Great Power Competition: Resurgence and Implications

The world is witnessing multiple military conflicts simultaneously. Beyond the already tragic human toll, there is a real possibility of regional expansion for these wars. In addition to armed conflict, significant tensions exist between countries such as the United States and China, and within nations (e.g., the divide between Republicans and Democrats in the U.S.). How are the existing wars likely to evolve from here? What would change internationally and domestically if Trump returned to the White House? How should investors think of these key questions from a portfolio perspective?

Last April, Richter hosted an insightful discussion between Dr. Matt Gertken, PhD, Chief Strategist, Geopolitical Strategy and U.S. Political Strategy at BCA Research, and Tony Keller, Columnist at The Globe and Mail, to deep dive into the resurgences and implications of great power competition. Here are some of the highlights of their conversation.

The discussion on great power competition underscores a revival of state-led geopolitical strategies that mark a significant shift from the globalization trends of the late 20th century. Dr. Gertken suggested that great power competition has historically been the norm, especially post the Treaty of Westphalia in 1648, which effectively solidified the concept of nation-states. This competition has re-emerged despite a hiatus after the dissolution of the Soviet Union in 1991, when the unipolar moment of the U.S. seemed unchallenged. The era of benign globalization ended with the Great Recession, as major powers reverted to domestic demand and started prioritizing national security and sovereignty over economic globalization.

This shift was accelerated by strategic mistrust and security dilemmas, prominently illustrated by the ongoing tensions between the U.S. and Russia over NATO expansion, and the U.S. and China over technology and Taiwan. The conflict between Israel and Iran further encapsulates the revival of traditional geopolitics, where military might and strategic influence are pivotal.

Hypo-Globalization: A New Economic Reality

The term “hypo-globalization,” as introduced by Dr. Gertken, refers to the current global economic environment characterized by reduced economic integration and increased nationalism. This phase is distinct from the previous era of “hyper-globalization” as well as the worst-case scenario of full-scale de-globalization. It suggests a slowdown of globalization and a transformation of the global economic order. The rise of trade barriers, reconsideration of supply chains, and reduced foreign direct investment are indicators of this trend.

Hypo-globalization reflects a world where states are increasingly focusing on domestic industries and technology to ensure economic security and social stability, albeit to the detriment of competitiveness. The U.S.-China trade war exemplifies this shift, as both nations reassess their economic policies to reduce dependencies which might compromise their strategic autonomy.

Populism and Nationalism: Influences on Global Politics

The resurgence of populism and nationalism is reshaping global politics by influencing domestic and foreign policies across nations. Dr. Gertken discussed how these ideologies are driving countries  to adopt protectionist and/or militaristic policies, thus undermining international cooperation and global governance structures.

This trend is visible in the rising political movements across Russia, China, the U.S., Europe, and other parts of the world that prioritize national identity and often espouse skepticism towards multinational agreements and institutions. The impact of these movements is profound, influencing policy decisions from immigration to trade, and reshaping international alliances and policies.

The Future Trajectory of International Relations

Looking ahead, Dr. Gertken posits that the interplay between great power competition, hypo-globalization, and rising populism will define the future geopolitical landscape. The potential for conflict increases as nations pursue aggressive regional and global policies to secure their interests.

However, opportunities for diplomacy and international cooperation remain, particularly as states confront the harmful consequences of the current trajectory.

First, as the threat of nuclear conflict reemerges, the great powers will have an incentive to negotiate diplomatic settlements to avoid direct hostilities.

Second, as long as major wars are avoided, politicians will need to cooperate to some extent to preserve economic growth and social stability. That will require pragmatic solutions on cross-border trade and investment. But there is little chance of a major acceleration of globalization in the short term – and it is at least as likely that hypo-globalization will deteriorate further into outright de-globalization.

U.S.-Russia Relations: A Permanent Problem

The conversation about U.S.-Russia relations is particularly poignant given the war in Ukraine and the latest round of bipartisan U.S. military aid and Russian nuclear threats. Dr. Gertken highlighted how historical patterns of mistrust and competition have resurfaced in eastern Europe, reminiscent of the Cold War, but complicated by the emergence of Russia’s long-term economic decline and increasing alliance with China.

The annexation of Crimea and the conflict in eastern Ukraine are illustrations of Russia’s strategic ambitions to reclaim its influence abroad, and its willingness to challenge the West’s expansion of NATO. The result is the opposite: expansion of NATO to include Finland and Sweden, substantial EU-Russia economic divorce, a high likelihood of continued Russian economic decline and social instability over the long run, and hence European rearmament.

This great power dynamic is further complicated by technological and cyber warfare, areas where the rules of engagement are not clearly defined and various nations are actively seeking to bolster their defensive and offensive capabilities.

U.S.-China Competition: No Basis Yet For A True Détente

The U.S. attempt to make a strategic pivot to Asia was not just an idea but a necessity dictated by China’s rise as a global power. Dr. Gertken discussed how the initial U.S. engagement with China, aimed at integrating it into the global economic system, evolved into a great power rivalry as America grew distracted and divided while China began converting prosperity into strategic capability. The issues range from trade imbalances and intellectual property theft to military tensions over Korea, Taiwan, and the South China Sea. This competition is not just about economic dominance but also about ideological and security interests, where both countries are vying for influence in Asia and beyond.

The disputes are serious enough that relations will likely get worse before they get better. A new strategic understanding must be negotiated, with concrete pledges to secure its implementation, and that is nowhere near occurring in 2024. In the best case it could develop in 2027-28, but that is speculative.

