An unprecedented 30-year period of economic globalization and geopolitical stability came to an end in 2020 when China unleashed COVID19 on the world.
Today, the world is once again divided into two opposing camps, led by the United States and China.
In Europe a kinetic battle over Ukraine pits NATO against Russia and its accomplices.
Simultaneously, an escalating economic struggle rages between China, the United States, and their respective allies.
The First Economic World War, as we refer to it, illustrates why monitoring trends in technology, demography and human behavior acting within the constraints imposed by nature is critical for those who want to minimize risks and maximize rewards.
In the case of geo-political competition, the constraints imposed by nature include geography, geology, and climate, which amplify a competitor’s other strengths and weaknesses.
Just a few years ago, most investors, managers and policymakers assumed that the globalization wave which exploded in the 90s would keep rolling forward and China would become the world’s most important economy.
But long ago, the Trends editors explained why technology, demography and human behavior would interact with geographical realities to undermine that vision.
Consequently, the West’s decoupling from Russia and China has come as no surprise to Trends subscribers. By the West we mean the EU and the Anglosphere, as well as Japan,
South Korea, the Philippines, and Indonesia. Via the Belt &Road Initiative and other vehicles Russia and China have been able to cobble together their own “rogues gallery” of supporters including Iran, Cuba, Venezuela, North Korea, Pakistan and a few former Soviet Republics.
Because of commercial relationships with both blocks, the BRICS countries are attempting to remain as neutral as possible.
India, in particular, has become a leading importer of cheap Russian oil, even as it has joined with the United States, Australia and Japan to create the Quadrilateral Security Dialogue, intended to thwart China’s expansionism.
Russia has been in demographic decline since the late Soviet era; it suffers from very low birth rates, very high mid-life mortality rates, out-migration and a collapsing education system.
Meanwhile, urbanization combined with its notorious one-child policy has caused China’s birthrate to collapse and created an unprecedented gender imbalance.
As a result, both countries are experiencing a plunge in the working-age population needed for economic production and military service. Worse yet, China and Russia are ill-prepared to attract or assimilate immigrant talent, unlike North America and the EU.
Over twenty years ago, our team identified these factors as “ticking demographic time bombs,” which would eventually undermine both countries.
Recently this has become obvious to all but the most oblivious observers. However, some Sinophiles still insist that China will rebound to new heights.
Russia is in a more desperate situation because it has remained on the periphery of globalization.
Aside from agriculture and segments of the defense sector, its corrupt economy is only competitive in extractive industries like oil, gas, coal, and metals.
Even in those segments, it lacks the geography and infrastructure needed to optimally import and export goods.
Worst of all, pervasive corruption stifles entrepreneurship and capital formation.
While China’s economic development is widely hailed as “stellar,” it should be thought of as an exploding “supernova,” rather than a healthy, long-lived star like the sun.
When China emerged from self-imposed isolation in the 1980s, it had a young, rural population that was well-suited to manufacturing.
Over the next 40 years, hundreds of millions moved to cities where they were employed in factories created by joint-ventures with Western and Asian innovators.
Foreign investors rushed in, seeking to benefit from the cheap labor, loose regulations and promised access to the huge domestic market.
As a result, the age of globalization saw China become “the factory to the world.”
The only thing that came close to the growth of China’s manufacturing base was the development of cities and infrastructure to house factories and their workers.
China even began to make waves in the tech sectors with companies like Tencent, Alibaba and Baidu.
Unfortunately for China, this stage created too much individualism to be countenanced by the Chinese Communist Party, especially as it became clearer that saturated global markets and rising labor shortages would prevent a large proportion of the population from rising out of abject poverty.
In other words, China found itself in the dreaded “middle-income trap” from which few export-driven nations have escaped.
Given these realities, the ruling elites in both China and Russia have become increasingly concerned as they have recognized that the trends super-charging China and keeping Russia afloat are now turning against them.
And rather than accept their implicit declining roles in the existing unipolar world, these adjacent authoritarian regimes have joined forces to recreate the bi-polar world of the Cold War era.
