Global reset – Two whales in a pond
Phuah Eng Chye (5 June 2021)
Global reset refers to the monumental changes triggered by a reset in the relationships between the world’s two most powerful nations. The analogy of “two whales in a pond” captures several critical dynamics. It describes how the global landscape will change now there are two whales rather one. The pond symbolises the information sphere where the space for free movement, without the two large creatures running into each other, is shrinking[1]. Whales are prone to act unilaterally and, because they are large, their movements affect all other creatures in the pond. Whales will not easily cede strategic space to each other and certainly not to smaller fish. Battles among whales are not about right or wrong They are bullies accustomed to throwing their weight around. For this reason, disputes among whales can only be resolved through a contest of strengths.
The global reset is triggered by China’s ascendancy[2] and the fate of the world will be shaped by the dynamics of “two whales in a pond”. The two nations are on course for confrontation across a wide front[3]. Zuo Xiying notes the US has adopted a whole-of-government strategy to match what it perceives as China’s approach[4]. This “is directly manifested in its formation of new policy discourse and political ecology. By gradually making China stereotyped and stigmatized, the United States’ abnormal political correctness increasingly reduces the influence and policy discourse space of moderate and cautious parties in the strategic circle”. By doing so, the US has unsettled “tacit understanding” of past norms. “The traditional policy red line has been affected and gradually transformed into a vague policy area, leading to the consequence that behavior becomes unpredictable and policy uncertainty gradually rises”. Thus, the US now “emphasizes the use of all tools within national power, including diplomatic, economic, intelligence, legal, and military factors, to compete with China comprehensively”.
Zuo Xiying observes “the whole-of-government strategy on China is being formed faster than expected. Over the past year or so, the U.S. strategic elites have completed public opinion mobilization in a short period of time. A new consensus on the strategy on China has been reached among the Congress, Administration, think tanks[5] and press circles. Once the cognition changes, the institutional factors of the two countries will play a key role in the strategic competition. The development of Sino-U.S. relations will be more in the direction of confrontation than cooperation”. He thinks “the United States does not intend to terminate Sino-U.S. trade conflicts through a negotiation. Multiple games and continuous pressure are choices in line with the logic of the United States. At present, the United States has not yet decided to conduct a full-scale confrontation with China, so it will continue to sound out China’s intents in the security and political fields in the short term”. Over time, “China and the United States will have a deeper understanding of each other’s policy bottom line and behavioral patterns. The overall situation of the trade disputes between the two countries will be more controllable. If changes take place in domestic situations of the two countries and in international affairs, there will still be certain strategic space to improve Sino-U.S. relations”.
The great power confrontation is entering a critical phase; moving from theatrics to the sober and calculated approach of the current US administration. Both sides are conducting their reset on a blank sheet of paper. The US is testing the boundaries of the once-sacrosanct one-China policy. China is questioning the legitimacy of the US-led Western order. As the probing deepens, they are giving and getting a full taste of each other’s bitter medicine – tariffs, disinformation campaigns, cyber-attacks, security investigations, sanctions, long-arm court litigation and non-conflict military incursions.
They are moulding alliances to expand or defend their space and are exerting pressure on key players such as EU, Russia, India and others[6]. Currently, the US seems to be strengthening its traditional alliances with the advanced and “dependable” nations and to reduce China’s access to its sphere. This would leave China to partner with countries that it deems less developed and less “dependable”. Hence, China may be stable at its core, but if it chose to expand its sphere by integrating with weak partners, this could increase its vulnerability. Naturally, China will aim to foil such containment strategies by threatening to reciprocate in cutting off access to its markets.
A quick resolution to the conflict is unlikely. Neither party has sufficient advantage to land a knock-out blow. The skirmishes and stand-offs will persist as there is little political benefit from compromise and few areas where it is possible to forge a consensus. China and US are settling down for a long campaign; maintaining the tension to keep the other off-balance, seeking quid pro quo for concessions and manoeuvring to eke out small strategic advantages on the global chessboard. Nonetheless, several tectonic forces will shape the outcomes of the global reset.
