Book-to-book review: ‘The Avoidable War’ and ‘The Changing World Order’
10 key re-enforcing points from former Australian PM Kevin Rudd and investor Ray Dalio on the escalating China-US tension
About the authors:
Both author’s have unique and unprecedented access to China’s business and political elite.
Rudd has worked in and around Chinese politics for 40 years since he was a student and one of the few Western politicians — let alone prime ministers — who is fluent in Mandarin. He is now the CEO and president of the Asian Society Policy Institute.
Dalio has spent decades visiting and working with Chinese businesses as since the head of the world’s largest global macro hedge fund since the country started opening up its capital markets in the past 30 years.
Both books are written for a Western audience to put them inside the head of China’s policymakers so they can better understand Chinese culture, and, also, so Westerners can see themselves from the other’s perspective. Both stress the importance of Taiwan.
“Probably the most dangerous sovereignty issue is Taiwan… I would worry a lot if we were to see an emerging fight over sovereignty, especially if we were to see a Fourth Taiwan Strait Crisis.” — Ray Dalio
It is important to note that both books were written pre Russia’s invasion of Ukraine and the now emerging Taiwan crisis. At the time of writing, Dalio has published an update on the situation in his newsletter: “Unfortunately, what is happening now between the US and China over Taiwan is following the classic path to war laid out in my book”. Though he still believes war is “improbable”.
This review focuses on the escalating Taiwan-China-US tensions (though the books cover many other topics) and the mutually reinforcing key points each author makes.
How we got here: 1839-present
China’s Century of Humiliation
Rudd, like Dalio, traces the current situation back to what is known in China as the ‘Century of Humiliation’ which kicked off with the Opium Wars with Britain 1839 and concluded with the pillage of China by Japanese powers in World War 2.
Britain, still then the world’s great superpower and global reserve currency, demanded terms of trade with Chinese Ming Dynasty’s superior goods — clothes, silks, spices — but China didn’t want any British goods in return, only their silver.
When the British ran out of silver they smuggled opium into the country which they sold for silver and gold to pay for the goods. This caused a wave of opium addiction.
Naturally, drug induced-indolence was counter-productive to the Chinese economy and values so the Qing Dynasty banned British merchants from trading opium.
To protect their favourable trade position, Britain, in a nutshell, waged war on China defeated them and imposed a treaty which opened up their ports to British trade. The treaty also ceded large parts of China’s territory: Hong Kong to the British, northern China to Russia, and, most importantly, China lost Taiwan to Japanese control.
In 1894, the first Sino-Japanese War broke out in which Japan’s Meiji Empire easily conquered and subjugated the Chinese and marked the start of the end of the Qing Empire, the last Chinese dynasty.
The Century of Humiliation concluded with the brutal Japanese invasion during World War 2, or the Second Sino-Japanese War. As Rudd points out this happened despite President Woodrow Wilson’s promise to China after World War 1 that the US and allies would protect China in the event of such an invasion. It never happened.
Nor did the Chinese believe it received adequate war reparations nor any input to the creation of the ‘new world order’ set out in the Bretton Woods system after WW2.
This led to disillusionment in China with the West/democracy and retreating into geopolitical isolation for decades after Mao’s Agricultural Revolution, which was just as destructive to human life and Chinese culture as any foreign invasion.
“Put yourself in Mao’s position during 1900–49 period. Imagine him reading what Marx wrote and the actions he took… It makes sense that Mao was a Marxist and held the established Confucian approach to harmony in disdain.” — Dalio
Mao promulgated Marxism/Leninism as an antidote to Western capitalism which had destroyed China’s once-great empire.
Chinese military tradition:
China’s army has had very little infantry combat for centuries apart from a few border skirmishes with neighbour states. Its last royal empire, Qing, lost most of the big battles.
Traditionally, over centuries, China’s dynasties followed a foreign policy of a tributary system whereby China used soft power and its prolific trade to make regional states dependent on their investment and protection. This subjugated regional nations to Chinese policy without having to invade them.
These tributary states became vassals that paid money, goods and political deference to the dynasty and supported its regional aims in return for China’s de facto protection.