Assuming that its energy exports to Europe would fracture the solidarity of the NATO alliance, Russia invaded the former Soviet Republic of Ukraine on February 24, 2022.
Contrary to most expectations, Ukraine did not instantly collapse. In fact, Russian corruption and ineptitude gave NATO time to provide veritable tidal waves of weapons and ammunition to highly motivated Ukrainian troops.
And as of this writing, Ukraine has recaptured most of the territory Russia seized in the first few weeks of the war. Moreover, efforts to expand the Russian forces for a prolonged siege have resulted in an estimated one million Russians fleeing the country.
This has led to the most serious economic sanctions in history being leveled against Russia by NATO countries.
As a result, Russia has lost access to most of its foreign currency reserves, as well as markets for oil, natural gas, and refined petroleum products.
Even more importantly, Russia is unable to important semiconductors needed for its weapons systems.
Recognizing its own vulnerability, China is working to create more domestic consumption, deal with its overwhelming debt burden, and generate revenue from its Belt & Road Initiative.
However, the level of geopolitical belligerence it projects, has led to an escalating backlash from the United States and its allies.
So, where do we go from here?
Since ancient times geopolitical struggles have been won by strategic positioning, technology, and speed. This begs the question, “How does the Western alliance stack up against the Sino-Russian alliance on these metrics?”
When it comes to strategic positioning for the First Economic World War, we see that neither China nor Russia is well-suited to compete against an alliance centered in North America.
That’s because both countries lost the “geographic lottery.” That means they are:
- surrounded by hostile neighbors,
- easily cutoff from the world’s trade-routes,
- limited in terms of cost-effective internal logistics, and
- highly dependent on imports & exports for their survival.
Now, let’s consider staying power.
Unlike the OECD countries, neither Russia nor China has a “high-trust economy,” where consumers, employees, companies and investors have confidence in the government and each other.
That’s why, citizens want to get their assets out of both countries whenever they can. This sort of culture is toxic when it comes to generating the kind of innovation which keeps America on top.
Therefore, despite its prowess at assembly and its theft of intellectual property, China has failed to develop precision manufacturing of the kind needed to compete with Europe, Japan or the U.S.
In fact, it could not even produce the tips of ballpoint pens until the mid-2000s. And it can currently produce only low-end semiconductors suitable for RFID tags, washing machines, and toys.
Furthermore, China is extremely dependent on the rest of the world for food, energy and a wide range of crucial raw materials.
To generate the funds needed to purchase these items, China relies on exports, primarily to OECD countries.
A trade boycott or a blockade of the “first island chain” would totally cripple China’s economy within a few months.
That’s why the reindustrialization of North America is a vital component of Western strategy for the First Economic World War.
Russia is in a similar situation, but its economy is far more insulated from short-term pressure.
It’s self-sufficient in food and energy, and it exports mostly basic commodities like oil, gas, fertilizer and wheat.
Since finding substitutes for these commodities is so challenging, the West has imposed “energy price caps” enforced by western shipping systems;
these caps limit Russia’s ability to profit from war-related shortages. Meanwhile, the west has encouraged Russia to continue shipping food and fertilizer, while permitting Ukraine to do the same.
The tendency of totalitarian states like Russia, China and their allies to centralize innovation and decision-making around mega-projects, largely undermines the perceived advantages of speed. In cases like the Manhattan Project, wars were won by mega-projects which rushed an innovation into the battle.
However, even in this case, it was small-scale academic research that built the foundation for success.
China and Russia both lack a history of cultivating and exploiting the independent thought needed to put game-changing solutions to work in wartime.
Over the past three years, these trends have morphed into the First Economic World War. America did not ask for this any more than we asked for World War II.
Nevertheless, we’re in it and we have no choice but to win it, as we did the World Wars and the Cold War.
And like those wars this one will be fought on many fronts.
Given this trend, we offer the following forecasts for your consideration.
First, in order to win this war, the United States will leverage the unique economic strengths of North America to thwart the Sino-Russian alliance.
World War II forced the United States to rebuild North American manufacturing, which had been decimated by the Great Depression.
Today, the First Economic World War is driving the reconstruction of industries hollowed out by Globalization.
