Excellent analysis, thank you. Yes, we’ve been in a heated cold war since Putin and Xi announced their best-friend status and Putin turned around and started a hot war at NATO’s border. Since we are at war, it’s time we Americans remembered how we won the last war and begin to act accordingly. Hank Paulson can continue to invest in China, but our politicians should not help him. Friendshoring and other forms of decoupling will gain even more momentum.
But the people who will soon start to feel the cold breezes are school administrators. As soon as the Supreme Court bans affirmative action there will be calls in Washington to ban Chinese student visas. For how can it be that seats previously going to Blacks and Latinos will now go to the children of the CCP...? No, that will not work in a democracy. Rubio is probably already working on the draft.
This does seem like the direction we're headed. It will be good to decouple what is too tightly coupled now both to on-shoring and friend-shoring so we can't be held hostage to not being able to manufacture. Also learning curves happen in manufacturing.
We should not let finance screw the world again like they did by forcing the off-shoring and gutting of US Manufacturing. Great line " I predict, will end up being the “dumb money” that swoops in to give some Chinese investors a timely bailout from their mistakes in the 2010s" its ok if its their money but unfortunately its really our money from retirement funds, etc.
There should be no "finance industry" its just accounting that has been hijacked to grift the world.
Okay, you're correct that the most likely path forward is a Cold War scenario, but it's worth also thinking about what a scenario might look like in which we avoid that.
I don't have a clear sense, but it would require, on all sides, that it will involve negotiating a shifting relationship in public, as China exercises more global power, and that won't be easy.
Good stuff, Noah, as always. The balloon was a provocation for sure. They are testing things in the new environment. China is still smarting from the Hong Kong and Covid backlash in the rest of the world. Ukraine is also giving them food for thought. If their proxy (Russia) is defeated, China is less likely to risk it over Taiwan and may seek accommodation. If, however, Ukraine (US proxy of sorts) falters, China will b emboldened to escalate cold war 2, thinking that Russia's nuclear arsenal is strengthening their hand.
What better way to bolster PacRim countries than moving U.S. business investments into South Korea, Vietnam, Japan, Malaysia, etc.? Paulson is old school. He should know by now a desperate reach for yield most often ends badly. Who could forget Paulson was vomiting into his office wastebasket at the outset of the Financial Crisis? His time has passed. He should stick to his pastime: bird watching.
Why didn’t the U.S. shoot down the balloon over land so it could examine the payload? But what do I know?
You bring up Southeast Asian nations balancing against China, and while that may be somewhat true on the military side, it's also true that ASEAN does not want to choose between the US and China and has explicitly rejected the idea of being a "pawn in a new Cold War." So for many of China's neighbors, it's not that they're becoming totally anti-China but that they want balance. The interdependence story you touched on is key.
Any US company with a supply chain through China should have a team dedicated to getting out, and they should be working 6 days a week right now. Why leave? There is of course the historical risk of IP theft that should drive this, but let's be honest - it has already happened. There is also the risk that these companies will be in a lurch if/when the shooting starts over Taiwan. Everything will be as good as lost once that happens, so why should a company sit back and wait? More important, though, is the risk posed by meddling, gamesmanship and political crackdowns in a new cold war - would you want your company's supply chain to be a bargaining chip in Cold War 2? Your factories shut down and tacitly held ransom so China can extract a policy outcome on some unrelated matter? Because that is the world we are moving towards. Companies should leave now. And the US govt should encourage them to move to friendly countries elsewhere in SE Asia, as well as Africa (which will be a key area of competition btwn the US and China in Cold War 2).
This is not tomorrow's issue. This is all happening in real time. Any company not already taking precautions is too late.
Investing in China seems incredibly risky. Corruption, manipulated metrics, and a capricious government that could decide to kneecap any company or industry at any time. Makes me wonder if American investment firms are so used to the protections of American law they can't see the obvious red flags waving in front of their faces.
This cold war is different. Expect fewer open military confrontations, more backstage coalition diplomacy.
China isn't as militaristic or ideological as the USSR. Unlike the Soviets, China hasn't relied on dramatic invasions or sponsored coups. Instead, we see "frog-boiling": escalating military and economic pressure.
