The Art of The New Cold War Newsletter

#5

Welcome readers to the 5th edition of The Art of the New Cold War Newsletter.

This week we focus on topics including: U.S.-China decoupling, the CCP’s crackdown on the video gaming industry, and COVID origins.

As always, for more, please check out my book: The Art of The New Cold War

Feedback is always welcomed. Thank you for reading!

Topic 1: To Decouple or Not to Decouple, that is the question?

For years, scholars and economists have pondered the question of when China will overtake the U.S. as the world’s biggest economy. A question gaining increased interest as China gets closer to achieving that goal, with some speculating that based on current trajectory it may be as soon as the end of the decade. Indeed, by certain metrics, including Purchasing Power Parity (PPP), China’s economy is already larger.

The question has profound implications for both nations, and for the world at large. These implications are psychological and practical and include, but are not limited to, the status of the dollar as the reserve currency, the balance of power, and the signaling of a new epoch in the world.

But what if China never overtakes the U.S. as the world’s largest economy? What if they fail to achieve their goal and instead go the way of Japan; which in the 1980s was heralded as a potential economic challenger to the U.S., until it crashed and never recovered to vie for the throne again.

Undoubtedly, China is a much larger nation than Japan, both by population and size, and has many more natural advantages than Japan ever did, making it a far more likely contender for America’s economic throne than perhaps Japan ever really was. And after all, China was the world’s biggest economy for much of human history, and so would simply be regaining its former title.

Still, China is not without significant weaknesses that may potentially derail its economic trajectory and stall out its development. And while China’s extraordinary rise over the past few decades was relatively smooth, and certainly aided by a number of factors, including in no small measure America’s highly accommodative policy of economic engagement with China, it is now facing strong headwinds that threaten its decades long, largely unimpeded economic march to the top. Indeed, things are starting to get much more perilous for China as they attempt to make their way to the world’s economic summit.

For starters, much of the low hanging economic growth fruit has already been picked, and infrastructure driven investments and other frequently used simulative measures no longer juice growth as they once did. Along with providing diminishing returns, they now simply add more debt onto an already overly indebted economy.

China is also facing significant demographic issues. The decades of reaping the great benefits of a young and seeming inexhaustible workforce to power China’s economy is coming to an end. Now China is faced with what some have called a demographic time bomb, as birth rates have plummeted to extreme lows due to decades of one child polices, coupled with soaring costs of education and housing. Thus, China is faced with the fate of growing old before it grows rich. And having many older people without enough young people to support them, will necessitate the creation of a massive social safety net, which China currently lacks. This will cost enormous amounts of money, and will divert resources from other economic drivers.

Additionally, America has at long last awoken to the full measure of the China threat and China’s potential rise to the top of the global food chain. As a result, America’s decades long highly accommodative policy of economic engagement with China, which greatly facilitated China’s rise, has come to an end. Now instead China is facing U.S. tariffs on its products and other trade curbs that are disrupting its access to global markets and advanced technologies, which China’s requires to move its economy up the value chain and avoid the dreaded middle income trap that may threaten to stall its development. Other countries, like those in the E.U., have become far more cautious about allowing Chinese investment as well, especially in their strategically important industries and technologies. China is also facing greater isolation than in the past due to its human rights abuses, and potential responsibility for COVID (more on that later in the Newsletter).

There are also growing calls for the partial or complete decoupling of the Chinese and U.S. economies.

To that end, a recent Bloomberg study showed five different futures regarding China’s economic rise. Of the five futures generated the two that envisioned a near complete decoupling in the trade and economic relationship between the U.S. and China, showed that the Chinese economy would never catch up with the U.S. economy. For while decoupling would certainly hurt America in ways, it would hurt China much more.

Thus, as the study suggests, one of the most effective ways to disrupt and contain China’s rise is for America to simply economically decouple from China, and to accelerate this process as soon as possible while China is still dealing with other significant issues, as set forth above. Indeed, I advance just such an argument in my own book, as recited in the excerpt below:

“To further disrupt China economically, America should pull supply chains out of China. Not only will this secure America and its economy but also place strain on China’s economy and populace, and by extension the CCP, as China has an extremely large population to employ, house, and feed to stave off social unrest. Moreover, this will force China to become more insular, and revert further into its state controlled economic system, starving out the private sector. This will retard China’s economic growth, and breed even greater inefficiencies, causing China to become more like the Soviet Union with the same strategic vulnerabilities.

Further, by ripping supply chains out of China America can take away some of the CCP’s most powerful weapons of political coercion and economic warfare. Currently, the CCP wields enormous power and leverage over both companies and countries by virtue of their control over critical global supply chains. This represents a major vulnerability for not only America but the entire free world. One that must be reversed. And while there will undoubtedly be short term pain and costs as a result, it is a price worth taking. For though in the short term some goods may become more expensive for Americans and corporations may lose profit, these costs pale in comparison to the long-term costs and consequences of continued American dependency on China. Moreover, the benefits both economically and from a national security perspective of America regaining control over industries and supply chains will be tremendous.  Additionally, “decoupling” from China will pose a serious threat to its main source of global influence—the size of its market.”

There will of course be those who will fight this decoupling tooth and nail for the sake of their own economic interests and profits. Namely, those business groups and multinational corporations with large interests and dependencies in and on China. Known infamously as the “China Lobby.” And indeed, just this very week, the China Lobby was actively seeking to undermine any kind of decoupling, as reported by the Wall Street Journal :“Nearly three dozen of the nation’s most influential business groups—representing retailers, chip makers, farmers and others—are calling on the Biden administration to restart negotiations with China and cut tariffs on imports, saying they are a drag on the U.S. economy.” A request which thankfully was flatly rejected by President Biden’s administration.

