China’s Reverse Reagan

It is a very different Cold War. China could believe it can win without firing a shot—just as the US did with the USSR forty years ago. But it’s tricky; the US has the ball in its court. Here is a picture in four quadrants.

Military Capacity and Costs

Two separate questions are troubling America and every country dealing with China: What is China’s military industrial production capacity, and how much do Chinese weapons really cost? The first answer is simple: Chinese industry is unmatched in the world. It has an independent, self-sufficient production line, perhaps unlike any other nation. It can manufacture more weapons and do so faster than any other competitor. The second answer is unclear. Some experts say their costs are a fraction of US costs; others are doubtful. It depends on how the calculations are made—including incentives and their details. If Chinese costs are significantly lower than American ones, the US is in big trouble. If they are roughly the same or higher, China could be in trouble.

The stakes are high because they concern America’s future. The question is whether a US arms race with China could now weaken the Americans, just as the 1980s arms race with the USSR eventually broke the Soviets under President Reagan. Beijing claims it would.

Is it true? Even if not, it’s believable—and presents a huge challenge to America and the world. So what?

The ghost of an arms race might be a key reason why China keeps labor costs low and is hesitant to boost domestic consumption, which would require higher wages and lead to increased production costs. It’s about gaining market share, creating trade surpluses, advancing technological improvements, and reducing industrial expenses. These are all critical elements of an arms race, especially in the Cold War scenario suggested by the Beijing parade.

Low production costs and the possibility of a reverse Reagan move could be a scenario China exploits to scare the US into avoiding confrontation. It could also backfire, fueling anger among Americans and other countries against China. Still, a sense of fear remains vital in a Cold War.

But this is not the only element in the scenario. There are other issues about what was called “soft war,” and now the US seems to neglect them.

Ideology

China has also changed another aspect of the current Cold War dynamic compared to the earlier one with the Soviets.

Unlike Soviet communism, which was hostile to private wealth, Chinese ideology isn’t necessarily a threat to capitalists. It doesn’t want to take their wealth—it promises to make them richer. Hong Kong and Taiwanese billionaires prove this, and many US financiers have already made billions in China. They are told they will keep doing so as long as they follow the party line—which doesn’t concern them—and in fact, they might even support it.

Here, there is a subtle difference regarding the role of the party. Billionaires are not part of a res publica, like in capitalist countries, but operate under the protective wing of the top leader, who decides who gets the best morsels. It’s against a fair, liberal market—but some capitalists, wanting to corner the market, might prefer the recourse to state help.

Moreover, some Hong Kong’s billionaires were hardly part of the ruling elite when the territory was a British colony, they felt at the behest of the foreign authority. Some of Taiwan’s billionaires grew in the shadow of the old KMT dictatorship. As a result, the Communist Party now may seem little or no different. Western capitalists might be different—but are they, really? In many countries, they supported despicable dictators to strong-arm workers and carve up the market. The PRC could be considered better as it is far more sophisticated than many wannabe tyrants.

Therefore, global capitalists aren’t afraid that the Chinese communists will seize their money and make them poor. They could conversely welcome a stable government amenable to their requests. They are not part of a res publica; they lack political guarantees for their property rights. Ok, but does this really matter to many capitalists? Germany and Italy had their crowd of enthusiastic entrepreneurs eager to please their dictators and reap the benefits a century ago. Modern Russia now does the same.

It’s a crucial element explored by Raghuram Rajan and Luigi Zingales in their 2003 book Saving Capitalism from the Capitalists. It is inscribed in the history of capitalist evolution. Since at least the 12^th century, capitalism sprouted in Italy and beyond, but it never fully flourished because every time a wealthy capitalist achieved success, they tried to corner the market and kill off the competition, literally. This is what the Medici family did in Florence with the Pazzi family (who wanted to do the same) – they killed each other to physically eliminate the business competition.

Capitalism may have emerged from the state playing a greater role in providing structures, abstract rules, and maintaining a neutral stance in internal disputes. This possibly came about through a slow sedimentation of trust in the abstract principle of a fair market, which goes hand in hand with modern democracy. But these are all things that every unbridled and unscrupulous capitalist will gladly do without. And capitalism is also fed by unbridled “animal spirits”, resenting any constraints. Therefore, when the fair market fails to deliver its promised results, cornering it with the help of state structure can be a welcome solution.

