Changing Global Order: The United States and China

Part Two of Changing Global Order Series
ProQC International

The first part of this series provided historical background information, explaining why this rivalry even exists. Click here to read it.

We are at a critical point in history where the global order is changing rapidly. One major aspect of this process of change will be the rivalry between the United States and China. The tensions between the United States and China are increasing in recent years and have far-reaching consequences for the global order, therefore influencing the future of our world

In this series, the author analyzes the political, economical, financial, and technological aspects of this rivalry. This part will illustrate the amount of tension between the two powers by looking at the developments over the past few years and by analyzing certain areas of conflict.

From strategic cooperation towards the fierce competition

For more than half a century the relationship between the United States and China has been relatively stable. Of course, the rise of China has been a concern for the United States for many years. Nonetheless, both countries engaged in strategic dialogue to cooperate as much as possible on global issues. Although they remained sharply divided on a wide range of topics, the general relationship remained fairly balanced and no major escalations between the two powers occurred. 

( For a full timeline of US-China relations from 1949 until 2021: click here )

Over the last four years, it has become clear that this era now has ended. Whilst the exact point of no return is debatable, the rivalry between the two countries became increasingly visible under president Donald Trump. In his four year term, we witnessed an escalating trade war, and US-China relations reached an all-time low. Economical and political actions were taken back and forth by both countries. There has been a huge shift in their stance towards each other, and it will change the dynamics of the international global order drastically. 

After four years of deteriorating relations between the US and China under the Trump administration, some had hoped that a new president would somewhat ease US-China relations. Four months into the Biden administration has shown us that this idea is merely wishful thinking.  

( For a full timeline of US-China relations since the Biden administration: click here )

The sustained tension between the two will not only alter international relationships, but it will also affect the world economy as a whole and will have an impact on the development of new technologies. It is already disrupting global supply chains, altering public policy and financial markets have felt the rivalry as well. More turbulence and escalating conflict can surely be expected in the coming months, probably years, ahead.

As described in the first article of the series, one of the main reasons for this ongoing tension is because China has been emerging rapidly as a global power. Since the end of World War II, it has been the United States which occupied the number one position as a major world power. They took the leading role in shaping the post-war global order by creating important international institutions such as the IMF, World Bank and the United Nations. Their authority over the past decades has impacted the development of our world and heavily influenced international relations. Until today, the United States remains the most important nation on the world stage. However, the rapid rise of China is sawing off the branch on which the United States is sitting, and it has become clear that this rivalry is causing intensifying conflict on multiple levels.

Great empires and global power

Before proceeding to detailed areas of conflict, one should understand what defines a nation as a global power. The size of their economy plays an important role but many other factors come into play when determining a global power. One of my favourite authors, Ray Dalio, has written extensively about the history of great empires. By looking at previous global empires – such as the British and the Dutch – he has analyzed certain factors of strength which, when combined, indicate the overall position of a global empire. These are measurements such as innovation, military, technology, trade, education and being a financial centre. He analyzed how previous empires have risen and ultimately declined by looking at these aggregated factors. 

Below are two charts that were published in Ray Dalio’s research. The first one highlights the usual rise and decline of an empire by factor. The second one plotted the relative standing of great empires, using the aggregated factors as an indicator.

Source: Principles Perspectives Newsletter – Ray Dalio

It clearly shows that the United States remains the most powerful empire as of today. However, their relative standing has been declining, especially compared to the Chinese – which have been rising rapidly. China is advancing even faster than the United States has, and in a relatively short period gained terrain in areas such as trade, innovation and technology. Below you will find two graphs to illustrate this.

Source: Principles Perspectives Newsletter – Ray Dalio

The factors Dalio used to determine the relative stance of a great empire seem to be fairly accurate when one is following the developments between the United States and China. The domains of trade, competitiveness, innovation and technology are right in the middle of the ongoing rivalry between the two nations. Remember, the whole escalation of their relationship started as a ‘trade war’ under the Trump administration. But being a financial centre, military might and reserve status of one’s currency are falling within the scope of their battle for supremacy as well. Looking into the developments within all of these areas should provide one with a broad understanding of the US-China rivalry.   

Therefore, I will analyze the rivalry between the United States and China by looking at these separate factors which Dalio has used in his research. In every new part of this series, I will highlight one of them and look at the recent developments within that domain. A lot of conflicts have been happening in the technology and innovation sphere lately, so let’s start by analyzing the technology domain.

New Cold War

After the Second World War, the post-war world had to be rebuilt completely. The global world order as it existed before the war could not simply be replicated, since most countries were severely impacted by the devastating war. At the end of the war, the world fell apart into two blocs: the capitalists under the United States and the communists led by the Soviet Union. 

The rivalry between the two blocs caused a global arms race where both battled intensively for military supremacy, trying to develop the most advanced weapons as soon as possible. Both wanted to attain superior spaceflight capabilities as well, which resulted in the Space Race. The United States and the Soviet Union understood that military and technological supremacy would increase their chances to thrive as a world power. 

Today, the United States and China are engaged in a similar competition. Just like the space race between the Soviet Union and the United States, the battle for technological superiority got extended to outer space this time as well. China wants to build its space station, rivalling the International Space Station project. Recently it was announced that they successfully launched the first module of their planned space station.

However, this time the rivalry encompasses the newest technologies of the 21st century. Both countries realize that these technologies will play an important role soon and are undertaking actions to attain supremacy in this domain.

