Democracies Can Out-Compete the China-Russia Alliance
Democracies Can Out-Compete the China-Russia Alliance
The economic trauma of the Ukraine War is only beginning: Energy shocks, food-supply disruption and commodity shortages will have growing impact as the conflict persists. The war, moreover, is just part of an accelerating geo-economic realignment.
The golden age of globalization, when countries pursued interdependence with minimal fear of insecurity, is over. The global economy is now being reshaped by competition and conflict. That will create some opportunities for the US to strengthen its position — as well as a whole lot of worldwide turmoil.
A remarkable aspect of the post-Cold War era was that calculations of economic efficiency so often trumped calculations of geopolitical risk. An era that began with the fall of the Berlin Wall was dominated by the pursuit of integration across traditional strategic divides.
A web of trade, financial and technological ties developed between China and the world’s democracies. European countries became highly reliant on Russian energy (notably Germany) and investment (the UK). The pursuit of profit was accompanied by a diplomatic rationale — that economic entanglement would create a common interest in global stability, mitigating whatever dangers might otherwise result from trading with a prospective enemy.
That rationale proved faulty. Globalization increased Chinese and Russian capabilities without meaningfully decreasing their ambitions. By the mid-2010s, global tensions were increasing and interdependence came to be seen as a source of vulnerability.
Worried that Beijing might translate technological primacy into geopolitical primacy, President Donald Trump’s administration urged other nations to wall off their 5G telecommunications networks against Chinese influence. It sought to forestall completion of the Nord Stream II pipeline between Russia and Germany, lest Europe become diplomatically paralyzed by dependence on Moscow’s energy.
When Beijing then threatened to withhold critical pharmaceutical components amid the Covid-19 pandemic, it showed how complex supply chains could be wielded as strategic weapons.
In this context, the war in Ukraine has thrown global integration into reverse. Western companies that pushed into Russia after the Cold War are being forced to flee, with McDonald’s Corp. being the latest (and perhaps most symbolic). US export controls have severed Russia’s access to advanced semiconductors; Germany and other European democracies are rapidly undoing decades of economic engagement. This conflict-driven decoupling may simply be a preview of what comes next.
President Xi Jinping’s China was already pursuing what Matthew Pottinger, deputy national security adviser in the Trump administration, calls an “offensive decoupling” strategy — a program meant to insulate the country from Western pressure and give it tremendous coercive power by dominating critical technologies. Xi’s “dual circulation” program is meant to develop China’s internal market and make the country less reliant on external markets that might slam shut in a crisis.
It seems inevitable that this campaign will accelerate. China, whose relations with Washington are in a nosedive, can hardly leave itself susceptible to the sort of punishment the US and its allies have imposed on Moscow.
Similar processes are underway across the democratic world. Europe is moving to wean itself off Russian oil and natural gas. The US is considering sharper curbs on investment in China; Treasury Secretary Janet Yellen is pushing “friend-shoring,” or relocating production to countries aligned with Washington.
The administration of President Joe Biden is also working with allies, such as Japan, to create technological supply chains and innovation ecosystems that leave China on the outside.
It has refused, so far, to remove Trump’s tariffs on China, a step that would help ease inflation, for fear of surrendering a diplomatic advantage. This turns the post-Cold War norm on its head: Calculations of geopolitical risk are now trumping calculations of economic efficiency.
To be sure, interdependence is hardly a thing of the past. US trade in goods with China was more than $650 billion last year, and American companies such as Tesla Inc. and Apple Inc. are doing more, not less, business with Beijing.
But the basic trend is toward a more balkanized global economy, in which key rivals aim to seal off dangerous vulnerabilities and manipulate the terms of interdependence to their advantage. And if recent experience is any indication, this process will happen gradually until it happens rapidly — when a grave crisis erupts, as in Ukraine, and sunders ties that had seemed unbreakable not long before.
Structurally speaking, the US is well positioned. America and the other advanced democracies possess a clear majority of global production and wealth. If they, plus key developing states such as India, deepen their integration with each other while limiting it with their rivals, they can create a free-world economy more vibrant than anything China, let alone Russia, can muster.
But the current crisis has also revealed how delinquent the democratic world has been in planning for the dramatic economic interruptions a major geopolitical showdown involving China would cause. And even if the US and its allies get their act together, no one should underestimate the dislocations headed our way.
As Ukraine demonstrates, obtaining greater geo-economic security will require rupturing supply chains, upending trade and investment patterns, and otherwise revisiting the lucrative efficiencies of the post-Cold War era. A world that is more divided geopolitically will be more turbulent economically as well.