our view, the COVID-19 situation is most definitely a textbook example of just that.

Let us start by briefly addressing some of the problems with obvious political implications that the COVID-19 situation has caused directly:

1. Supply chain disruption, plain and simple. Simply put, as the spread of the virus progressed and epicenters changed, a chain reaction inevitably took place. From bottlenecks in China to bottlenecks in China and the European Union and so on… the virus most definitely caused an import/export nightmare
2. Widespread economic shutdown. The authorities found themselves in a bit of an economic predicament with respect to how to handle the situation. Do you try to keep the economy running and risk letting the virus spiral out of control, with it possibly crippling the medical system or do you implement strict “whatever it takes” quarantine measures, knowing that you are causing unprecedented economic shutdowns? As time passed, the science became clear, in that aggressive quarantine measures were the only way to go, with even initially “skeptical” nations such as the United Kingdom (that believed ultra-aggressive quarantine can be avoided) changing course
3. Unprecedentedly abrupt (temporary or even permanent) job loss. Millions upon millions (… upon millions) of individuals from all over the world found themselves in one form or another of unemployment. In some cases temporary/technical unemployment, in other cases permanent unemployment, with them no longer having a company to return to. Governments and central banks did indeed intervene so as to save as many jobs as possible but at the end of the day, it is difficult to do so when it comes to companies (for example tourism-related ones) which saw their income source dry out completely overnight
4. Dishonest competition among countries for medical equipment due to bottleneck issues in exporting nations such as China and India. From political pressure to secret government agency involvement so as to secure medical supplies, countries essentially outbid to the point of out-bribing one another, with the United States representing a textbook example to that effect, much to the frustration of even long-time allies such as European Union nations

The list could continue but we do not believe it is necessary, in light of the fact that it already paints an accurate enough picture of reality. As such, let us take things one step further and also focus on some of the most important indirect political implications involved, such as:

1. Increased pressure being placed on companies that rely on imports to a great degree to move as much as possible in terms of production back home. Few can deny the fact that the 2020 developments have made one aspect perfectly clear, the fact that at least as far as strategic products are concerned, over-optimization and increasingly complex supply chains (with components imported from a wide range of different countries and even the smallest of disruptions throwing a wrench into the entire endeavor to the point of making it impossible to deliver the final product) represent systemic risks. As such, politicians are being remarkably firm when asking for dramatic changes in this respect
2. It should come as no surprise that “selling” a generalized quarantine isn’t exactly a simple job for politicians and as such, they had to reach for their proverbial wallets (more specifically, taxpayer wallets or central bank “printers”, depending on how you choose to see it… arguably both) and essentially promise mass assistance in an effort to increase compliance
3. In an effort to save as many jobs as possible, entire industries have essentially been bailed out, with the general public however (skeptical after the bailouts which came after the Great Recession) demanding that there be strings attached. For example, again, that companies which have been saved by the proverbial taxpayer return the favor by moving as much in terms of production and adjacent services back home as possible so as to create jobs
4. When it comes to international relations, yes, the virus has caused problems directly (as mentioned in item #4 of the previous list) but also exposed existing vulnerabilities. For example, it made it clear that yes, Donald Trump was being more than serious with his “America First” agenda and the same principle was valid with respect to other geopolitical actors. Therefore, a more than valid case could be made that the COVID-19 crisis exposed serious flaws in international cooperation and, as if that was even necessary anymore, the fact that the world is in an undeniable isolationist trend

Did the start of 2020 only expose negative elements?

Most definitely not, there have of course also been success stories involving impressive cooperation but after drawing the line and trying to let’s say assess the net result, the scale tends to unfortunately be tilted rather aggressively toward the negatives. Again, many of them were hardly unknowns to the average geopolitical trend observer in a post-2016 framework (with the Brexit vote and 2016 US elections in the spotlight) but this much is certain: globalization is most definitely under attack.

Can it survive?

That remains to be seen. There are undoubtedly very strong forces which are working toward maintaining the current political status quo (companies and politicians who understand that even with its many imperfections, the benefits of globalization outweigh the cons) but on the other end of the spectrum, there are mounting negative ones determined to push humanity in the opposite direction, especially in light of the fact that 2020 is an election year in key jurisdictions such as the United States. Historically speaking, the ChinaFund.com team hopes the latter forces will prove to be unsuccessful because if there is one thing history books have taught us, it’s that widespread isolationist tendencies don’t exactly tend to lead to positive outcomes. Or, as a conclusion: hope for the best but prepare (hedge) for the worst.

