Preface: In this chapter I will be looking at the positions that the US and China now find themselves in and what being in these positions means for US-China relations. Because the US and China are now rival powers in a number of domains, they are in "conflicts" or "wars" in these domains, so we will be looking at where these stand. Because for the most part what we will be looking at are just new versions of old and classic conflicts (e.g., new technologies in a classic technology war, new weapons in a classic military war, etc.), we will be looking at them in the context of what has happened repeatedly in history and with the timeless and universal principles we learned from studying these cases. While I will be looking at the range of possibilities that one might consider, I will be doing that without getting into what the future might look like. I will do that in "The Future," the concluding chapter of this book. In this chapter I will also be moving a bit more from just conveying facts to sharing opinions (i.e., sharing my uncertain conjectures). (Note: We have reordered the chapter numbers in this series, making what was originally the appendix to Chapter 2 its own chapter. As a result, this chapter, which is the next installment after the September 11 Observations "Chapter 5: The Big Cycle of China and Its Currency," is numbered Chapter 7.)
As with my other chapters if you want to quickly read this chapter you can read just that which is in bold and if you want to read just the principles, you can read that which is in italics.
I will start by passing along three principles of mine about relationships that pertain to all relationships—between people, between organizations, etc.—including the US-China relationship. Like any of my other principles you can take them or leave them as you like. They are just what I have observed to be true and have worked for me. Feel free to skip them if you're not interested.
My main principle about relationships that I think is relevant to the US-China relationship is:
- Both parties in a relationship can choose whether they will have a win-win cooperative-competitive relationship or a lose-lose mutually threatening relationship, though it takes both of them to agree on what type of relationship they will have. If they choose to have a primarily win-win cooperative-competitive relationship they will take into consideration what is really important to the other and try to give it to them in exchange for them reciprocating. In that type of win-win relationship, they can have tough negotiations done with respect and consideration, competing like two friendly merchants at a bazaar or two friendly teams at the Olympics. If they chose to have a lose-lose mutually threatening relationship they will primarily think about how they can hurt the other in the hope of forcing the other into a position of fear in order to get what they want. In that type of lose-lose relationship they will have more destructive wars than productive exchanges. History has shown that small wars can get beyond anyone's control and turn into big wars that are much worse than even the leaders who chose this path imagined so that virtually all parties wish that they chose the first path. Either side can force the second path on the other while it takes both sides to follow the first path. In the back of the minds of all parties, regardless of which path they choose, should be their relative powers. In the first case, the parties should realize what the other could force on them and appreciate the quality of the exchange without getting too pushy, while in the second case, the parties should realize that power will be defined by the relative abilities to endure pain as much as the relative abilities to inflict it. When it isn't clear exactly how much power either side has to reward and punish the other, the first path is the safer way because there is great uncertainty around how each side can hurt the other. On the other hand, the second path will certainly make clear which party is dominant and which one will have to be submissive after the hell of war is over. That brings me to my main power principle.