Against China's frog-boiling, America's aim will be as much "counter pressure" and "deny leverage" as "deter conquest."
(Although that diplomacy will still be ultimately backed by traditional arms shipments, military treaties, and trade preferences.)
The United States hasn't been very good at diplomacy in the past. On the other hand, China's been even worse. No country wants their peace or prosperity to be at the mercy of Xi Jinping's next mood swing. Overall, America's odds are good.
Interestingly, for Cold War 2, it does not seem like China has a roster of committed allies. Not that Soviets did either, but I think that China is facing some difficult decisions regarding its future. That could be why certain factions are trying to dial back the invective/“wolf-warrior” diplomacy.
China shares borders with very powerful countries, I think it is starting to realize that their neighbors can only be pushed so far.
Thanks. Interesting analysis and relevant facts. It seems odd to use a balloon in such a way. Not many people realize that satellites have a resolution limited by physics and optics: it doesn't matter how good your tech gets, you aren't going to be able to resolve objects smaller than about the size of a truck from a satellite. A balloon can do better. But it's just so obvious compared to something like just fixing cameras to the bottom of what looks like a commercial cargo flight, it seems hard to understand why any country would do things that way.
Mmmm, foreign financial investments in China. Just wait until the investors discover that the US is not the only jurisdiction that can impose sovereign risk on foreign financial investors …
The parallel I immediately thought of wasn't the Cold War, but 1930s Japan, when civil authority was steadily being encroached on by the military. Is that the only plausible explanation for the spy balloon situation? No, but in my view it's a worryingly plausible one.
Some people have a certain mindset to the point that making money is the most important activity a person can be involved with. It is quite possible China's leaders are banking on this short-sighted view. All are to be forgiven if there is an opportunity to make money.
China lied about Hong Kong, repressed democracy in brutal ways, and incarcerated minorities. This is not even considering its threats to take Taiwan back by force.
I think any money invested in China will disappear when it suits the government to do so. They have told us what they intend to do, and I see no reason to doubt what they say.
Excellent analysis, thank you. Yes, we’ve been in a heated cold war since Putin and Xi announced their best-friend status and Putin turned around and started a hot war at NATO’s border. Since we are at war, it’s time we Americans remembered how we won the last war and begin to act accordingly. Hank Paulson can continue to invest in China, but our politicians should not help him. Friendshoring and other forms of decoupling will gain even more momentum.
But the people who will soon start to feel the cold breezes are school administrators. As soon as the Supreme Court bans affirmative action there will be calls in Washington to ban Chinese student visas. For how can it be that seats previously going to Blacks and Latinos will now go to the children of the CCP...? No, that will not work in a democracy. Rubio is probably already working on the draft.
This does seem like the direction we're headed. It will be good to decouple what is too tightly coupled now both to on-shoring and friend-shoring so we can't be held hostage to not being able to manufacture. Also learning curves happen in manufacturing.
We should not let finance screw the world again like they did by forcing the off-shoring and gutting of US Manufacturing. Great line " I predict, will end up being the “dumb money” that swoops in to give some Chinese investors a timely bailout from their mistakes in the 2010s" its ok if its their money but unfortunately its really our money from retirement funds, etc.
There should be no "finance industry" its just accounting that has been hijacked to grift the world.
Okay, you're correct that the most likely path forward is a Cold War scenario, but it's worth also thinking about what a scenario might look like in which we avoid that.
I don't have a clear sense, but it would require, on all sides, that it will involve negotiating a shifting relationship in public, as China exercises more global power, and that won't be easy.
Good stuff, Noah, as always. The balloon was a provocation for sure. They are testing things in the new environment. China is still smarting from the Hong Kong and Covid backlash in the rest of the world. Ukraine is also giving them food for thought. If their proxy (Russia) is defeated, China is less likely to risk it over Taiwan and may seek accommodation. If, however, Ukraine (US proxy of sorts) falters, China will b emboldened to escalate cold war 2, thinking that Russia's nuclear arsenal is strengthening their hand.
What better way to bolster PacRim countries than moving U.S. business investments into South Korea, Vietnam, Japan, Malaysia, etc.? Paulson is old school. He should know by now a desperate reach for yield most often ends badly. Who could forget Paulson was vomiting into his office wastebasket at the outset of the Financial Crisis? His time has passed. He should stick to his pastime: bird watching.