At the origin of these developments lies… of course, China. Right off the bat, we would like to make it clear that we are not trying to paint a picture of China as a geopolitical actor that deliberately caused and causes problems but rather a picture involving a series of unintentional as well as unfortunate circumstances which each chipped away at the proverbial foundation bit by bit. In aggregate, they caused changes which make it clear that the international relations system countries have returned to after extensive quarantine periods is in a bit of a “new paradigm” situation.

The problems, at their core, revolve around unintended consequences pertaining to supply chain complexity and over-optimization, which have proven to be a literally deadly duo:

1. On the one hand, globalization inevitably brought about an increase in supply chain complexity which cannot be ignored, with a very fragile equation being involved in the production of most goods: components which need to be imported from various countries, the manufacturing process which takes place in yet another jurisdiction, just like the customer support dimension and the list could go on and on. Needless to say, all it takes is for one cog to stop spinning and the activity of the supply chain as a whole grinds to a halt. This became painfully obvious in early 2020, when China was the epicenter of the coronavirus pandemic (before it was labeled a pandemic) and companies that were dependent on Chinese imports found themselves unable to keep functioning
2. On the other hand, a valid case could be made that had enough inventory existed around the world, the temporary disruption of economic activity in China or anywhere else would not have represented such a literally deadly scenario. Unfortunately, the exact opposite trend has manifested itself over the years, with companies doing their best to avoid a “bulky” inventory strategy and instead, keeping the business as “lean” as possible by only keeping a carefully calculated quantity of supplies within reach (needless to say, a low one). As such, the minute disruptions appeared, many overly-optimized businesses found themselves in a blockage situation

To make matters worse, the previously mentioned duo did not just manifest itself when it came to let’s call them “expendable” products but rather as far as the exact opposite was concerned: crucial medical equipment. As the epicenter of the COVID-19 pandemic moved to Europe and later on to the American continent, healthcare system after healthcare system found itself forced to deal with a severe shortage of masks and other essentials due to the fact that they were either dependent on Chinese imports of the actual product or at the very least on imports of various components. Regardless, the end result remained the same: a severe shortage of medical equipment precisely when it was needed the most.

This state of affairs, as mentioned at the beginning of our article, brought out the best in people as well as governments in certain cases: international cooperation, with for example both China and other European Union nations helping the gravely-affected Italy with much-needed equipment and medical expertise (Germany, for example, even agreed to accept Italian patients and relieve the especially Northern Italian healthcare system of a serious burden).

Unfortunately, it also brought out the worst, with for example the United States engaging in behavior one can consider less than ethical, even when allies were involved. Whether we are referring to the Donald Trump administration essentially trying to bribe German biotech companies that were working on vaccines or US officials outbidding their French counterparts to the tune of offering three times more for medical equipment as well as instant payments, it has become clear that in many instances, the worldwide international relations framework revolved around a more than obvious adversarial approach.

It will most likely take years upon years for the many ramifications of this adversarial attitude to manifest themselves but the bottom line is this: trust, especially among Western nations, has been lost to a significant degree. Even within the European Union, leaving positive examples such as the previously mentioned ones aside, tensions kept appearing with respect to how to tackle the economic implications of the 2020 crisis, with debtor nations such as Italy and Spain demanding extremely aggressive and decisive measures, whereas Northern European creditor nations such as Germany and the Netherlands hesitated.

To make matters worse, 2020’s realities didn’t exactly come after an extremely rosy period in terms of international relations, especially after the (in)famous 2016 developments, with the Brexit vote kicking off a trend of increasing isolationism and the US elections which resulted in the victory of Donald Trump sealing the deal. Therefore, a more than compelling case could be made that the 2020 developments did not just come as a short-term hiccup in a longer-term trend of increased international cooperation but on the contrary, essentially made an already volatile geopolitical landscape worse.

Can China take advantage of this state of affairs? Let’s just say that even if logic dictates that this might be the case, the situation tends to be more complex than meets the eye because despite there being increasing tensions among Western nations, the temptation to simply point to China as the main cause of everything that is going wrong both economically and geopolitically might be too great to resist, especially in the United States and other countries where leaders on the isolationist side have been or will be elected. No matter what happens, the ChinaFund.com team will continue keeping its fingers on the pulse of not just China but the broad international relations landscape as well.