“The supreme art of war is to subdue the enemy without fighting” — Sun Tzu, The Art of War
Both Dalio and Rudd cite the ancient Chinese military book, general Sun Tzu’s The Art of War as a massive influence on China’s military, foreign policy and philosophy to this day.
Rudd posits that China is once again using Tzu’s tactical approach on the Belt and Road Initiative (BRI) to bring developing nations into its orbit.
10 Key issues to watch for:
1. Declining diplomacy and rising rhetoric:
Relations deteriorated rapidly after C19. Trump flipped from praising Xi for his initial handling of the outbreak to slandering the pandemic as “the China virus”.
Relations have continued to deteriorate under Biden who has continued Trump’s hard line diplomatic stance and held in place many of the trade sanctions and China-related policies Trump enforced. Long before Nancy Pelosi’s controversial visit to Taiwan Rudd wrote:
“the era of US strategic engagement with China is over " — Rudd
2. One China policy:
Xi Jinping has doubled down on bringing Taiwan back under Chinese rule, much more so than predecessors. This plays on Chinese nationalism and the redemption of China’s Century of Humiliation to reclaim lost land and restore it as a great global power once again.
“One country, Two systems” is the slogan for China’s administration over Macau and Hong Kong — and leaving room for Taiwan.
3. Made in China 2025: This policy aims to raise Chinese manufacturing to the global gold standard of new technologies, especially 4th Industrial Revoultion technhologies 5G, AI and semiconductors.
Essentially this is Xi’s promise to ‘Make China Great Again’ and he has staked his power on making it happen. Both Rudd and Dalio agree that China might have an edge in certain , while there are at least 4 Chinese companies building 5G there are none in the US. The plan also aims to raise China’s GDP above the US. As Dalio says,
“Whoever wins the technology war usually wins the economic and military war” — Dalio
4. Xi Jinping Thought:
This is now official Chinese Communist Party (CCP) doctrine enshrined in the constitution alongside ‘Mao Zedong Thought’, and it doubles down on the CCP control over everything in the country.
“Xi going further to the left on the economy but further to the right in ideology” — Rudd
Underpinning this “economic nationalism” is Xi’s ability to continue raising Chinese living standards and avoiding the middle-class trap currently consuming the US and most Western economies.
Xi has almost uncontested power within the CCP, far more consolidated than previous prime minsters and, in fact, he has arrested (or worse) more CCP political rivals than any other PM since Mao’s party purges. This has also earned Xi enemies in the party, though they’re emasculated for now.
“some people are concerned that Xi is becoming more autocratic than Mao” — Dalio
Xi is building up for CCP party re-election in 2024 and is vying for “the mandate of heaven” — a title previously ordained by the public to successful emperors who had undisputed power.
Rudd believes every action Xi takes between now and 2024 will be about consolidating his power because losing the 2024 election may be a matter of life and death for him.
5. The race to shape the future of digital Governance:
Digital dominance, digital currency and cyberspace is a new battlefield.
Rudd alludes to China’s “New Internet Protocol” being built by Huawei as a challenger to the current Western open standard of TCP/IP internet protocol. China knows how important it is to shaping the 4th Industrial Revolution, having missed out on the preceding two and suffered because of it.
In the West, China/Huawei’s plan for the top-down design New IP has been described as dystopian as users would have to register to use the internet and authorities have the discretion to boot people out, further enhancing China’s surveillance state. To Western ears it sounds like the opposite premise of the prevailing global TCP/IP open internet standard today.
*As an aside, in 2020, I was a guest judge at the GBA Future of Money, Governance and Law awards event in Washington DC. In the Capitol Hill Auditorium Dr. Scott Stornetta (pictured above), one of the founding fathers of blockchain, gave an impassioned opening speech about “Blockchain with American Characteristics”. At the time I didn’t get but it as I was reading Rudd’s book it dropped as a direct counterweight to Xi’s “Socialism with Chinese Characteristics”. Could a base-layer blockchain provide an alternative to China’s New IP? To me they both trend toward a social credit system, only the former is branded ‘Decentralized’ .
