Is World War 3 coming? A political-economic perspective.
The Thucydides Trap
The Thucydides Trap, coined by American political scientist Graham T. Allison, is a theory that suggests war and conflict is inevitable when a new power is rising and challenges the incumbent superpower. The world’s current superpower, the United States of America (USA), boasts the highest Gross Domestic Product (GDP) (24.5 trillion USD in 2018), which is the value of all newly-produced goods and services over a year, and has the most advanced military, armed with several state-of-the-art nuclear submarines and nuclear aircraft carriers. The new rising power is China, which has experienced exponential economic growth since Chinese Premier Deng Xiaoping’s economic reform in 1974, overtaking Japan to be the second largest economy. The People’s Liberation Army (PLA) has also taken steps to modernise and upgrade their armaments under the current leadership of President Xi Jinping, producing their very own aircraft carriers in 2018.
Under the Trump administration, USA has taken a more aggressive stance to protect her overseas interests as per Trump’s “America First” policy, slamming multiple tariffs on Chinese goods to promote local production, citing “unfair trade practises” as the reason. China, on the other hand, believes USA is trying to safeguard her status as the world’s superpower and aims to curb the growth of China. Chinese foreign affairs officials have also become more assertive, especially when it comes to territorial disputes in the East China Sea, South China Sea and the Chinese-Indian border, where massive military buildups have taken place.
Currently, USA holds substantial influence over many global financial institutions like the World Bank and International Monetary Fund because majority of their funding comes from USA and thus, USA has majority of voting rights. The USD is also the denominator of foreign exchange conversions, meaning if you are a Briton and wish to buy some Japanese Yen, you need to buy USD using GBP before using the USD to buy JPY, and as such, many countries keep USD as their foreign exchange reserve due to the perception that USD is a safe haven currency. China has attempted to expand her influence by starting the Belt and Road Initiative (BRI) by loaning money to less developed countries along the old silk road and maritime trade route to build transportation infrastructure to facilitate better trade and connectivity in order to boost the Chinese economy. The Chinese have painted the BRI in a overly-optimistic way, because the initiative has many drawbacks and limitations due to corruption, local unrest due to little or no job creation, as well as the debt trap that China has imposed on the less developed countries. Therefore, China’s expanding economic influence in the Asia-Pacific region can be a sign that China is challenging USA’s status, and might lead to conflict in proxy regions like Korea, Japan, Taiwan and India.
USA’s debt cycle since the Nixon Presidency
Back when the USD was pegged to the Gold Standard, the supply of USD was generally fixed, in line with the rate at which gold was being mined and circulated in the economies. This meant that each USD has a fixed value in gold, and could be exchanged for gold at the banks, boosting confidence in the value of the USD. However, when President Nixon took the USD off the Gold Standard in 1971 due to rapid inflation and mounting debt due to the Vietnam War, allowing the USD to depreciate rapidly, boosting exports. However, in the long run, the money supply is no longer fixed and can be changed by the Federal Reserve either by “printing money” and giving them out to banks, acquisition and purchase of bad debt, or putting money directly into the hands of citizens.
This essentially means that banks could loan out more money than they actually keep in reserve (if everyone went to withdraw money, banks would not have enough to give everyone), contributing to increasing debts such as government bonds. Currently, USA’s debt-to-GDP ratio is 106.9%, the highest in the last 50 years, second only to the debt-to-GDP ratio during the Second World War. With the recent US$2 trillion stimulus package to combat the Covid-19 virus, confidence in USA’s ability to repay her debts has faltered, with increasing fears of stagflation. Hence, USA has increasing incentives to start a war with China to maintain her position as the global superpower while she still has a winning chance.
However, some posit that war between the Eagle and the Dragon is unlikely due to the following reasons.
Economic Integration and the New International Division of Labour
After China joined the World Trade Organisation (WTO) in 2001, China has increased access to overseas markets to boost exports while foreign Multi-National Corporations (MNCs) could also set up factories and offices easily in China, contributing to Foreign Direct Investment (FDI) in China. Back then, labour costs in China were relatively low. Coupled with the government’s setting up of Special Economic Zones (SEZ) to provide basic infrastructure and low or no taxes for foreign companies on the condition that the goods manufactured are for export. This shifted many production process into China, outsourcing different parts of the production process to different geographical areas to minimise costs. For example, iPhones are manufactured by Foxconn factories in China while the HQ in USA provides Research & Development support.
The American and Chinese economies are also complimentary in terms of production and consumption, with China providing low-cost goods and USA providing capital. Either party starting a war would ultimately hurt both sides due to the huge trade volume between the two and the inter-connectedness of economies.
In spite of this, the economic integration between the two powers have decreased in recent times as MNCs are moving their production facilities to Southeast-Asian countries like Vietnam as labour costs have risen in China over the last few years. Trump has also started a new wave of protectionism by imposing tariffs on China and advocating “America First”, reducing the economic integration.
Mutually Assured Destruction
During the Cold War between USA and Russia, both parties understood the risk of nuclear war and Mutually Assured Destruction (MAD) as the undesired outcome of launching a full-scale, nuclear war. As such, conflicts between the two were small-scale and in proxy states like Vietnam and Korea.
Both USA and China possess nuclear warheads and Intercontinental Ballistic Missiles (ICBM) and have the ability to wipe out each other’s major population centres. This acts as a deterrent to prevent either side from starting a nuclear war, assuming the leaders of both countries are rational and not madmen fuelled by nationalistic sentiments.
Overall, the chances of full-scale nuclear war between USA and China is low because it would most likely incur a cost too great for either party to take. However, localised conventional war in proxy areas like the East China Sea, South China Sea and the Sino-Indian border is possible, especially if USA wants to safeguard her interests in the Asia-Pacific region. USA is currently considering the formation of an Asian version of NATO to counter China. This alliance may include Japan, South Korea, Australia and India. With the recent Covid-19 pandemic pushing countries into a corner, USA might have a final chance to maintain her position as the world’s first: launching small-scale, conventional war in proxy regions.
