Navigating the Political Economy of Cold War 2.0

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Navigating the Political Economy of Cold War 2.0

Lessons from the first cold war could help states in the second. So could recognizing what’s changed.

Navigating the Political Economy of Cold War 2.0

U.S. President Joe Biden, right, and Chinese President Xi Jinping shake hands before their meeting on the sidelines of the G20 summit meeting, Nov. 14, 2022, in Nusa Dua, in Bali, Indonesia.

Credit: AP Photo/Alex Brandon, File

In December 2017, the U.S. National Security Strategy introduced the notion of a “new era of strategic competition,” describing its once-close economic partner, China, as an “adversary,” “rival,” and “strategic competitor.” Foreign policy analysts point to a new cold war between the United States and China, possibly ushering in a period of economic disintegration and the formation of regional trade, investment, and national security blocs. 

Navigating this new economic and geopolitical terrain will be critical for many countries that seek to chart stable and sustained pathways for both economic development and national security. Some lessons from the first cold war may be useful in that regard – even as this impending cold war is going to be vastly different from the previous one.

Battle of Ideas

One key aspect of the Cold War involving the United States and its Western allies and the Soviet Union and its sphere of influence referred to the “Battle of Ideas,” i.e. the competition of economic and political ideologies and policies: democratic and free markets vs. socialist/communist and centrally planned governance systems. The strength, stability, and sustainability of the economies of the U.S. and Soviet Union, respectively, were seen as critical in recruiting allies and partners on both sides of the Cold War divide. 

The nuclear, military, and space races placed the respective economies of the U.S. and the Soviet Union under significant pressure, revealing what many considered to be the stronger efficiency and credibility of the democratic and free market governance systems. With the eventual fall of the “iron curtain,” the introduction of key reforms to restructure politics and economics (glasnost) as well as promote greater transparency and openness (perestroika), and the period of technological growth that ensued, soon fueled a wave of democratization and free market economics that began to reshape not just the former Soviet Union, but also many countries under a period of integration and globalization. 

Nevertheless, far from the pivot to democracy that signaled the end of the first cold war, democracy today faces many threats, not simply reflected in the rise of populist politics, but also in the disruptive nature of new technology such as AI and disinformation in social media. Democratic societies seem more polarized than ever – for some countries, policies swing with the political tides. 

Second, so-called free market economies have suffered from a string of financial and economic crises in the past three decades (e.g. the 1996-1997 Asian financial crisis, 2000 dot-com bubble, 2008-2010 global financial crisis, and 2020-2021 pandemic). Many countries have turned to industrial policy and protectionism again, reversing several decades of economic openness. Scholars argue that part of this is in response to growing domestic pressure for job creation and democratic stress, along with calls in many countries to promote stronger equity in the gains from globalization, and regain national sovereignty over economic and political decision-making.

Suffice it to say that globalization – and more specifically international economic integration – faces a threat of reversal because of the very same factors that fueled the emergence of this second cold war. The same period of globalization that enabled the emergence of China as a superpower, along with many middle powers, in turn, fueled myriad challenges to sovereign governance and particularly what Dani Rodrik called mass politics. The latter is clearly intertwined with the populist wave that was partly fueled by globalization, and in many ways today stifles further aggressive globalizing ambitions. 

It is on this broader canvass that the new cold war must be understood. Several main ingredients appear crucial, in order to thrive in the present uncertain and polarized environment of a second cold war.

Stable Politics and Better Governance 

First the confluence of political and economic pressures faced by many countries will require that each nation recalibrate economic policies in favor of rebalancing the benefits (along with the broader legitimacy) of their integration into, and engagement with, the international economic order. The strengthening of national economic institutions will also prove critically important as the world faces another wave of potentially unequalizing technological shocks brought about by the fourth industrial revolution. Just as the period of globalization witnessed rapid technological advancements, along with the increased economic volatility and inequality risks these accentuated, this new period ahead of us necessitates better preparation for the likely unequalizing and disruptive features of new technologies (e.g. AI, social media, internet of things, robotics, etc) now reshaping the world economy and even touching on democratic politics and governance. 

Multipolar Alliances

Where possible, countries can and should explore the development of international economic cooperation and regional trade and investment groupings in ways that create mutual value and avoid being forced to choose between the United States and China. If such a choice may have been inevitable under the first cold war, this may not be the case today given the emergence of middle powers that create more options for different layers of economic, technological and national security partnerships, and what some call “strategic autonomy.” Some analysts have argued that far from the two-superpowers phenomenon of the first cold war, the world today can be characterized as multipolar – while the two superpowers and their alliance blocs in the 1950s accounted for 88 percent of the global economy, today these same countries account for only about 57 percent of world GDP. Economic (and to some extent military prowess) has become more dispersed across nations, and particularly a large group of middle powers that have become much more influential since.  

Since 2003, the number of low income countries has declined from 66 to about 31 in 2019. There are 107 middle income countries in the world today; 60 of them are classified as upper middle income A network of diverse economic partners may be much more resilient in a multipolar setting when compared to the kind of polarization that a China-U.S. trade and tech war would imply. Arguably, a network of partners may also lessen the vulnerability of countries to pressure from either of the superpowers (notably by providing more options for economic alignment). It may also help alleviate the reduction in international economic integration benefits forecast by recent research on economic decoupling scenarios – a predicted reduction in global welfare by 2040 of about 5 percent, with some regions’ welfare losses reaching as high as 12 percent.

Democratic Resilience

Finally, analysts note how the deep challenges to democracy stem in part from the relative success of the Chinese model itself. As Tarun Chhabra put it in a 2019 analysis for the Brookings Institution

The rise of China and the persistence of deep, internal challenges across open societies have created tremendous headwinds for democracy and liberal values globally, threatening U.S. alliances, liberal economic order, and even the political identity of the United States and its democratic partners and allies. Beijing’s ‘flexible’ authoritarianism abroad, digital tools of surveillance and control, unique brand of authoritarian capitalism, and ‘weaponization’ of interdependence may in fact render China a more formidable threat to democracy and liberal values than the Soviet Union was during the Cold War.

With that in mind, all countries – notably democratic countries – must revisit and bolster their political governance in light of the populist wave and the democratic retreat that is now well recognized by many governance analysts. Weak and unstable democratic governance associated with populist politics can become a vulnerability, as entire systems of infrastructure financing, technological development (e.g. AI, social monitoring and management), and social media applications (e.g. disinformation) may be applied with weaker checks and balances and far less multilateral consensus on protecting individual rights and freedoms. 

Under these conditions, more stable domestic politics can better underpin the protracted engagement necessary under a new cold war between the superpowers and the uncertainty and volatility, as well as the “slowbalization” (modest global growth) that may accompany these tensions in the years ahead.

This article draws on the author’s study of the same name, which is available here.