Trade

On “Ruling” and “Rising” Powers

By David Stockman  |  January 8, 2019

What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.

-Thucydides, History of the Peloponnesian War

“China,” Charles de Gaulle famously said, “is a big country, inhabited by many Chinese.”

The Middle Kingdom is indeed the fourth-largest country in the world by area. And more people live there – 1.4 billion – than in any other country in the world.

Almost 47 years after Nixon went there and “opened it up,” China is the second-largest economy on the planet – with a bullet. Soon, it’ll be No. 1 on this count too.

And even its territory could expand, should it have its way in the South China Sea.

With nearly three decades of exponential growth behind it, China seems to be prepared for a bigger role on the global stage.

The question now is how big that role will be and what it means for the prevailing order.

It’s a dilemma as old as history.

Indeed, conflicts like these are the very foundation of history.

According to the Harvard political scientist Graham Allison, China and the U.S. are “in a dangerous period.”

It’s all because, from Imperial Washington’s perspective, the rise of China could instill fear in the United States. This is the basic framework for what Allison long ago described as the “Thucydides Trap.”

He wrote a book about it, Destined for War: Can America and China Escape Thucydides’s Trap?, published in 2017.

Indeed, the Belfer Center for Science and International Affairs at Harvard’s Kennedy School of Government is running a Thucydides’s Trap Project, “where you learn more about the defining challenge of the 21st century.”

Well, you’d certainly learn more about Imperial Washington’s conception of “the defining challenge of the 21st century”…

And the operative fact here is that Imperial Washington – and Allison, who, in addition to serving as Dean of the Kennedy School from 1977 to 1989 was Assistant Secretary of Defense for Policy and Plans during the Clinton administration – sees Imperial Washington as the “ruling power.”

According to Allison, it’s a deadly pattern: “When a rising power threatens to displace a ruling one, the most likely outcome is war. Twelve of 16 cases in which this occurred in the past 500 years ended violently.”

And, of course, there’s the Great Disruptor:

If Hollywood were producing a movie about China and the US on a path to war, central casting could find no better American lead than Donald Trump. His insistence on “blaming China first” portends a blockbuster finale. Will Washington and Beijing follow in the tragic footsteps of Britain and Germany a century ago? Or will they find a way to avoid war as effectively as the US did in crafting a Cold War strategy to meet the challenge posed by the Soviet Union?

For its part, China simply wants to improve living standards for its people and exercise its territorial rights. Indeed, China’s poverty rate has fallen from 90% in 1978 to 1% in 2014.

What about territory? Here’s Professor Zhengxu Wang of Fudan University, writing recently in the South China Morning Post:

From Beijing’s point of view, China’s sovereignty over South China Sea islands was infringed by surrounding countries in the 1970s, and Beijing is now simply defending and asserting its sovereignty in the region – with the capacity it didn’t have before. This is not a picture of China going around bullying its neighbours.

Any fear generated by China’s modest domestic and regional ambitions rests on “thinking that has turned the U.S. into a highly insecure and paranoid actor today.”

The U.S. and China in the days after Tricky Dick, developed an economic relationship of staggering proportions.

Seeds the 37th President of the United States planted with “Nixon Goes to China” as well as the “Nixon Shock” were nurtured to full flower by Alan Greenspan and succeeding monetary central planners.

Still, China is becoming more unstable by the day.

Three decades of egregious money-printing by the Federal Reserve ballooned U.S. demand for merchandise imports. And it led to the offshoring of America’s supply base of the same.

That’s even as break-neck credit expansion in China drained its rice paddies of cheap labor and massively subsidized the construction of gleaming new export factories and the related supply-chain infrastructure.

The risk now is China maintain control of its runaway $40 trillion credit machine while also staving off a serious economic downturn.

And President Xi Jinping must negotiate the winds of Trade War with the mercurial President Trump.

Trade and tariffs, though, might actually be small potatoes compared to history’s forces…

We’re talking about two nations with completely opposite approaches to governing, broader issues of philosophy and worldview that may be simply too wide to bridge.

It’s their top-down approach to our bottom-up approach.

Consider the China 2025 plan. It’s state-backed industrial policy. And that’s the core of Imperial Washington’s concerns about Beijing and “technology transfer.”

“A turbulent history,” Henry Kissinger noted, “has taught Chinese leaders that not every problem has a solution and that too great an emphasis on total mastery over specific events could upset the harmony of the universe.”

That sounds nice. But the China Trade War is off the charts of known history. It’s uniquely bilateral. And both combatants are delusional about their own bargaining strength.

Neither the “ruling power” nor the “rising power” can withstand these particular blows at this particular time.

And that creates unique dangers, “Thucydides’s Trap” or no…

A Model for These Times

Desperate times call for… “common sense” measures.

These are desperate times… how else to explain 600- and 800-point swings for the Dow Jones Industrial Average on what seems a daily basis?

This is not “normal.”

Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan.MORE FROM AUTHOR