This will become more apparent at the upcoming Biden-Xi APEC meeting.
To Be Clear on What I’m Giving You
I know that I’m throwing you a lot of my posts about what’s happening related to life, work, investing, economics, and the changing world order. I’m also giving you both my principles about these things and my descriptions of what’s actually happening in the context of these principles. Because that’s a lot and I presume that you have varying degrees of interest in these different things, I will make clear to you what each communication is about so you can decide what you want to do with it. Also, to make it easier for you to skim and get the headline points, I will put in bold these headline points. Here it goes.
What These Posts Are About
The big category that these posts are about is principles for dealing with the changing world order. As you probably know, I believe that to understand the changing world order one must understand the five big forces that are driving it:
- the debt/money/economic force that is manifested in market and economic movements,
- the internal conflict force that is most obviously manifested in political conflict,
- the external conflict force that is most obviously manifested in the geopolitical wars,
- acts of nature that are most obviously manifested in the climate change issue, and
- humanity’s learning and technology development that is most obviously manifested in AI development.
The below is about the third of these forces—the external geopolitical conflict, and more specifically about changes in the US-China relationship. The headline point of the following piece is that the nature of the conflict between the United States and China is changing in an important way that reduces the odds of a military war (my very rough estimate is about 35% over the next 10 years) though this new type of ”war” will remain very intense and threatening. Below, I explain how I see this changing. I expect it will be on display during the upcoming APEC meeting in San Francisco between President Xi and President Biden and in the broader, global geopolitical news that will follow over the next several months.
What Happened That Brought Us to This Point?
While the competition between the United States and China is constant and will intensify, the risks of military war undulate. Think of them as trending higher with ups and downs around the uptrend. The two great powers were closest to the brink of war and their estimated risks of going over the brink were highest in March, which was when I last visited Beijing. That was after there was the 20th National Congress and big changes in leadership. The realizations by both sides that they were at the brink and the looking over the brink into the abyss scared the leaders on both sides so, starting in June, there were a number of interactions designed to pull back from the brink, including beginning working toward a good APEC meeting between President Biden and President Xi, which will lead to some modest increased cooperation.
While this stepping back from the brink is a great step away from the worst type of war, it is not an end of war. Rather, there is a shifting to a different type of war. The goal of both sides in this new type of war is to win without getting into a bloody, military war. The Chinese version of this type of war is well described in The Art of War, written around the 5th century BCE by Sun Tzu. It is mandatory reading for anyone who cares to understand Chinese thinking about war. This approach was echoed by Deng Xiaoping when he led China.
It is to “hide your strength, bide your time” (tao guang yang hui)—i.e., get yourself into a superior position by quietly building up your strengths so as to not appear threatening to the opposition until you are strong enough to show them so they will submit. This type of war is fought by using deception, by having the other side expend resources while saving one’s own, and by using the opponent’s own circumstances to weaken them and take advantage of their weakness.
This type of war is much more like chess or Go than a fistfight. The Chinese have much more practice and skill in playing this type of game because they have more history that they have derived more continuous learning from. Meanwhile, the United States is doing itself a lot of harm. Of course China has its own set of problems and internal conflicts. This will be a war that will test the relative capabilities of each side’s leaders, systems, and people.
In this type of war, how well one manages and develops one’s own financial, economic, technological, and social strengths relative to the opposition is more important than how well one builds up and uses one’s military strengths, though military strengths are still important to intimidate one’s enemy and possibly use to beat them militarily if the non-military strategy doesn’t work.
Because the Underlying Circumstances Haven’t Changed, the Fact That the United States and China Will Be in Some Type of War Won’t Change
Even though it is certainly in both the United States’ and China’s interest to cooperate rather than hurt each other, the classic reasons for war between them remain and the classic principles still apply. The most important is the prisoner’s dilemma.
As I described in my book Principles for Dealing with the Changing World Order, “the prisoner’s dilemma” is a concept from game theory that explains why, even when the best thing to do is cooperate, the logical thing to do is kill your opponent first. That is because survival is of paramount importance. When you don’t know for certain if your opponent will defeat you, you do know that it is in your interest to defeat them before they defeat you, ideally in a secretive way.
As long as that exists, there will be incentives to defeat the other rather than to cooperate. It is for that reason that to avoid such a war the conflicting parties have to have processes for proving to the other side that they are not secretively developing a way to beat them. Without that, the secretive war to win will continue.
