17Capital International Analysis

Few would disagree that the relationship between the United States and China is and will be central to the international order in the years, indeed decades, to come. That is where the consensus ends. Predictions and expectations about how the two nations will manage their perhaps inevitable rivalry vary enormously. Recent events and statements have led to increasing debate over a direct or “hot” conflict between the powers in the context of Taiwan, while others have asserted that an overt clash between the US and China is unlikely, but something akin to the Cold War involving the US and the USSR in the 45 or so years after 1945 is highly conceivable. Another school of thought, one which has received less attention of late, is that the notion of a military confrontation – be it “hot” or “cold” – is essentially a distraction from the real nature of their contest, which is economic and technological.

The hot war thesis

The notion of a “hot war” between the United States and China, once deemed improbable, has had a high-profile airing. This has in part been because certain US military figures have mused publicly about the possibility (including one General who opined that it was his “gut feeling” that the US and China would be engaged in fighting in Taiwan by 2025), reports that President Xi Jinping had told the Chinese military “to be ready to invade Taiwan by 2027” (although an alternative translation as to what he had allegedly asserted is that China should “be capable of” launching an assault by 2027, a subtly different message) and the self-evident tension between Washington and Beijing over the flight of a super-sized balloon containing spying equipment, and arms supplies in Ukraine. All of this has prompted even the normally cautious The Economist magazine to highlight the threat of war.

The more sober critique which provides the basis for the “hot war” argument is as follows, China, it is said, has a limited window of opportunity in the second half of this decade at which point it will have the military capacity to hold a full-scale invasion of what it sees as a “renegade province” but not long after Taiwan will have acquired the ability to see off such an attack by its own rearmament. The reunification of China is sufficiently important to its leadership, this contention runs, that it will act in the approximately five-year opening (2025-2030) that it has available to it, even if this runs the risk of not only air and sea military engagement with the US but a land clash on Taiwanese soil too. Everything that China is doing in terms of the build-up of its armed forces is framed in this context.

Taking out Taiwan

Even allowing for the further advance of the Chinese military over the next few years, the task of invading and then occupying Taiwan (rather than simply seeking to obliterate it) is an incredibly challenging one. The practical constraints are considerable and essentially render the notion of a swift and surgical strike to be something close to inconceivable. The factors that matter include:

• The sheer distance involved. At its narrowest point, the Taiwan Strait is 128km (79.5 miles) wide, itself a sizeable distance to travel. When realistic embarkation and disembarkation points are taken into account, the sea voyage required becomes at least 50% longer still. The notion that an invasion could be conceived secretly or by stealth lacks any kind of credibility.
• The preparation that would be required for such an undertaking would be huge and involve many months of planning and moving the relevant supplies into position. It would be close to impossible to avoid such activity being detected in advance, with Taiwan and its allies able to anticipate what might be directed at them. The idea that it would be possible to disguise all or part of this war effort as being a “military exercise” verges upon the ludicrous. It would need to be the longest “military exercise” ever recorded. Real intentions would be signalled.
• The waters concerned include numerous well-fortified islands between China and Taiwan that are home to an array of extremely effective watching and warning facilities which would enable an attack to be observed and obstructed well before Taiwan itself was struck. The odds on orchestrating an attack which had a genuine sense of surprise are about zero.
• Any actual invasion would require a vast and slow-moving fleet transporting a minimum of 300,000 troops (more plausibly double or triple that number). The force would have to be much larger still if it were not possible to use the facilities at ports captured largely intact in Taiwan in order to ensure the necessary supply lines back to mainland China. This creates the paradox that destroying key Taiwanese assets would complicate any military incursion.
• Taiwan has few beaches (the maximum figure is only 14 of them) which would be suitable for amphibious landings to allow incoming troops to establish a viable base on the island.
• Taiwan also has an unusual topography which affords it additional security. It has a heavily forested mountain ridge which runs down almost the whole length of the right-hand side of the island for 395km (245 miles). Cities are spread out around this ridge in a fashion that is close to a natural defensive barrier. This makes conquest of the entire territory exceptionally difficult and would probably require intense urban warfare of a street-by-street character of which the People’s Liberation Army has no experience of whatsoever, while the defenders of this terrain, albeit outnumbered, would have the seminal asset of intense local knowledge.
• Taiwan had developed its own state-of-the-art offensive weapons. It has an impressive air force which can operate using tunnels cut into mountains and is supplemented by its own satellites systems and ultra-sensitive radar. Controlling the skies over the island by knocking out the Taiwanese air defence system would be an exceptionally ambitious endeavour.

