The Breakdown - A Primer on the US and China's 'New Cold War'

Episode Date: July 16, 2020

No geopolitical relationship will shape the world over the coming decade as much as that of the U.S. and China.  A day after President Trump signed the Hong Kong Autonomy Act enabling sanctions on those that threaten the autonomy of China (and the companies that do business with them) and the UK worked to ban Huawei 5G infrastructure, this episode of the Breakdown looks at the key faultlines and issues that have that relationship in a dangerous downward spiral:  Virus blame recriminations  Trade war tensions  The Hong Kong Security Law  Huawei 5G and critical digital infrastructure TikTok  India border skirmish South China Sea Military Exercises The politics of labeling this a “new cold war” 

There is no geopolitical relationship in the world, with more power to shape what the next decade or longer looks like than that of the U.S. and China. Over the last few months, that relationship has undeniably spiraled downward. But the questions of whether this is truly a new Cold War or something else are about more than just terminology. They come with a set of biases and expectations and prescriptions and policies that may or may not befit the situation we find ourselves in. This episode is a primer on the fault lines in the U.S.-China relationship and what we should think about whether it is, in fact, a new Cold War.

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. Welcome back to The Breakdown. It is Wednesday, July 15th, and today we are talking about China. This originally started as a brief, but when I got into it, I realized that this is the subject that we keep coming back to on the breakdown, and we're going to, right?

Because it has such a huge impact on the world that we live in. It sets the context for so many parts of our economic policy, our global military policy, basically the things that shape the nature of the world we live in and operate businesses within. And so I thought it might be valuable to expand out what was going to be, like I said, just a short brief and instead look at some of the key fault lines for the U.S.-China rivalry. My goal with this episode is not to pretend that I'm an expert in this. In fact, I've already brought experts in on China. I will be bringing more experts in on China.

If you want a primer on the relationship over the course of history going back to the 19-19. 40s, the 1970s, the 2000s, et cetera, go listen to my episode with Graham Webster. This instead is about some of the key issues that you're going to be reading about day in, day out in the news. And my goal is really to help give you some context as you start to try to absorb all that information and make sense of it yourself. So let's kick off with the context for why we're discussing this right now. And really, this week, there have been a number of potential context for this as we'll get into,

but the one I want to specifically mention is yesterday Donald Trump made a speech about the Hong Kong Autonomy Act, at least nominally, it was about the Hong Kong Autonomy Act. And the idea of this bill is it's a bill that imposes sanctions on entities that help violate Hong Kong's autonomy and the financial institutions that do business with them. So this is legislation that's been talked about for a while. It was finalized in June, and that President Trump just signed yesterday, that basically is part of the response of the U.S. to this national security law, which effectively brings Hong Kong much more into the Chinese system rather than preserving this sort of differentiated relationship. Now, we're going to talk more about Hong Kong in a minute, but this is

the latest tit for tat back and forth that China and the U.S. have had among a number of them over the last few weeks, and especially the last few months. But importantly, this also showed how tied up U.S. politics is in this relationship. Donald Trump, wandering to a number of different topics, also brought Joe Biden into this conversation, saying at one point that, quote, Joe Biden's entire career has been a gift to the Chinese Communist Party. And really interestingly, the one issue that seems to be nonpartisan in America, at least in terms of presidential politics right now, is the idea of being tough on China. Both sides are lobbying campaign ads, effectively, that are accusing the other of being soft on China. So that's the most recent news of a lot of recent news. And so now

let's look at some of the issues that are undergirding this conflict that's happening now. First up, we obviously can't talk about China and our relationship with China in 2020 without talking about the coronavirus. There has obviously since the very beginnings of this thing getting out into the world been a blame game. Now, we are well familiar in the U.S. with Donald Trump's labeling of this as a China virus and so on and so forth. And there's been plenty of conversation and discussion about that that I don't need to rehash here. But I think it's also important context that a similar process of the blame game was happening in China. And the reason for that is that this posed one of the most serious threats, it has posed, I mean it continues to pose in many ways,