Confidence

China may believe that America is not prepared for confrontation, despite all its rhetoric. The US announced a policy of decoupling, which could have been easily executed with China during the COVID pandemic in 2020. It could have blocked China then, just as it did with SARS in 2003. But the US didn’t do it. Therefore, one could infer, it wasn’t genuinely ready for decoupling—it was just talk. The same could be true now. The US announced a tariff war but backed down after China announced retaliation.

It tells the Chinese that America isn’t prepared. It talks big but doesn’t carry a big stick—the opposite of what America claimed to do a century ago: “speak softly and carry a big stick.”

The recent Pentagon strategic paper, which emphasizes a US focus on the Americas, compared to Asia and Europe, may confirm this view. After over a decade of the “ominous” Pivot to Asia aimed at China, the United States seems to be in retreat. Its tepid support for NATO in Europe against Russia highlights this impression.

The consequences of US retrenchment might not be surrender to China or Russia, but rather that the EU and UK must take care of Europe and Africa. At the same time, Japan, Australia, India, and others need to look after Asia. In fact, it could increase risks for China. America acted as a political lubricant for Asian tensions for decades, easing friction between a rising China and equally ambitious neighbors. Now, without that lubricant, tensions could rise. But will they? History shows that Asian countries know China shouldn’t be trifled with—and perhaps they believe they are better at managing China than dealing with US interference.

At the same time, the Asian contours have changed. Once the continent was roughly divided into three parts: one around China, one about India, and the other in the middle. Now the three parts have, for the first time in history, merged among themselves and merged into a larger world. Dynamics could be very different. Regional history could be of little help.

This sentiment could set America further back. Similar feelings are growing in Europe: If America won’t defend us, we must look after ourselves. Israel is an example—it’s taking matters into its own hands. The US can’t stop it and is just following behind. Poland might be next. Young people are flocking to military training, believing they will soon face Russia. Similar trends could happen in Asia as well. It might be worse for China—but it could also be a slippery slope for America, and more easily so.

Ancient Rome and America

In the third century AD, the Romans grew weary of spending their money and risking their lives to defend the empire. They became spoiled by the panem et circenses—the free food and entertainment provided by the emperors. Then they hired semi-Romanized barbarians to fight their wars. It worked for a while—until a hired general, Alaric, felt shortchanged in 410 AD and demanded his dues. Rome refused, was sacked, and the mighty empire—the only one to ever unite the Mediterranean Sea—fell.

The US is far from being overrun by an Alaric. But how far, exactly? Additionally, the fall of an empire can create opportunities for competitors like China, but it also introduces challenges and risks. Small Japan conquered nearly all of China and was never subdued by it. Vietnam has fought and coexisted with China for over 2,000 years. Furthermore, there are more neighbors with greater ambitions. America maintained an order; without it, the situation could become very chaotic.

The US may believe it will hold firmly to both Europe and Asia within this framework. But will it succeed? How the US manages the next few months could be pivotal.

From the Chinese side, the vitriolic controversies within America and between America and the world are cause for confidence. China could try to wait and see, sitting on the shore of the proverbial river. If America turns around, China can still cope. If America doesn’t turn around, it might be ready to pick up the pieces.

No outcome is inevitable. The recent killing of young right-wing activist Charlie Kirk made many Americans think that the democratic covenant is broken and the nation is on the brink of annihilation. Some 60 years ago, the situation was perhaps similar. Civil liberty activist Martin Luther King was assassinated in 1968, and so was a few months later presidential candidate Bob Kennedy, brother of President John, killed in 1963. Then the US was stuck in a disastrous war in Indochina and locked in a bitter Cold War with the USSR. The Soviets believed America and the world belonged to them.

Yet a few months later, America swung to the other side, electing Nixon, who turned a new page on America and the world. Nothing is the same now. There is no presidential election around the corner, but everybody should still be on their toes. US President Donald Trump is pragmatic and has proved many times that he can change his mind.