The European Union: Between Integration and Sovereignty

Europe’s response to these global shifts is unique due to its supranational governance structure. Dr. Gertken touched on how Europe is caught between deeper integration, necessary to wield influence on the global stage, and the rising nationalist sentiments within member states that advocate for greater sovereignty and local control. The EU’s handling of Brexit, the migration crisis, and economic disparities among its members exemplifies this tension. Moreover, Europe’s reduced energy dependence on Russia and recent push for strategic autonomy vis-à-vis the U.S. highlights the EU’s complex position in the global power structure.

Investment Implications of Geopolitical Shifts

Dr. Gertken explained that the shift towards hypo-globalization and renewed great power competition has significant economic consequences, from larger budget deficits to fluctuating energy prices and trade tariffs to the realignment of global supply chains. Investors and businesses face a new paradigm where geopolitical risk assessments are crucial in making investment decisions and strategic planning.

Geopolitical risk does not necessitate a permanently “bearish” investment outlook. But it does necessitate a defensive positioning in the current context of high equity multiples and a softening labor market.

Emerging Markets: Opportunities Amidst Turmoil

While the focus is often on major powers, emerging markets present significant opportunities and challenges in this new geopolitical era. Countries like India and Brazil are navigating these global shifts by leveraging their economic and demographic advantages to play greater roles on the world stage. However, they also face internal challenges from populism and economic volatility that could affect their trajectory.

Generally Dr. Gertken takes a constructive approach to emerging markets, especially India, Southeast Asia, and Latin America.

Technological Advancements and Security Implications

As Dr. Gertken emphasized, technological advancements remain focal points of great power competition. The race for technological superiority, particularly in areas like new energy, artificial intelligence, quantum computing, and cybersecurity, has profound implications for fiscal policy, industrial competitiveness, and trade policy.

This technological battleground consists of industry promotion, securing supply chains, protecting intellectual properties, and attempts at establishing norms for the use of emerging technologies. There is potential for fiscal support and international competition to generate new innovation and enhance productivity, but economic and market distortions will also take shape, reducing global efficiency.

Cybersecurity: A Modern Warfare Arena

In the realm of cybersecurity, threats are evolving rapidly, with state and non-state actors exploiting asymmetric capabilities, the lack of international norms, and new digital vulnerabilities to gain an advantage. Dr. Gertken explained how the U.S.-Russia cyber confrontations and accusations of election meddling are just the tip of the iceberg. There is a perverse incentive for nations to test each other’s limits and capabilities in cyber space, raising the potential for competition to spill over into the real world, affecting critical infrastructure and prompting threats of conventional military retaliation.

Similarly, China’s push to lead in 5G technology is not only an economic move but also a strategic effort to shape global telecommunications infrastructure, raising concerns among U.S. and European policymakers about privacy, security, and surveillance. China’s combination of commercial success and strategic ambition is prompting further American restrictions, gradually dividing the world into opposing spheres of influence.

Astropolitics: The Role of Space

Space emerged as a new frontier during the Cold War. Today it is becoming an expanding arena of both commercial and geopolitical competition. Countries like the U.S., Russia, China, India, and even private entities, are vying for advantage.

The U.S., Russia, and China are increasingly exchanging threats about the militarization of space. A total lack of behavioral norms creates high odds of mistakes and clashes. Eventually the great powers may develop rules of engagement that prevent the arena from seeing unbridled competition, but history suggests that those rules will develop after, not before, crises that threaten to destabilize the world order.

If diplomatic solutions are not found to geopolitical disputes, then those disputes can play out with new weaponry in space and on earth. The proliferation of ballistic missile systems has already led to the first incident of warfare in space, when Israel on October 31, 2023 intercepted a ballistic missile launched by the Iran-backed Houthis outside of earth’s atmosphere.

Israel and its allies successfully defended against an Iranian barrage of ballistic missiles on April 13, but the conflict is expanding, not contracting, given that Iran is pursuing a deliverable nuclear weapon. In all of the theaters of geopolitical competition there will be new investments in missile defense as well as space capabilities and cyber capabilities.

Environmental Challenges and Geopolitical Implications

Lastly, environmental issues are increasingly recognized as critical elements of national security. First, regimes fear for their survival if de-industrialization and/or natural disasters increase social unrest, so they are subsidizing alternative energy. Second, states cannot afford to miss out on any major innovations in energy technology, since that would reduce their security. At the same time, too rapid of a policy approach to energy transition can engender the very thing that states want to avoid: social unrest.

Competition for resources like rare earth minerals needed for high-tech industries is reviving as a significant aspect of international relations.

Preparing for a Dynamic Future

The insights from the fireside chat with Dr. Matt Gertken provide a comprehensive overview of the dynamics shaping the geopolitical environment. As investors navigate these turbulent times, the ability of nations to adapt and respond to these challenges productively will determine whether the world moves toward peace and prosperity or war and poverty.

For businesses and investors, these insights are crucial for navigating risks and identifying opportunities in a rapidly changing world. As we move forward, the interplay of geopolitics, macroeconomics, technology, and the environment will continue to dictate the evolution of the global order, requiring a vigilant and adaptive approach from all stakeholders, potentially creating a more challenging economic and investment backdrop in the years to come.

The views and opinions expressed in this article are solely those of the contributors and do not necessarily reflect the official policy or position of Richter. Any information provided is for general informational purposes only and should not be construed as official Richter statements or endorsements.