The Escalating New Cold War

The New Cold War

I am going to have to get my hands on the new Pettis-Klein book that has come out recently. Here’s how Yale University Press touts “Trade Wars are Class Wars”:

A provocative look at how today’s trade conflicts are caused by governments promoting the interests of elites at the expense of workers

Trade disputes are usually understood as conflicts between countries with competing national interests, but as Matthew C. Klein and Michael Pettis show, they are often the unexpected result of domestic political choices to serve the interests of the rich at the expense of workers and ordinary retirees. Klein and Pettis trace the origins of today’s trade wars to decisions made by politicians and business leaders in China, Europe, and the United States over the past thirty years. Across the world, the rich have prospered while workers can no longer afford to buy what they produce, have lost their jobs, or have been forced into higher levels of debt. In this thought-provoking challenge to mainstream views, the authors provide a cohesive narrative that shows how the class wars of rising inequality are a threat to the global economy and international peace—and what we can do about it.

Very interesting, indeed

One thing is for certain; the trade war has escalated to a new Cold War between the United States and China. The flurry of news about the escalating conflict is dizzying. And the novel coronavirus is a major escalating factor.

Let me piggyback on these four pieces:

• Internal Chinese report warns Beijing faces Tiananmen-like global backlash over virus – Reuters, May 4
• In Canada, the tide of opinion is turning on China – The Globe and Mail, May 21
• China Warns U.S. Politicians Pushing Nations Into ‘New Cold War’ – Bloomberg, May 24
• China five-year plan to focus on independence as US decoupling threat grows – South China Morning Post, May 25

Chinese acknowledgement of changing times

Let’s start with the Reuters piece:

An internal Chinese report warns that Beijing faces a rising wave of hostility in the wake of the coronavirus outbreak that could tip relations with the United States into confrontation, people familiar with the paper told Reuters.

The report, presented early last month by the Ministry of State Security to top Beijing leaders including President Xi Jinping, concluded that global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown, the sources said.

As a result, Beijing faces a wave of anti-China sentiment led by the United States in the aftermath of the pandemic and needs to be prepared in a worst-case scenario for armed confrontation between the two global powers, according to people familiar with the report’s content, who declined to be identified given the sensitivity of the matter.

The report was drawn up by the China Institutes of Contemporary International Relations (CICIR), a think tank affiliated with the Ministry of State Security, China’s top intelligence body.

So, already by April the Chinese knew that it faced a hostile global environment. And it saw the US as its main adversary in that environment. And it saw armed conflict as a potential worst case scenario.

The Bloomberg and Globe and Mail articles demonstrate that the Chinese were right. The tide is turning against China everywhere in the West. They are no longer seen as an integral part of supply chains. Now, they are seen as a global healthcare threat. And with that change, China’s economic role has come under scrutiny. They are seen as an economic threat as well now too.

China’s strategy

What’s China’s strategy here then? Until now, they had been joined at the hip to the West in a bid to increase living standards and maintain high levels of growth. That’s not possible if the West wants to decouple.

Here’s how SCMP puts China’s planning for a 14th 5-year plan:

How can China survive and thrive in the face of US hostility? What does it need to take development to the next stage? And where should Beijing focus its resources to turn the Chinese dream into a reality?

These are the big questions Chinese officials and researchers are deliberating as the nation begins drafting its new five-year plan, which will set out key economic and political goals for the period 2021 to 2025.

With China and the United States increasingly at odds, the new policy blueprint is likely to reflect a shift in the way Beijing conducts itself in what is perceived to be an increasingly adversarial international system, according to Chinese researchers who are involved in preparations for the new plan.

While the final version of the 14th five-year plan will not be made public until March 2021, preliminary research and discussions show that China will seek more autonomous development by cutting reliance on the US for technology supply and exports.

The SCMP article shows that the Chinese get it.

I suspect that China has decided to use the coronavirus-induced economic drag as an excuse to not publish a growth target – but not just for this year, but for good. With a new Cold War on the horizon, growth targets, in large part dependent on exports, are a relic of the past. De-coupling is well and truly here.

Huawei shows de-coupling in practice

What does a world in which China and the US are in a Cold War look like? I think it is chaotic and uncertain because the Cold War will play out on a geopolitical basis as it did with the Soviet Union.

What’s happening in Hong Kong right now tells you the Chinese are prepared to take geopolitical risks as the New Cold War escalates. And if this leads to difficult economic sanctions, the Chinese will retaliate.

So the New Cold War will also play out on an economic basis, where China is well integrated into the global economy in a way the Soviets were not. That has to hit growth.

