The coming cool war with China

Someone steals your most sensitive secrets. Then, planning a face-to-face meeting, he says he wants to develop “a new type” of relationship with you. At what point would you start thinking he was planning to drink your milkshake?

Ahead of the first summit meeting between U.S. President Barack Obama and President Xi Jinping of China today, the two nations are on the brink of geopolitical conflict. As its officials acknowledge, China is a classic rising power, poised to challenge U.S. dominance. In historical terms, the sole global superpower never gives up without a fight.

“China’s peaceful rise” was a useful slogan, while it lasted, for China’s leaders. “America’s peaceful decline” will get no one elected, whether Democrat or Republican. Geopolitics is almost always a zero-sum game. If China can copy or work around U.S. missile defenses, fighter jets and drones, the U.S.’s global position will be eroded - and the gains will go directly to China.

At the same time, trade between the two rivals remains robust. Last week, Henan-based Shuanghui International Holdings Ltd. agreed to buy the U.S. pork-processing giant Smithfield Foods (SFD) for $4.7 billion.

This could be the single-largest Chinese acquisition of a U.S. company, and it is reason for enthusiasm. Mutual ownership of significant corporate assets across borders doesn’t miraculously guarantee peace, nor can it make conflict disappear overnight. But it gives both sides the incentive to manage geopolitical conflict, and not let it overtake the tremendous mutual benefits created by trade.

The juxtaposition of rising tensions over cyberattacks and the pork cooperation perfectly captures the paradoxical state of Sino-U.S. relations - and explains why officials on both sides are struggling to come up with a new conceptual framework to understand the change.

Never before has a rising power been so economically interdependent with the nation challenging it. The ties go beyond the U.S.’s 25 percent market share for Chinese exports or China’s holdings of 8 percent of the outstanding U.S. national debt. They include about 200,000 Chinese studying in the U.S. and perhaps 80,000 Americans living and working in China.

The combination of geopolitical competition and economic interdependence sets the terms for the struggle that won’t be a new cold war so much as a Cool War. If the Soviet Union and the U.S. avoided all-out conflict because of mutually assured nuclear destruction, the relations between China and the U.S. today could be defined by the threat of mutually assured economic destruction. The economic costs of violent conflict would be incalculably large.

As a practical matter, however, we mustn’t assume that economic interdependence precludes the possibility of old-fashioned violence. On the positive side, China is urging North Korea to re-engage with the six-party talks and denuclearize the Korean Peninsula - a sign that the government in Beijing realizes that its unruly ally could do significant damage to regional stability.

On the negative side, the North seems perfectly content to ignore its mentor’s directives. As we learned during the Cold War, proxies don’t always behave the way their would-be masters want them to. It is far from clear that the Americans and the Soviets wanted their allies in the Middle East to go to war in 1967, 1973 or 1981.

What steps, then, should Obama take in preparation for a summit at which he will confront an adversary who wants a much greater role in their mutual relationship? How should we think about keeping the Cool War from getting hot?

The first is to understand the structure of motivation on the other side. A nationalist Chinese public will expect a rising China to be treated as a counterpart by the U.S. - and Xi, who has spoken of achieving the “Chinese dream,” must be attuned to this public expectation over the medium term. In the immediate future, however, the legitimacy of the Chinese Communist Party still depends upon continued high rates of export-driven growth. And Xi’s most important job - today, tomorrow and forever - is keeping the party in power.

Understanding this motivation reveals the main U.S. levers against a rival bent on narrowing the military-technology gap: China’s continuing dependence on the U.S. export market, and more broadly, China’s need to integrate into the global economy to maintain economic vitality. Of course, it would be precipitous for Obama to draw any direct links between U.S. security interests and America’s willingness to keep its borders open to Chinese companies.

But the message should nevertheless be communicated clearly: The U.S. won’t tolerate being subject to cyberattacks designed to change the military-strategic balance. A country that steals your trade secrets can become your economic enemy; one that steals your national-security secrets is signaling that it may become an actual security enemy.

The long-term strategy for managing the Cool War is the same: Keep the pork foremost. The positive gains from trade can and must be leveraged to move both sides’ incentives away from force and toward cooperation. We shouldn’t be seeking to create a utopia. But we can and should use the magic of trade and economic cooperation to shift the incentives that push great powers to fight each other. The iron laws of history, like the iron laws of economics, are malleable.

*The writer, a law professor at Harvard University and the author of the forthcoming “Cool War: The Future of Global Competition,” is a Bloomberg View columnist.

by Noah Feldman