(1) Changing world order
The composition of global GDP[7] is shifting away from the West. Kishore Mahbubani notes the combined GDP of Asia’s leading economies “exceeds that of the United States and of the European Union”. China is “already a larger trading partner to more countries than the US” and a signatory to more free-trade agreements. However, “the world order has not kept pace with these shifting economic dynamics. On the contrary, the US dollar remains the predominant currency for settling international trade. The US and Europe retain control of the two leading global economic organisations…And the United Nations Security Council…is dominated by just a few, largely declining, powers”. He warned that “if world leaders do not start addressing the contradictions plaguing the world order soon, the likely result is a crisis – and even more dangerous contradictions”.
Richard N. Haass and Charles A. Kupchan warns “the international system is at a historical inflection point. As Asia continues its economic ascent, two centuries of Western domination of the world, first under Pax Britannica and then under Pax Americana, are coming to an end. The West is losing not only its material dominance but also its ideological sway…even if Western democracies overcome polarization, beat back illiberalism, and pull off an economic rebound, they will not forestall the arrival of a world that is both multipolar and ideologically diverse…History makes clear that such periods of tumultuous change come with great peril. Indeed, great-power contests over hierarchy and ideology regularly lead to major wars”.
China seems to be pushing to re-arrange the global order along two fault lines. One is based on a revival of the North-South concepts espoused by the Non-Aligned Movement (NAM) [8]. The concepts of non-alignment and non-intervention are at odds with the Western order that insists on universal adoption of its values. The other is the shift towards an Asian-centric order to compete against the Western order. Evan A. Feigenbaum points out “draws off a deep well of traditions of pan-Asian ideas, ideologies, pacts, and negotiations…Contemporary Asian regionalism – the desire to forge at least some cohesion out of the region’s enormous diversity – has deep roots”. The non-aligned and Asian-centric orders are viewed as attempts to create China-centric spheres of influence to undermine the grip of Western nations on global governance.
Evan A. Feigenbaum notes the US Administration believes “Beijing has eschewed the institutions and rules that have prevailed since World War II, especially those preferred by the United States. Instead, it aims to lock in a Sinocentric vision of the world through parallel institutions, disruptive bilateral initiatives, and a rewriting of global rules”. On the other side, he notes China’s “skepticism of the application of liberal ideas internationally” and its divergent views on the legitimacy of military interventions, the role of security alliances, the status of sovereignty and on the formulation and application of international law.
The US-led Western order had established a governance umbrella that fostered a relatively open and benign international environment that underpinned globalisation. However, the dominance of the US-led Western order is being questioned by the shifting weight of economic power and emergence of alternative economic models. In this regard, Western nations themselves are relying on state intervention to meet the challenges posed by the pandemic and decoupling.
The core multilateral organisations – such as the UN, IMF, World Bank and WTO – appear paralysed by great power squabbling. As is typical of the information society, the functions of these legacy institutions are already being parasited by new global organisations and groupings. This is a source of tension and indicates further confrontations on reshaping the global framework to accommodate and balance the divergent interests.
(2) Shift from physical to information sphere
Globalisation is effectively an information phenomenon. Information is the conductor facilitating the flow of goods, services, capital, people and technology across borders. It is also a disruptive catalyst stepping up the pace of change. Marshall Auerback and Jan Ritch-Frel notes “today, the New World Order looks old. Offshoring and global supply chains are out; regional and local production is in. Market fundamentalism is passé; regulation is the norm. National security considerations supersede untrammeled foreign investment flows. Public health is now more valuable than just-in-time supply systems. Stockpiling and building industrial capacity suddenly make more sense…Biodata will drive the next phase of social management and surveillance, with near-term consequences for the way countries handle immigration and customs. Health care and education will become digitally integrated…Each of these changes will produce political tensions both within particular political constituencies and demographic groups and also in the society as a whole, as people adapt to the new normal…And it is finally dawning on Western and Western-allied economic planners that the military expenditures that have made so-called cheap oil and cheap labor possible are vastly higher than investment in advanced research and next-generation manufacturing, much of which (such as 3D printing) has the potential to unravel existing global supply chains…The fault lines of the next economic era have already begun to develop, creating friction with the previous international structure of finance, trade, and industry. These tensions arise not only from elites and critical industries, but from the increasing instability of the global poor and working class”.
