Economic Research Forum (ERF)

Geopolitical and economic tension in the 21st century: Not your grandfather’s cold war

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Current geopolitical tensions between China and the United States have been compared to the Cold War. But the modern-day rivalry differs from that of the US and Soviet Union, not least of all in terms of how other countries have responded. This column argues that in today’s context, a given state is less likely to side directly with either China or the US, and is instead able to benefit economically from courting both superpowers. But while not as deeply entrenched as in the 20th century, the schism between the US and China, as well as the way the international community has reacted, remains harmful to the wider global economy – de-escalation is needed urgently.

In a nutshell

Tensions between the US and China have drawn comparisons with the Cold War. But unlike during the 20th century, today the world is not split so clearly into two rival camps.

Instead, many countries are able to benefit from the power struggle, courting both Washington and Beijing for their own economic and strategic gains. This process has been seen across the Middle East, Africa, Latin America and Asia.

The ongoing tension, together with other countries’ reactions, points to a process of re-globalisation. This trend does not benefit the global economy and could hamper growth and development. De-escalation is a major policy priority, both on economic and international security grounds.

Tensions between China and the United States continue to escalate. There is talk among scholars and commentators about a new Cold War between the two powers, and US officials have also indicated that they are framing relations with Beijing in these terms. But people should be cautious in making such comparisons. Politically and economically, the world today is quite different from the post-World War II era, when relations between the Soviet Union (USSR) and the US were extremely strained.

Back then, other countries were stuck between a rock and a hard place and had to choose a side. Of course, there was the non-aligned movement which promoted decolonisation and sought to stave off an escalation into a nuclear war between the USSR and the US, but many of the members of the movement still had to choose a camp. What sphere of influence a country would fall into was determined not only by ideology and the interests of political leaders, but also by threats and coercion coming from the great powers. Indeed, throughout the Cold War, both Washington and Moscow backed a series of coups and insurgencies in Africa, Latin America and Asia, trying to sway countries into a position over which they could exert maximum control.

Today, the ability of superpowers to instigate regime change with impunity is considerably more limited. That is because they risk an immediate and massive backlash from the global public opinion. This is amplified by technological interconnectedness and the power of social media. And China, unlike the USSR, is not just a strategic rival to the US, but also an economic one. This means countries caught in the middle of the China-US rivalry are able to bargain not just on defence but also on economic terms.

Globalisation also makes the choice of exclusive alignment much more costly. Today, choosing a side would mean turning one’s back on economic gains from investment and trade with the other camp. This is why it is unlikely that history will repeat itself and deliver a situation similar to the Cold War of the 20th century. Picking a side would bring with it too many economic sacrifices.

So, in today’s world alignment is not exclusive, as states try to engage with both the US and China for their own economic gain. This means that the process of de-globalisation which some observers have warned about is unlikely to dominate in the coming years. Instead, what we are likely to see is re-globalisation. That is, globalisation taking a new path defined by interconnectedness driven by further technological advances, and no longer solely driven by the pursuit of efficiency in trade and investment. In other words, the process which in the past created global supply chains, entangling great powers and smaller countries into tight trade relations, is changing to reflect new global realities.

Nonetheless, tensions between the US and China (and their attempts to isolate each other economically) are influencing global trade and investment decisions. Superpowers now have new considerations in approaching trade relations, such as the security of supply and rewards for partner countries.

Security concerns are increasingly being voiced in the context of trade and commerce. For example, the US and its allies argue that outsourcing production in key industries to China (and maintaining a high level of technological integration with Chinese companies) threatens national security. That is why they have started moving such production to other countries which may not provide the best conditions from an economic standpoint but are nevertheless perceived as more politically dependable. This means that small- and middle-countries are being rewarded with investment, trade and even aid for helping with this process of ‘decoupling’ or -de-risking’ (as EU Commission Chief Ursula von der Leyen recently called it). Security, for now, appears to trump efficiency.

Countries at the forefront of re-globalisation include large emerging markets, exporters of fossil fuels and critical materials for the energy transition and digitalisation, and countries in geo-strategic positions. Countries such as Brazil, India, Indonesia, Mexico and Turkey are in regular contact with both superpowers and are making the most of their multi-layered relationships. Gone are the days where distinct clusters of countries sit firmly in opposite geopolitical trenches.

The Gulf countries, especially Saudi Arabia, have long been exclusive allies of the US, which was backstopping their security in exchange for energy supply. Now, that exclusive relationship is shifting, not least because the US has become energy independent. China, which has become a major importer of oil from Saudi Arabia and other Gulf countries, is in turn gaining influence in the region.

In Africa, countries such as the Democratic Republic of Congo (DRC) have long been open to large investment projects in infrastructure and mining from China. Today, the US and its European allies are also engaging the DRC, trying to pull it closer with promises of vast export markets for its raw materials, major investments, and development of their electric vehicle battery value chains.

By contrast, the Solomon Islands, which are located in the South Pacific (an area of traditionally strong military presence by the US and its allies), have recently rebalanced their relationship in favour of China. The island nation not only granted Beijing major infrastructure projects to develop (including ports), but also signed a new security pact which could pave the way for a Chinese military base on its territory. This would help China expand significantly its reach within the Pacific region.  

But while some nations may benefit form China-US tensions, the world as a whole is likely to suffer. This is because re-globalisation will undoubtedly lead to loss in economic efficiency and potentially exacerbate poverty. Trade and investment flows are likely to decrease overall, undermining the economies of many developing countries. This could curb wealth and job creation and affect millions of households. Further, re-globalisation will not mitigate the risks associated with the growing tensions between the US and China. The conflict in Ukraine, which some see as a proxy war between the US and China, as well as tensions over Taiwan reflect the dangers of this rivalry. 

The temptation of the two superpowers to weaken each other by provoking regional conflicts could also heighten the risk of direct military confrontation. In this aspect, the new cold war resembles the old one, with the shadow of a global war and nuclear annihilation looming large. Lessons from history must be learned. The US and China need to establish effective mechanisms of de-escalation. Dialogue and trust building between the two superpowers will be critical, limiting the economic and geopolitical fallout of their clash for the rest of the world. While some countries are managing to gain from the US-China tensions by courting favour with both states, the global economy does not stand to benefit from a continued deadlock. In short, de-escalation is the main route to international prosperity and security. But as with during the height of the Cold War of the 20th century, tensions look likely to remain high for the foreseeable future.

This column was first published at Al Jazeera website. The original version is here.

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