The rise of China, war on the horizon?

There is an interesting new twist in the current geopolitical landscape. As the U.S. announces its intention to separate itself from the world, China is stepping into the power vacuum.

Speaking to people who went to Davos, I learned that there was no visible U.S. representation and 400 Chinese delegates. There were whisperings about not taking the Chinese too seriously because their political and economic system may not be ready to assume a leadership role.

But, if the U.S. starts following a protectionist route (or even just a confused route of uncertainty and contradiction) we will likely see new trading blocs emerge, and China may play an important role. The country is still a developing country and the army, as someone recently said to me, is professionalizing (emphasis on the -ing), but it does have the capacity to surprise.

This wouldn’t be the first time the experts were wrong on China.

China’s ascent goes beyond trade: the Chinese generally have a very different approach to business and business relationships. For decades, the U.S. and Europe have dominated international policy setting, which has given the West an advantage. Laws geared towards enforcing a Western view of anti-corruption and transparency have governed international markets. This has arguably created a more level playing field internationally, but it could also be seen as tilting the scale towards Western ideals.

As Chinese influence increases the rules could change.

There is an even more grim possibility. As China gains more political clout and the U.S. is left with military might, a war with China becomes more plausible. The U.S. is unlikely to just shrink away without a fight.

A Chinese army official, Liu Guoshun, recently commented on the increasing probability of war:

"'A war within the president's term', 'war breaking out tonight' are not just slogans, but the reality,"

- Liu Guoshun Chinese Army Official

The Rand corporation issued a report a few months ago suggesting that as tensions heat up preventing escalation will require a measured approach, which is not the theme of the day.

As the nature of war shifts and the U.S. alienates allies, the outcome of such a war is not clear cut. In all likelihood any war would amount to a few skirmishes - the last thing the U.S. would want to do is occupy China.

What does this mean? We still think war is unlikely but do see shifting patterns in trade relationships. Any war talk will likely just impact trade relationships. This is too foggy to call a hard trend now, but it is a key uncertainty, and we recommend including China as a major potential player and war as more than a black swan event when thinking through future scenarios.

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