The US-China "Cool War"

International trade lawyers

A good friend sent me an email from Cliff Kupchan of Eurasia Group, “the global leader in political risk analysis, advisory and consulting.”

Before I discuss Kupchan’s email, I want to note that for the last year or so I have believed there would be no US-China trade deal and that has made me obsessed with trying to figure out what that will mean for international trade and for the world going forward. I long ago concluded that the world will eventually essentially divide into two spheres: China and the United States. But what I have not been able to figure out is what that will mean overall nor what that will mean for particular regions and countries. In particular, I get stuck when trying to figure out which countries will go to which side.

I have always believed some countries will essentially be required to choose between the United States and China, some countries will want to choose between the United States and China, and some countries will want to straddle between the United States and China. See e.g., Israel will soon have to choose between China and the US, for an example of a country that would prefer to straddle between the United States and China but will almost certainly end up having to choose to side with the United States. But every time I have sought to break down what countries will fall into or migrate to what spheres I give up because so much seems uncertain.

Kupchan is far less uncertain and his analysis seems quite sound and I found myself nodding yes to his email probably twenty times more often than I found myself thinking, “I don’t think so.” Just to be clear though — and to minimize the hate mail we get whenever we write about anything geopolitical — what is written above and below is not necessarily what I (or anyone else for that matter) wants for the future; it is merely what is predicted.

Kupchan starts his email by “setting the table” by saying today’s “global structure is one of ’emerging bipolarity.’ The US and China are superpowers, the rest lag far behind.” Kupchan sees a “new cool war”:

I use the word emerging because it’s a close-ish call whether China is already a superpower or well on the way to becoming one. I’ll go with the latter formulation mainly because China lags in the military sphere. Still, we are entering the second bipolar world since 1945. Though both are bipolar, the new system has quite different characteristics than the Cold War. It will be more economically-focused and less confrontational – I call it the new cool war.

He then goes on to say that “bipolar systems are more stable than multipolar ones. So the next several decades will probably be somewhat more peaceful than many observers expect – though only somewhat as the new system will have dangerous chasms.”

He then does a fantastic job explaining his views on how we got to where we are and what it is going to mean politically and militarily. He then writes how the “greatest antagonism and strongest US-China balancing will occur in the economic realm and on how China “will attempt to balance US capabilities on butter more than guns.” Kupchan sees the battle over advanced technology and trade as “the main theater of the cool war,” with “competition over robotics, AI, quantum computing, and 5G …. [as] the new, primary form of structural balancing between the two superpowers.” Per Kupchan, “this [technological] battle will be long-term and confrontational – the same forces are driving the advance technology battle in the cool war that drove ICBM competition in the Cold War” and “advanced tech firms around the world will [likely] have to choose between US-aligned and China-aligned markets.”

Earlier this month, in When Will the US-China Trade War End? It’s the New Normal, I wrote how the trade war is about much more than trade and because of that it will not end at all soon:

For the last year, the most common question  asked of both our China lawyers and our international trade lawyers has been: When will the US-China trade war end? President Trump’s announcement yesterday that the U.S. will be putting a 10% tariff on all Chinese goods not yet tariffed partially answers that question.

My full answer (which has been my answer for about a year) is that there is no end in sight to the US-China trade war. It will not end because it is much more than a trade war; it is a political, economic, and low-level military war. The better question right now is not when it will end, it’s how is it going to spread. In subsequent blog posts we will discuss how you should expect that trade war to spread and how you as an international company should start preparing to deal with what we have been publicly calling the New Normal for going on a year now.

For essentially the same reasons, Kupchan too does not see much chance for trade war resolution:

The escalating trade war also reflects balancing behavior, as the sides jockey for advantage. This interaction represents an interesting mix of structural and foreign policy drivers. For Steven Mnuchin, Larry Kudlow and other Trump advisers, the trade/tariff war is a discrete foreign policy designed to level the playing field by stopping certain Chinese policies. But for others, such as Peter Navarro and John Bolton, it’s an effort to contain or balance China – and that’s structural. Trump has a foot in both camps but is tacking toward the hardliners. Balancing behavior is therefore also driving the trade war, which bodes ill for a resolution.

Most interesting for me though was how Kupchan divides our future world as between China and the United States. As per Kupchan, “the key question for investors is what the new spheres will look like and how they will affect business.”

Kupchan sees Asia splitting between the United States and China and I tend to agree:

Northeast Asia will remain closely tied to the US, through treaties and military deployments. US commitments to Japan and South Korea are unlikely to weaken markedly, especially because they are now located on the front porch of the other superpower. Meanwhile, Tokyo’s and Seoul’s historic suspicion of and enmity toward China is unlikely to abate significantly for a long time.

But the ASEAN region could well become a relative Chinese sphere of influence. ASEAN states have geographic proximity and large and rapidly growing economic ties with China. Beijing has focused on infrastructure and technology sector investment; tech regulation in the region has accordingly taken a Chinese-like tack on data localization and other issues. Meanwhile, from the US perspective, Southeast Asia is not a priority area for the political establishment. Under conditions of retrenchment, the US probably won’t be a reliable strategic partner for ASEAN countries.

Cambodia, Laos, and Myanmar are already in China’s orbit. Prime Minister Mahathir Mohamad’s election in Malaysia led to a recalibration of that nation’s tilt toward China, but the long-term trend will continue. Indonesia and Singapore will try harder to remain non-aligned, but both will come under great economic pressure from Beijing. The Philippines’ trajectory depends on whether President Rodrigo Duterte completes his term through 2022, who succeeds him, and how much of his pivot toward China becomes institutionalized. Moreover, the South China Sea issue is headed toward game over in terms of territorial disputes and Chinese expansion, with Beijing winning.

In my view, Vietnam will probably be the most independent ASEAN country. Antipathy toward China and strong economic links to Russia, South Korea, Japan, the US, and the EU give Hanoi more leverage.

Kupchan sees Europe as fluid too:

Europe will also be more fluid, with its trajectory in part dependent on the fate of NATO. Southern and central and eastern Europe, for economic reasons, will likely see the biggest uptick in Chinese influence. The Middle East, on the other hand, will remain tied to the US for longer. Iran aside, China’s ascent has been slower there.

Kupchan dubs Russia, India, Brazil and the EU28 “floaters” who will not become “deeply embedded in a sphere of influence”, but because “they fall so far below the superpowers regarding distribution of capabilities that their “floater” status won’t have major impact on the system or outcomes.”

Kupchan’s email then discusses what all this will mean for war and for “public goods” and he is actually fairly optimistic on both these fronts.

What are your thoughts? Do you see a cool war coming? Are we already in a cool war? What does the future hold for US-China relations? Is it a Trump issue or is it a US-China issue? Will any of the above impact your business plans and, if so, how? What countries will line up where?

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