Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

Tensions at the Ukraine border and the Taiwan Straits grew throughout 2021. War games were held and troops mobilised. Russian president Vladimir Putin gave very blunt messages in his “red line” speeches addressed to Nato. Year-end reviews put geopolitical conflict as the highest of risks. Are we marching towards war between the Great Powers?

The Roman saying “Si vis pacem, para bellum” means “If you want peace, prepare for war”. This dictum has a cyclical perspective — life is a cycle between war and peace, but there are periods when war risks escalate, followed by periods of peace.

The world has had peace for so long since World War II (WWII) that most have forgotten about war, except in computer games and movies. The US, as the superpower with a mission to defend Pax Americana, has been at war in one theatre or another since 1945. But after her withdrawal from Afghanistan last year, we see the focus of American attention pivot to Asia, preparing for an existential rivalry with China.

Why do I want to talk about war, when this publication is about investing? The answer is that national security affects investing more than most of us realise. The investing maxim of 19th century banking house Rothschilds was: “Buy with the cannons, sell with the bells.” Buy when everyone fears the bad news (war) and sell when everyone is cheering the good peace announcement. In other words, be countercyclical to the crowd — sell when everyone is buying (at high price) and buy when everyone is selling (at low price).

The last war in East Asia was the Vietnam War — the US left and Vietnam was unified in 1975. Wars like Iraq and Afghanistan were watched from afar, whereby distant people and enemies were destroyed by snipers, bombs and drones, like in computer games. The Cold War between the US and USSR (Soviet Union) ended with the collapse of the Soviet Union in 1991 and total victory for the Western capitalist model. The Dow Jones Industrial Average was 5,650 in January 1991, and 6.47 times higher by the end of 2021 (36,585), so investing in victorious America has been very successful.

In 1990, the US gross national product was US$5.2 trillion, whereas the USSR had a GNP of US$2.7 trillion (second only to the US). By 1991, Russian GNP was down to US$518 billion. The loser saw the collapse of empire and economy at the same time.

How close are we to war? Probably closer in rhetoric than in reality.

The RAND Corporation, the leading American think tank on military and security issues, recently issued two major studies — “Stabilizing Great Power Rivalries” and “China-Russia Cooperation”. The first paper is a more nuanced analysis of the potential for war than the fashionable Thucydides Trap, which Harvard Professor Graham Allison famously summed up as “when the rising power challenges the incumbent hegemon, 12 out of 16 historical cases suggested that war was an inevitable outcome”.

I have never been comfortable with the Thucydides Trap argument, because the US took over from the UK as the world 

hegemon without a major war between the two. Like in the animal kingdom, wars are fought over power, of which economics is only one factor. Wars are also not rational, because emotion often overrides rational calculations.

The best example is World War I, where no one was prepared for or expecting war.

In pure GDP terms, WW1 was not between No 1 or No 2, which was the US (US$517 billion) and the UK (US$225 billion + India US$204 billion), but essentially between European powers — the UK, France (US$144 billion) and Russia (US$232 billion) against Germany (US$237 billion). China had a GDP of 

US$241 billion but was very poor and weak, having just lost against Japan (US$72 billion) in the 1894 Sino-Japanese War (Maddison 1913 GDP estimates). Germany was the major rising power militarily and industrially, but was in no economic position to challenge the allies against her. Militarily, the land battles ended in a stalemate within six months of the declaration of war in 1914. When the US entered the war in 1917, it was all but a lost cause for Germany.

WWII was a direct consequence of WWI. Having won WWI, the UK became weaker in the inter-war years, whereas the US grew stronger as European capital flight moved to finance American industrialisation. Hitler was democratically elected on the back of the German people’s anger against the unequal war reparations. WWII was in a sense a settling of old scores, and the Japanese became an ally of Germany when American sanctions blockaded Japan’s access to oil resources in Southeast Asia. In the end, the Germany-Japan-Italian Axis powers were nowhere near being able to sustain a long-term war against the rising American and Soviet powers.

History is always written by the winners. What Western historians airbrushed away about WWII was the fact that the Soviet Union and China tied down a significant part of the German and Japanese armies, losing the most casualties (27 million in Soviet Union and 15 million to 20 million in China). This enabled the US and UK to eventually win WWII, but the Yalta Agreement in 1945, for the victorious Allies, was recognition that the two post-war dominant military powers were the US and the Soviet Union.

The British Empire was essentially broken, not just because Britain could no longer militarily control India and other colonies, but because the US did not want any allies to own substantial colonies to economically challenge her. It was a continuation of the British tradition of divide and rule. By 1945, the pound sterling had lost its dominant reserve currency status to the US dollar.