All of the above assumes that Taiwan would be on its own in any confrontation with China. It is far more probable that the United States, and even Japan, would feel compelled to intervene in a war.

The American presence in this part of the Pacific Ocean is stunning. The US Seventh Fleet is located at Okinawa, Japan. This facility contains 32 separate bases, a large air fleet, 20,000+ US marines, at least one aircraft carrier strike group (and often two of them) and several cruise missile submarines. This by itself is a formidable armada and one which China would have to calculate would respond. If Japan were to enter the strife, the fourth largest navy in the world would also be engaged in Taiwan. Outside the wayward North Korean regime, China could rely on few regional allies of any value to it.

The cost of conflict

The cost of any conflict, while obviously transformation for Taiwan, would be staggering for China.

• Military losses would be massive and a seismic shock for a country which has not been in a significant conflict since it raided Vietnam in 1979 (and was forced back behind its borders). The danger of outright dissent against the Communist Party leadership would be sizeable.
• The economic fall-out would be on an epic scale. The best estimates are that China’s GDP would shrink by between a quarter and a third in a very short order of time. This is without the full impact of sanctions against its exports which would surely result from any invasion.
• The diplomatic and reputational damage to China as it aspires to present itself as a crucial player in global politics would be ruinous. The costs of a conflict far out-weighs any benefits. That would remain true even if Taiwan could be totally subdued (which is itself doubtful).

The “Tepid War” option

China does not need the complexity, cost or chaos of a war to achieve its minimum objectives as they concern Taiwan. Avoiding such a situation has become even more appealing in the light of the disaster that the Russian attempt to subjugate Ukraine has proved for Moscow and its ruling elites.

What China wants above all else is to avoid Taiwan formally declaring its independence and for the United States to recognise its autonomy. There are a range of military options open to Beijing that would fall well short of a “hot war” but nonetheless act as a strong disincentive for any President and Government of Taiwan claiming independence. China could seize some of the outlying islands between its coastline and that of Taiwan. It could substantially increase its flight across the airspace which Taiwan considers to be its own. It might, if it wanted to take matters further, blockade ports. A “tepid war” of this form would be enough to convince most in Taiwan to stick with the status quo.

The clash of systems

The US-China relationship is not a clash and contest of belief systems. In both countries, nationalism is a more important factor than was true of the US-USSR era. Washington is more likely to talk in terms of “American values” than the virtues of capitalism as such and free market idealism is not what it once was (especially inside the Republican Party which has strayed from the Reagan model). China’s notion of “market socialism” (with a lively internal argument about the balance between the “market” and the “socialism” aspects of it, currently moving away from the former to the latter) is not really being offered or presented as an export to other countries. Indeed, the consistent aspect of the Chinese Communist Party’s outlook is an emphasis on the vital “Chinese characteristics” of its methodology. Whereas Soviet Communism regarded itself as something with universal qualities ripe to be adopted across the planet, China tends to stress the unique elements of its political approach.

Global reach

It is in terms of “global reach”, however, that any concept of a Cold War II falls apart. The US has a global reach in military terms. China is still striving to secure regional authority in its neighbourhood.

This can be seen in a few basic comparisons between the military capacities of the two countries.

• While China’s spending on defence has increased markedly over the past 20 years and as a percentage of GDP outstrips the US, in absolute dollar terms (at $230 billion) it is still well less than a third that of the current United States military budget (at almost $800 billion).
• Although China is often described as having “the largest navy in the world”, which it does do strictly speaking (about 355 vessels to 295 for the United States), the statistic is misleading. Having lots and lots of comparatively small boats does not constitute a “global reach”. It is far better to have a smaller number of larger ships to realise that end. China has two aircraft carriers (with three more under construction). The United States Navy has eleven of them, with two more near completion and an additional seven of them in the pipeline. In terms of overall tonnage (2019 figures), the US ranks first with some 4,635,628 tonnes. China comes in second with a relatively modest 1,820,222 tonnes. The US Navy has a larger tonnage than the next ten fleets combined. There is simply no competition here in terms of global power. All of this will be reinforced robustly by the new Australia-UK-US (or Aukus) security alliance which will allow Australia, in particular, to play a critical supporting role in the Pacific Ocean.
• It is a similar story and ratio when it comes to combat aircraft. The US (in 2020) had some 2,407 such planes at its disposal. China had 922. The US Airforce also had assets with a much longer range than those of China and which could operate with a much larger firepower.
• Only when it comes to the armies of the two countries does China (superficially) have a lead. The People’s Liberation Army is approximately 975,000 individuals strong, more than twice the size of the regular US Army (about 480,000 persons). The difference, though, is that 99% of the PLA is located within China, responsible for 22,117 km (13,743 miles) of borders with 14 nations. The United States Armed Forces (the Army plus other services) are everywhere.
• Everywhere really means everywhere. It is the vast Grand Canyon in terms of overseas bases between the US and China which hammers the nails in the coffin of a Cold War comparator. The United States has at least 750 bases internationally. China has, depending on what you regard as an overseas base, one, two, three, five or eight such bases. Why the uncertainty?

