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The concept of mutually assured destruction (MAD) has long been associated with great power competition and nuclear conflagration. Now, thanks to globalisation, we have entered a new era of MAD: economic mutually assured destruction, with Taiwan the key flashpoint.
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Built in the rubble of the old world order of colonial empires, the potential of the new world order, post-World Ward Two, was quickly dashed as two new, armed, ideological camps emerged with competing visions of the global future.
Revolutionary Marxist Communism as championed by Stalin’s Soviet Union and then, in short order, Mao’s People’s Republic of China stood diametrically opposed to the “exploitative” nature of the capitalist Western world, citing centuries of exploitation of the working class and native populations by the ruling elite and colonial expansion to support the rapid post-war decolonisation of the “global South”.
Standing opposite this order of revolutionary powers was the capitalist, Western, liberal democratic world, led in large part by the United States, which throughout the war, emerged as the world’s pre-eminent economic, industrial, and for a short time, nuclear power.
As both blocs solidified into a dichotomy of East versus West, the competition would – despite being kept below the threat of direct, nuclear exchange and confrontation between the two global hegemons – effectively keep this potentially world-ending, hot competition, cold.
Despite kinetic proxy conflicts in southeast and central Asia breaking out periodically, the “grey” zone operations conducted by intelligence agencies on both sides expanded this geopolitical competition across the world, until ultimately, the final collapse of the Soviet Union in 1990 heralded the “End of History”, and if many policymakers, analysts, and historians were to be believed, the ultimate victory of liberal democratic, capitalism on the global stage.
Fast forward to today and the jubilation and hubris which characterised the years immediately following the collapse of the Soviet Union has now transformed into a far less optimistic vision of the future, as once again, great power competition and multipolarity are alive and well.
Where the previous incarnation of Cold War was largely defined by the ideological competition between East and West, this contemporary “Cold War”, despite the rhetoric to the contrary by political leaders on both sides, is largely defined by a combination of economic, strategic, and demographic competitions, marking the emergence of a rapidly different form of competition.
In spite of the “novel” nature of this new Cold War, territorial expansion still remains firmly on the cards, particularly for the People’s Republic of China under Xi Jinping, who has repeatedly stated his intent to reunite mainland China and the breakaway island democracy of Taiwan, potentially bringing the rising superpower into direct, kinetic conflict with the United States.
Highlighting the destructive potential of this conflict, Niall Ferguson, in a piece for Bloomberg, titled, The US and China are Waging a Cold War that is truly MAD, unpacks the truly colossal costs associated with a kinetic conflict between the United States and China.
Ferguson begins his analysis stating, “Today, in the early stages of Cold War II between the US and China, an equivalent concept exists. To be sure, this conflict also has a nuclear dimension, now that the Chinese have massively enlarged their own nuclear arsenal. But not many people seem terribly worried about that aspect of the Sino-American rivalry. Rather, it is mutually assured financial destruction that constrains today’s superpowers and most clearly distinguishes Cold War II from Cold War I.”
Nuclear MAD v Economic MAD
In unpacking this difference between Cold War I and Cold War II, Ferguson seeks to establish the dramatically different nature of this new global competition, while also covertly identifying that the US-led Western World’s response to this competition isn’t necessarily the best course of action.
The basis of this undertone comes from the firm belief that this competition is simply a repeat of the first Cold War, which was characterised by a heavy emphasis on ideological competition and kinetic proxy conflict which kept the broader economic and military competition, mainly the nuclear arms build-up below the threshold of exchange, despite periodic surge in hostilities.
However, repeated antagonistic moves made by Xi Jinping’s China, coupled with the recognition of economic, industrial, and national vulnerability that swept across most of the Western World throughout the COVID-19 pandemic as a result of the “just in time” supply chains which have become common place since the 1980s, coupled with mounting trade deficits, prompted a return of “reshoring” as championed by former US president Donald Trump.
This resurgence of “reshoring” and an emphasis on rebuilding long hollowed out industrial and economic capacity has equally served as a major battleground for the US-led Western World and China’s own developing group of emerging powers through organisations like BRICS and the Shanghai Cooperation Organisation.