Understanding the trade relationship between these two countries can make you a more savvy investor or forward-thinking business person. Knowing how the two countries rely on each other can help you make decisions and predict where the relationship is likely to head next.

As such, this article represents is a look at the trade relationship between the U.S. and China from the perspective of an investor or business person who is interested in opportunities related to China.

How China Fits on the Global Stage

In most major economic categories, China has been creeping up to become one of the highest-ranked countries in the world. This increase in productivity has mainly been the result of their transition to more of a free-market country. After implementing changes to their markets in 1979, China has been experiencing unprecedented levels of economic growth.

Right along with its economy, China’s trade has also been exploding over the past few decades:

➢ In 1995, China’s imports and exports of goods were valued at a total of $280.9 billion (just 3 percent of global trade at the time)

➢ However, by 2018, its total trade in goods had jumped to a value of $4.6 trillion (12.4 percent of global trade)

Currently, this 12.4% is enough to make China the world’s top trading powerhouse, followed by the United States at 11.5 percent of total trade. Germany is in third at 7.7 percent. Considering the bulk of goods that are manufactured in China these days, it’s not all that surprising that they are sitting at #1 in terms of trade. We’re willing to bet that the bulk of goods you purchase will have a small Made In China sticker somewhere on them.

When it comes to who China is actually trading with, their top partners are the United States, Hong Kong, Japan, South Korea, Vietnam and Germany. It’s interesting that all of these countries are close geographically, with the exception of the United States and Germany (which are #2 and #3 in global trade). For China, trade has become an increasingly important part of their overall economy, and it has been a significant tool used for economic modernization.

China has been seeing increasing tensions with at least one of their trade partners, the United States. We will touch more on this in a later section but China’s relationship with the US has heightened business uncertainties, given that the US is the country’s main trade partner. In 2017, China had a trade surplus of $275 billion with the United States (an all-time record).

To help compensate for this risk, the Chinese government has been adopting looser economic policies to ensure that the country can keep growing despite tensions with their top trade partner.

Now let us take a look at the relationship from the United States’ viewpoint.

How the U.S. Fits on the Global Stage

The United States is currently the world’s largest economy and the largest exporter and importer of goods and services. Trade has been a key component to American prosperity and is what fuels its economic growth, good jobs for its citizens, a continuously rising standard of living and also helps Americans provide their families with affordable goods and services. This is why the United States puts an emphasis on global trade and this is a constant talking point from their politicians.

Let’s take a look at a few stats offered by the Office Of The United States Trade Representative:

➢ In 2017, the U.S. was the world’s largest goods and services trading nation, with exports of goods and services totaling $2.35 trillion

➢ In 2017, agricultural goods accounted for $264 billion in total (two way) U.S. trade. Exports were $143 billion; Imports $121 billion; and the trade surplus was $22 billion

➢ In 2017, services accounted for $1.3 trillion in total (two way) U.S. trade, up 5.6% from 2016, and up 56% from 2007. The United States is the largest services trading country in the world

The United States has been immensely successful at trade and is well equipped for it. As a nation, they have a fair bit of natural resources they can offer as well as innovative companies and hard-working citizens. This, coupled with an entrepreneurial spirit, has created a country that takes trade very seriously and sees the results that come from it.

There are a lot of reasons why the United States places such a high emphasis on trade. First, engaging in trade can help bring jobs to the country, which is very good for citizens and putting people to work. Second, effective trade can help offer new products or services that were previously unavailable to its citizens. Last but not least, trade encourages investment (which leads to faster economic growth).

Given that the United States and China are two of the top countries in the world when it comes to their production, imports/exports and trade, it’s worth taking a closer look at their relationship.

The United States vs. China Trade War

We wouldn’t be able to write this article without mentioning the trade war that erupted between the two countries over the last couple of years. If you’re not familiar, a trade war is not a literal war but instead, it’s what happens when one country retaliates against one another by raising import tariffs or placing other restrictions on the other country’s imports. This happened between China and the U.S. when Donald Trump initiated tariffs on China’s imports.