The shift from a physical to an information sphere changes the nature of confrontation because it is a different type of battlefield. In this regard, physical conflict is brutal and, in the extreme case of nuclear, the outcome is mutual destruction. Traditional military actions such as invasions, missiles and blockades are impractical because the aggressors end up damaging their own factories, cutting off their own supplies or markets and triggering a ruinous breakdown in the global systems for output, trade and finance. Military stand-offs probably matter more for its media and (domestic) political impact. There is no pathway for one side to declare victory and to demand reparations and concessions as in the past.
Military campaigns are being replaced by cyber-attacks, disinformation campaigns, sanctions and long-arm laws. Networks are the key battleground. Henry Farrell and Abraham L. Newman explains in their influential concept of “weaponized interdependence” that countries will seek to exercise power through its control of strategic nodes on networks. In a recent article, Henry Farrell and Abraham L. Newman explains “instead of liberating governments and businesses, globalization entangled them. As digital networks, financial flows, and supply chains stretched across the globe, states – especially the United States – started treating them as webs in which to trap one another”. “Globalization, in short, has proved to be not a force for liberation but a new source of vulnerability, competition, and control; networks have proved to be less paths to freedom than new sets of chains”.
They point out “governments and societies, however, have come to understand this reality far too late to reverse it”. This is because economies “too deeply entwined to be separated – or decoupled – without causing chaos”. Hence, “countries will remain entangled with one another, despite the dangers that their ties produce – bringing a new era of what might be called chained globalization. Under chained globalization, states will be bound together by interdependence that will tempt them to strangle their competitors through economic coercion and espionage, even as they try to fight off their rivals’ attempts to do the same”.
Henry Farrell and Abraham L. Newman argue “in this landscape, blunders could set off escalatory spirals, and mutual suspicion could engender hostility. By targeting a firm with an unexpectedly crucial role in a broader industrial network, for instance, a government could mistakenly generate widespread economic damage – and trigger retaliation from other states in turn. As global networks grow thanks to developments such as the so-called Internet of Things, such dangers will grow, as well. Accordingly, it is not surprising that countries want to free themselves from chained globalization by smashing its links”.
However, “except in the case of total war, however, governments will find it impossible to re-create the separate national economies that prevailed before the advent of globalization…Washington may be able to reshape its military procurement, but it would set off massive resistance and economic chaos if it tried to remake the consumer economy along similar lines, since that would overturn entire industries and vastly increase prices for ordinary people…To avoid such problems, policymakers need to understand not just how the world’s networks function but also how each of them connects to the others”. In tandem with this, “the government’s broad goal should be to break down the traditional barriers between economic and security concerns… regulators will have to intervene in the economy more deeply than they have in decades”.
Henry Farrell and Abraham L. Newman suggest to lessen risks of conflict, “governments should tread carefully around others’ network hubs…That is why China’s efforts to use Huawei to topple the United States’ control over global telecommunications are so provocative. For its part, the United States needs to recognize that its attempts to weaponize the world’s financial and information networks threaten others and moderate its behavior accordingly. Restraint will not just encourage stability; it will also serve the country’s own narrow interests. U.S. policymakers should remember that their punitive measures can encourage states to defect to networks beyond Washington’s control, stripping the United States of important sources of leverage”. Overall, they suggest constructive engagement requires forging a common language and understanding, for states “to make their decisions transparent and predictable”, and for the US to “avoid overreacting to other countries’ efforts to make themselves less vulnerable to chained globalization…Washington must now recognize that it can benefit when other states take steps to feel secure”.
Networks are just one part of the information sphere which also includes digital services and products, data, technology (IPs), laws, content, brands, language and finance. In the past, US domination of the information sphere was largely uncontested and this underpinned its global supremacy. This is no longer the case as the information advantage of the US-led order has narrowed significantly. As the value of information assets gain recognition, more countries are jumping into the fray to assert national sovereignty over information assets and to expand their jurisdictional reach.
Cyber strategies[9] are more complex and abstruse than military strategies. They focus on managing interdependencies, access and space. In the meantime, traditional strategies such as containment and isolation are becoming obsolete. It is not possible to contain the flows of knowledge and information when information borders are ill-defined and porous. One unintended outcome is that education, research, knowledge-sharing and recruitment are being viewed with suspicion. Attempts to isolate the opponent through sanctions have short-term impact but eventually lose their bite as opponents reconfigure operations to bypass the restrictions. In addition, the rapidly falling costs of establishing rival networks will dilute the power of dominant networks. Overreach in freezing access and ownership rights can cause the dominant network to implode.
