China, the US, and the three-body problem: US-China relations and lessons from history

The three-body problem

The three-body problem describes the task of working out how three ‘bodies’ under gravity – be they particles, or planets – will move around relative to one another, given knowledge of their initial position and speed. It is an area of mechanical maths wholly beyond my reach but produces solutions that are fascinating nonetheless. Three bodies exerting gravity on one another can appear to chase each other satisfyingly around a figure of eight continuum, or trace never-repeating seemingly independent paths, resembling chaos.

The United States’ policy toward China is sometimes described too as comprising three parts: the co-operative, the competitive and the adversarial. Each is distinct and influences overall policy toward China. What about predicting the movement of these three influential bodies? Is there a pattern, and so a historical precedent? Is that pattern one that repeats, or does it evolve? Or are we observing chaos?

Fear and Greeks

Chief among the arguments for historical precedent is the idea of the Thucydides trap. China is fast-gaining on the US in terms of national GDP, and so just as a rising competitive threat induced Sparta to wage war on Athens, so the adversarial part of US-China policy could collide with the competitive and lead us to some awful confrontation. Or so the argument goes. Out of 16 equivalent cases over the last 500 years, 12 have resulted in conflict. (Source: Destined for War, Graham Allison)

It must be said that Thucydides (I am told) can be translated in subtly different ways. This will determine whether you take the text to mean that it is in the nature of all competing powers, where one ideology differs from the other, to revert to fear and ultimately war…or that fear of a rising competitor simply makes for a more febrile environment in which other events may play out and risk conflict.

The concept is also seductive because the historical comparisons appear so apt: one society governed by a strict ideological framework, the other democratic; one apt to use economic sanctions as a policy tool, the other more of a closed economy and society.

Ships and chips

So, if Thucydides is right, who then in the US-China relationship is most fearful? Is it the US fearful of losing the top spot? Which top spot? Is it GDP, productivity, nuclear warheads, global influence, or vanguard technology? Who is more fearful of a system of government incompatible with its own?

A sensible place to start is the current front line of economic conflict between the two nations: semiconductor chips. The US has placed restrictions on sales of advanced chips to China, as well as working in partnership with the Netherlands and Japan to restrict sales of accompanying crucial manufacturing and testing equipment.

Nominally this is to prevent development of weapons of mass destruction, but in reality, is a powerful and broad brake on China’s economic and technological advancement. China’s domestic chip producer SMIC may successfully have produced a 7-nanometer chip, but it will be years if not decades before it can do so again, and at scale, with all-Chinese equipment and intellectual property.

In the years preceding the Peloponnesian war, Athens controlled the Mediterranean seas. Ships and sea trade – just like chips – meant economic advancement. The decision by Athens to further entrench its control of the Mediterranean through an additional treaty with the navy of Corcyra (now Corfu), was taken as clear provocation.

Iteration and incrementation

So, why this economic declaration of war on China’s chip-making capability? A lot can be blamed on a policy known as Made in China 2025, laid out in 2015. This policy was startlingly overt in its stated aims to assimilate and replace foreign technology partners, above all in semiconductor manufacture. It is equally startling to think that this was the very same period in which Xi Jinping was declaring ‘a new model of major country relationship with the United States that features non-conflict, non-confrontation, mutual respect, and win-win cooperation’ as China’s foreign policy priority.

Upgrading China’s industry, providing higher quality jobs and harnessing middle class consumption are all policy aims that make sense. Structuring industrial policy to avoid strategic dependence can be legitimate, and indeed echoes much of what is belatedly occurring in Europe. However, such aspirations when it comes to chips, fundamentally under-estimate the incremental advances in this field.

The ‘value’ of semiconductor manufacturing equipment at the leading edge is as much in integration and implementation by the teams that go with it, as with the physical equipment itself. Ultimately, failing to recognise the nature of this dependency was a major misstep. Some analysts have suggested that a wiser policy aim would have been to make China indispensable as an integrated part of the global semiconductor value chain by dominating one field with the help of industrial policy, rather than seeking self-sufficiency. Instead, its national champions face the long drudge of figuring out the last 20 years of chip manufacturing advances long-hand.

A trisolar day

The Three-Body Problem is also a brilliant science fiction novel by Chinese writer Cixin Liu. It entirely re-imagines the ‘first contact’ genre in which the human hegemony is threatened by the superior technology of an alien race fleeing the destruction of its own planet, chaotically orbited by three suns. Their shifting gravitational influence make for a capricious physical environment. This is what causes the Trisolarans to head to Earth. History is rich with unintended consequences of aggressive policy.

Presently it is hard to see beyond the adversarial and competitive spheres. Yet, the collaborative is out there. Without Chinese solar cells or batteries, Europe and the UK can say goodbye to Net Zero aims. And China in turn still relies on sophisticated automation machinery and quality consumer goods from over here. We should also consider the unknown technological frontiers ahead: China is ahead of the US in 37 out of 44 critical technologies according to the Australian Strategic Policy Institute. If clean tech is the new currency of economic diplomacy, China is establishing a massive lead.

The top 10 countries for energy transition investment 2022

Source: Bloomberg New Energy Finance

Breaking the repeating cycle

There is a template for the bi-polar world we are now entering, albeit it will offer little comfort to those who remember the times in which it was set out. In 1946, George Kennan wrote his ‘Long Telegram’ to the US Secretary of State, sharing his thoughts – among other things – on how co-existence of conflicting ideologies could function in practice. The analogy between Soviet Russia and China today is highly flawed, but Kennan’s advice has aged well:

“‘Much depends on health and vigor of our own society. […] Every courageous and incisive measure to solve internal problems of our own society […] is a diplomatic victory […]. We must formulate and put forward for other nations a much more positive and constructive picture of the sort of world we would like to see than we have put forward in the past.’’

Kennan’s telegram is neither apologist nor evasive. At the same time, we must not forget to work on our own gravitational pull.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on the information contained within.

Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.

The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

Issued by Premier Portfolio Managers Limited (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice of any kind.

We make no warranties, representations or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.

Although we make reasonable efforts to update the information on this site, we make no representations, warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.