A brief history of the trade war would look something like this:

1. The war started in July 2018, with both countries exacting tariffs on $34 billion dollars worth of goods from the other country
2. The U.S. has escalated the trade war several times and has implemented tariffs on over $400 billion dollars worth of Chinese goods to date. China generally has responded each time the United States has acted but on a much smaller scale (about $120 billion worth of U.S. goods). The leadership between the two countries has also been back and forth, flipping between butting heads and praising one another
3. Most recently, these countries reached an agreement for a trade deal (that is currently in Phase One)

It’s important to note that the trade war is still ongoing but has taken a back seat to the pressing matter of the coronavirus. As it currently stands, these two countries reached an agreement for a new trade deal. Phase One of this deal is set to begin in the upcoming year (2021) and China has stated that the effects of the coronavirus will not change their deal. The main agreement from the deal was that the United States agreed to cut tariffs on certain Chinese goods and in exchange, China will purchase American goods (specifically farming goods, energy and manufactured goods).

China also agreed to increase purchases of US goods by up to $200 billion over the next two years. It’s also worth noting that the deal included a few other obligations on the part of the Chinese. First, there was a section on intellectual property. China has long been accused of pressuring companies into handing over technology to the Chinese government in exchange for market access. For example, if Google wanted to set up a location in China, they would probably be pressured into handing over their software so that the Chinese government could use it. Google might even be pressured into handing over data surrounding their users. China has agreed to restrict this practice moving forward.

The final aspect of the trade deal had to do with currency. China has long been accused of artificially devaluing their currency to make the country seem more attractive to foreign investors. If the Chinese currency is less valuable, investors’ money can buy more goods in China, so they’re more likely to want to invest. China has agreed to limit this practice moving forward as well.

It will be interesting to see what happens with this trade war and deal if Donald Trump is removed from office (which could happen in November if Joe Biden wins the election). If he wins reelection, then the deal will most likely continue as normal. However, if Joe Biden wins the election then his administration may choose to take the relationship in a different direction.

We hope that you found this article valuable when it comes to understanding the current trade relations between the United States and China. If you’re interested in reading more, please visit our blog as well as the “New Here?” section of ChinaFund.com.

● Taking a trip around the world (something that was almost impossible just a hundred years ago) can now be achieved in a matter of hours by anyone with a middle-class income
● Anyone with access to the Internet or a cell phone is able to communicate instantly with anyone in the world
● People can order products online from companies across the planet and receive these goods in days

Through this article, we will examine what globalization is and what it means for investors.

What Is Globalization?

Globalization is defined as the process by which businesses or other organizations develop international influence or start operating on an international scale. One of the easiest ways to visualize this is to imagine the Internet connecting practically every human on Earth. Anyone with an Internet connection can log into Facebook, WhatsApp, or Instagram and check their accounts as well as communicate with people on the other side of the world.

If you’ve grown up after the late 90s, it’s a little easy to take something like the Internet for granted. However, if you were born a little bit earlier in the 1900s, then you get a better scope for just how far the world has come in quite a short time. Additionally, if someone from the 1700s or 1800s was alive today, the world would hardly even be recognizable.

It’s not just tech and Internet companies. Businesses like Nike or Apple (which both sell physical goods) rely heavily on other countries to help manufacture, produce, ship and market their merchandise.

International Trade

Globalization is not new. It’s a slow but steady process that has really been going on since the beginning of human civilization. As human colonies got bigger and bigger, they slowly spread to interact with other groups of humans. Imagine colonizers from Europe first stepping foot on American soil and trading with Native Americans. That was globalization in the works!

However, the main reason that globalization seems much more pronounced today is represented by the rate of acceleration at which it happens. For example, according to the SUNY Levin Institute, the volume of international trade increased twenty-seven fold from $296 billion in 1950 to $8 trillion just 55 years later, in 2005. This is astronomical growth that would’ve been unprecedented at any other point in human history.

This growth of international trade between countries has been fueled in recent years by the introduction of new technologies.

Let’s take a look at some of the more recent technologies that have created the perfect climate for globalization to increase at the rate that it has.