That means creating strategic industries in America’s industrial heartland, which could lead to millions of good jobs.
The biggest challenge remains misguided regulations which are at odds with “wartime” production goals. Rather than thinking like FDR in the New Deal era,
Democrats need to think like FDR during the war years.
Second, the west’s greatest advantage will be its full-spectrum capabilities. When joined by its NATO and Asian allies, the United States has an unparalleled ability to control the playing field.
This includes trade routes, payment systems, intellectual property, communication networks and other resources upon which a Sino-Russian alliance is dependent. Realistically, the Sino-Russian alliance will need decades to find substitutes.
Even large-scale trade between China and Russia themselves will depend on expanding long-lead-time rail and pipeline infrastructure.
Third, over the medium-term technology sanctions will paralyze the Sino-Russian alliance.
Russia has been stalemated by Ukrainian forces primarily because it quickly ran out of precision-guided weapons, and it has been unable to replace damaged battlefield management systems.
Similarly, Russia’s energy sector is suffering because it no longer has access to western expertise.
Worse yet, China’s whole economy is constrained by a lack of anything but low-end semiconductor chips and related manufacturing equipment and expertise.
These sanctions impact everything from AI to communications systems to automobiles. China’s involvement with high-end electronics is now limited primarily to assembly and export of consumer products.
Soon, this short-age will undermine its datacenters and research labs, rendering them nearly obsolete.
Fourth, after seeing what Russia is suffering, China will postpone, if not abandon its conquest of Taiwan.
Supposedly, China wants to be ready to take Taiwan in 2027. War game simulations indicate that this would be virtually impossible, although losses by the U.S. and its allies might be heavy.
Experts report that a Chinese invasion force would take 9 hours to reach Taiwan. Such a force would Allied Forces Poised to Respond to Taiwan Invasion be immediately identified by satellites and targeted for destruction.
Importantly, if existing or intensified technology sanctions remain in place, the capability gap between Chinese and Western weapons will widen further by 2027.
Fifth, internal divisions among U.S. allies since the end of the Cold War will be suppressed in order to deal with the Sino-Russian threat.
Some who see China as the primary threat and Russia as secondary, have urged a pull-back from the Ukrainian commitment.
However, Americas’ allocation of resources to Ukraine has reawakened the EU’s commitment to its NATO allies.
That’s important because China’s largest export market is the EU and the EU is also the world’s leader in semiconductor manufacturing technology.
Consequently, anything the U.S. spends in Ukraine simply makes China more vulnerable to economic pressure.
And that will minimize the likelihood that China delivers military resources to Russia.
Sixth, the Belt & Road Initiative will turn into a financial and diplomatic disaster for China and a nightmare for its customers.
As you would expect, poorly designed, poorly built infrastructure projects in high-risk countries are failing to produce value.
At best, they were “make-work projects” employing hundreds of thousands of Chinese workers for decades.
Unfortunately, unfinished cities, leaking dams, and crumbing highways financed by Chinese loans are unlikely to pay-off for anyone.
From Pakistan to Sri Lanka to Angola to Ecuador, the story is the same. Now, angry locals in bankrupt countries are sorry they ever signed up for these deals.
Not only is China likely never to get paid, but they’ve also alienated many of the countries they were hoping to coopt into their alliance.
In the case of Pakistan, China may be willing to “extend and pretend” in an effort to reach the Arabian Sea without going through the Straits of Malacca; but most other deals will end far more acrimoniously.
And that’s probably good for the west. And,
Seventh, the Ukraine campaign will end in utter failure for Putin and the Russians. Crimea is likely to fall once the Kerch-Strait Bridge is disabled.
Furthermore, the Russian military will lose any residual credibility it had from the Soviet era, which is likely to put an end to its foreign military hardware and ammunition business.
However, the worst part will be the loss of the Nord Stream Pipelines and the likely seizure of Russian assets to pay for Ukraine’s reconstruction. This could lead to the breakup of Russia into smaller entities.
Resource List
1. Trends. January 2023. Trends Editors. Responding to the Evolving Economic Threat from China.