one of the most serious threats to the authority of the CCP of anything in years, right? The response that people had to the whistleblowers, including the young doctor who died after trying to warn the nation about coronavirus, was an outpouring of public sentiment, the likes of which the CCP has worked very, very hard to tamp down. That's part and parcel of the reason that the Chinese authorities tried to then kind of turn around and pin this on the U.S. and spread rumors that it had actually, in fact, been the U.S. who created this virus and brought it to China. Of course, even beyond that sort of narrative game of who's to blame, is this a China virus, is this a China plague, which is words that Donald Trump again used recently, there's another set of questions

that have come out of the virus that aren't just strictly about the virus itself, which have much more to do with a question of economic interdependence and how well that actually serves U.S. and global interests outside of China. This, as we'll see, is going to be a much, much more important part of the conversation going forward. There's another question here of the capture of international institutions like the World Health Organization by China. That was a big part of the U.S.'s supposed reasoning for their withdrawal last week from that organization. But let's come back to this question of how the virus and the response to the virus has impacted a larger trade debate that's been going on. So in the U.S., obviously the trade war was actually one of if not

the biggest concern for businesses and the economy coming into this year. I saw numerous polls that basically had that as one of, if not the most important issue, the most likely to impact the economy issue that there was coming into 2020. How wrong we were, of course. But it's important to see or remember how important this was right from the beginning. Last Friday, Donald Trump told reporters that basically that phase two of the trade deal with China had much more doubt cast on it because of their handling of the coronavirus. So, again, this is the use of this sort of coronavirus narrative to come into play with the conversation of the larger trade balance

between these two nations. Importantly here, it's not just the U.S. that's involved with changing relationships with China as it relates to trade that come out of its response to coronavirus and just its general presence in the world. Australia is obviously hugely within the Chinese sphere of influence by virtue of the fact of being so physically proximate and by having such deep relationships, but is also in some ways more connected to Western governments, to the U.S., to the UK, to Canada, etc., in terms of political, philosophical orientation.

China is, however, Australia's biggest trade partner. In 2018 and 2019, trade was $235 billion, which was $2.5x Australia and Japan's trade balance, which was the next highest number. What's more, China spent 153.2 billion on Australian exports in that same period, which was 32.5%, almost a third of the total. The magnitude of those numbers is really important to keep in mind when you see that after Australia led calls for an inquiry around the virus's origin and China's role in it, they slapped, or Beijing slapped an 80.5% tariff on barley in retaliation. Australia had also recently, earlier this year, announced a boost in defense spending, $186 billion over 10 years, clearly suggesting that they were getting less secure and less comfortable with their physical proximity to China.

So we've discussed the role of China in the coronavirus and their culpability there. We've also discussed the ongoing and sort of omnipresent questions around trade. but in many ways the biggest shift in the world's relationship with China recently has come around Hong Kong's national security law. This is a law that was proposed last year and finally enacted very recently that effectively outlaws all criticism of the Chinese government. It makes Hong Kong by all accounts effectively within, completely within the Chinese sphere of influence and domain. The response to this law as well as to China's response to this law, right? China's response to the protests that have been breaking out in Hong Kong for over a year now because of this law,

have been divisive in international politics. On the one hand, you have many members of the United Nations, specifically those who are within the sphere of influence of China's Belt and Road Initiative, who came out and supported it, but the larger sort of Western block, as we thought about it in the Cold War, coming out to condemn it. You have a new coordination body called the Inter-Parliamentary Alliance on China, which includes members from 16 countries and the EU, senators from the U.S., the U.K., Australia, Canada, Japan, and others, who are all kind of trying to create global consensus around issues like dropping extradition relationships with Hong Kong now that this law has been enacted.

