The United States and China in a Cold War 2.0 Context?

More and more market observers are using terms such as ”Cold War 2.0” to describe a potential trajectory with respect to the obvious tensions between China and the United States. This discussion gives the ChinaFund.com team a reasonable enough context to make one of its viewpoints perfectly clear: it might be wise to stop imagining future events pertaining to complex dynamics based on outdated paradigms.

In our view, we need to understand that the Cold War describes a period which ended almost 30 years ago (from 1947 to 1991, to be more precise) and it would be the understatement not of the decade or century but downright millennium to state that in 2020 and beyond, the proverbial rules of the game and especially context haven’t changed in a dramatic manner.

For example:

1. Never before in human history has the global economic system been so interconnected as in the present, and the geopolitical implications should be more than obvious when analyzing one of the hallmarks of the Cold War, represented by proxy wars. As strange as it may sound, nations such as the US and China actually have valid reasons to restrain the ambitions of their less powerful allies rather than encourage confrontation. The Iran situation represents a textbook example to this effect because as explained in another article, China does have to gain from US-Iran tensions up until a certain point but for pragmatic reasons, it most definitely does not desire extreme escalation such as let’s say Iran blocking the Strait of Hormuz and oil prices skyrocketing (with the fact that China represents the world’s #1 oil importer obviously playing a significant role in this equation). To put it differently, it is remarkably differently to hurt an opponent economically (even indirectly) without dire consequences on your end as well
2. Today’s financial system paradigm is also remarkably different, with the worldwide economy dependent on cheap financing and even direct injections of capital to such a degree that its very foundation is questioned. Did asset prices reach extremely high levels due to regular market price discovery activity or rather because our economic model is on life support, sustained by unorthodox monetary policy and ready to collapse should it be taken away? And due to the previously mentioned interconnected nature of the worldwide economy, even adversaries such as the United States and China are included in the “our” term, with both having a lot to lose if the status quo were to be meaningfully altered (China because it is not yet robust enough to withstand a paradigm-altering exogenous shock and the United States because the very status of the US dollar as the de facto world reserve currency might be challenged)
3. “Mutually Assured Destruction” taking on more and more different forms. While initially used to make it clear that a nuclear war between the US and the Soviet Union would be so devastating that mutual destruction would be essentially assured, we have a wide range of variations at our disposal these days, such as Mutually Assured Economic Destruction (for example, China dumping all of its US dollar reserves on the market quickly, leading to equally devastating US retaliation)

… the list could go on and on.

Rather than view the current US – China tensions from the perspective of the Cold War, World War I, World War II or any other past conflict, it might make more sense to channel that energy toward understanding the particularities of the conflict in question from a “2020 and beyond” perspective. For these reasons and many others, the ChinaFund.com team tends to simply chuckle and move on whenever debates such as ones involving a potential “Cold War 2.0″ between the United States and China unfold.

Does this mean comparisons are impossible?

Of course not. Look hard enough and it isn’t the least bit difficult to find common denominators between the current US – China situation and pretty much any other past conflict, be it the Cold War or Ancient Greek currency debasement. However, we firmly believe that time and intellectual capacity are better channeled elsewhere.

However, please don’t mistake our amusement when it comes to Cold War comparisons with an intention on our part to somehow minimize the severity of the current state of affairs between China and the United States. On the contrary, we have made it clear time and time again that it arguably represents the number one systemic threat at this point in time, dwarfing the Russian dimension from an economic perspective.

But, and we cannot stress this enough, a meaningful understanding of this phenomenon and how/why it plagues us in 2020 cannot come from forced comparisons with past events with which today’s situation does not have enough in common. Does it mean no common denominators whatsoever can be identified? Of course not, it is always quite unlikely not to find at least a few common denominators when comparing pretty much any modern-day event to something that occurred in the past… within reason. But to turn that into your main narrative would, in our opinion, be a fundamental mistake.

Instead, we would strongly recommend remaining anchored in the present in light of the fact that many facets of the US – China dynamic are unprecedented and should be treated as such. Needless to say, this approach tends to be more difficult than simply finding comfort in historical analogies but the ChinaFund.com team firmly believes there is no meaningful alternative that makes sense at this point in time. Should you be interested in working with a team of experts that has had its fingers firmly on the pulse of the Chinese economy for over a decade so as to make sense of it all, ChinaFund.com is at your disposal. Simply visit our Consulting page for more details about what we can do for you and/or your organization or send us a message through the Contact section of our website.