The New Cold War
Felix W. Zulauf
15.04.2021
A new conflict has begun between the United States and China that will shape the coming decades. No country will be unaffected, and Europe some day may have to pick sides. Risk premiums for financial assets will rise.
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Bill Clinton ensured that China was admitted to the World Trade Organization (WTO), which spurred the economic rise of the People's Republic. He and his successors, George W. Bush and Barack Obama, subsequently committed the folly of letting China's misconduct – theft of intellectual property, patent infringements, lack of reciprocity, to name a few – happen and not sanctioning it. Unfortunately, the WTO also looked the other way.
Everyone believed that as China rose economically, it would liberalize and conform to the rules-based democratic Western model. However, the Chinese Communist Party saw and sees things differently. Its absolute claim to power sits at the top of the agenda; everything is subordinated to it.
Washington has slept through this development for too long. China is about to overtake America in terms of the number of new patents. The country has created an outstanding education system that churns out more than a million new engineers every year. In some technologies, such as artificial intelligence, China has not only closed the gap, but is slightly ahead of the West.
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We do not know whether the new cold war will some day escalate into a hot war. But it is virtually certain that defense spending will be increased again worldwide.
For the time being, we must assume that there will be disruptive maneuvers of all kinds at the economic level in the next few years, which may cause temporary uncertainty in equity markets. Therefore, the application of competent risk management and a certain opportunistic trading behavior is an advantage.
Prices of commodities can increase in conflict situations because their supply is often tightened and made more expensive by producers as well as by transport bottlenecks. In general, investors will probably have to expect more modest investment returns from bonds and equities over the course of this decade compared to the past ten years.
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