Obviously, in the context of this podcast and this exploration, the big one, the big response to the Hong Kong national security law that matters is the U.S.'s response. In addition to this Autonomy Act that was passed, Donald Trump also signed, executive order revoking Hong Kong special trading status. Basically, there was a recognition that there was now no longer a one-country-two system type of policy or type of reality that the U.S. could work against. This could lead to additional tariffs in Hong Kong. This could make it a much less attractive business environment. Now, on the one hand, there are critiques of some of these measures, the biggest being that this will drive Hong Kong closer to China, but at the same time,

these have passed through Congress and the Senate with flying approval, basically. The UK has said that it will open up more visas for Hong Kong residents, which was a move that was condemned by the Chinese. Australia has already opened up more visas for Hong Kong residents. So this issue of Hong Kong is a significant international issue, and one that has big open questions. Just recently, there was a Bloomberg article that is about the fear of growing taxes in Hong Kong as well. there's a new potential tax rate as high as 45%, which would be up from 15%,

that seems sort of specifically designed to, at least in part, push foreigners out. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top financial institutions. BitStamp is built on professional grade trading technology. Their platform is powered by a NASDAQ matching engine, and their APIs are recognized as the best in the industry. Download the BitStamp app from the App Store or Google Play

or visit BitStamp.net slash pro to learn more and start trading today. That's bitstamp.net slash pro. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping.

When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September. The other big news that you might have heard this week that relates to China and the growing international concern with China has to do with the UK and Huawei. So the UK announced that the country's telecoms would not be allowed to, to buy new Huawei 5G kits starting on December 31st of this year, and that all Huawei equipment should be stripped out of mobile networks by 2027. This is all about the idea that this data from these manufacturers, Huawei specifically, can be captured and used by the Chinese government

as a part of its cyber espionage and intelligence. This specific move in the UK comes after new U.S. sanctions that will effectively push production, design, and testing of all of the chips in Huawei equipment into China, making it much more opaque. The UK security apparatus effectively told government that because of these sanctions, because of this push, which will push Huawei into Chinese manufacturing, they couldn't guarantee the security, the non-compromised nature of the chips in this critical piece of infrastructure. Now, interestingly, if you read a lot of the analysis, it seems that although this U.S. sanctions did really push things over the edge, there were many in the U.K. who already concerned about entrusting this key piece of infrastructure to a Chinese

government that they had seen respond the way it had in Hong Kong, ultimately leading up to this national security law. This was a big win for those in the U.S. who have been pushing their allies to make these types of moves. Last week, on July 7th, FBI director Christopher Ray kicked off a speech called China's attempt to influence U.S. institutions with this line. He said, the greatest long-term threat to our nation's information and intellectual property and to our economic vitality is the counterintelligence and economic espionage from China. It's a threat to our economic security and by extension our national security. So those are big, big words. The FBI director saying that the greatest long-term threat to our nation's information and intellectual

property, and to our economic vitality is China. It's very clear that one of the fronts in this conflict, whether it is a Cold War or not, is the technology apparatus. And in many ways, the first global domain that is being balkanized that has been balkanized by the difference between the West and the East is the Internet. The Great Firewall of China has been by some claimed as the Berlin Wall equivalent in this conflict. We've talked over the last few weeks around how TikTok itself, right, an incredibly popular meme app in the U.S. the first Chinese app ever to be number one in the U.S. app store is at the center of this conflict as well. By the way, as an aside, just so you guys know that I'm paying attention to it, there is a very weird thing going on in terms of the dust up

between Silicon Valley and journalists, where TikTok has become this weird football, where people are effectively arguing that the fear of TikTok as Chinese spy software is way overblown. And these are the same folks who are going out of their way to critique the Googles and Facebooks of the world. And that is easily an entire episode on its own to piece through that and get into all of the psychodrama that is Silicon Valley versus journalism. So I'm not going to get it here. But I think it does reflect just how heightened these tensions are and just how significant this issue of China and China's ability to get information and insight into the population really is. There is, however, another dimension to this conflict which seems to be growing, which is