Huawei comes to mind first here. The Sydney Morning Herald published a great piece back in December 2018 showing how the ‘Five Eyes’ cooked up the campaign to kill Huawei. That was well before the New Cold War had escalated because of the coronavirus.

Their analysis says that Australian PM Malcolm Turnbull lobbied US spy agencies to ban Huawei and ZTE from Australian 5G networks as far back as February 2018. That resulted in New Zealand banning Huawei in November 2018, citing “significant network security risk”. Huawei executive Meng Wanzhou was arrested in Vancouver soon thereafter. And six days later, BT said it would strip Huawei equipment out of its 3G and 4G networks and would not use it in 5G.

Sweden’s Tele2 made a big splash with the opening of its 5G network at the weekend (link in Swedish). In the article about the introduction of 5G, Swedish daily Svenska Dagbladet said Ericsson has positioned itself as a more neutral supplier of 5G technology to the company’s biggest competitor, Chinese Huawei. 

They went on to say that Huawei does not meet the same resistance in Europe, and that Tele2 uses, among other things, technology from Huawei. Tele2’s Björn Lindberg said a “mix of suppliers makes it possible” for Tele2 to offer 5G – not just Nokia and Ericsson, but also several others including Huawei.

How long will this stand? What will US President Trump do? Will other countries be under pressure to build out 5G without Huawei? The UK is reviewing Huawei’s role again for its 5G networks. And I think this is a signpost. Huawei will be a casualty of the New Cold War.

Outcomes

Again, none of this is positive for growth. As much as the world is likely to change because of Covid-19, stunting growth, it will change even more as supply chains are re-arranged around the New Cold War.

Writing in the South China Morning Post, Stewart Paterson says Manufacturers pulling out of China should consider Africa to diversify their supply chain. And that makes sense to a degree because the African nations are the ones least aligned before a New Cold War. You can bet that the EU, North America, Japan, the UK, Australia and New Zealand will side with the US despite present acrimony because of US President Trump’s unilateralism. But emerging markets are going to be courted by both sides. And because these countries have huge amounts of raw materials at the ready, who they choose will be significant in terms of supply chains and finished consumer products.

Niall Ferguson, one of the world’s foremost economic historians sees trouble. Here’s how Radio New Zealand described his view recently:

“Right now a new crisis over the status of Hong Kong is brewing, effectively doing away with Hong Kong’s semi-autonomous status. The US government is going to respond,” he says.

“Cold War II is happening now; it’s happening in the realm of technology, where the US govt has just imposed effectively sanctions on Huawei, preventing it from being able to import semi-conductors from Taiwan… and I could go on and on.

“China’s performance [surrounding Covid-19] – its attempted cover-up and its continued lack of transparency about what happened, have only fuelled the fires of anti-Chinese sentiment in the US and parts of Europe.”

Does he think it will escalate? It’s probable, he says.

“That’s the thing that I do worry about. There’s an assumption in many quarters that China would never risk a military confrontation with the US, or at least not for 10 years.

“But when anyone tells me something can’t happen for at least 10 years I look at them with puzzlement – haven’t you realised that in 2020 what usually takes at year takes a month?  So why shouldn’t we get to [the outbreak of war] in a matter of months, rather than years. I do worry that in all kinds of domains tensions between China and the US are escalating in ways that we may underestimate.”

Ferguson says the Chinese government is struggling with the pandemic’s ‘major blow’ to their economy, and unemployment in China is likely to be at the highest it’s been for a long time, which presents a tinderbox situation for international affairs.

“If history teaches us anything, it’s that when authoritarian regimes are in crisis, when they are under pressure, that is when they’re likely to do reckless things in the realm of geo-politics.”

My View

Everyone is watching coronavirus infection counts and looking at the re-opening to understand what kind of medium-term impact the Covid-19 situation will have on the global economy. Meanwhile, another pernicious and sinister threat to global growth and geo-political calm is developing. I think Niall Ferguson is right; China’s initial moves, especially in Hong Kong, shows it is willing to take geo-political risks. And that will set off a chain reaction, the outcome of which is unclear.

For me, the only thing that is clear in all of this is the uncertainty will cause disruption as countries and companies adjust to a new world. That’s bad for growth.

And then, it returns you to the Klein – Pettis doctrine that this all started in the West because of income inequality and widespread civil disaffection. All of this disruption, bankruptcy and job loss due to Covid-19, shifting supply chains and a New Cold War will be happening when people are already dissatisfied with the status quo. What does this mean for politics and the political economy, taxes and antitrust?

It’s a very uncertain time. And a New Cold War will make it much more so.