6. The success of the Belt and Road Initiative (BRI):
Although there’s been numerous headlines about delays and debt overhangs in projects along the BRI. What Western media rarely talk about however is how successful the majority of projects have been to date.
The BRI has also succeeded in bringing African and SE Asian countries into China’s economic orbit. Its billions in funding to developing countries presents a challenge to the US-dominated aid from the IMF and World Bank. China’s Asian Infrastructure Investment Bank (AIIB) is also a challenger.
7. Xi is redirecting and controlling the economy:
Xi is leaning the economy back to Leninism back from private to public sector growth driven by state-owned enterprises.
This conflict of interest between the private and public sector seems to be on full display at the moment as the Chinese real estate industry struggles under what looks like a classic debt bubble of overlending, overbuilding, developer bankruptcies, bank runs on regional banks and freezing of customer deposits.
So far the CCP has resisted intervening a la ‘GFC bank bail-outs’. But it’s in a hard place to balance stability with creating moral hazard and supporting the private sector which it’s trying to emasculate.
In its attempt to reign in the rapacious growth of Chinese tech behemoths and address accelerating wealth inequality the CCP has brought in anti-trust against companies like Alibaba, Baidu and wealth redistribution taxes aimed at their CEOs.
This attack on the entrepreneurial class could have unintended consequences, according to Rudd, and one thing that could undermine Xi’s rule is an economic downturn.
8. Military arms race:
Like Germany in the build up to World War 1, China has rapidly built up its navy fleet and ballistic missiles, particularly in the South and East China Sea. Both Rudd and Dalio agree that, under Xi, China has moved from defensive military capabilities to a proactive stance.
Both believe that if a war was to break out in the Taiwan Strait, America would most likely lose.
9. US nor China will back down to avoid losing face:
The US and NATO have been sharply criticised for not physically defending the Ukraine from Russian invasion. This makes it next to impossible that the US would stay out if Taiwan, a US protectorate ally, came under attack from China.
Both Rudd and Dalio believe US inaction would lead to an intolerable loss of face and status for the US as the dominant global power as would a Chinese military loss in such a war.
“The US would rather have war sooner while they still have a military and tech advantage, while China would rather have it in a few years when they have closed that gap.” — Dalio
Both leaders have a lot to lose in the public eye if they back down from a confrontation — Xi’s China as the rising power eager to stamp its place and Biden’s US as a declining power, eager to prove that it’s still #1.
10. Battle of ideologies:
Both Rudd and Dalio believe the tension arises from neither country being able to see from the other’s perspective in how to manage a country;
“America is run from the bottom up and optimized for the individual; China is run from the top down and optimized for the collective” — Dalio
It is a battle of Democracy vs Autocracy, Liberalism vs Legalism and which will prevail as the operating system in the new world order. And people are willing to die for each.
“Let the best ideology win” — Rudd
As Rudd points out, the 2008 Global Financial Crisis and poor handling of the 2020 Covid pandemic showed flaws in the Western approach to governance and organisation. Nations in Southeast Asia and Africa particularly will now find China’s mix of autocratic socialism and capitalism more attractive.
Africa is a major recipient of Belt and Road Initiative funding.
Summary
Xi is betting big stakes on 3 outcomes to consolidate his power before the Party 2024 election:
Continued strength of China’s economy, including containment of Covid-19
Regaining Taiwan and territorial interests of South China and East Sea
Not losing any face or backing down if there is a threat of armed conflict from US. It is win at all costs.
There’s lots of space for what Rudd describes “managed strategic competition” to find common ground between the two and that both liberal democracy and autocratic legalism can coexist in different areas of the world.
Dalio points out that the US and China are already in a form of war over currency and technology. He stresses that “in the moment” nobody knows what part of history we’re living through, it’s only in hindsight that we make these chronological demarcations.
https://twitter.com/ag_perspectivesAndrew Gillick here. Thanks for reading my perspectives on the future of money, governance and organisation!
I contract to fintech companies as a technical writer and business analyst. If you enjoyed the content sign up to my free Future Perspectives Newsletter which prepares businesses for a cashless society.
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