My main principle about power is:
- Have power, respect power, and use power wisely. Having power is good because power will win out over agreements, rules, and laws all the time. That's because, when push comes to shove, those who have the power either to enforce their interpretation of the rules and laws or to overturn the rules and laws will get what they want. The sequence of using power is as follows. When there are disagreements, the parties disagreeing will first try to resolve them without going to rules/laws by trying to agree on what to do by themselves. If that doesn't work, they will try using the agreements/rules/laws that they agreed to abide by. If that doesn't work, those who want to get what they want more than they respect the rules will resort to using their power. When one party resorts to using its power and the other side in the dispute isn't sufficiently intimidated to knuckle under, there will be a war. A war is the testing of relative power. Wars can be all-out or they can be contained; in either case they will be whatever is required to determine who gets what. A war will typically establish one side's supremacy and will be followed by a peace because nobody wants to fight the clearly most powerful entity until that entity is no longer clearly the most powerful. At that time, this dynamic will begin again. It is important to respect power because it's not smart to fight a war that one is going to lose; it is preferable to negotiate the best settlement possible (that is unless one wants to be a martyr, which is usually for stupid ego reasons rather than for sensible strategic reasons). It is also important to use power wisely. Using power wisely doesn't necessarily mean forcing others to give you what you want—i.e., bullying them. It includes recognizing that generosity and trust are powerful forces for producing win-win relationships, which are fabulously more rewarding than lose-lose relationships. In other words, it is often the case that using one's "hard powers" is not the best path and that using one's "soft powers" is preferable.[1] If one is in a lose-lose relationship, one has to get out of it one way or another, preferably through separation though possibly through war. To handle one's power wisely, it's usually best not to show it because it will usually lead others to feel threatened and build their counter-threatening powers, which will lead to a mutually threatening relationship. Power is usually best handled like a hidden knife that can be brought out in the event of a fight. But there are some times that, when push comes to shove, showing one's power and threatening to use it is most effective for improving one's negotiating position and preventing a fight. It is valuable to know what matters to the other party most and least, especially what they will and won't fight for and how they will fight. That is best discovered by looking at the types of relationships they have had and the ways they used power in the past, by imagining what they are going after, and by testing them through trial and error. Sometimes mutual testing leads to tit-for-tat escalations that dangerously put both parties in the difficult position of having to choose between fighting and being caught bluffing. Escalating tit-for-tat wars often take conflicts beyond where either side would logically want them to go. Knowing where the balance of power lies—i.e., knowing who would gain and lose what in the event of a fight—should always be kept in mind because it is essentially the equilibrium level that parties keep in the back of their minds when considering what a "fair" resolution of a dispute is—like thinking about what results a court fight would lead to when considering what the terms of a negotiated agreement should be. Though it is generally desirable to have power, it is also desirable to not have powers that one doesn't need. That is because maintaining power consumes resources, most importantly your time and your money. With power comes the burden of responsibilities. While most people think that having lots of power is best, I have often been struck by how happy less powerful people can be relative to more powerful people. When thinking about how to use power wisely, it's also important to think about when to reach an agreement and when to fight. To do that, it is important to imagine how one's power will change over time. It is desirable to use one's power to negotiate an agreement, enforce an agreement, or fight a war when one's power is greatest. That means that it pays to fight early if one's relative power is declining and fight later if it's rising. Of course there are also times that wars are logical and necessary to keep or get what one needs. That brings me to my main principle about war.
My main principle about war is:
- When two competing entities have comparable powers that include the power to destroy the other, the risks of a war to the death are high unless both parties have extremely high trust that they won't be unacceptably harmed or killed by the other. Imagine that you are dealing with someone who can either cooperate with you or kill you and that you can either cooperate with them or kill them, and neither of you can be certain what the other will do. What would you do? Even though the best thing for you and your opponent to do is cooperate, the logical thing for each of you to do is to kill the other before being killed by the other. That is because survival is of paramount importance and you don't know if they will kill you, though you do know that it is in their interest to kill you before you kill them. In game theory being in this position is called the "prisoner's dilemma." It is why establishing mutually assured protections against existential harms that the opponents can inflict on each other is necessary to avoid deadly wars. Establishing exchanges of benefits and dependencies that would be intolerable to lose further reinforces good relations. Because a) most wars occur when it isn't clear which side is most powerful so the outcomes are uncertain, b) the costs of wars are enormous, and c) losing wars is ruinous, they are extremely dangerous and must only be entered into if there is confidence that you will not have unacceptable losses, so you must think hard about what you will really fight to the death for.
