Cold War 2.0 has begun, and with it, speculation over how it will play out, particularly in comparison to Cold War 1.0, which shaped the world after WWII. While one should hope that the new Cold War will resemble its predecessor in that the outbreak of a "hot” global war will be prevented, it will likely differ in many other ways.
The most salient and most commented upon difference is that China has replaced Russia as the main adversary of the United States. For obvious reasons, this will affect the conflict in terms of geography. While the first Cold War originally focused on Europe, the centre stage in Cold War 2.0 will be Asia.
However, geography is only part of the story, and not the most important one. The nature of the conflict will change as well, reflecting differences between the Chinese and Soviet economies. China’s economy is much stronger than the Soviet economy ever was, it is much more integrated into the global economy, and China – while staunchly communist – is less often perceived as an ideological adversary of the West than the Soviet Union was. The conflict between the US and China is mostly seen as a fight between competing economic superpowers, while only a few people believe that China is in the business of overthrowing Western societies.
Despite China’s importance, its emergence as the second key global player is not the only aspect that will set Cold War 2.0 apart from its forerunner. There are two other important features that are not directly related to China which will shape international relations in the coming years: mercantilism is replacing globalisation, and the US has a declining interest in European affairs.
Mercantilism on the rise
Cold War 1.0 coincided with a period of economic liberalisation and globalisation. It began with the liberalisation of state-controlled war-economies after 1945, went through a period of increasing international trade and multilateral co-operation, and culminated in the era of hyper-globalisation in the 1990s and early noughties. National economies became less state-controlled, as trade, finance and investment became increasingly internationally intertwined. Business interests dominated politics.
The world is now entering a new regime. Together with the start of the new Cold War, the world is also moving towards a mercantilist global order. Various factors have contributed to it: the pandemic; the Ukraine war; the rise of ESG; the inflationary use of economic sanctions; and most importantly, US trade restrictions targeting China. As a result, industrial policies and, more generally, a protectionist policy stance are seeing a revival.
In part, the new mercantilism is based on time-tested rationalisations related to national security and autonomy, but increasingly it draws on new themes such as fighting climate change or revamping global value chains to accommodate ESG investors. Whatever the justifications, the economic consequences will be the same: subsidies for local suppliers, less international trade, and higher prices for consumers.
But most importantly, the move towards mercantilism will trigger a shift of power from business to politics. International trade, direct investments and supply chains will be driven by politics rather than commercial factors such as cost optimisation or plans to enter or source from new markets. Even professional careers will be influenced by political considerations, as many US citizens working for Chinese chip companies have learnt as of late.
Second, the new Cold War will bring a reset of the political and economic relations between the USA and Europe. Post-WWII, when Communism was perceived as a serious challenge to liberal capitalism, the US had a strong interest in establishing a united Western Europe as a bulwark against Soviet expansionism. US foreign policy aimed to make Western Europe an attractive place relative to its communist neighbours, both in political and economic terms.
This has changed. The hard truth is, Europe’s economic strength is not of particular interest to the US anymore. Rather, the US is focusing on its rivalry with China and on its own mercantilist policy goals. On both issues the Biden administration does not significantly deviate from what President Donald Trump started.
George Friedman, the US geopolitical analyst, has pointed out that the US for a long time had been wary of the growing economic ties between Europe and Russia. Thus the collapse of the economic relations between the two powers as a result of Russia’s invasion of Ukraine and the subsequent economic war between Europe and Russia could be a collateral benefit in the eyes of the Americans, even if it implies a long-term decline of Europe’s economy due to the elevated costs for energy and raw materials.
It has not gone unnoticed in Brussels and European capitals that the corporate sector has started shifting investment activities from Europe to the US. Preparations for Europe’s own industrial policy in response to US mercantilism are under way, but even EU officials like Commissioner Margarethe Vestager seem to be doubtful of Europe’s chances of succeeding.
Unsurprisingly, many company executives, particularly in Europe, hope that they will benefit from governments doling out cash to attract direct investments and to incentivise onshoring. However, given public sector budget limitations, it is equally likely that governments will heavily rely on regulations and sanctions to achieve their aims.
Here to stay
The new geopolitical backdrop will have far-reaching consequences. It will make the lives of company executives and investors more complex, and the lives of consumers and taxpayers more expensive. While top-down considerations in recent years were mostly limited to central bank watching (actually Fed-watching), going forward, monitoring of geopolitics, trade and fiscal policies will become equally, if not more, important for market pundits and investors.
Most importantly, the new environment will not be a cyclical blip but will affect our future for decades. There will be a lot of talk about the (hopefully) Cold War again, but those who lived through its first edition will be surprised how different its recurrence will be.