Why didn’t the U.S. shoot down the balloon over land so it could examine the payload? But what do I know?
You bring up Southeast Asian nations balancing against China, and while that may be somewhat true on the military side, it's also true that ASEAN does not want to choose between the US and China and has explicitly rejected the idea of being a "pawn in a new Cold War." So for many of China's neighbors, it's not that they're becoming totally anti-China but that they want balance. The interdependence story you touched on is key.
https://www.rfa.org/english/news/china/indonesia-asean-09262022151328.html
Any US company with a supply chain through China should have a team dedicated to getting out, and they should be working 6 days a week right now. Why leave? There is of course the historical risk of IP theft that should drive this, but let's be honest - it has already happened. There is also the risk that these companies will be in a lurch if/when the shooting starts over Taiwan. Everything will be as good as lost once that happens, so why should a company sit back and wait? More important, though, is the risk posed by meddling, gamesmanship and political crackdowns in a new cold war - would you want your company's supply chain to be a bargaining chip in Cold War 2? Your factories shut down and tacitly held ransom so China can extract a policy outcome on some unrelated matter? Because that is the world we are moving towards. Companies should leave now. And the US govt should encourage them to move to friendly countries elsewhere in SE Asia, as well as Africa (which will be a key area of competition btwn the US and China in Cold War 2).
This is not tomorrow's issue. This is all happening in real time. Any company not already taking precautions is too late.
Investing in China seems incredibly risky. Corruption, manipulated metrics, and a capricious government that could decide to kneecap any company or industry at any time. Makes me wonder if American investment firms are so used to the protections of American law they can't see the obvious red flags waving in front of their faces.
This cold war is different. Expect fewer open military confrontations, more backstage coalition diplomacy.
China isn't as militaristic or ideological as the USSR. Unlike the Soviets, China hasn't relied on dramatic invasions or sponsored coups. Instead, we see "frog-boiling": escalating military and economic pressure.
Against China's frog-boiling, America's aim will be as much "counter pressure" and "deny leverage" as "deter conquest."
(Although that diplomacy will still be ultimately backed by traditional arms shipments, military treaties, and trade preferences.)
The United States hasn't been very good at diplomacy in the past. On the other hand, China's been even worse. No country wants their peace or prosperity to be at the mercy of Xi Jinping's next mood swing. Overall, America's odds are good.
Interestingly, for Cold War 2, it does not seem like China has a roster of committed allies. Not that Soviets did either, but I think that China is facing some difficult decisions regarding its future. That could be why certain factions are trying to dial back the invective/“wolf-warrior” diplomacy.
China shares borders with very powerful countries, I think it is starting to realize that their neighbors can only be pushed so far.
Thanks. Interesting analysis and relevant facts. It seems odd to use a balloon in such a way. Not many people realize that satellites have a resolution limited by physics and optics: it doesn't matter how good your tech gets, you aren't going to be able to resolve objects smaller than about the size of a truck from a satellite. A balloon can do better. But it's just so obvious compared to something like just fixing cameras to the bottom of what looks like a commercial cargo flight, it seems hard to understand why any country would do things that way.
Thank you. This makes sense.
Mmmm, foreign financial investments in China. Just wait until the investors discover that the US is not the only jurisdiction that can impose sovereign risk on foreign financial investors …
This makes for fascinating if disconcerting reading:
https://www.nytimes.com/2023/02/04/us/politics/chinese-spy-balloon-shot-down.html
The parallel I immediately thought of wasn't the Cold War, but 1930s Japan, when civil authority was steadily being encroached on by the military. Is that the only plausible explanation for the spy balloon situation? No, but in my view it's a worryingly plausible one.
Won the first one. Win the next one. Three cheers for the red, white, and blue.
Some people have a certain mindset to the point that making money is the most important activity a person can be involved with. It is quite possible China's leaders are banking on this short-sighted view. All are to be forgiven if there is an opportunity to make money.
China lied about Hong Kong, repressed democracy in brutal ways, and incarcerated minorities. This is not even considering its threats to take Taiwan back by force.
I think any money invested in China will disappear when it suits the government to do so. They have told us what they intend to do, and I see no reason to doubt what they say.