Failure to sustain innovation leadership makes a China war inevitable.

The global economy has become more integrated, with China’s economy growing strongly—poised to soon take over the United States at market exchange rates and having already done so in terms of purchasing power parity. More importantly, China has become the top trading partner and creditor/investor for many countries. The size and penetration of the Chinese economy have rendered a strategy of containing China impractical and costly to all sides, and makes the US-China contention more protracted and difficult.

The West thus faces a dilemma: Efforts to decouple from China in order to limit its influence would hurt not only China but also Western countries and the global economy more broadly, but striking a trade deal with China to reduce tensions will likely help the Chinese economy perform better, making the strategic competition with Beijing more intractable.

The rivalry has slowly led to a bifurcation of the global economy, most discernible in high-tech areas such as the tension between digital authoritarianism and digital liberalism, artificial intelligence and surveillance technologies, satellite-based navigation for civilian and military uses, and 5G/6G telecommunications.

A balanced assessment

It’s important to remember that China has many weaknesses, including an aging population with a shrunken labor force, a secular decline in labor productivity, high levels of debt, environmental degradation, and social and economic inequalities. It is still an open question whether China can graduate from its old and trusted development model of mobilizing massive investment for exports to one driven by innovation—a model that tends not to thrive under political control.

However, it is equally important not to underestimate the domestic challenges facing the United States and several European countries. Confronted by aging populations and declining productivity, many affluent Western countries have been beset by populist backlashes against economic inequalities and social problems. Especially in the United States, the division has deepened to the extent that there is no shared perception of reality, let alone common ground for debate. This makes it difficult for the United States to build political consensus behind any sustained actions needed to deal with its challenges—even though the country has managed to overcome difficulties in the past and could do so again.

With or without the label “cold war,” the United States and China are locked in a protracted conflict over core national values, including economic and geopolitical interests. The fact that the Chinese economy is stronger than the Soviet Union’s decrepit economy, playing a key role in integrated global supply chains, while many Western countries suffer from internal divisions, makes the strategic competition more challenging for the West than the Cold War of the late twentieth century was. Of particular concern is the fact that the United States has suffered a steep fall in its Freedom House “Freedom in the World” score since 2010, denting much of its soft power. Consequently, the contestants in today’s conflict appear to be more evenly matched, making for a difficult struggle ahead—whatever you want to call it.