really important to keep note of. Cold wars are cold because they have small battles that threaten but don't ever hopefully go into hot wars, right? Hot wars meaning military conflict. They're about small kind of economic infractions, espionage, spies. That's the whole idea of a cold rather than a hot war. Well, there has been a new or increasing militarism that we're seeing manifest in a couple different ways. Obviously, over the last few months, we've been keeping up on the discussion of border skirmishes with India. It seems in some ways that China is testing the world's distraction and focus on the coronavirus to see which buttons they can push from a military perspective in a very terrestrial sense. The first deadly clash between India and China took

place just a few months ago that led to 20 Indian soldiers dying. It was the first deadly clash between India and China since 1975. India responded by, in part, banning 59 apps from China, including WeChat and TikTok, which is a serious ping to TikTok, by the way, as India represents a third of their total downloads. The conflict in Hong Kong as well has created spillover in into this tech dimension with TikTok shutting down operations in Hong Kong and Facebook, Google, YouTube, Twitter, and others saying that they're going to stop reviewing data requests from Hong Kong authorities now that they believe that they are effectively the Chinese authorities.

These skirmishes with India remain important both from a real sense in terms of just two big powers next to each other, although there's not really any comparison of the two militaries, but also in the sense that India is one place that many are advocating a greater investment in. If our system relies on a global just-in-time supply system, well, maybe part of the answer is moving from China to India. One small indicator of this is that it just came out that Foxcon, which is best known as the Taiwanese manufacturer that assembles Apple's iPhones, is going to invest up to a billion dollars to expand a factory in southern India.

Basically, Apple is trying to kind of quietly navigate its way away from China as it relates to manufacturing. Now, the India border skirmish stuff is scary, but scarier still is what's going on in the South China Sea. Earlier this week, Japan warned that China was attempting to, quote, alter the status quo in the East China Sea and the South China Sea. They have called China a more serious long-term threat than nuclear North Korea. Over the last eight years, Japan has significantly increased its military capacity. The Wall Street Journal just ran a full-fledged article about this within the last week or two. More concerning still than even just Japan was that as China started practicing amphibious landings

in a contested area of the South China Sea, the U.S. Navy dispatched two aircraft carriers to the area, quote, to support a free and open Indo-Pacific. Secretary of State Mike Pompeo said that Beijing's claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them. So you're seeing a significant increase in rhetoric around territorial claims in the South China Sea that is escalating to actual placement of military assets in those places. So the question for all of this is, of course, in some ways, is this a new Cold War? The New York Times on July 14th wrote,

caught in ideological spiral, U.S. and China drift towards Cold War. Rush Doshi, the director of the China Strategy Initiative at the Brookings Institution, said, quote, the power gap is closing, and the ideological gap is widening. China's foreign minister last week said that this is the lowest point since reestablishing diplomatic relations in 1979, the lowest point in the U.S.-China relationship. Now, in many ways, it feels hard to argue against the idea that this is at least the start, right? It has some of the hallmarks of a new Cold War.

We have this ongoing tit-for-tat. We have proxy battles in the business sphere. We're seeing things like student visas used and withdrawn as a way to get at this conflict. But there is, of course, as well, much that's different. The people who argue against the idea that this is a new Cold War argue a number of things. Mario del Perro is an international history professor at Seance Poe and wrote an article about this and opinion piece about this just recently. He says, as is often the case when thinking analogically, invoking a cyclical vision of history obfuscates more than it clarifies.

This thinking promotes policy prescriptions which are at best, useless, and at worst outright dangerous. He gives three reasons that this is different than the Cold War. The first, he says, is that the Cold War was an ideological clash between, quote, two universalisms, two versions of history and the historical process, two models of modernity. Nothing, literally nothing, in the current relationship between China and the US resembles this total and, in theory, irresolvable ideological antagonism. Two, the Cold War was a battle over Europe. Nothing mirrors that as well. And three, during the Cold War, there was no global system. This is his quote, over the past 50 years, we've seen a process of global integration that frequently puts the Sino-American relationship