And as Florida Senator Marco Rubio said accurately and presciently this week in a Senate Intelligence Committee hearing, China has weaponized America's own "corporate lust for profits" against the U.S., and that the U.S. must look closely at corporate America’s reliance on China and the Chinese Communist Party: "U.S. corporations are so desperate to have access to the Chinese market that they’ll lead costly boycotts in an American state that passes a law that they don’t like.”

America’s dependency on China’s market and cheap Chinese goods is akin to an addict hooked on drugs. And just as an addict must get off the drugs or face dire consequences, so must America remove its dependency on China or suffer long term costs. But just like the drug addict, it will not be an easy or painless process. There will be the pain and agony of withdrawals. While enablers, like the China Lobby, will push back and try to justify continued dependency. But it must be done, and it must be done now for the sake of the long term health and strength of the nation. And in the end not only will America and its citizens be much better for it, but China will lose a great deal of its current and potential power. That’s what I would call a win-win proposition.

Topic 2: Opium of the Mind

This latest victim of China’s continuing tech crackdown was the massive Chinese video gaming industry (the world’s largest). This follows on the heels of the CCP’s crackdown on the education and after school tutoring industry the week prior, which was discussed in The Art of the New Cold War Newsletter #4. And which of course itself followed a long line of tech related companies that have been laid low by the CCP going back to last year.

But unlike the CCP’s earlier crackdown on technology companies, the latest crackdowns on the video gaming and after school tutoring industries are of a different sort. For while previously tech companies were brought to heel due purportedly to issues surrounding data collection and national security concerns, the CCP’s concerns surrounding education/tutoring and online video gaming industry appear to be more societal in nature.

For example, the after school tutoring sector was seen as a driver of inequality, and placed too much competitive pressures and work load on the young. And due to its often exorbitant expense also deterred people from having more children; something the CCP is hugely concerned with given China’s massive demographic issues.

Likewise, the CCP has societal concerns with online video gaming as well. The CCP recently called it the “Opium of the Mind.” A politically potent term given its historical connotations to the infamous Opium Wars that heralded China’s Century of Humiliation. The CCP has come to see online video gaming as addictive and destructive for young people, and thus damaging to societal harmony.

With the CCP seemingly expanding the scope of its crackdown to more industries and companies everyday, and with many believing that it is far from over, it has caused the risks of investing in China to rise dramatically. Indeed, as reported in the Wall Street Journal, “investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns.”

This is even more reason to refrain from investing in China. For if it wasn’t clear before, than it certainly is now, there is only one entity in China that truly possesses all the power: the CCP. And even massive multi-billion dollar industries can be crushed overnight. Invest wisely.

Topic 3: COVID: An origin story (continued.)

As discussed in the The Art of the New Cold War Newsletter #3 there has been a great deal of renewed interest lately in the COVID “Lab Leak Theory”—that COVID leaked or escaped from a Wuhan lab in China conducting research into, among other things, bat coronaviruses, and located in close proximity to where the world’s first COVID outbreak occurred.

While the lab leak theory was dismissed initially—and prematurely—by scientists in favor of natural origins, the theory has since made a resurgence. Based upon the continued lack of evidence for COVID’s natural origins along with additional evidence for the lab leak theory, both circumstantial and otherwise, and prominent scientists calling for it to be fully investigated as a result. 

To that end, in late May, President Biden directed US security services to conduct a 90 day review and investigation into the probability of the lab leak theory.

CNN reported last month that based on the ongoing investigation senior Biden officials now believe that the COVID lab leak theory is as credible as natural origins explanation. And this week CNN reported that US intelligence agencies have obtained a treasure trove of new genetic data from the Wuhan Lab, that they are currently deciphering. Per CNN sources, “[t]his giant catalog of information contains genetic blueprints drawn from virus samples studied at the lab in Wuhan, China which some officials believe may have been the source of the Covid-19 outbreak.”

China of course continues to block the World Health Organization (WHO) from any further investigation into the Wuhan lab. Even though the WHO has formally called for further investigation of the lab as part of its Phase 2 search into the COVID origins. China has also deliberately not provided critical data from the lab or from the early days of the first COVID outbreak in Wuhan. This makes the new “treasure trove of data” obtained by US security services all the more interesting, and potentially impactful. It also means that the information was likely obtained through the hacking of China’s computer systems, and other covert means. This fact alone will make China very unhappy.

But to further add to the suspicion around China and the Wuhan lab, the South China Morning Post reported this week that “China is updating its lab animal testing laws as it tightens up on animal use in the aftermath of the coronavirus pandemic and allegations that the pathogen leaked from a laboratory. The draft changes to the Regulation on the Administration of Laboratory Animals include expanded rules on safety and infectious disease control in labs, as well as specifications on genetic modifications.”

So while China continues to block further investigation into the Wuhan lab, it is making significant revisions to its laboratory regulations, especially those related to the handling of animals and infectious diseases. This is made even more curious by the fact that right before Covid hit, the Wuhan Lab in question had alarming and well documented issues with its severe lack of safety protocols while it was engaged in dangerous gain of function experiments, on among other things, bat coronaviruses. It makes one wonder then if the CCP is tightening up protocols now to ensure another pandemic causing virus doesn’t leak out from one of its labs.