While I am primarily focusing on US-China relations in this chapter, the game we and global policy makers are playing is like a multidimensional chess game that requires each player to consider the many positions and possible moves of a number of key players (i.e., countries) that are also playing the game, with each of these players having a wide range of considerations (economic, political, military, etc.) that they have to weigh to make their moves well. For example, the relevant other players that are now in this multidimensional game include Russia, Japan, India, other Asian countries, Australia, and European countries, and all of them have many considerations and constituents that will determine their moves. From playing the game I play—i.e., global macro investing—I know how complicated it is to simultaneously consider all that is relevant in order to make winning decisions. I also know that what I do is not as complicated as what those in the seats of power do and I know that I don't have access to information that is as good as what they have, so it would be arrogant for me to think I know better than they do about what's going on and how to best handle it. For those reasons I am offering my views with humility. With that equivocation I will tell you how I see the US-China relationship and the world setting in light of these wars, and I will be brutally honest.
The Positions the Americans and Chinese Are In
As I see it, destiny and the Big Cycle manifestations of it have put these two countries and their leaders in the positions they are now in. They led the United States to go through its mutually reinforcing Big Cycles of successes, which led to excesses that led to weakening in a number of areas. Similarly they led China to go through its Big Cycle declines, which led to intolerably bad conditions that led to revolutionary changes and to the mutually reinforcing upswings that it is now in.
For example, destiny and the big debt cycle led the US to find itself now in the late-cycle phase of the long-term debt cycle in which it has too much debt and needs to rapidly produce much more debt, which it can't service with hard currency so it has to monetize its debt in the classic late-cycle way of printing money to fund the government's deficits. Ironically and classically being in this bad position is the consequence of the United States' successes that led to these excesses. For example, it is because of the United States' great global successes that the US dollar became the world's dominant reserve currency, which allowed Americans to borrow excessively from the rest of the world (including from China) which put the US in the tenuous position of owing other countries (including China) a lot of money and which has put these other countries in the tenuous position of holding the debt of an overly indebted country that is rapidly increasing and monetizing its debt and that pays significantly negative real interest rates to those holding it. In other words it is because of the classic reserve currency cycle that China wanted to save a lot in the world's reserve currency, which led it to lend so much to Americans who wanted to borrow so much, which has put the Chinese and Americans in this awkward big debtor-creditor relationship when these wars are going on between them.
Destiny and the way the wealth cycle works, especially under capitalism, led to the incentives and resources being put into place that led Americans to produce great advances, wealth, and eventually the large wealth gaps that are now causing conflicts, threatening the domestic order, and threatening the productivity that is required for the US to stay strong. In China it was the classic collapse of China's finances due to debt and money weaknesses, internal conflicts, and conflicts with foreign powers that led to China's Big Cycle declines at the same time that the US was ascending, and it was the extremity of these terrible conditions that produced the revolutionary changes that eventually led to the creation of incentives and market/capitalist approaches that produced China's great advances, great wealth, and the large wealth gaps that it is understandably increasingly concerned about.
Similarly destiny and the way the global power cycle works have now put the United States in the unfortunate position of having to choose between a) fighting to defend its position and its existing world order and b) retreating. For example, it is because the United States won the war in the Pacific in World War II that it, rather than any other country, will to have to choose between a) defending Taiwan—a place that most Americans don't know where in the world it is and can't spell its name—and b) retreating. It is because of that destiny and that global power cycle that the United States now has military bases in more than 70 countries in order to defend its world order even though it is uneconomical to do so.
History has shown that the successes of all countries depend on sustaining the strengthening forces without producing the excesses that lead to their declines. The really successful ones have been able to do that in a big way for 200-300 years. None has been able to do it forever.
Thus far in this book we looked at the history of the last 500 years focusing especially on the rise and decline cycles of the Dutch, British, and American reserve currency empires and the last 1,400 years of China's dynasties, which has brought us up to the present. The goal has been to put where we are in the context of the big-picture stories that got us here and to see the cause/effect patterns of how things work so that we can put where we are into better perspective. Now we need to drop down and look at where we are in more detail, hopefully without losing sight of that big picture. As we drop down, imperceptibly small things—TikTok, Huawei, Hong Kong sanctions, closing consulates, moving battleships, unprecedented monetary policies, political fights, social conflicts, and many others—will start to appear much larger, and we will find ourselves in a blizzard of them that comes at us every day. Each warrants more than a chapter-long examination, which I don't intend to do here, but I will touch on the major issues.
