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Foreign Policy

Not a Cold War, But a Chaotic Mélange

Nov 14, 2018

With the development of a full-blown trade war between the United States and China, more and more voices are warning of a new “cold war.” Recent pronouncements by U.S. government officials and various pundits on both sides of the Pacific certainly give credence to such an image.

However, a cold war in which both sides carve out autonomous spheres of influence and jockey for power in a bipolar order is highly unlikely. The global system has evolved considerably from the post-World War II period. Much more likely is the emergence of a chaotic mélange – a transitional era in which neither the United States nor China exert effective international leadership, while other powers hedge, balance and dodge the influence of the two most important global powers.

Such an era would be by far more messy, complex and unruly than the post-World War II era of U.S. dominance. The international liberal order would atrophy, but not disappear. Fewer global public goods would be one consequence: global coordination on major challenges facing humanity, ranging from nuclear weapons to climate change, is likely to suffer. But this chaotic mélange is very different from the all-out competition among two major power blocs – one socialist, one capitalist – before the fall of the Berlin Wall.

For sure, no one can be faulted for thinking a new cold war is dawning. Recently, former U.S. Treasury Secretary Henry Paulson cautioned that a new “economic Iron Curtain” could fall between China and the United States as their divisions become unmanageable. But the clearest indication of the beginning of a new cold war was U.S. Vice-President Mike Pence’s speech at the Hudson Institute on October 4, 2018, which has been compared to the Iron Curtain Speech delivered by Winston Churchill more than 70 years ago.

In his speech, the vice-president laid out a fundamental change in U.S. policy toward China. He noted that “America had hoped that economic liberalization would bring China into a greater partnership with us and with the world. Instead, China has chosen economic aggression, which has, in turn, emboldened its growing military.” Pence declared that “Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States.”

China’s aggression marked the beginning of a new era of “great power competition” under which foreign nations are “contesting [America’s] geopolitical advantages and trying to change the international order in their favor.” Clearly, the vice-president’s speech indicated that a prolonged and fractious period could emerge during which the only country on the globe with the economic and military wherewithal to block China’s rise is determined to do just that.

The United States has, in fact, already begun to translate its adversarial perspective into concrete policy, such as with the new U.S.-Mexico-Canada Agreement that prohibits any of its members to strike free trade agreements with non-market economies like China. Competition is also heating up in other policy arenas, such as development finance and defense, especially regarding China’s maritime claims.

However, a new cold war is one of the least likely outcomes of a tenser U.S.-China relationship. Two factors stand out in particular: first, China is not the Soviet Union. The country does not engage in direct ideological rivalry with the United States and, most importantly, practices a form of capitalism.

Chinese capitalism encompasses a larger role for the state than its liberal cousin in the United States. The employment of state-owned enterprises, state control over the financial system, wide state regulatory purview and massive state investments in infrastructure and technology are some of its hallmarks. However, Chinese capitalism also incorporates a highly dynamic and large private sector. China’s economic future is predicated upon private capital accumulation and market competition.

One important insight which can be traced back to Kant holds that there is a “capitalist peace” – nations whose economies rely on market competitive forces and private capital accumulation to drive their economic fortunes become inherently bound together. A full-scale divorce into two separate and autonomous economic spheres would have extreme economic costs. No American (or for that matter Chinese) government is likely to survive such an economic rupture politically.

Although not without its critiques, the capitalist peace theory holds up against scrutiny. Capitalist political economies with deep interdependencies, such as the United States and China, do not tend to engage in war with each other. In fact, capitalist integration is historically a more powerful force for peace than shared democratic norms.

But even if the United States chooses to decouple its economy from China’s and comes to see China as another Soviet Union that needs to be contained, such a policy is highly unlikely to meet its desired objective. China is now the largest trading partner of more countries than the United States, including many U.S. allies like South Korea and Australia. China is also a major global financial power, commencing new initiatives for development such as the Belt and Road Initiative and the Asian Infrastructure Development Bank.

Perhaps most importantly, China possesses a vibrant economy with a large consumer market. While still lagging behind the United States in overall technological development, China can provide many of the key inputs that modern economies require to develop. As China moves up the value-added ladder, its market demand for high-tech goods from Germany, Japan, and others is increasing rapidly.

A U.S. policy to contain China and drive a wedge between China and other countries is thus highly unlikely to succeed. Countries will hedge and balance their interests. In some cases, they will even pursue deeper economic integration with China, as seems to be the case with Japan, a staunch U.S. ally, and India, a potential bulwark against Chinese “expansionism” that Washington is intent on cultivating.

Ultimately, most countries will, whenever possible, opt to dodge U.S. efforts to make them choose sides. The Trump administration’s “America First” policies are driving away many allies and friends, especially Germany, France, and Japan, all three of which have been chided by President Trump for contributing little to common defense and preserving unfair trade practices. Others, like Indonesia, a key player in the ASEAN group, are insisting that the new “Indo-Pacific regional architecture” suggested by the United States is inclusive and not aimed at containing China.

As Parag Khanna argues, America’s future depends on its ability to compete with the European Union and China to pull the Second World – pivotal developing countries that are growing in economic strength, like Saudi Arabia, Russia, India and Indonesia – into its orbit. The scorecard so far is not encouraging.

The image of a new cold war pitting two autonomous power blocs against each other is a distant possibility. Instead of a starkly bipolar world, a chaotic mélange is more likely. Already, the United States is becoming selectively isolationist, while China’s support for the liberal international order is half-hearted.

An uneasy transitional era is beginning. The diverging interests of national capitalisms favoring neo-mercantilist jockeying for competitive advantage will be juxtaposed with the converging pressures of global corporate power and market forces. Targeted clamp-downs on elements of globalism, including trade, finance, migration, and technology cooperation are likely to become more prevalent in all major political economies.

Nonetheless, national economic interests combined with the power of corporations and integrated value chains will continue to forge a common global destiny under capitalism. No one country can afford to shut itself out from its dynamism. What will suffer is global leadership and with it the provisioning of global public goods. But this transitional era will look very different from the all-out competition between one socialist and one capitalist power bloc before 1990. Welcome to the chaotic mélange of the early 21st Century!

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