The US-China “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.”

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.”

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?