New Technologies and Services

Here’s a quick look at just a few of the new technologies and services that have lead to a rapid increase in globalization. We’re sure you’ll see quite a few familiar faces on the list:

1. Google – The Internet has completely revolutionized the world and Google is one of the top players when it comes to cataloging and organizing the Internet. Not to mention the free services they offer (Google Maps, Gmail, etc.) that help people connect every day
2. Facebook – Facebook has 2.6 billion users. The company also owns Instagram (1 billion users) and WhatsApp (2 billion users). Although there may be overlap in users, that’s over 5 billion people that connect through Facebook’s family of apps. Reminder: the world population is just under 8 billion
3. Amazon – Amazon commands 50% of the eCommerce market. Not only that, but they offer services like Amazon FBA to allow other companies to list products for sale on their site. All these goods wouldn’t be moving and exchanging hands without Amazon
4. PayPal – Only about 8% of the world’s currency is represented by physical currency. The rest exists only on computers. PayPal is a major player with respect to helping this digital cash exchange hands
5. Alibaba – Alibaba is one of the leading eCommerce companies in China (currently the world’s second-largest economy). Not only that but they play a major role in connecting manufacturers and suppliers with B2C business owners

It’s hard to dispute that globalization is taking place. However, a more pressing question might be: is even good? Let’s examine…

The Good of Globalization

One of the main advantages of international trade is that consumers enjoy a wider selection of products than they wouldn’t have access to if they could only get domestic products. Also, the ability to utilize the workforces and resources of other countries generally means that companies can produce their goods at a much cheaper rate. This means that consumers are not only getting better goods, they’re also getting them for a cheaper price.

Additionally, the growth of international trade has created tremendous economic growth across the globe. As a whole, incomes have risen, there are more jobs, lower prices, and workers have more earning power. One of the best recent examples of this is China.

China has been on an economic tear recently, becoming a hub of global trade. Foreign companies want to use China to produce goods as well as trade with China. As a result, their economy has doubled almost every 8 years since the 1980s and China’s citizens have been better off for it. China’s middle class has risen to make up about 58% of their population (up from 19% in the 1980s)

The Bad of Globalization

However, now that the global economy is so interconnected, there can be worldwide repercussions when a large economy suffers a recession. When trade decreases, jobs and businesses are lost. Even though everyone prospers when things are going well, everyone also feels the effects when things start going south. The best recent example of this is represented by the coronavirus pandemic.

Before the pandemic even left China (the country where it originated), it was having effects on countries such as the United States, which lean on China for their supply chains. Investors started to panic amid all of the uncertainty and the stock market went through a significant drop. This is a good example of how savvy investors could’ve used knowledge related to globalization to their advantage.

How to Use It to Your Advantage?

Investors who understand globalization will be better positioned to make it work in their favor. For example, if you had the foresight to realize that a pandemic in China could have drastic effects on the U.S. economy even before it had reached U.S. soil, then you could’ve gotten out of the market in time to avoid the drop (or hedged yourself in other ways). Another potential use revolves around understanding which countries economies are growing and which are in decline. Although it’s easy to lose perspective on a shorter day-to-day timeline, countries are constantly in flux.

One of the best ways to use globalization to your advantage is simply to just stay on top of new developments, policy changes and data. This article in the Harvard Business Review puts good advice on the table. They recommended reading the most up-to-date news and statistics but avoiding portfolio changes which compensate for each development. Instead, make an assessment as to whether the companies you’re investing in will still be thriving 10-20 years from now and focus your attention on long-term trends.

Here are a few other ways to adapt your mindset when investing:

1. Know which companies operate in which countries and stay on top of the news (business, economic and investment) pertaining to foreign countries
2. Consider investing in other countries to take advantage of growth outside of the United States. The best country to start with is (of course) China and if you have more specific questions, feel free to send us an email or message directly!
3. One of the easiest ways to invest in other countries is simply to incorporate stocks from foreign countries into your portfolio
4. Look for companies to start leading the way with changes that were usually reserved for government action. This is already starting to happen with the spats between social media and the U.S. government. We wouldn’t be surprised if companies wielded just as much power as governments in the future

The future is going to be incredibly exciting, as countries continue to increase the capacity in which they work with each other. We predict that there will continue to be a rise in globalization (countries working together) as well as a rise in companies starting to work more and more with foreign governments to help boost global commerce. Just make sure that as an investor you’re poised to take advantage of them and be prepared to whether the occasional powerful storm (with the 2020 situation representing an example to that effect)!