To have a leading edge in these areas of expertise is seen as a must to ensure their position as a global power. 

Technological superiority

The U.S. and China are engaged in a fully-escalated technology war. What started as a trade war under the Trump Administration has now resulted in a global battle for tech supremacy. The U.S. has been the historical leader in terms of invention, research and development, but China is now fiercely challenging that position. Tens of billions are being spent to outcompete each other. 

In the meanwhile, crucial industries and advanced technologies are being viewed as strategic assets. The development of technologies such as artificial intelligence, biotechnology, quantum computing and semiconductors are now becoming important state matters. As a result, certain sectors in the technology domain are undergoing a process of politicization in this fierce battle for technological superiority.

Recently, the US Senate introduced the Endless Frontier Act, which aims to stay ahead of China by funding technologies such as artificial intelligence and semiconductors. Next to funding research and development, the bill plans to create a new high-level office to oversee the development of these hi-tech technologies. More than $100 billion will be spent on this, which highlights the grade of importance.

Besides subsidizing technology domestically, new regulations to counter Chinese ambitions are being introduced as well. The Strategic Competition Act of 2021 aims to contain China’s expanding influence by formalizing the policy objectives of the US, labelling China as a strategic competitor in areas such as economics, technology, and military security. A more concrete example is the restriction of trade with Chinese supercomputer companies.

China is spending a lot of money on the technology race as well. In 2020 it spent a record amount of $33 billion to subsidize key sectors like the semiconductor industry. The nation is aiming to increase its annual R&D budget by 7% each year for the next five years. The money will be used for the development of quantum information, neuroscience, semiconductors, biotech, healthcare technology and other high-tech such as artificial intelligence. 

Semiconductor industry

The most interesting developments within the technology trade war between the two global powers are happening in the semiconductor industry. Chips are crucial for almost every aspect of modern life: smartphones, cars, computers and other electronics need them to function. New technologies such as autonomous vehicles, artificial intelligence and the internet of things will increase the demand for semiconductors even more. Share prices of semiconductor companies have been increasing at an incredible rate over the past years. It shows that investors expect a substantial amount of future growth within the industry.

Before the coronavirus shook up the global economy, the trade war between the U.S. and China had already disrupted the supply chain of semiconductors. In 2018, the Trump administration imposed tariffs on imports of Chinese semiconductors. In 2019, new export controls targeted the global semiconductor supply chain by restricting the Chinese company Huawei to buy chips, which caused a severe disruption within the business and industry. 

Already being disrupted by the trade war, the semiconductor industry had to deal with the coronavirus pandemic at the beginning of 2020. The ongoing trade war in combination with the pandemic has resulted in a huge shortage of semiconductors. It shows how the rivalry between the two global powers is already resulting in real-life consequences for the global economy.

The motives behind the trade-war part of the story seem purely strategic and fit within the narrative of the ongoing battle for technological supremacy.

To allow American companies to export critical components like computer chips to Huawei, which then turned around to help build the next generation of wireless technology, would be something like allowing American companies to export munitions or steel to the Soviet Union in the Cold War,” Sen. Tom Cotton told Cheddar’s J.D. Durkin in an interview.

Peter Wennink, head of Dutch chip equipment manufacturer ASML, has said that the anti-China technology blockade by the United States is a bad idea. You’ll force them to strive toward tech sovereignty, in their case real tech sovereignty … In 15 years they’ll be able to do it all by themselves,” Wennink said in an interview with Politico

The manufacturing of semiconductors has heavily shifted to Asia, with both Taiwan and South Korea controlling more than 70% of the manufacturing market. The Taiwanese company TSMC is the largest producer of chips and therefore takes a central position in the semiconductor rivalry. The strategic reliance on the island for its chip-making abilities makes the island an important flashpoint for geopolitical and economic tension.

China is the biggest consumer of chips, but domestic production does not meet the demand. Being largely dependent on imports, policymakers now have emphasised the need for technological self-reliance. To counter US sanctions, strengthening their chip autonomy has been made a top priority.

Due to the ongoing tension, the U.S. wants to increase its ability to manufacture chips domestically as well. President Biden signed an executive order in February which will review high-priority supply chains such as those for semiconductor manufacturing, noting that “Given the central role of semiconductors, strengthening the US position in semiconductor research, design, and manufacturing is a national priority.” Moreover, the U.S. Senate has recently proposed an emergency funding bill to spend $52 billion to support domestic chip development and production.

Due to the geopolitical tensions between the US and China, the whole semiconductor industry has now become a politicised battleground. It is just one example that shows the rivalry between the two is getting serious. There are at least a dozen other hi-tech industries where similar developments are going on.

Conclusion

To think that the trade war between the US and China is just that, a trade war, would be a great mistake. Their battle for dominance in the technology domain is a strategic chess game, with the most important industries of this century being used as chess pieces. Judging by the increasing amount of tension in recent months, one should expect the rivalry to escalate further shortly. 

The consequences of the ongoing rivalry between the U.S. and China will be enormous for the world economy and the global order as we know it. By looking at the bigger picture one can see that the rivalry includes more than trade and technology. The next time I will address another domain of Dalio’s research to illustrate the rivalry from another angle.

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Jordy Beuving
Jordy works as a junior investment professional in the Netherlands. He writes mainly about investing, financial markets, global affairs, geopolitics and macro-economics. He is currently obtaining his Law Degree at Tilburg University. He is also an active board member and financial analyst at A&F Investments.