History has taught us that there are five major types of wars—1) trade/economic wars, 2) technology wars, 3) geopolitical wars, 4) capital wars, and 5) military wars—that need to be considered. While all sensible people wish that these "wars" weren't occurring and that cooperation was occurring in their places, we must be practical in recognizing that they exist, and we should use past cases in history and our understandings of actual developments as they are taking place to think about what is most likely to happen next and how to deal with it well. We see them transpiring in various degrees of play now. They should not be mistaken as individual conflicts but rather recognized as interrelated conflicts that are extensions of one bigger evolving conflict. In watching them transpire we need to observe and try to understand each side's strategic goals—e.g., are they trying to hasten a conflict (which some Americans think is best for the US because time is on China's side because China is growing its strengths at a faster pace) or are they trying to ease the conflicts (because they believe that they would be better off if there is no war)? In order to prevent these from escalating out of control, it will be important for leaders of both countries to be clear about what the "red lines" and "trip wires" are that signal changes in the seriousness of the conflict. Let's now take a look at these wars with the lessons from history and the principles they provide in mind.
The Trade/Economic War
Like all wars, the trade war can go from being a polite dispute to being life-threatening, depending on how far the combatants want to take it.
Thus far we haven't seen the US-China trade war taken very far—it just includes classic tariffs and import restrictions that are reminiscent of those we have repeatedly seen in other similar periods of conflict (e.g., the Smoot-Hawley Tariff Act of 1930). We have seen the trade negotiations and what they achieved reflected in a very limited Phase One Trade Agreement that is in its early stages and is being tentatively implemented. As we have seen, this "negotiation" was about testing each other's powers rather than looking to global laws and judges (like the World Trade Organization) to achieve fair resolution. That—i.e., via tests of power—is how all these wars will be fought. The big question is how far these tests of power will go and what form will they take.
Beyond the trade dispute there are three major economic criticisms the US has about China's handling of its economy.
- The Chinese government pursues a wide range of evolving interventionist policies and practices aimed at limiting market access for imported goods, services, and businesses, thus protecting its domestic industries by creating unfair practices.
- The Chinese offer significant government guidance, resources, and regulatory support to Chinese industries, most notably including policies designed to extract advanced technologies from foreign companies, particularly in sensitive sectors.
- The Chinese are stealing intellectual property, with some of this stealing believed to be state-sponsored and some of it believed to be outside the government's direct control.
Generally speaking the United States has responded to these things both by trying to alter what the Chinese are doing (e.g., to get them to open their markets to Americans) and by doing its own versions of these things (closing American markets to the Chinese). Americans won't admit to doing some of the things they are doing (e.g., taking intellectual property) any more than the Chinese will admit doing them because the public relations' costs of admitting to doing them are too great. When they are looking for supporters of their causes, all leaders want to appear to be the leaders of the army that is fighting for good against the evil army that is doing bad things. That is why we hear accusations from both sides that the other is doing evil things and no disclosures of the similar things that they are doing. As a principle…
When things are going well it is easy to keep the moral high ground. However, when the fighting gets tough, it becomes easier to justify doing that which was previously considered immoral (though rather than calling it immoral it is called moral). As the fighting becomes tougher a dichotomy emerges between the idealistic descriptions of what is being done (which is good for public relations within the country) and the practical things that are being done to win. That is because in wars leaders want to convince their constituents that "we are good and they are evil" because that is the most effective way to rally people's support, in some cases to the point that they are willing to kill or die for the cause. Though true, it is not easy to inspire people if a practical leader explains that "there are no laws in war" other than the ethical laws people impose on themselves and "we have to play by the same rules they play by or we will stupidly fight by self-imposing that we do it with one hand behind our backs."
