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Ian Bremmer: Here’s the real risk posed by a rising China

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8 months 2 weeks
Schwab ID
A113296
Submitted by mark.mcdermott on Fri, 03/16/2018 - 16:38

U.S. investors should worry less about trade wars and military threats than the potential for a technology cold war, says Ian Bremmer, PhD, the influential political scientist and founder of Eurasia Group.

As the world's second-largest economy and growing global powerhouse, China is naturally on investors' minds as a source of both opportunity and risk. Political scientist Ian Bremmer believes that those seeking profits in China are looking in the right place. China's accelerating influence—at a time when the United States is retreating from the global stage—will translate into increasing fortunes for companies and countries that can stay on China's good side. But when it comes to assessing the threats posed by a rising China, Bremmer says that investors' concerns are largely missing the mark.

Speaking at a recent Schwab event, Bremmer argued that investors tend to worry about China for the wrong reasons. The increasing reliance of other countries on China has insulated it from many of the typical risks—downturns, trade wars, military conflicts—that have undermined booming economies. China's growing international reach and tight control of its domestic market have combined to turn the tables on its trading partners and force them into bigger concessions. Bremmer maintains that nobody, not even dominant U.S. multinationals, will be able to negotiate their way past the "serious problem" posed by China—its growing dominance in technology.

Shenzhen Stock Exchange

"The biggest piece of good news is that the world's second-largest economy, soon to be the world's largest economy, is not failing"

Misplaced worry #1: The state of China’s economy

When it comes to gauging global economic trends, investors tend to sell at the slightest hint of a deceleration in China’s pace of growth. But China’s current expansion rate exceeds that of every major economy except India, and it is more than three times that of the United States1. "The biggest piece of good news is that the world’s second-largest economy, soon to be the world's largest economy, is not failing," Bremmer said.

Because China's willingness and capacity to invest extend well beyond its own borders, infrastructure projects around the world are benefiting at a time when the United States and other developed countries are showing little interest. "If you don't have infrastructure, those countries don't develop, they don't grow, we don't get the global middle class, they don't consume our stuff, and that's a problem," he said. "We would all much rather the Chinese build the infrastructure than no one build it, right?"

President Xi Jinping's recent move to consolidate power by changing China's constitution to extend his rule adds to the country's political stability even as it undermines civil liberties, Bremmer said. Westerners have long believed that China would have to reform politically as it grew wealthier, but that's wrong, he said. Instead, China has succeeded by tightening the reins. Bremmer explained that it's much harder now than it was just five years ago to be a member of the media and to say or write what you want. But China's state-owned enterprises have become more efficient under stricter control, and the country continues to use access to its market, capital, and consumers as a lever to get what it wants. 

Taken all together, China's outlook—at least for the next five years—looks "pretty stable," he said.

"The reaction of the Chinese government [to new tariffs] will be very carefully calibrated."

Misplaced worry #2: The Impact of a U.S.-China trade war

Much has been made of President Trump's plan to levy tariffs on steel and aluminum imports, with many predicting growth-inhibiting retaliation by its major trading partners. Don't count China among them, Bremmer said. "You might be surprised that I say this, but I think the likelihood of a trade war between the U.S. and China is virtually zero."

Bremmer is confident about the prediction for two main reasons. The first is that the new tariffs are much more likely to hurt countries other than China, which counts on the United States for a relatively small share of its metal exports. The bigger reason is that the two economies are increasingly interdependent, and China won't want to do anything that hurts its own economy. That's why, when the Trump administration put tariffs on imported washing machines and solar panels, China responded by issuing tariffs of similar scope on U.S.-produced sorghum, an animal feed. Any reaction of the Chinese government to new tariffs “will be very carefully calibrated.”

"Militarily, the Chinese are not particularly a threat."

Misplaced worry #3: China's military threat

Over the years, much has been made of China's strong-arm tactics when it comes to claiming regional territories such as the South China Sea. In March 2018, a leading Chinese general said the country would seek to build up armaments on islands in the sea as part of its claim of sovereignty2. Other geopolitical posturing has focused on Taiwan—officially named a Republic of China—and Hong Kong, where some have accused China of meddling in recent elections.

Outside of these regional disputes, China is not making waves, Bremmer said. "Militarily, the Chinese are not particularly a threat," he said. "They don't really have a presence, and they're not building one." 

Bremmer sees it as far more likely that the United States will get into a military conflict with North Korea, but he puts the odds at only 10%. "I am less worried than almost anyone I know who covers North Korea," said Bremmer, adding that any possibility is still "way too high" and a real cause for concern.

"We are heading towards a technology cold war between the Americans and the Chinese that will increasingly fragment the global marketplace."

The underappreciated threat: A "technology cold war"

Bremmer said the real cause for alarm between the United States and China is the latter's growing dominance in the technology sector. The Chinese government is investing an "enormous amount of money" into artificial intelligence (AI), and three of the six companies that dominate the field are based there. 

The issue, Bremmer said, is that while Chinese companies might lack AI scientists, they have more and better data than their American counterparts have. Unlike global trade in most products, "in AI and advanced technology we're not interlinked," he said. U.S. technology companies have "virtually no access" to the Chinese market, and Chinese technology companies currently operating in the American market will likely soon pack up.

"We are heading towards a technology cold war between the Americans and the Chinese that will increasingly fragment the global marketplace," Bremmer said. "That is a big problem, and I don't think anyone is really focusing on it. Some of the most important American companies are fundamentally only going to have access to a reduced portion of the global marketplace."
 
Bremmer said it's a problem that will get worse over time and likely act as a drag on global growth. As one example of this, Bremmer pointed to the development of fifth-generation, or 5G, cellular networks. The United States and China are racing to roll out 5G rather than collaborate on integrating standards. And national security officials within the Trump administration are reportedly considering a plan to nationalize the U.S. 5G network to help guard against competitive and cybersecurity threats from China3.

"It's becoming zero sum, like a space race," Bremmer said. "Someone's going to get someplace first, and the other is going to lose."

This article is based on a presentation dated March 3, 2018. The opinions expressed are those of Ian Bremmer.

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