The RAND study is particularly valuable because it uses a theoretical framework to try and understand when Great Power rivalry slips into conflict or instability, drawing on recent history. Rivalry is broadly defined as contestation between two or more powers over economic, military, political and cultural arenas, in which conflict can rise to the level of war.

Instability occurs when there is mutual hostility and a lack of trust, and national policies, contextual factors and perceptual factors all interact to escalate the tensions. A stable rivalry occurs when there is mutual acceptance of a shared status quo. A resilient equilibrium exists where shocks can be absorbed to return to status quo, either because war is too costly or where common interests (against climate change, for example) can unite the rivals against conflict. Status matters, because if one side does not acknowledge the other as equal, fights will inevitably occur, sometimes at the fringe, but eventually in direct war.

In other words, national policies can be in conflict with other powers’ interests, but context also matters. Indeed, Great Powers are often pushed by allies or borderlands into conflict because of perception or misperception of the other side’s intentions. Lack of trust is decisive in pushing decisions to war.

For example, if one side underestimates the enemy, overestimates its own military power and thinks that the conflict will be short and easily won, the conflict often turns out to be long, costly and wasteful. Germany made this strategic mistake twice in the two World Wars.

The second RAND paper explored the implications of Russia-China cooperation for US National Security. Between 1941 and 1945, the Soviet Union (Russian empire under Communism) allied with the US in the fight against Germany and Japan. The famous 1946 telegram from George Kennan, the US envoy in Moscow, identified the USSR as the US’ existential rival, pitching communism versus capitalism. Thus, when the Chinese Communist Party (CCP) won the Chinese civil war and created the People’s Republic of China in 1949, a three-cornered (US versus USSR plus China) global situation arose.

The irony of this nexus is that the US has no common land borders with either USSR or China. The world was divided not just ideologically but also economically because trade across the Iron Curtain was minimal. Skirmishes between the rivals were at the borderlands — Korean peninsula, Vietnam and even along the China-Russia border in the 1970s. Thus, the Nixon-Kissinger geo-strategy masterstroke was to exploit China-Russian disagreements to pull China out of the Soviet camp that led eventually to the collapse of the USSR. The Soviet Union was militarily strong but economically weak, simultaneously trying to cover three fronts — Western Europe, Central Asia (the disastrous Afghanistan venture) and China.

Seen from this geo-strategic perspective, by allowing the US to be sucked into the War on Terror after 9/11, the Bush-Clinton-Obama administrations took the eye off the ball on the global strategic front. True, Russia lost the Cold War, and instead of helping Russia rebuild her economy, the neoliberal ideology of free markets allowed the Russian economy to become a kleptocracy favouring the mafia. Nato began expanding eastwards until Putin played the strategic card in 2014 to take back the Crimean ports that were home to the Russian Black Sea Fleet from Ukraine.

Around this time, the Obama administration finally began its “Pivot to the Pacific”, focusing more on the rivalry with China. When Trump applied the tariffs against China, the Chinese were caught off-guard, thinking this was a temporary tiff. Instead, the rivalry escalated quickly with rhetoric ramped up to include accusations of genocide in Xinjiang, human rights in Tibet, Hong Kong and aggression against Taiwan and in the South China Sea.

One has to remember that under the status quo since the 1970s, all powers agreed that there is only one China, and that any disputes with Taiwan are a domestic affair. Just as Russia fears that Ukraine would be home to enemy missiles only 480km from Moscow, China also fears that Taiwan independence would splinter Greater China and become what US General Macarthur called a fixed aircraft carrier 160km from the Chinese heartland.

Thus, by intention, accident or neglect, the strategic position has driven China and Russia closer together, so that the US now faces two fronts in which conventional armies have little relevance, since all three rivals are nuclear, missile and cyber powers.

Condivergence means simultaneous convergence and divergence. This is the situation facing global security, with new alliances and lines being formed, drawn and dismantled. Will more and more countries splinter under domestic conflicts with international intervention (divergence) or will war enforce national integrity (convergence)? In 2022, geopolitical condivergence will be the most interesting phase of the second decade of the 21st century. This column will analyse the unfolding drama of geopolitics, climate warming, technology and social injustices with the eye of an investor. We have had 70 years of peace. Will we be marching to war, as what happened in the 1930s?

That is what we need to confront — the sum (and more) of all our fears or hopes.


Tan Sri Andrew Sheng writes on global issues that affect investors 

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