at its very center. Interaction between the two countries has become both a product and a decisive driver of globalization. I don't have the answers, but I do have some thoughts. And my major feeling as I reflect on all of this, again, as an observer, not as an expert, is that in some ways, whatever the nature of this conflict is, the phase that we're in is something of an act of unwinding the global interconnectedness. In that way, it's almost a process by which we might allow for the preconditions for a Cold War to take root. That's why so much of this is about business. I think that the people who say this isn't a new Cold War, the world is too interconnected are right on some level. The interdependency, the nature of just-in-time supply chains,

etc. is very, very different from what we had before. However, look at all of the first acts, the first opening salvos of whatever this conflict is. It's to withdraw students from each other's universities and to make it harder. It is to undercut fundamental infrastructure where there would be key business relationships. It is to pick and focus on territories where there is is major global international overlap, such as Hong Kong. These all amount to an unwinding of the economic interdependence. And I don't want to overstate how much that is. Obviously, China and the U.S. still have extraordinary amounts of global economic connection. And frankly, that's the thing that makes me the most confident in some ways about the fact that this is unlikely to turn into a

full-on Cold War and certainly a full-on hot war. However, it is a process. of unwinding that we're seeing, and it's hard to deny that. So to the extent that the prohibiting factor of a new Cold War is the fact of global interconnectedness, if we see an unwinding, then wouldn't it hold that that would allow for the preconditions for that Cold War to take root? I do think as well that these ways of interpreting the conflict matter, right? I think some people would say, well, who cares what it's called? That's just narrative. It doesn't matter. What matters is the substance. And I wish that were true, because here's the thing. If these are just specific individual issues, even interconnected individual issues, they can be

resolved on an issue-by-issue basis. If they are just symbolic, however, of a larger strategic battle, then the conversation we're having is about China's desire to be at the center of a new world that the U.S. seems to be losing its grip on. That comes with much more significant implications in terms of strategic policy, not just tactical addressing of each individual issue. Finally, if all of this is hold aside strategic, if all of this is a side strategic, if all All of this is just symbolic of a larger ideological battle.

Two ways of seeing the world that are fundamentally confronting. That's the hardest of all. That's what got us into Cold War I in many ways, is the leveling up from specific issues to a larger strategic battle to a larger ideological battle. I do think that right now we're in a period where many of the people who use the terminology of Cold War are using it because they believe prescriptively that that is how we should see it. And that doesn't mean that you should disagree with them. It means that as you are trying to make your own opinion, you should know that there is more than a little bit of self-fulfilling

prophecy in that. I'll give you one example from a very smart person who's been on the show before, Neil Ferguson. He says, I have argued that this new Cold War is both inevitable and desirable, not least because it has jolted the U.S. out of complacency and into an earnest effort not to be surpassed by China in artificial intelligence, quantum computing, and other strategically crucial technologies. Yet there remains in academia, especially significant resistance to my view that we should stop worrying and learn to love Cold War too. This is a mainstream thinker. This is a brilliant person, even if you disagree with him, I think most people would agree that he's a very smart guy, and he is actively trying to advocate for this perspective. Part of why I've always been attracted to

foreign policy rather than domestic issues is that very quickly the sort of party lines break down because they just don't have as much focus. They don't have as much of a play in electoral politics. It's interesting then to see that this is one issue that is pretty cross-cutting for Democrats and Republicans. But I think as we try to figure out what's actually going on, it's worth understanding the stakes of the game and it's worth understanding and trying to break apart all these individual pieces, even as we're trying to see. how they fit together. So hopefully you've had a chance through this conversation to better get a sense of the both military and territorial issues that we're seeing in India and the South China Sea,

the questions that have to do with pure economics and the trade war, and the questions that have to do with this larger question of tech and espionage and power in the digital domain. Of course, there's so much more to dig into here, and as I said, I'm not an expert. I will definitely be bringing more experts onto the show. I've got a couple who are hopefully lined up, but this was meant to be a 101, a TLDR, a primer for especially the issues that are showing up in news articles this week. Anyways, guys, let me know if this was helpful, and as always, I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.