#10 - The Return of the Second World and the Coming Deterioration of World Order - Alliance Structure

协议 - Xie2 Yi4 - Entente / Agreement

In the US, Americans often refer to the first world (a hazy collection of economically developed countries) and the third world (an equally obscure collection of economically poor countries). This terminology stems from the beginnings of the Cold War and originally was used to frame the alliance structures of the post-WWII international great power competition.

The first world were those countries that followed a free competition economic model paired with a free competition political system. The center of gravity for the first world was and remains the United States. The second world were those countries which followed centrally controlled socialist economic models paired with centrally controlled totalitarian political systems. Obviously, the center of gravity for the second world was initially the USSR. At its root, the Cold War competition was a clash of values. After the collapse of the Soviet empire in 1991, it became clear that the values of control are unable to compete with the values of freedom.

The third world was a class of unaligned countries. For many different reasons, these polities would eschew close relations with the first or second world. Sometimes third world countries would seek to balance all sides like India or sometimes retain a loose understanding with one side like Iraq. During the Cold War, competition in the third world between the US and USSR was intense, and was a contributing factor to both the Korean and Vietnam Wars.

Putin’s decision to invade Ukraine (which Vermilion assessed as likely in post #7) and Xi’s announcement of Russo-PRC limitless friendship has almost certainly pushed and maybe even forced both countries towards a future enduring co-dependent partnership. For now, the best term to describe the relationship is as an entente; an understanding between nations agreeing to follow a particular policy in international affairs. In this case, the particular policy is anti-Western, anti-first world, anti-freedom, and pro-regional spheres of control. Both Russia and the PRC desire to carve up their respective regions, in the face of their neighboring countries' determined resistance to these aggressive plans. 

Regardless of Russia’s current military setbacks, the entente between the People’s Republic of China (PRC) and the Russian Federation (RF) is setting the conditions for the most dangerous international situation Washington has faced since the high tide of Axis conquest in 1942. A united China-Russia second world will be the most significant economic bloc that the United States has faced since the British Empire.

A PRC-RF entente makes sense for both parties for multiple reasons, two of which we will review. The first is economic. Both sides would see significant benefits in matching plentiful Russian commodities to PRC domestic demand and industrial outputs. Additionally, the PRC and RF working together are able to get closer to US tech dominance than each pursuing tech goals in isolation. 

The grain trade is a concrete example which helps illuminate the potential danger. Russia is the world's top producer of wheat. Before the war in Ukraine, Beijing had in place strict limits (likely non-tariff trade barriers) on Russian grain exports, excluding the largest wheat-producing regions in Russia. Early in February, just before the start of the war, Putin and Xi agreed to allow the export of wheat from all regions of Russia. To add insult to injury, the grain deal was publicly announced after the invasion occurred. Ukraine and Russia together account for roughly a third of the world's wheat supply, and with global food prices surging, these trade deals will help insulate PRC and Russian populations from the price shocks.

Disturbingly, it is the details of trade deals like these that makes it very possible that Xi was informed of Putin’s invasion plans and supported them by expanding many types of trade and cooperation just before Russian troops crossed the line of departure. More disturbing is the possibility that there has been an unacknowledged quid pro quo between them that Russia will take over Ukraine (and possibly other countries in the future) and the PRC will take over Taiwan, while each offers mutual support.

This economic relationship will likely be an all-weather one, with neither side having to worry much about Russo-PRC trade disruptions. Russia’s Ukraine-related trade sanctions and the US-PRC trade war have likely made both Putin and Xi see the West as more unreliable on trade compared to ten years ago. Putin’s blowback for his invasion of Ukraine has been unprecedented, with heavy economic sanctions targeting the Russian central bank as well as business with Russian companies. These actions have frozen roughly half of Moscow’s balance sheet and forced an economic decoupling within months.

Second, Russian and PRC military planners will be able to revise strategic level assumptions and invest in operational level logistics infrastructure. In the event of war (as in Ukraine or Taiwan) Moscow and Beijing now know they will be cut off from the world economic flows which sustain the effectiveness of their war machines. The question is if they can achieve their military goals before they are too economically crippled to support their military capabilities in the field. The entente significantly extends the time available to achieve their respective military goals. The PRC will be able to keep Russia on life support through financing, commodity purchases, and tech assistance. If the situation was reversed, Russia would be able to keep Beijing afloat through massive deliveries of energy and food.

The logistics infrastructure to support this new level of cooperation exists, but is likely to receive significant upgrades. The 满洲里 (Manzhouli)/Zabaikal’sk railroad port, construction of new  energy pipelines, and joint Russo-PRC infrastructure and basing initiatives will likely increase in importance over the next decade. There will be significant efficiencies in arraying Russo-PRC military infrastructure unidirectionally towards the areas of anticipated conflict versus each side maintaining omnidirectional infrastructure and military plans. Additionally, this infrastructure will not be affected by naval blockade, a major fear of Beijing military planners. 

Consequences for Strategic Competition:  

First, the US needs to invest far more heavily into the defense of Ukraine as a bulwark against Russia. There is a small window of opportunity - if Ukraine can defeat Russia’s army in the field, the consequences for Moscow could possibly be regime change. It is one of the very few ways to head off the PRC-Russia entente before it gains steam. Alternatively, if the flow of military aid remains at the current level, Russia will eventually wear down the smaller country of Ukraine and collapse it into Moscow’s new sphere of influence. Every dollar invested in Ukraine will go further than the dollars poured into Iraq or Afghanistan.

Secondly, much stronger ties of international trade with friendly first world countries and select allies and partners (who are unfree) are more important now than ever. These trade ties will affect the political calculus of our allies while simultaneously strengthening the US economy along with the economies of our allies arrayed along Russia and the PRC’s doorsteps. It is unlikely that Washington will be able to prevent the world from splitting into two trade blocs. Putin and Xi were able to drastically increase the trade between their countries by simply having a man-to-man meeting before the invasion, where a raft of trade agreements were agreed to. Such are the benefits of totalitarianism. In terms of global trade, the US has been pushed onto the backfoot by a series of unfair trade deals, a lack of initiative on Washington’s part in crafting new trade frameworks, and the PRC’s whole-of-government approach to waging unacknowledged economic warfare. 

While existing initiatives could be helpful, they need to be realigned to focusing on market access (removal of tariffs and trade barriers). Without a single-minded focus on market access, these trade plans will not offer the benefits of strong ties of international trade the US needs to offset the second world Russo-PRC trade bloc.

The third issue is to have an overarching strategy. During the Cold War, the strategy was containment. Containment helped to frame US operational actions and political initiatives within an understandable and discussable universe. A strategy to address the new second world will help Washington define which areas are worth defending, how to spend limited national security dollars, when and how to decisively engage, what international relationships to build, and how to message the problem to US domestic and international audiences. Washington currently lacks the coherence that a strategy brings. 

Finally, Russia was becoming a part of the international system in fits and starts since 1992. With central bank sanctions and Moscow’s inability to use any dollar-backed reserves, it is clear to Putin that the international dollar-backed system has significantly harmed Russia. Moscow will not be returning any time soon. The effectiveness of these sanctions will give more reason for America’s enemies to diversify reserves and transactions away from the dollar, somewhat eroding the greenback’s international status and Washington’s ability to borrow.