Ray Dalio：What I think is going on with China-US relations (This article is purely to provide market information to give entrepreneurs insight into the changing world)

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For nearly 40 years, I have been going to China. I have built very close friendships there and participated in its evolution, not in the pursuit of money but in the pursuit of meaningful work and meaningful relationships. I enjoyed an abundance of both and feel a deep commitment, like you would feel with your friends, to help. That has put me in the privileged and awkward position of being deeply attached to the two greatest powers in the world, which are on the brink of going to war with each other. I am in the middle trying to help both while trying not to hurt either side in the process of helping the other. I recently had two trips to China lasting 13 days that included many meetings and conversations with people from a variety of backgrounds. These trips, along with what I learned from other meetings with non-Chinese policy makers in other countries (including the US) and Chinese citizens and China experts outside of China, have given me the perspective that I am going to share with you here and now.

The purpose of this memo is to describe as accurately as I can what I believe to be true without any biased assessments of who is doing what right or wrong. My goal is simply to increase understanding to help minimize miscalculations. I will speak frankly, probably too frankly for some, because I believe in the power of collectively trying to objectively look at what’s true and explore what to do about it. At the same time please understand that while I believe the following to be true, I’m not certain of anything.

The United States and China are on the brink of war and are beyond the ability to talk.

What I mean when I say that the US and China are on the brink of war is that it appears that they are close to having a sanctions war and/or military war that neither side wants but many believe will probably happen because:

a) each side is very close to the other’s red lines, 

b) each side is using brinksmanship to push the other at the risk of crossing each other’s red lines, and 

c) politics will probably cause more aggressive brinksmanship over the next 18 months. 

I want to emphasize that by saying that they are on the brink, I don’t mean to say that they will necessarily go over the brink. I mean to say that they are very close to crossing red lines that, if crossed, will irrevocably push them over the brink into some type of war that damages these two countries and causes damage to the world order in severe and irrevocable ways—like Russia’s invasion of Ukraine did for Russia and the world, just much bigger.

As for the two sides not being able to talk with each other, what I mean is that discussions about big, important things have become exchanges of accusations that worsen relations rather than help them, so it is worse to have the discussions than to avoid them. While there are some tactical discussions aimed at preventing slipping over the edge into war (e.g., on topics like how to deal with Taiwan President Tsai’s visit to the US) and both sides agree that these tactical exchanges are good things, there is growing belief that the unavoidable trajectory is toward war. This belief is due to the unfolding of circumstances, politics in both countries, and geopolitical considerations.

As for politics as an influence, it is important to realize that the United States is not united and the Biden administration is not in control of dealing with China because the US political decision-making system is fragmented. As we saw in the Nancy Pelosi visit to Taiwan incident and in the balloon incident (and in many other less-publicized incidents), President Biden can’t speak for or control the United States by himself. While both parties and most Americans agree on being anti-China, they can’t agree on how much and in what ways.

The hawkish political influences in the United States will exert more pressure on the relationship over the next 18 months because of the emergence of the 2024 election season. That will be a very risky period because China and the US are now already on the brink of war. 
The political timetable of the election cycle between now and the 2024 elections in the United States and Taiwan will likely lead to more push-the-limit anti-Chinese brinksmanship from the US. For example, US congressional hawks and their actions, such as hearings from Representative Gallagher’s Select Committee on the Chinese Communist Party, together with most candidates for the presidency, the Senate, and the House of Representatives appealing to a populace that wants its leaders to stand up to China, plus Taiwanese politics, will all likely lead to pushing to the brink of or beyond the red lines. Because China and the US are already at the edge of war, pushing hard against China over the next 18 months will be very risky.
There are many red lines that will be pushed up against with brinksmanship over the next 18 months. Each one is risky, and together they carry a lot of risk. Here are some:

• A well-known Chinese red line is the United States or Taiwan coming out in favor of Taiwanese independence. Everyone knows that if that happens, it will be considered an act of war by China. Looking ahead, there is a relatively high probability that the United States government in some form will come out in favor of defending Taiwan’s separation from China militarily and will sell Taiwan lethal military equipment to do so. A visit by Kevin McCarthy to Taiwan carrying a strong message of support for defending Taiwan, especially increased arms sales, or even such statements made without a visit would be pushing the red line.

• Chinese military planes and ships are testing previously established red lines because of what the Chinese say are previously uninitiated provocations and because they claim it is their sovereign right because they see Taiwan as indisputably a part of China.

• China’s dealings with Russia are leading the US and China to probe each other’s red lines in this relationship. For example, which technology constitutes lethal military equipment isn’t clearly agreed on because some equipment is dual-use. There is also a debate in China about why it is acceptable for NATO to provide lethal military equipment to Ukraine but not have China do the same for Russia.

