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The long-term vision of Sun Tzu versus the short-term view of the cowboys

First, a proposal. Let’s make a theoretical detour and apply the grid of political science to current events. After all, Keynes was a student of political science!

For example, let’s take the ideas of some neorealist authors[1]. In summary, in any situation of “hegemonic transition”, the declining power will necessarily become very aggressive: first against the ascending rising power, but also against the international system as a whole, which it sees as no longer defending its interests. Any global system is designed according to two criteria: the interests of the dominant power (where “interests” are understood in the broadest sense: economic, ideological, political, etc.) and the relative balance of powers (economic, military, ideological, etc.). But when something happens to upset the balance of powers, and/or preferences in the dominant countries evolve, the entire international system goes into crisis and ends up being destroyed by the dominant power itself… Other points to look out for: the conflict will take place in every area of power – hard, soft and smart – and, above all, will continue as long as the declining power’s long-term interests are considered more important than the short-term costs to that power of destroying the system.

Today, Trump himself has given us the cost/interest rules for the system change he is pushing through: in his words, “whatever the economic cost”. This is not completely true, since the US president is not indifferent to markets. However, it is clear that, at the moment, there is political advantage to be gained by casting himself as the destroyer of China. This is easy when your opponent is Joe Biden; it’s more difficult when faced with a candidate along the lines of Sanders. The latter is a protectionist, which means Trump would have to push the conflict to its limits to ensure that it remained an electorally divisive argument.

It was the “right” time for America

Economically speaking, while it’s difficult to quantify who will suffer most, two things are certain and explain why the US is putting its head above the parapet.

Firstly, China is transitioning its model towards an economy more focused on services and technology. This is vital given its demographic structure, which is leading it towards higher dependency ratios from 2030 onwards. If ever there was a time to halt this transition, and thereby put a stop to China’s hegemonic rise, that time is now.

Secondly, Xi’s moves to assert his authority have aroused criticism within the party by virtually doing away with the semi-consensual aspect of China’s ruling powers. Seen from the US, this also makes it a good time to apply pressure. However, this type of politics often has the opposite effect because it aggravates nationalism and unites populations around strongman leaders. Moreover, the US tends to get it wrong when applying such strategies. And it is possible that it could be underestimating China’s economic and mental capacity to engage in long-term resistance. Just like it underestimated Russia’s ability to eat Russian-made mozzarella to prove its patriotism[2] (though, it must be said, there are limits…).

It remains to be seen how the Chinese will gauge the balance of power and whether they will apply the strategic advice of Sun Tzu – when faced with a stronger adversary, buy time by appearing weak – or whether the risk of humiliation will be the decisive factor. Be that as it may, in the end the US’s aggressive stance will probably prompt China to find new domestic sources of growth, notably by speeding up the geographical rebalancing of growth, with infrastructure plans aimed at less developed regions of the country.

In this context, what are we to make of the Huawei affair?

The Huawei affair marks the expansion of the hegemonic conflict between the US and China into a new sphere of power. The technological space is now at stake. For those who like geopolitics, this is strongly reminiscent of the idea of “nomos”[3], which suggests that to each epoch corresponds a space and a political ordering of that space. Indeed, this is the very essence of the word “geopolitics”, which blends politics and geography. Today, there is conflict over cyberspace, the market (economic) space and the technological space, but the geographical space is also coming back to the fore with the question of the South China Sea, the Indian Ocean and strategic straits to be controlled – starting with the Taiwan Strait, where US warships have been patrolling since July. This week, the presence of two ships prompted two journalists with the China Daily to write that “there is no guarantee that the presence of US warships on China’s doorstep will not spark direct confrontation between the two militaries”.

The Huawei episode also marks a risk of escalation that has now been perceived on markets around the world – with stock markets shaken up but also zinc and copper prices falling and, conversely, some real estate funds and the yen rising (hooray for safe havens!). Over the coming months, the direct effect of US measures on affected sectors will come under scrutiny, as will China’s purchases of gold (increasing) and US Treasuries (decreasing, but so much is at stake for both countries that Beijing is proceeding with caution) and the flow of Chinese tourists to the United States (declining, which will add to the US current account deficit). In short, all the signals, in all areas, point to a conflict between powers.

Lastly, the Huawei affair undoubtedly marks a significant shift in expectations. For long-term investors, the process of rethinking the structure of value chains is set to quicken, whatever the cost. In truth, though, the strategic choices to be made correspond to geopolitical scenarios: either move closer to the Chinese sphere of influence or bet on a return to Atlanticism buoyed by a Trump/Brexiteer combination. Something like that, anyway…

On financial markets, Huawei’s difficulties will have a form of positive effect: for a while, the confusion of trying to tie events to underlying trends – often without a robust policy analysis grid – and overreacting to short-term events will be left behind. In summary, it had been thought that a trade deal would put an end to tensions. The Huawei affair proves that this is not the case… even if such a deal ends up being done! Meanwhile, the Big Data tools used to track the language of tension often end up merely adding to the confusion between events and trends, to the point of sending false signals during periods of calm.

So there you go.

The geopolitical shift is more clearly underway, and more visible. Political strategies will take precedence, influenced by strongman leaders and their own paths to personal affirmation. One can only hope that worldviews like those of Clausewitz and René Girard[4], wherein escalation of tensions also corresponds to the depths of human nature, will come up against the interdependencies created by economic globalisation and global ecological imperatives.





[1] R. Gilpin, War and Change in World Politics, 1981

[2] US sanctions have encouraged Russia to find replacements for imports, particularly in the agri-food sector.

[3] Carl Schmitt, The Nomos of the Earth, 1950

[4] René Girard, Battling to the End, 2007

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