Ferguson states, “President Joe Biden’s administration is ‘seeking careful, productive, strategic interactions with China … a more predictable, judicious set of interactions across a variety of spheres.’ On her recent visit to Beijing and Shanghai, Commerce Secretary Gina Raimondo secured a commitment to set up new ‘working groups’ on commercial issues and another on export controls.
“Yet Raimondo rebuffed a Chinese request to reduce US tariffs on Chinese goods. There was no discussion of the October 2022 Commerce Department rules that limit Chinese access to high-end semiconductors and the machines that make them. In early August, the White House announced new restrictions on investments in Chinese artificial intelligence, quantum computing and semiconductors by US private equity and venture capital firms,” Ferguson explained.
By now, it becomes clearer that this iteration of great power competition and “Cold War” is vastly different to previous incarnations, particularly the nuclear competition that characterised the competition between the Soviet Union and the United States.
It is equally important to understand as while the outcomes of a nuclear confrontation between even small nuclear powers, let alone fully integrated superpowers are VERY obvious as the world is plunged into a nuclear Armageddon, the fallout from mutually assured destruction of the economic variety is a little more opaque, particularly for national policymakers who are often removed from their populations.
Ferguson explains, “Yet both sides have economic weaknesses that undercut these drives to reduce interdependence. On the Chinese side, recovery from the regime of ‘zero COVID’ has been lacklustre ... China’s problems can be summed up as diminishing returns from fixed-asset investment, insufficient consumer demand, and a lack of fiscal room for manoeuvre attributable to excessive reliance in the past on local government financial vehicles and sales of land to developers. Meanwhile, the country’s demographics go from bad to worse.”
Shifting to the US side, Ferguson adds, “The problems of the US are in some ways a mirror image. To European eyes, the US economy is doing wonderfully well, with full employment, consumers continuing to spend, and inflation coming down after its spike in 2022. This apparent health conceals a severe structural weakness on the fiscal side, however.”
Unpacking this further, Ferguson explains the truly devastating impact a kinetic confrontation would have on the US-led world order as a result of the serious structural issues which undermine the resilience, competitiveness, and capacity of the once world-leading US economy, stating, “Recent years have witnessed a succession of excessively large federal deficits, in substantial measure financed by enlarging the Federal Reserve’s balance sheet. What was a US$19.9 trillion debt when Donald Trump was inaugurated is now close to a US$32.3 trillion debt. The Federal Reserve’s balance sheet more than doubled in size between January 2020 and its peak last April, from US$4.2 trillion to just under US$9 trillion.”
The Taiwan question
By now it is no secret that Taiwan is the key battleground of this new Cold War, particularly for the world’s two competing superpowers, the US and China, with 2027 long believed to be the “move it or lose it” date for Xi Jinping’s ambitions of reunification.
Highlighting this, Ferguson explains, “The CIA’s track record of predicting conflicts has improved in recent years. Under Burns’s direction, it was exactly right about the timing of the Russian invasion of Ukraine (though wrong about how long Ukrainian resistance would last). But one cannot wholly rule out a confrontation earlier than 2027 if the Chinese were to calculate that the US and its allies were unprepared, and that the element of surprise would compensate for Chinese unreadiness.”
In response to such a direct Chinese hostilities towards Taiwan, the US and its alliance network would seek to leverage economic measures against Beijing as a means of seeking to level the playing field and undermine the Chinese economy to weaken the Chinese military capacity on Taiwan.
Ferguson explains, “Before or soon after such a Chinese Pearl Harbor, the US and its allies – including all the other G7 members at a minimum – would certainly take economic countermeasures. Charlie Vest and Agatha Kratz of the Atlantic Council envision that in a “maximalist scenario … at least US$3 trillion in trade and financial flows, not including foreign reserve assets, would be put at immediate risk of disruption.