Intelligence agencies have also moved from traditional spycraft[10] into the information sphere. They seem to be more involved in conducting cyber and information campaigns, and to expand their influence over mainstream media. In this regard, they are one of the main parties amplifying information disorder. In broadening their scope, they are dragging everyone into the dark and foreboding world of national security.
Dexter Fergie notes “now, national security threatens to swallow everything”. “It turned everything from trade rules to dating apps into a potential threat to the United States…Invoke national security, and unpopular policies become law – or the law itself may even be suspended…Uttering the magic phrase can make other things disappear. Shelf upon shelf of government documents vanishes from public sight after being shrouded in security classifications…What was not connected to national security was hard to say, as feelings of insecurity pushed national security to cover more and more policy areas, like a can of spilled paint…So totalizing is the conception of national security today that it has even recast commercial disagreements with America’s closest allies as existential threats”.
Dexter Fergie questions whether the concept of national security has been pushed too far. “There was a time in the not-so-distant past when Americans didn’t subsume every area of policymaking under security, when peace advocacy and the import of foreign car parts weren’t treated as existential threats. Defense was a wartime concept, not an all-purpose excuse for officials to conceal or destroy information. Remembering this, we might seek something similar today – to put national security back in its box, and, perhaps, in so doing, to breathe more easily”.
There are also risks the whole-of-government approaches will reduce the opportunities for de-escalation. This is because conflict in one area will trigger whole-of-government responses that puts everything into play. This reduces the room to manoeuvre while increasing the risk of contagion and the severity of consequences. Whole-of-government approaches also creates difficulties for allies because it requires them to be whole-hearted in reducing inter-dependencies and space for the opponent but at great expense to their own interests.
Overall, confrontations in the information sphere are uncharted territory – there is little precedent and nobody knows how it will end up. First, there is a need to consider the spillover effects between the information and physical spheres. For example, geopolitics has long been dominated by the Middle East because of the strategic importance of oil. But as semi-conductors supplant oil as the main physical resource powering economies and the US becomes self-sufficient, the goals change. It isn’t coincidental that for the US, the strategic importance of the Middle East is diminishing while that of Taiwan, a major supplier of semiconductors, is rising. In the meantime, Middle East countries appear to be courting China who is replacing the US as the biggest customer for oil. Hence, the US is more focused on Taiwan and the South China Sea while China is expanding its relationships in the Middle East.
Another example is that the information disruption of vertical production chains and growing product complexity is crippling traditional power projection by nations. Vertical production chains are conducive to national strategies to secure supply lines. Components for today’s sophisticated products are sourced globally. No nation has the military capability to secure their supply lines while it will take many years to replace the “lost” production capacity that lie behind enemy lines.
Second, direct conflicts in the information sphere, once dominated by the West, are occurring as other countries enhance their policy and legal frameworks. As a result, countries are expanding jurisdictional[11] reach (against enemies and allies as well), fining multinational firms and imposing sanctions on each other. The policy and legal uncertainties and unrestrained tainting by expanding national security concerns are hampering economic coordination, innovation and growth.
Third, the confrontations have been limited so far to trade, technology and content, Hence, the impact on global systems has been relatively minimal. Nonetheless, the risks are growing and an incident could trigger a fallout that could cause a breakdown in global systems – such as for IP rights or payments. Nobody knows how to manage the risks of a consequential fall-out in the information sphere. Neither are they even sure about how and what to negotiate for in a peace agreement (such as for cyber-attacks and disinformation campaigns[12]).
(3) Consequences of decoupling
“The arrow has left the bow”. Decoupling has been set in irreversible motion. For example, even if the US lifts its restrictions on technology, China is already accelerating plans to achieve supply self-sufficiency. The pandemic and confrontation have also been a wake-up call for powerful countries to reduce their strategic vulnerabilities and build all-round resilience. There is no precedent of a decoupling between tightly integrated nations and hence the consequences are difficult to predict. My analysis considers three aspects of decoupling.