Regarding the trade war I believe that we have pretty much seen the best trade agreement that we are going to see and that the risks of this war worsening are greater than the likelihood that it will improve, and we won't see any treaty or tariff changes anytime soon as all trade negotiations are on hold until well after the US presidential elections. Beyond the elections, a lot hinges on who wins and how they will approach this conflict. That will be a big influence on how Americans and the Chinese approach the Big Cycle destinies that are in the process of unfolding. As things now stand, the one thing, maybe the only thing, that both US political parties agree on is being hawkish on China. How hawkish and how exactly that hawkishness is expressed and reacted to by the Chinese are now unknown.
How could this war worsen?
Classically, the most dangerous part of the trade/economic war comes when countries cut the other off from essential imports (e.g., China cutting the US off from rare earth elements that are needed for the production of lots of high-tech items, auto engines, and defense systems, and the US cutting China off from essential technologies) and/or from essential imports from other countries (e.g., the US cutting China off from semiconductors from Taiwan, crude oil from the Middle East or Russia, or metals from Australia)—much like the US cutting off oil to Japan was a short leading indicator of the military war that followed. Thus far we haven't seen this, though we have seen movements in this direction. I'm not saying such a move is likely but I do want to be clear that moves to cut off essential imports from either side would signal a major escalation that could lead to a much worse conflict. If that doesn't happen evolution will take its normal course so international balances of payments will evolve primarily based on each country's evolving competitiveness.
For these reasons both countries, especially China, are shifting to more domestic production and "decoupling."[2] As President Xi has said, the world is "undergoing changes not seen in a century" and "in the current external environment of rising protectionism, downturn in the world economy, and shrinking global markets, [China] must give full play to the advantages of the domestic super-large-scale market." Over the last 40 years it acquired the abilities to do this. Over the next five years we should see both countries become more independent from each other. Obviously the rate of reducing one's dependencies that can be cut off will be much greater for China over the next 5-10 years than for the United States.
The Technology War
The technology war is a much more serious war than the trade war because whoever wins the technology war will probably also win the economic and military wars.
The US and China are now the dominant players in the world's big tech sectors and these big tech sectors are the industries of the future. The Chinese tech sector has rapidly developed domestically to serve the Chinese in China and to become a competitor in world markets. At the same time China remains highly dependent on technologies from the United States and other countries (e.g., semiconductor chips from Taiwan). That makes the United States vulnerable to the increased development and competition of Chinese technologies and makes the Chinese vulnerable to being cut off from American or non-American essential technologies.
The United States appears now to have greater technology abilities overall, though it varies by type of technology and the US is losing its lead. For example, while the US is ahead in advanced AI development, it is behind in 5G. As an imperfect reflection of this lead the market capitalizations of US tech companies in total are about twice the size of China's with China's share rising faster than America's share. This calculation understates China's relative strength because it doesn't include some of the big private companies (like Huawei and Ant Financial) and the non-company (i.e., government) technology developments, which are larger in China than they are in the United States. Today the largest public Chinese tech companies (Alibaba and Tencent) are already the fifth and seventh largest technology companies in the world, right behind some of the largest US "FAAMG" stocks. Some of the most important technology areas are being led by the Chinese. For example, 40% of the world's largest civilian supercomputers are now in China, China is leading the 5G race, and it is leading in some dimensions of the AI/big data race and some dimensions of the quantum computing/encryption/communications race. Similar leads in other technologies exist, such as in fintech where the dollar volume of e-commerce transactions and mobile-based payments in China is the highest in the world and well ahead of that in the US. There are of course technologies that I, and even our most informed intelligence services, don't know about that are being developed in secret.
China will probably advance its technologies and the quality of its decision making that is enabled by them faster than the US will. Big data + big AI + big computing = superior decision making. The Chinese are collecting vastly more data per person than is collected in the US (and they have more than four times as many people) and they are investing heavily in AI and big computing to make the most of it. The amounts of resources that are being poured into these and other technology areas are far greater than in the US. As for providing money, both venture capitalists and the government are providing virtually unlimited amounts to Chinese developers. As for providing people, the numbers of science, technology, engineering, and math students that are coming out of college and pursuing tech careers in China is about eight times that in the US. While the United States has an overall technology lead (though it is behind in some areas) and of course has some big hubs for new innovations especially in its top universities and its big tech companies, so the US isn't out of the game, its relative position is declining because China's technological innovation abilities are improving at a faster pace. Remember that China is a country whose leaders 36 years ago marveled at the handheld calculators I gave them, and imagine where they might be 36 years from now, which is not far away.