Unpacking this further, Ferguson adds, “In the case of a war, moreover, the US has long intended to impose a blockade on China to shut down the flow of essential goods, including oil and food, through the Strait of Malacca, the key chokepoint between the Malay Peninsula and the Indonesian island of Sumatra. Some experts doubt that such a ‘far blockade’ could be effective because of the familiar incentives for neutrals to evade the blockade as well as China’s capacity for self-sufficiency in certain areas. But even the attempt at a far blockade would cause significant disruption to global markets, driving up prices in ways similar to those we saw last year after Russia invaded Ukraine, but on a much larger scale."
For Australia, it goes without saying that such a blockade would have a dramatic impact on Australia’s own economic stability and prosperity as we have long put all our eggs in a single basket, however, the economic impact of such a confrontation would have broader implications.
Ferguson adds, “the possibility of a war between the US and China raises the spectre of mutually assured financial destruction. It is not clear that either the US or China can afford even to sustain their current arms race. It is surely out of the question that they could cope with the adverse financial consequences of a war over Taiwan.
“The symbiotic economic relationship between China and the US – is not dead yet, even if trade and investment have receded from their peaks at that time. The US annual trade deficit with China remains in excess of US$300 billion. More than 80 per cent of US smartphone imports continue to come from China, as The Wall Street Journal recently noted,” Ferguson explains.
Unpacking the economic fallout, Ferguson explains, “So, in the case of a showdown over Taiwan, the US might impose financial sanctions on China – but the effect would be to impose a form of secondary financial sanctions on itself. I cannot estimate precisely what the effect of all this on global stock, bond and currency markets would be, but it would not be small.
“In Cold War I, it used to be argued, the prospect of mutually assured destruction had averted the nightmare of World War III. In Cold War II, it is tempting to conclude, mutually assured financial destruction (MAFiD) may have a similar deterrent effect on the two superpowers,” Ferguson explains.
Perhaps most concerningly is the shattering of the long-held game theory belief that national leaders and by extension, their nations, are made up of rational actors and will always act in their best interests, something history has repeatedly shattered, raising a concerning question worthy of further analysis and unpacking, particularly for nations like Australia which is dependent on the post-Second World War status quo: “Yet it would be wrong to regard MAFiD as a sufficient guarantee against Armageddon. Did financial considerations deter Britain and Germany from going to war in 1914, at a time when their economies were almost as interdependent as the American and Chinese economies in our time?”
Final thoughts
Only by recognising the relative decline of the United States and accepting that the United States has limitations in the face of this new, multipolar world can Australia truly begin to take stock of the challenges of operating in this increasingly multipolar world.
However, it is critical for us to understand that Australia’s security, prosperity, and stability will not be determined by events in Europe, nor will they be determined by circumstances in the Middle East. While they may influence circumstance, our national future will not be determined by these areas.
It is important to highlight that in the coming era of multipolarity, Australia will face an increasingly competitive Indo-Pacific. Indeed, separate to the People’s Republic of China, our immediate region is home to some of the world’s largest populations with its fastest growing economies with their own unique designs and economic, political, and strategic ambitions for the region.
Rather, we have to accept that while the world is increasingly becoming “multipolar”, the Indo-Pacific, in particular, is rapidly becoming the most hotly contested region in the world. Underpinned by the emerging economic, political, and strategic might of powers like China, India, Pakistan, Thailand, Vietnam, and the established and re-emerging capability of both South Korea and Japan, in particular, are serving to create a hotbed of competition on our doorstep.
Recognising this array of challenges and opportunities, both the Australian public and its policymakers need to look beyond the myopic lens that has traditionally dominated our diplomatic, strategic, and economic policymaking since Federation.
Ultimately, we need to see Australia begin to play the long game to fully capitalise on the opportunities transforming the Indo-Pacific. The most important question now becomes, when will we see a more detailed analysis and response to the challenges and opportunities facing Australia and when will we see both a narrative and strategy that better helps industry and the Australian public understand the challenges faced and opportunities we have presented before us?
As events continue to unfold throughout the region and China continues to throw its economic, political, and strategic weight around, can Australia afford to remain a secondary power, or does it need to embrace a larger, more independent role in an era of increasing great power competition?
Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below, or get in touch
Stephen Kuper
Steve has an extensive career across government, defence industry and advocacy, having previously worked for cabinet ministers at both Federal and State levels.