We hope that you’ve found this article valuable when it comes to understanding what globalization is and how you can use it to your advantage as an investor. If you’re interested in reading more, follow our blog and/or visit the “New Here” section of ChinaFund.com.

Or, to be more precise, up until this point at least, such situations have resulted in military escalation more often than not… but not always, and therein lies the nuance we are trying to address. Graham Allison started with the Peloponnesian war which took place between 431 and 404 BC and revolved around the rising Athenians on the one hand and the Spartans who were worried about the ascension in question on the other. Needless to say, the end result was anything but peaceful.

Time and time again throughout history, such scenarios manifested themselves and as explained in Graham Allison’s “Destined for War” book, war was the ultimate outcome in 12 of 16 conflicts that have been identified and studied. As such, if we are to adopt a tunnel view approach and see things thoroughly through the lens of historical precedents, we would have no choice but to acknowledge that war represents the most probable outcome, with the situation developing that way in 75% of the previously mentioned conflicts.

That perspective is, however, quite a bit shortsighted in our view.

Why?

Simply because aside from knowing what happened with the past and having a firm grasp on historical arguments, it is at least equally important to… well, think critically.

This critical thinking correlated with a meaningful understanding of current events will reveal that the closer to the present we venture, the more war-averse society has become. As such, the ascension of the USSR led to the Cold War rather than a hot conflict, with the end result being represented by the implosion of the USSR… economics rather than missiles, in other word. The same way, we have the strong ascension of Germany as a case study and, of course… drum roll, please, that of China.

Why is society less war-tolerant at this point in time?

For a wide range of reasons, for example:

1. The fact that as fields such as reporting or photography advanced and the average person was on the receiving end of war-related images which were anything but glorious and triumphalist (on the contrary, they made it clear that the “truth” of war is closer to dying of diarrhea than covered in glory), the idea of going to war as a propaganda tool lost its luster quite a bit
2. The fact that the means have changed dramatically in our nuclear age and as such, a potential nuclear World War III could literally end in minutes… for all parties involved. To put it differently, we are in a Mutually Assured Destruction framework as of the Cold War, with nuclear powers understanding all to well that one cannot exactly “win” a nuclear war, unless we attribute a remarkably cynical connotation to the term “winning”
3. The fact that never before in human history has the worldwide economy been so interconnected. Therefore, a more than valid case could be made that while nuclear wars would be clearly be in Mutually Assured Destruction territory, wars in general would be in the realm of let us call it Mutually Assured Economic Destruction territory. To put it differently, there would be so much to lose on the economic front, leaving all other dimensions aside, that going to war makes considerably less sense in 2020 and beyond than in the past

As can be seen, these are just three examples of more than pragmatic reasons, with us not even appealing to humanity or using words such as “kindness” or variation thereof. Simply put, there are so many disincentives associated with hot conflicts at this point in time that the equation is anything but appealing from a strategic rather than humanitarian perspective. Add the latter dimension to the mix and even more so… it just doesn’t make sense.

However, we do need to understand that nothing is set in stone and peace should not be taken for granted. For example, reason #3 revolves around globalization and as the post-pandemic situation makes clear, quite a few actors are let’s just say strongly re-considering globalization and instead, are opting for more or less isolationist approaches under the guise of addressing the issue that supply chains are overly complex and that when situations such as medical equipment shortages emerge (as was the case this year), countries that are over-reliant on China and other exporting nations stand to lose.

The same way, if there is anything history has taught us, it’s that the proverbial masses aren’t exactly always textbook examples of level-headed thinking. As such, if confronted with perhaps an economic crisis that is devastating enough, the status quo could conceivably be altered to such a degree that the idea of rallying against a common enemy becomes appealing, whether or not the arguments in question are logically or factually coherent.

Our conclusion is therefore straightforward: in 2020 and beyond, arguments which revolve around the Thucydides Trap and various alternatives make considerably less sense than a few decades ago because the proverbial rules of the game have changed. From Mutually Assured (Military) Destruction to Mutually Assured Economic Destruction, there is more than enough in the way of disincentives for the ChinaFund.com team to state that we have valid reasons to not necessarily be optimistic but at least not be morbidly pessimistic. As always, however, it is wise to never say never in the oftentimes murky world of geopolitics and as such… we won’t. Instead, our team will monitor geopolitical developments carefully and do its best to keep readers and especially clients meaningfully informed.