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Foreign Policy

China-US ‘Cold War,’ Drastic Decoupling, or a Restructuring of Interdependence?

Aug 14, 2019

The longstanding and multifaceted competition between China and the United States will inevitably restructure 21st-century international relations. While a ‘Cold War’ interpretation is inaccurate, a drastic economic decoupling between Beijing and Washington would prove destructive. Instead, China and the US will both take small steps toward self-reliance. While China is the greatest benefactor of global economic integration, it will pursue selective revisionism as its influence evolves and expands. China will offer alternative projects to Western models like the Asian Infrastructure Investment Bank and the Belt and Road Initiative, and aside from Trump’s tariffs and tech bans, current supply chains work well for Beijing. For now, Washington is the more likely party to tilt the relationship toward one long-term direction over another.

Political hostilities just short of open warfare define a ‘Cold War.’ Up until very recently, President Trump and President Xi Jinping were ‘good friends.’ Trump recently stated that they are “probably not quite as close now, but I have to be for our country. He's for China, and I'm for USA.” It is safe to say that light rhetoric, combined with a $660 billion trade relationship and the fact that one-third of international students studying in the US are Chinese, prove that China and the US are not currently in an easily definable ‘Cold War.’ Unlike the current conflict, the US aimed to isolate the USSR from the post-WWII economic and political order. The two superpowers nearly destroyed the world in the pursuit of ideological supremacy.

Earlier this month, American ‘Dr. Doom’ economist Nouriel Roubini, known for his accurate predictions of the last global financial crisis, warned that US-China rivalry in artificial intelligence, automation, and 5G technology would restructure international business into a binary choice between Beijing and Washington. Roubini stated that trade uncertainty would continue to delay or eliminate investment, already illustrated by recent collapses in capital expenditures. Soon after, the recession would strike tech, then manufacturing, industry, and the services sectors. As a result, a decoupling would occur, presenting corporations and states with a binary choice between Chinese and American business. A messy decoupling would lead to a ‘Cold War,’ in which economies would balkanize into regional hubs for Beijing and Washington to compete over for influence.

A dual world economy would require a duplicating of technologies, as already evident in the 5G space, where the US will either reverse pressure or further alienate firms like Huawei. Increased US force only fuels the Chinese narrative that US imperial tendencies seek to stunt Beijing’s growth. Further punishment of Huawei also forces Chinese firms to readjust and pursue self-reliance in hardware and software production. A self-sufficient Huawei strategy, although painful in the present, would erode US leadership over time. The Huawei case illustrates the current China-US rivalry: either Beijing will continue to benefit within the limits of the system, only to adjust when Washington demands concessions on trade or intellectual property, or China must out-innovate the US, regardless of immediate outlays. While costly, increased independence is an excellent choice for Beijing, especially as it hopes to expand control over its sphere of influence.

Yet, while the ‘Cold War’ concept is overstated, who is really winning the tech competition between China and the US? Last June, Bloomberg evaluated the China-US rivalry in eight categories: company valuation, size of internet base, domestic income gap, venture capital investment, chip production, 5G and telecommunications innovation, talent base, and manufacturing.

First, US tech firms are still the most valued in the world. As Tencent and Alibaba catch up, increased capitalization allows Chinese firms to acquire competition and attract top talent.

Second, the Chinese Internet base dwarfs that of the US. China contains four times the mobile users of the US, which will drive innovation in e-commerce and fuel machine learning.

Third, US income per capita is much higher. An American offers seven times the economic output than that of the average Chinese citizen. Increased per capita income leads to increased revenues that companies can direct toward innovation.

Fourth, Chinese and US venture capital investment is currently level.

Fifth, chip production and semiconductor IP are still US-dominated spaces. For example, Huawei’s chip unit, HiSilicon, China’s largest semiconductor company, only recorded revenues $7.6 billion last year, only one-tenth of Intel revenues.

Sixth, Huawei leads to 5G telecommunications technology and provides states and corporations with Chinese alternatives to Western infrastructure.

Seventh, the World Economic Forum stated in a 2016 report that China had 4.7 million recent graduates from STEM fields, while the U.S. only had 568,000. Nonetheless, the US currently leads China in sought-after tech talent.

Lastly, despite losing to the US in talent, China’s manufacturing power is superior. Apple and other leading American firms continue to shift production and assembly to China.

Although the race to tech supremacy is heating up with China gaining on the US, it is unclear if rivalry will create stark and divided ‘sides.’ Couldn’t corporations and states choose to ‘shop around’ between Chinese and US options in technology? Earlier this year, Hungary expressed its commitment to “deepen ties with the US on topics like defense,” [while] continuing “economic and energy policies with the East.” Nuanced and pragmatic foreign policies are more common as US and Chinese interests and worldviews diverge. From a private sector view, less dominant telecommunications companies capitalize on China-US disagreements. For example, further fragmentation of global markets allows European firms like Ericsson and Nokia to elevate themselves. The most beneficial choice for ‘non-aligned’ corporations and nations is to pursue their interests irrespective of the politico-ideological visions promoted by the US or China. Over the next decade, new perspectives on sovereignty, human rights, and intellectual property will revise current legal norms. We are not in a ‘Cold War,’ but Beijing is courting US allies away from liberal democracy with investment, as globalization and its growing pains, prove unpopular and spread populist politics and illiberal democracy across the globe.

The politico-ideological splits, elevated by economic competition, rework traditional alliances as evidenced by Europe’s improved relationship with both China and Russia. Stewart Paterson, a partner at fund management company Tiburon Partners and the author of “China, Trade, and Power,” argued that future trading blocs might form along ideological lines, similar to the Five Eyes intelligence alliance, and that China and the US would inevitably decouple. The foreign policies of the future could rely on realpolitik and pragmatic calculations rather than 21st-century ideologies. However, even if abstract politico-ideologies lose out to practicality, the economic and technological competition will intensify.

The technologies of the future will spread ideology, just as populism and nationalism expand via alternative media sources today. The speed at which we connect, but also factionalize, will contribute to the cultural clashes that unfold as the China-US rivalry develops.

China and the US inhabit a world in which illiberalism and populism are expanding, and liberal democracy is contracting. In an interview for Financial Times at the G20 summit, President Putin of Russia stated that multiculturalism is no longer tenable. He proclaimed that liberalism ‘outlived its purpose’ and is ‘obsolete.’ The lack of enthusiasm for a reinvigoration of liberal democracy leaves the West underequipped against contending ideologies rooted in pragmatism and majoritarian democracy. Within this crisis of liberal democracy, China and the US will approach continuous cycles of economic and political reassessment, soft conflict, and eventual compromise, which will diminish Washington’s global hegemony as China ascends. New exclusive zones of influence will emerge in which other states will choose the side that maximizes its overall strategic interests. A restructuring of interdependence between will reconfigure global economic and political landscapes, as a cynical world searches for a dominant ideology. 

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