Ray Dalio Imagines A US-China War

Ray Dalio has a thought experiment for you.

When you get a few minutes, and assuming you’re inclined to deliberately terrify yourself, imagine China is Russia. Or Russia is China. So, not just a frozen gas station with an economy smaller than Italy’s. And not just a rickety remnant of a failed experiment in central planning. Rather, a rising superpower with an economy nearly the size of America’s, where central planning is going… well, as good as you can expect central planning to go.

“Imagine if importing goods from China and doing business with China became the same as they are with Russia now,” Dalio wrote, in a piece published Monday, exhorting readers to picture a bipolar world at war. “Imagine what the supply chain and economic impacts on the world would be. Imagine what sanctions on China would be like for the world.”

Really, though, you don’t have to imagine. There’s a reason that state of affairs doesn’t exist, and it’s not just because Xi Jinping hasn’t tried to seize Taiwan yet. Everyone knows what that world would look like: It’d look a lot like the cleared forests around Savannah’s ports.

If you haven’t been to Savannah lately, I can’t say I recommend it. Not anymore. As recently as 15 years ago (so, the last time I was there prior to this summer), the backroads on the other side of Talmadge Memorial Bridge (which is terrifying, by the way) offered an eerily wistful zigzag through the lowcountry. The drive produced a distinctively odd, and somewhat unnerving, kind of nostalgia — a longing for an era during which you didn’t live. Driving those roads used to remind me a bit of Mickey Rourke’s spectral travels in Angel Heart.

It was a haunted trek before, but now it’s just plain depressing. They’re building a proper highway, and the project entails clearing massive expanses of trees and marshland. It’s the closest thing to a post-apocalyptic hellscape you’ll ever see without being in imminent danger or visiting the site of a natural disaster. Miles upon miles of hewn tree stumps protrude from dark grey mud. Opaque black puddles the size of small lakes doubtlessly serve as watery graves for all sorts of local fauna. It’s framed by cranes and Lego-like stacks of shipping containers, visible in the distance.

That’s what most of the world might look like in the event the US tried to do to China what the West is currently doing to Russia. Xi’s “old friendship” with Joe Biden notwithstanding, there’s no lack of animosity on both sides. I don’t think it’s too much of a stretch to suggest that if either could do without the other, and if the risk of total annihilation weren’t so high in a hot war scenario, the slow-motion “decoupling” which gathered momentum during the Trump administration would by now be a total severing of ties, diplomatic, economic and otherwise.

But, again, that isn’t tenable. And Dalio explained why on Monday. “Supply chains would collapse, economic activity would dive and inflation would soar,” he wrote. “And that’s just what would happen to economies due to economic warfare, which would pale in comparison to the impact [of] military warfare, which we are obviously dangerously close to.”

Unlike Dalio, I doubt the US and China are “dangerously close” to military conflict. My doubts on that score are the primary reason I eschewed the temptation to dedicate the kind of obsessive, exhaustive coverage as other outlets (mainstream and independent) to Nancy Pelosi’s Taiwan trip. Dalio knows China well, and people who know it even better than he does expressed palpable consternation last week during Pelosi’s stopover, but ultimately, there’s just too much for everyone to lose in the event of a military conflict. On the economic side, giving China the Russia treatment isn’t feasible. Not entirely. At the same time, it’s doable enough to deter Beijing from taking actions that would give the US no choice but to turn the screws.

For his part, Dalio thinks the odds of confrontation are high. To underscore the point, he highlighted his own “conflict gauge.” It’s “composed of many indicators such as changes in military spending, personnel and deployment; sentiment of each country’s people about the other country [and] media attention given to the conflict,” he told readers, noting that “the combination of military spending and attitudes toward each rival country has been particularly indicative.”

The figure (above) compares the current reading on his index to historical readings in the 12 months prior to a crisis. I won’t pretend to assess the utility of Dalio’s gauge or otherwise comment on the extent to which readings are comparable across history. I have no idea. I’m giving him the benefit of the doubt, which I think he deserves. He’s earnest, and that’s more than you can say for most people.

Dalio went on to recap China’s military drills, mostly as a kind of public service for his readers. Xi, he wrote, is “demonstrating that [China] can militarily control the area around Taiwan, which implies that China could shut Taiwan off from the rest of the world.” The implications of such a blockade would be very dire. “Imagine if semiconductor chips couldn’t get out of Taiwan,” Dalio wrote. (Imagine a semiconductor shortage!)

As for the prospects of war (the kind with bullets and missiles), Dalio suggested one risk is that the US, as a declining empire, might be inclined to “fight more than is logical because any retreat is seen as a defeat.” “Even though the US fighting to defend Taiwan would seem to be illogical, not fighting a Chinese attack on Taiwan might be perceived as being a big loss of stature and power over other countries that won’t support the US if it doesn’t fight and win for its allies,” he said.

At the risk of oversimplifying one of the world’s most vexing geopolitical dilemmas, the bottom line is that Beijing isn’t sure whether the US would defend Taiwan from an invasion, and Washington isn’t sure either. When it comes to “strategic ambiguity,” you might fairly quibble with the “strategic” part, but the US’s position is as ambiguous as ambiguous gets. It’s so ambiguous, in fact, that not even the Pentagon has a clear read on it.

The US isn’t good at asymmetrical warfare (despite being founded on one of the most successful guerrilla campaigns in world history), but America has never lost a conventional war. Even if the PLA thinks they have an edge, I doubt seriously that Xi wants to test those waters, no pun intended. Consider this: If a hot war between the US and China somehow didn’t result in apocalyptic global devastation and China lost, that would likely be the end of the Communist Party.

“A good thing is that sensible people on both sides are scared of war even though they don’t want to look like they are,” Dalio went on to write. “A bad thing is that some people on both sides want to intensify the fight because to not do so in the face of provocation would be perceived as a sign of weakness.”

One way or another, Ray said, he’ll “try to be as realistic as possible, navigate accordingly and communicate well with you.”

So, if you find yourself searching for answers in thigh-high, nuclear-contaminated mud the day after MAD, look for a sheared tree stump, have a seat on it, pull out your smartphone and see if you can pick up a faint WiFi signal transmitted from the smoldering, skeletal remains of that city off in the distance. Maybe — just maybe — Ray is trying to “communicate with you.” From his bunker in New Zealand.