By Marko Papic

There’s a growing consensus that China and the U.S. are hurtling toward a Cold War. President Joe Biden’s administration is doing little to change the narrative. Biden promised China that it would face “extreme competition” while the U.S. Secretary of State Antony Blinken raised human-rights issues and a slew of other complaints in his exchange with his counterpart, Foreign Minister Yang Jiechi.

I should not complain, as I was one of the early contributors to the “Cold War 2.0” consensus when I published an investment research report titled “Power and Politics in East Asia” in September 2012. At the time, I was a Chief Geopolitical Strategist for BCA Research, the world’s most respected investment research firm. My clients – everyone from institutional to retail investors – were obsessed with the Middle East. Occasionally, I would get asked about the longevity of the Euro area or the machinations of President Putin. But few, outside of maybe a handful in Australia and New Zealand, cared about the budding U.S.-China rivalry.

But in 2021, there are no more doubters. It is obvious that the U.S.-China rivalry is the gravest geopolitical risk facing policymakers on both sides of the Pacific Ocean. However, could the linear extrapolations of the countless Johnny-come-latelies have gone too far? Has the narrative pendulum shift overshot its mark? And does it really make sense to use the Cold War analogy as an analytical crutch in the 21st century?

I don’t have a crystal ball, but it’s my firm belief that extrapolating the past decade linearly into the future is a mistake. The time to forecast rising U.S.-China tensions was in 2012, not 2021 when they are now self-evident.

Going forward, the Cold War is a lazy analogy – at best – for what the relationship between China and the U.S. is likely to evolve into. And at worst, it is a self-fulfilling prophecy that – if acted upon by U.S. policymakers – will lead to global isolation and a definitive geopolitical decline.

The Year Is 2021, Not 1945

The obvious reason that the Cold War is a poor analogy is that the year is 2021, not 1945. But let me be clear about what that means. The world is not emerging from four years of vicious warfare that culminated in the use of nuclear weapons against Japan. The world’s greatest economy is not lying in ruin and poverty, as Europe was in 1945, beset with tens of millions of refugees and under a military occupation by the transcontinental powers intent on carving it up like schoolyard bullies sizing up the playground. India is not a colony of a tired empire, and China is not ripped asunder by a civil war.

It was these starting conditions that allowed the U.S. and the Soviet Union to carve up the planet in 1945. A bipolar world order emerged unnaturally and in large part due to the near complete destruction of several major powers that previously had a say in how the world was run.

Today, Europe and Japan may be mired in deflation and stagnation, but they… exist. That is an improvement over their near-ruinous condition in 1945. Russia has stabilized itself after the depressing 1990s and has even reestablished a lite version of the Soviet sphere of influence. India is rising, albeit haltingly, as a regional and economic power. And while China and the U.S. are clearly a head above the rest, combined they are less powerful – in relative terms – than the U.S. and the Soviet Union at the conclusion of World War II. As such, it will be difficult for Beijing and Washington to neatly carve up the world as Moscow and Washington did in the 1950s.

This is important… There is an interplay between geopolitics and globalization that is not obvious or linear. Because the international order of states is anarchic, there is no global government that enforces rules and norms of behavior. As such, the degree of anarchy depends on the distribution of power between states.

A unipolar system – where a single hegemon rules over the rest – is the most conducive to globalization. The superpower in charge gets to set the rules and norms of behavior. It gets to launch Tomahawks against unruly upstarts looking to carve out nascent spheres of influence. The most recent example is the U.S. in the 1990s. At the time, the U.S. provided not only geopolitical rules of the game but also the macroeconomic best practices, propagated by the IMF and the World Bank via a set of norms called the Washington Consensus.

The U.S. was the world policeman, the consumer of last resort, and the creditor of lasts resort. This hegemony greased the wheels of globalization, at a not insignificant cost to the U.S. that it hoped to recoup through access to foreign markets that it bestowed to its corporations.

A bipolar system – where two superpowers divide the world into spheres of influence – is the least conducive to globalization. The two powers – assuming that they are at geopolitical odds with one another (which is not always obvious) – have the relative power necessary to carve out the world into neat spheres of influence. They set the rules of the game within those spheres and, most importantly, punish unruly allies who dare to flirt with the other side.

Somewhat paradoxically, if unipolarity is the most conducive to globalization, multipolarity is not the least conducive. A multipolar system that is characterized by balance-of-power dynamics can still support some level of globalization of trade and capital.

Globalization and Degrees of Global Anarchy

Why? The answer lies in the interaction between allies in a multipolar world. In a bipolar world, allies of a superpower are weak and dependent on their powerful ally for security. For example, during the Cold War, the U.S. went to great lengths to limit economic cooperation between Western Europe and the Soviet Union. Sure, there were times when Europeans flirted with the other side, such as during the German Chancellor Willy Brandt’s Ostpolitik, but these were paltry exceptions to the rule.

In a multipolar world, such as the one we inhabit today, the coordination becomes more difficult. In today’s context, this means that the U.S. and China will struggle to enforce their own rules and standards on their own allies, let alone each other.

Who Gets to Tell France Not to Sell Airbus Planes to China?