• Economic sanctions, most immediately around the US cutting off China’s access to essential chips, is testing Chinese red lines. In response, for the first time, China is considering reciprocating with its own sanctions against an American company. More specifically, it is now considering sanctioning Micron Technology, which would be financially devastating for the company because it derives about 25% of its revenue from China and Hong Kong. Naturally other US companies and companies that are considered allies of the US that have large dependencies on doing business with China are worrying and considering how to protect themselves.

• Controlling essential technologies and minerals to defend against being cut off from them, and being able to cut off the opponent’s essential technologies and minerals, is now being done and is provocative. This self-reinforcing, economic-war-intensification dynamic is happening in classic ways explained in depth in my book Principles for Dealing with the Changing World Order and is a leading indicator of war. It is leading to more onshoring and “friendshoring,” both of which are much less cost-effective and will reshape alliances. That is because virtually all countries are caught in the middle of the conflict; the choices they make will determine their alliances. For example, regarding the earlier-mentioned Micron Technology case, the US has already asked the South Korean government to influence its two major chip producers (Samsung Electronics and SK Hynix) to not increase sales to China if Micron is banned from selling its chips in China. What South Korea does in this case and other cases will define its relations with the United States and China. This dynamic is rapidly changing alliances. Another example is how Saudi Arabia’s relationships with the United States, China, and Russia have changed for logical reasons reflecting the relative changes in economic and military power—i.e., while the United States and Saudi Arabia used to have a very strong alliance in which the United States provided military protection and the KSA provided the US and its allies protections against oil supply and price disruptions, this has ceased to make sense as China and Russia now have more symbiotic interests with Saudi Arabia than the US does. This is also affecting currency and capital flows so that they align more with trade flows and geopolitical alliances. For these reasons, in an environment in which one wants to deal with “friends,” trade and investment is shifting to being more with allies than cost-effective sources. Watch the demand for key materials that can be squeezed—e.g., lithium, cobalt, rare earths, wafers and cells in solar energy technology, etc. We are on the brink of an economic resources war.

• In addition to these things to argue over, there are many other types of disagreements happening—e.g., rules and protocols for doing business with Chinese companies, operating in outer space, cybersecurity, listing Chinese stocks on US exchanges, making investments in China, and too many others to list here.
  

Most of these conflicts are likely to intensify over the next 18 months.

US-China relations are getting so bad that there is reason to worry that anti-China sentiment could make doing business with China like doing business with Russia, which would lead US-China trade to collapse. This would have similarly damaging economic consequences, though many times larger, severely hurting supply chains and trade. That would at a minimum cause severe economic consequences for the US, China, and the world and at a maximum could lead to military war.

These conflicts are affecting most countries’ and multinational companies’ relations and how the world is operating in innumerable ways that are intensifying.

Now that there is a greater possibility of some form of war, there is more focus on what that war might look like and trying to reach some agreements about how to contain the possible types of war. 

For example, if there is going to be an economic/sanctions war, it would be good to have an agreement about what items are essential and what countries will be exempted from it, and if there is a military war it would be good to have agreements such as 

1) no side’s military will directly kill the other side’s military, 

2) no fighting will take place on the other side’s lands, and 

3) neither side will use nuclear, cyber, and space weapons, etc. 

It is hoped that in that way, if there is war, it will be contained. All war is terrible and so those in charge should strive to avoid even a contained war like the NATO/Ukraine-Russia war in Ukraine. But such a contained war is not the worst-case scenario because history has shown that when conflicts have reached this stage 1) they have terrible economic consequences and 2) there is a high risk of moving from a contained war to an all-out war.

I should emphasize that almost all policy makers I speak with are scared of war, which is an impediment to war that might, but should not be assumed will, prevent it. Both sides have been very clear that they recognize that either an economic decoupling or a military confrontation would be disastrous, while they are testing each other’s limits.

All things considered, I think that the greater provocations will most likely come from the American side, which I worry will cause a tit-for-tat crossing of the line. While I expect that these provocations will likely lead China to make bellicose responses, I don’t believe the Chinese reactions to the provocations will be strong enough to prompt a war in the near future (i.e., the next three years) because the Chinese don’t want to go to war. I expect the Chinese side to be very restrained for the time being. In fact, it was said to me a number of times when I was in China that they believe that some Americans are trying to bait them into a trap (a war) that they want to avoid. If I saw more aggressive moves, especially if unprovoked from China, I would be even more concerned.

Virtually all of these issues are being dealt with via brinksmanship that is occurring dangerously close to each other’s red lines, which means that the United States and China are like two giants wrestling with each other six inches from the edge of a cliff and threatening to pull others into this dangerous fight.

to be continued ......

For more information, please look forward to the next issue!

Original article from: Ray Dalio's Principled Perspectives

Disclaimer: The information in this article is purely for sharing purposes, and is intended only as a reference for entrepreneurs to keep abreast of the changing trends in the world in order to better meet the challenges and make better business decisions. The content should not be relied upon when making any business decisions and YYC is not responsible for any consequential loss or damage caused.

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