The only absolutely unambiguous Chinese overseas base is in Djibouti in the horn of Africa. Beijing is supposedly erecting a building at the Ream base in Cambodia on a 25-year lease but what exactly it is remains unknown (and the Americans have an outpost at the same place anyway). Some sort of construction is also occurring in Tajikistan but so close to the Chinese border that it is rather stretching the idea of an overseas base to its limits. There are five other (small) examples of China having created man-made bases in either disputed or international waters close to its own coastline. If you just count the ones which most bodies agree were definitely not in an area which China could legitimately argue was its water, the overall number of “overseas” bases makes five. Accept all of them as outside China, then it is eight. Any attempt to equate US-China today with the old US-USSR era starts to look surreal.

Furthermore, this is not a competition in which one could expect China to “catch up” swiftly. To be of any serious utility, an overseas base needs to be one where (a) there is stable and sympathetic host country and regime (b) a place of significant strategic significance and (c) where the location fulfils a military need (so deep-water ports for a navy to be located). The supply of such assets internationally is finite, and the US already has the pick of the planet.

Nuclear equivalence

Finally, in terms of the crude currency that is nuclear weapons and the prospect of Armageddon, this is not the Cold War Revisited either. The US holds on the most recently available data, a stockpile of 5,428 nuclear weapons of which 1,644 are actively deployed (on a missile so ready to go if required). China has between 350 and 400 in total, most of which are submarine based, so perhaps about half of them are actively deployed (and with a much more limited range than their US counterparts). On a day-to-day basis, France, with 280 actively deployed nuclear weapons, commands a bigger arsenal.

A cold peace?

The concentration on the military dimension of US-China competition thus appears misplaced. The real contest is economic and more precisely which country dominates key technologies in the future.

This has become more transparent as the Chinese economic model has changed under Xi Jinping and it started to do so before COVID-19 arrived as a factor. The formula which China had followed for the better part of 40 years from 1978 onwards had placed a premium on the highest possible level of economic growth by the most direct route open to it. This had meant, in practice, becoming a mass manufacturer of comparatively low-value goods at enticing prices for export to the developed world.

This strategy had been seen as an outstanding success until the last decade or so when it came to be reassessed. The by-products which it created, such as the emergence of a celebrity capitalist class (or “Jack Ma syndrome”), rising economic, social, and regional inequality and a reliance on others for the imports of technological building blocks (such as semi-conductors) are now seen as undesirable. Under President Xi, the private sector will be closely monitored by the State (and hence the Party), rampant capitalist excesses will be curtailed, and technological self-sufficiency is an essential target.

It is this shift which will lead to tensions between the US and China, rather than the military sphere.

• The US and China have become direct economic competitors in a way that were not before.
• The US is determined to keep China from making rapid progress towards technological self-sufficiency by restricting its access to outside technologies be that through overt acquisition or more covert means (including what Washington sees as shameless industrial espionage).
• The new “arms race” does not involve missiles and warships but the command of areas like artificial intelligence, digital science, quantum computing, cybersecurity, and biotechnology.

Both sides acknowledge that this is where they are likely to be in active disagreement. Neither are being particularly shy in attempting to disguise what they regard their new national interests to be. At the recent National People’s Congress which concluded on March 13^th, policies adopted included:

• A revised target for economic growth of 5% per annum for the near future. Although this was dismissed in some quarters as “unambitious”, it reflects the fact that a shift from a low-value to a high-value economy takes time and in the short-term means a slower growth rate.
• A State Council Institutional Reform Plan (approved on March 9^th) which affords the Ministry of Science and Technology a far wider role in forming a “new type of whole nation system”. In this, revealingly, it will be steered by a new Party entity, the Central Sci-Tech Commission.
• Expenditure on basic research is to double over the next five years with an almost 50% rise in funding to support micro-chip development and other priority technological sectors.

Conclusion

The focus on Taiwan and the military aspect of the US-China relationship is understandable. Yet it risks “fighting the last war” as an outlook based on the US-USSR rivalry of decades past in not likely to be an accurate or helpful basis for analysing Washington and Beijing in the 2020s and 2030s. As that US-China competition will be fundamental to the way in which international economics works, private equity, and the business community more broadly, has to pay the closest of attention to it.