- Deglobalisation. Over the past three decades, the most important driver of growth is globalisation (information, financialisation and exchange). Decoupling will trigger an unwinding of globalisation. This will rebase future economic growth rates to a lower point or, in a worst-case scenario, cause a contraction in global output, flows and exchange that could lead to a global depression[13]. Already, decoupling is generating uncertainties and costs for businesses and this is adversely affecting private sector investments[14]. Decoupling will also lead to divergent (or non-cooperative) economic and monetary policies. The absence of policy coordination will hurt prospects for a global economic recovery, result in localisation of aggregate demand and liquidity, awaken inflationary pressures, and underpin currency, interest rate and asset price volatility. These trends increase the risks and consequences of financial contagion.
- Disentanglement. Decoupling is leading to efforts to disentangle global supply and technology chains, and consumer and financial markets. Examples include concepts such as clean networks[15] and clean supply chains which are intended to exclude the participation of specific countries. Disentanglement creates uncertainties in anticipating supply and demand. Miscalculation is costly. Massive over-supply could result due to capacity over-expansion. Conversely, shortages could occur due to supply chain unravelling or unreliability due to actions (sanctions, boycotts) that create supply bottlenecks. In particular, private firms will be reluctant to invest huge sums in expanding capacity when global markets are being fragmented. Multinational firms will look to governments for subsidies and, take-up and other assurances before committing to new investments. Generally, global firms will aim for vertical re-integration and build parallel systems to strengthen their resilience to decoupling shocks. Disentanglement will accelerate the trend towards regionalisation. Fragmentation into regional blocs will reduce the economies of scale and scope and lower potential economic and profit growth.
- Damaging the global commons. The global economy and society have benefitted immensely from the free flow of goods, services, capital, people and knowledge; from sharing and open collaboration; and from common rules and harmonised standards. The global common is suffering severe damage from the bickering and hostile actions among nations. The breakdown in cooperation is leading to a governance system built on bilateral or regional reciprocity and the evolution of parallel universes of institutions and rules. It is unclear how the global economy will be able to withstand the strains from duelling governance paradigms.
Richard N. Haass and Charles A. Kupchan argue “it is no longer realistic to aim for the globalization of the Western order and the emergence of a world populated primarily by democracies committed to upholding a liberal, rules-based international system”. However, they consider a “G-2 in which Washington and Beijing would together oversee a mutually acceptable international order” to be flawed. “Even if these two peer competitors could find a way to dampen their intensifying rivalry, much of the world will remain outside of their direct purview. Moreover, predicating global stability on cooperation between Washington and Beijing is hardly a safe bet” as it “smacks of a world of spheres of influence – one in which Washington and Beijing agree to divide their sway along geographic lines, perhaps apportioning rights and responsibilities to second-tier powers in their respective regions…Indeed, the precise purpose of thinking through how to provide order in the twenty-first century is to avoid a world more prone to coercion, rivalry, and economic division”.
They dismiss “Pax Sinica is also a nonstarter. For the foreseeable future, China will have neither the capability nor the ambition to anchor a global order…Beijing has not yet demonstrated a robust willingness to provide global public goods, instead taking a largely mercantilist approach to engagement in most quarters of the globe. Nor has it sought to export its views on domestic governance to others or to push out a new set of norms to anchor global stability…An illiberal and mercantilist Pax Sinica would hardly be acceptable to Americans or to many other peoples around the world still aspiring to uphold liberal principles”.
Richard N. Haass and Charles A. Kupchan propose “the best vehicle for promoting stability in the twenty-first century is a global concert of major powers”. A global concert would be a consultative body with six members with geo-political clout: “China, the European Union, India, Japan, Russia, and the United States” representing “roughly 70 percent of both global GDP and global military spending”. Critically, “a concert’s informality means that it eschews binding and enforceable procedures and agreements”. Hence, a concert “offers a private venue that combines consensus building with cajoling and jockeying – a must since major powers will have both common and competing interests. By providing a vehicle for genuine and sustained strategic dialogue, a global concert can realistically mute and manage inescapable geopolitical and ideological differences”. In contrast, the UN Security Council “serves too often as a public forum for grandstanding and is regularly paralyzed by disputes among its veto-wielding permanent members”. The establishment of the concert would allow it to forge the “rules of the road for managing technological innovation – digital regulation and taxation, cybersecurity, 5G networks, social media, virtual currencies, artificial intelligence…important matters often fall between the institutional cracks, and the concert could provide a useful vehicle for international oversight”.