To fight the technology threats the United States is responding by preventing Chinese companies (like Huawei, TikTok, and WeChat) from being used in the United States, trying to undermine their usage internationally, and possibly hurting their viability through sanctions that prevent them from getting items needed for production. Is the United States doing that because a) China is using these companies to spy in the United States and elsewhere, b) because the United States is worried about them and other Chinese technology companies being more competitive, and/or c) as retaliation for the Chinese not allowing American tech companies to have free access to the Chinese market? While that is debatable, there is no doubt that these and other Chinese companies are becoming more competitive at a fast pace. In response to this competitive threat the United States is moving to contain or kill threatening tech companies. Interestingly, while the United States is cutting off access to intellectual property, it would have had a much greater power to do so not long ago because the United States had so much more intellectual property relative to others. China has started to do the same to the United States, which will increasingly hurt because Chinese IP is becoming better in many ways. They have come a long way in a short time from marveling at cheap calculators.
Regarding the stealing of technologies, while it is generally agreed to be a big threat (1 in 5 North America-based companies in a 2019 CNBC Global CFO Council survey claimed to have had intellectual property stolen by Chinese companies[3]), it does not fully explain actions taken against Chinese tech companies. If a company is breaking a law within a country (e.g., Huawei in the US) one would expect to see that crime prosecuted legally so one could see the evidence that shows the spying devices embedded within the technologies. We aren't seeing this. Fear of growing competitiveness is as large or larger a motivator of the attacks on Chinese technology companies, but one can't expect policy makers to say that. American leaders can't admit that the competitiveness of US technology is slipping and can't argue against allowing free competition to the American people, who for ages have been taught to believe that competition is both fair and the best process for producing the best results. As a practical matter stealing intellectual property has been going on for as long as there is recorded history and has always been difficult to prevent. As we saw in earlier chapters the British did it to the Dutch and the Americans did it to the British to make themselves more competitive. "Stealing" implies breaking a law. When the war is between countries there are no laws, judges, or juries to resolve disputes and the real reasons decisions are made aren't always disclosed by those who are making them. I don't mean to imply that the reasons behind the United States' aggressive actions are not good ones; I don't know if they are. I'm just saying that they might not be exactly as stated. Protectionist policies have long existed to protect companies from foreign competition. Huawei's technology is certainly threatening because it's better than American technology. Look at Alibaba and Tencent and compare them with American equivalents. Americans might ask why these companies are not competing in the US. It is mostly for the same reasons that Amazon and a number of other American tech companies aren't freely competing in China. In any case, there is a tech decoupling going on that is part of the greater decoupling of China and the US, which will have a huge impact on what the world will look like in five years.
What would a worsening of the tech war look like?
Still, the United States has a technology lead (though it's shrinking fast). As of result, as of now the Chinese have great dependencies on imported technologies from both the US and non-US sources that the US can influence. This creates a great vulnerability for China, which creates a great weapon for the United States. It most obviously exists in advanced semiconductors, though it exists in other technologies as well. The dynamic with the world's leading chip maker—Taiwan Semiconductor Manufacturing Company, which provides the Chinese and the world with needed chips and which can be influenced by the United States—is one of many interesting dynamics to watch. There are many such Chinese technology imports that are essential for China's well-being, and much fewer American imports from China that are essential for the United States' well-being. If the United States shuts off Chinese access to essential technologies that would signal a major step up in war risks. On the other hand, if events continue to transpire as they have been transpiring, China will be much more independent and in a much stronger position than the United States technologically in 5-10 years, at which time we will see these technologies much more decoupled.
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