In 1896, a bestselling pamphlet in the U.K., “Made in Germany,” painted an ominous picture:

A gigantic commercial State is arising to menace our prosperity, and contend with us for the trade of the world… The toys, and the dolls, and the fairy books which your children maltreat in the nursery are made in Germany: nay, the material of your favorite (patriotic) newspaper had the same birthplace as like as not.

By the late 1890s, it was clear to the U.K. that Germany was its greatest national security threat. The German Navy Laws of 1898 and 1900 launched a massive naval buildup with the singular objective of liberating the German Empire from the geographic constraints of the Jutland Peninsula. By 1902, the First Lord of the Royal Navy pointed out that “the great new German navy is being carefully built up from the point of view of a war with us.”

There is absolutely no doubt that Germany was the U.K.’s gravest national security threat. As a result, London signed a set of agreements with France in April 1904 that came to be known as Entente Cordiale. The entente was immediately tested by Germany in the 1905 First Moroccan Crisis, which only served to strengthen the alliance. Russia was brought into the pact in 1907, creating the Triple Entente.

In hindsight, the alliance structure was obvious given Germany’s meteoric rise from unification in 1871. However, one should not underestimate the magnitude of these geopolitical events. For the U.K. and France to resolve centuries of differences and formalize an alliance in 1904 was a tectonic shift – one that they undertook against the grain of history, entrenched enmity, and ideology.

Did the U.K. break off trade with Germany as the rivalry hurtled toward a war? The answer is a definitive no. The trade and investment flows between the U.K. and Germany rose steadily right up until the outbreak of World War I.

Trading With the Enemy

Could this historical curiosity be written off due to the U.K.’s ideological commitment to laissez-faire economics? Or perhaps London feared a move against its lightly defended colonies in case it became protectionist?

These are fair arguments. However, they do not explain why Russia and France both saw ever-rising total trade with the German Empire during the same period. Either all three states were led by incompetent policymakers who somehow did not see the war coming – unlikely given the empirical record – or they simply could not afford to lose out on the gains of trade with Germany to each other.

A similar dynamic was afoot ahead of World War II. Relations between the U.S. and Japan soured in the 1930s, with the Japanese invasion of Manchuria in 1931. In 1935, Japan withdrew from the 1922 Washington Naval Treaty – the bedrock of the Pacific balance of power – and began a massive naval buildup. In 1937, Japan invaded China. Despite a clear and present danger, the U.S. continued to trade with Japan right up until July 26, 1941, a few days after Japan invaded southern Indochina. On December 7 that same year, Japan attacked the U.S.

A skeptic may argue that precisely because policymakers sleepwalked into war in the First and Second World Wars, they will not (or should not) make the same mistake this time around.

I would be highly skeptical of the view that policymakers in the early and mid-20th century were somehow defective (as opposed to today’s enlightened leaders). A far more systemic explanation is needed.

Political science provides a clear theoretical explanation for why London and Washington continued to trade with the enemy despite the clarity of the threat. The answer lies in the systemic nature of the constraint policymakers faced: a collective action dilemma thanks to changing alliances and the difficulty of disciplining allies’ behavior.

The U.S. will find few allies in its combative approach to containing China. There are simply far too many absolute economic gains to be lost for other economies, even for the most ardent allies. To put it bluntly, who is going to call President Macron some fateful day and tell him that France can no longer sell Airbus planes to China?

Welcome to a Multipolar World

The answer, of course, is nobody… Instead, the U.S. will be forced to continue to trade and invest in China simply because others – including its geopolitical allies – will. The U.S. will dance to the tune of halted, albeit still actionable globalization, lest it fall behind in the global race for innovation and markets. This does not mean that U.S. policymakers cannot use the access to their own market to force compliance with intellectual property laws, labor regulations, a domestic industrial policy, or any other policy that furthers national interests. Or that they cannot use tariffs and currency devaluation to gain an advantage from time to time. These are all fair game, just as they have been over the past century.

The point is that a neat bifurcation of the globe into two economic spheres is just not going to happen. Forcing allies into compliance with such a vision, neatly copy-pasted from the Cold War chapter of the history books, will lead to folly.

Unfortunately, U.S. strategists are going to have to work much harder than they thought if they mean to beat China in the geopolitical arm-wrestling match. Forcing Chinese companies to delist from the New York Stock Exchange is a particularly laughable attempt at playing high-level geopolitics (they simply re-list in Hong Kong, or Frankfurt, or London, and make some other country’s bankers and brokers money!). Cutting off China’s access to U.S.-designed microprocessors apparently halts production in U.S. auto factories as much as in China’s.

These are crude policies designed by technocrats with little imagination and no historical context. The geopolitical context in which we find ourselves resembles the 19th century far more than the 20th. If there is anything we should learn from that century, it’s that alliances were fluid, red lines were blurred, and outcomes were often unexpected. Given the stakes for everyone involved, both Beijing and Washington should remember these lessons.

Marko Papic is a Partner and Chief Strategist at Clocktower Group, an alternative investment asset management firm based in Santa Monica, California. He is also the author of Geopolitical Alpha: An Investment Framework for Predicting the Future (Wiley 2020), a book that introduces his constraints-based framework to investors. This article is based on a chapter from his book.