Conclusion: The future of globalisation
The global reset is about the future of globalisation. But can two whales co-exist harmoniously in a pond? Certainly, the rest of the world wishes they would. While many try to keep their heads down, some countries and firms are already casualties. Unfortunately, a loud minority dominate and are stoking nationalist flames. Policy positions are becoming more provocative and confrontations are getting nastier. The superpowers are moving further apart and forcing a retreat from globalisation – which is reducing the levels of global flows, exchange and cooperation.
Decoupling is unfortunately taking place at a crucial time when global cooperation is needed the most. A crisis is looming and will occur when the effects of post-pandemic stimulus and debt forbearance wears off. In any case, policy-makers do not seem particularly prepared to manage the consequences of deglobalisation. National fiscal spending to drive consumer and investment expenditures will not be sufficient to lift economies out of their pandemic doldrums. Worldwide, there is a need for strong local and global private sector participation to generate capital formation, wage income and tax revenues. But the private sector is caught in a bind by the decoupling uncertainties and this will curtail its willingness to make substantial long-term commitments. The absence of global consensus and policy coordination would turn economic growth into a haphazard process. A world dominated by mutual suspicion and security concerns can only lead to unpleasant endings.
Policy-makers need to find a way to put globalisation back on track. Perhaps this requires the superpowers to rebuild mutual trust, reconcile their divergent perspectives on globalisation, establish lines of avoidance, accept voluntarily restraint on exercise of their powers and to commit to work together to address imbalances and other externalities from globalisation. However, there is complacency because the confrontation is mainly taking place in the information sphere. But the dangers are only too real. Towards this end, there are many dimensions of decoupling to consider.
References
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[1] Space shrinks as information connects disparate locations while transparency, speed, abundance and convergence can increase crowding of space within short time frames.
[2] “Now, people are suddenly realising that China has discreetly and unexpectedly launched a strong country blueprint – it is determined not to let the US control its future on the technological front and it no longer worries about the outside world’s finger-pointing on the Hong Kong and Taiwan issues. In fact, it wants to rewrite the rules of Hong Kong elections now, and will not accept being preached to by the West”. See Han Yong Hong.
[3] The acrimonious high-level meeting in Alaska, and recent speeches by Joseph R. Biden and Xi Jinping highlight the diverging policy perspectives.
[4] See Office of the Director of National Intelligence report for its assessment of the Chinese Communist Party (CCP)’s whole-of-government efforts to spread China’s influence and undercut the United States.
[5] See Anthony H. Cordesman advice for a whole-of-government strategy.
[6] See Hoang Thi Ha on how ASEAN is navigating between the rivalling Asia-Pacific and Indo-Pacific concepts.
[7] See Katharina Buchholz.
[8] Due to the US-Russia cold war, developing economies set up a Non-Aligned Movement (NAM) in 1955. The North-South refer the divide between the developed and affluent north with the less developed south. See https://en.wikipedia.org/wiki/Non-Aligned_Movement
[9] See James Andrew Lewis for his insights on formulating a cyber strategy.
[10] See “Information and organisation: Cross border data flows and spying”.
[11] See Josh Ye on the legal chaos being created as courts in China and Western countries expand the jurisdiction of their rulings beyond their borders.
[12] See “Information rules (Part 7: Regulating the politics of content)”.
[13] Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
[14] Simon Evenett and Johannes Fritz notes “Once a hallmark of globalisation, FDI has been in trouble for some time – a fact compounded by the ongoing pandemic…Even before last year’s 42% drop, sensibly benchmarked annual inflows of FDI have been in decline since the Global Financial Crisis…The economic fallout from COVID-19 has witnessed new FDI flows retreating to levels not seen for 25 years. New greenfield investments into developing countries have been particularly hit last year, falling 57% year-on-year in the fourth quarter of 2020”. They attributed this due to the recent spate of unfavourable public policies such as localisation requirements and policies affecting the entry, screening, and regulation of FDI. As a result, “businesses have faced mounting regulatory risks over the past decade… So while governments demanded more from FDI, they’ve been making life more difficult for international business”.
[15] “The clean network”. https://2017-2021.state.gov/the-clean-network/index.html