Today’s market drop shows that investors are starting to realize that we are not just in a trade war, but a new era of geopolitical competition between the United States and China. As I wrote in January here, a dramatic and rapid breakdown of post-WW2 multilateral structures is an underappreciated risk to markets and society. This breakdown is occurring as the United States adjusts to a new great power rivalry and a battle of ideologies. US coastal elites, angry at Brexit and the election of President Trump, have framed the ideology debate as one between Globalism and Nationalism. This is incorrect. It is a battle between Freedom and Autocracy.

Freedom v. Autocracy For All the Marbles

Famed hedge fund manager Ray Dalio wrote today here about the trade war. He first frames the war as one between comparable powers with different, but equal ideologies:

“It is an ideological war of comparable powers in a small world. In other words, it is not nearly as much about trade as it is about 1) two different approaches to life that extend to different approaches to government, business, individual behavior, and global geopolitics, with 2) China emerging to be a comparable power to the U.S. now and in the not too distant future a greater power in a small world in which these two countries will be bumping into each other in all sorts of ways.”

The Ideological War of Comparable Powers in a Small World published on 5/13/19 in Ray Dalio’s LinkedIn Blog

Dalio also cites historical characteristics as driving these ideologies.

“One would be naive to expect the Chinese to approach life differently than they have approached life for thousands of years (which is what they refer to as “with Chinese characteristics” which is at its heart their Confucian, family-like top-down way of being) one shouldn’t expect Americans to approach life differently from how they approached it for nearly 250 years (which is individualistic, bottom-up and democratic).” 

The Ideological War of Comparable Powers in a Small World published on 5/13/19 in Ray Dalio’s LinkedIn Blog

While I agree with Dalio that the US is in an ideological war, his article stops short of calling the war a battle between Freedom and Autocracy.

The Autocratic Alternative Has Taken Root

The very capitalistic Chinese economic miracle has created the view that there is an alternative to the US-led model. Many people, especially US and global elites, have benefited from China’s rise. They are predisposed to frame China’s rise separately from the autocratic political and societal model employed by the Chinese Communist Party. But their support of globalism and China’s rise has actually validated this exact autocracy while casting doubt on the freedom-led US model. The average middle-class American voters were the first to stumble on this realization, albeit by accident. Responding to lost economic opportunity in the heartland, they voted for so-called America-first politicians and policies. What they felt was, in fact, a loss of the freedom the American Dream provided them via economic security and mobility. Since then, any metaphor of autocracy, be it global trade, business regulation, or immigration, is met with disdain from this voting bloc. This is why President Trump remains popular with his base and likely keeps doubling down on these issues. He has done so, while also fanning these same autocratic flames. This is a disappointment, one that his supporters should call out.

Markets Haven’t Understood the Shift From Trade War to Ideology War

There this significant event risk as the entire world order gets pulled into this new global competition. Post-WW2 multilateral institutions like the United Nations and NATO are being reevaluated. Former enemies are now allies and vice versa. And voters in free countries continue to reject any metaphors for autocracy. Market participants are focused on the probability that the trade war ends. What they should instead be focused on is this clash of civilizations.

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Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.