History has also shown us that the winner of the technology war will be the winner of the economic and geopolitical wars; this typically takes the form of developing one or more new technologies that are used to make new types of weapons. Such technologies are typically made in secret and, when ready, are demonstrated to the opponent so that the opponent realizes that they can’t win and surrenders. The development and use of the atomic bomb by the United States that led to Japan’s unconditional surrender is an obvious example. We can see this technology war principle playing out today with chips and AI, quantum computing, and many other technologies, including those we don’t know about.
Also, as explained in my book, when an empire is overextended such that the costs of defending it are greater than the benefits of having it, that contributes to the weakening of the empire. For example, the costs of the United States supporting both the Russia-Ukraine war and the Israel-Hamas war will weaken the United States financially and in other ways (e.g., causing conflict between people within the United States). With the United States having bases in around 80 countries, it is not improbable that the US could find itself supporting or fighting a war in other places too, which could be debilitating.
For example, the exhaustion and financial strains of providing support in both the Russia-Ukraine war and the Israel-Hamas war will affect the perspectives of the American public and American leadership about engaging in another conflict, such as one in Asia (e.g., Taiwan). Similarly, the chaos that is going on in the United States, especially in the political system, creates vulnerabilities.
For example, even if the political system and the decision makers were working well, one could imagine the challenges they would face because those in government are also running to be elected so they will have their attentions split between running their campaigns and running domestic and international policy. And of course the political system and the policy makers are not working at their best. This set of circumstances creates an added vulnerability for the United States. Of course China has its own set of equivalent challenges. Anyway, you get my drift about what this new type of war (though it has gone back thousands of years) looks like in which deceptions occur and vulnerabilities are exploited.
While this war of clever deception and covert actions is a much smarter way of fighting a war than to barbarically bludgeon each other, it is still very threatening to these two great powers and to the world that requires them to perform well in maintaining the world order.
Though we aren’t seeing the United States and China in a military war, and though the war maneuvers in this type of war will likely be much more difficult to see, we can measure how their relative strengths are rising and declining, which is a pretty good indicator of which side is winning because the odds favor those who are strongest. To help see those relative strengths, I will continue to show stats that reflect them in the Country Power Index, which we update roughly twice a year (available for download here).
How the Sides Are Lining Up
Of course neither the United States nor China is in this conflict alone. They are in it with “allies” that have differing amounts of power and differing strengths of their allegiances to them and each other. Realizing that the conflict will be between the two sides of countries/regions that are aligned, I created a quick and simple indicator to see how the sides are lining up and the relative amounts of power of these two sides. Of course measuring this exactly is tough because it’s complicated.
For example, some countries/regions have more economic power while others have more military power, and sometimes economic power matters more than military power and vice versa. But to get my very rough picture, I took 1) the measure of each country/region’s strengths (looking at several metrics from our Country Power Index, including shares of world GDP and world trade as well as measures of military spending, military personnel, military firepower, and oil exports) and 2) which side they are most aligned with (using a measure we created to show the strength of each country/region’s alliances with the other countries/regions of each side)[1]. I then multiplied these together for each country/region and summed them for each of the two sides to get a rough measure of their relative strengths.
The individual strengths of each country/region and the measures of how aligned they are are as interesting as the totals for each side. These simple calculations ring true. They are shown below. As shown, the alliances are between the United States, the EU, the UK, Japan, South Korea, Canada, and Australia on the one side and between China, Russia, Iran, and Pakistan on the other side. That makes sense. As for the relative powers of the two sides, this shows that the United States bloc is a bit stronger (by a roughly 60/40 margin), which also seems about right intuitively. I think we should expect that those countries/regions that are shown to be aligned will likely be more inclined to support and influence each other.
Conclusion
We should expect to see a superficial improvement in US-China relations and a stepping back from the brink of military war, but we should not expect to see a return to the period of openness and cooperation that occurred when the United States was clearly the dominant power and the relationship was more symbiotic than threatening. Rather, we should expect to see a more behind-the-scenes, Cold-War-style great power conflict.
I will keep you posted.
Footnotes
[1] Specifically, we are looking at how powers are lining up and how strong a stance they’re taking in the major global conflicts today, across Israel-Hamas, Russia-Ukraine, and China-Taiwan. “USA Bloc” reflects the countries/regions that are more aligned with Israel, Ukraine, and Taiwan, while “CHN-RUS Bloc” reflects countries/regions that are more aligned with Palestine, Russia, and China. The US, China, and Russia do not show up as the most extreme on these measures because they are not the most strongly aligned on every one of these conflicts.
Article by Ray Dalio via LinkedIn
