The U.S.-China Competition Through Four Lenses

However, the current Great Power Competition (GPC) between China and the U.S. is nothing new; in fact, it’s a return to the norm that has shaped much of history (Figure 1 summarizes the main features of the prevailing global orders since 1900s).

Figure 1

A Snapshot of Historical Global Orders and the Respective Great Power Competitions

_{Source: PGIM Fixed Income}

Even so, not all Great Power Competitions lead to military confrontations. To our read of history, great power competitions descend into confrontation when four characteristics exist. (Figure 1):

1. Perception of threat among major powers is high.
2. Relative power differentials are low.
3. Alliances and global institutions are unstable.
4. Constraints to conflict are not prohibitive.

The first post in our GPC series looks at the U.S.-China relationship through these lenses and assesses whether the current global order faces elevated risk of confrontation, potentially further disrupting global stability, economic growth, and financial markets.

Threat Perception—High

Each side of the rivalry has clearly stated that it sees the other as a distinct threat. This year’s U.S. Annual Threat Assessment states that "China has the capability to directly compete with the United States and allies and to alter the rules-based global order in ways that support Beijing’s power and form of governance over that of the U.S." It added that China could use potential technological superiority "for economic, political, and military gain."²

For its part, Beijing has accused Washington of trying to "contain, encircle, and suppress" China to prevent it from achieving "national rejuvenation," a phrase that lies at the core of President Xi’s desire to restore China as a major world power. Furthermore, in his speech at the National People’s Congress in March 2023, President Xi described the United States' policy towards China as "a challenge of unprecedented severity to our nation’s development."

The rivalry is particularly fraught in terms of technological supremacy. When China announced its state-led "Made in China 2025" (MiC25) strategic plan with the objective of dominating advanced technologies of the future, the blowback from Washington was visceral. MiC25 and the subsequent "military-civil fusion" strategy—which sought to leverage private sector technologies to enhance China’s military capability—set off a series of U.S. countermeasures. Senior U.S. officials have repeatedly warned about the need to maintain "as large a lead as possible" so that technology does not "tilt the military balance" in China’s favor and threaten global peace and stability.³

The ability to manufacture the most advanced semiconductors is a critical component of this technological competition. China’s recent technological and manufacturing leaps have raised concerns about the sustainability of the United States' traditional advantage in this strategic domain.  As Figure 2 shows, without any U.S. response, China’s share of global semiconductor manufacturing capacity is forecast to reach 24% by 2030, which is a critical threshold signaling self-sufficiency. In contrast, the United States’ share of semiconductor manufacturing capacity is forecast to decline to 10% by 2030—a measure well below self-sufficiency.⁴

Figure 2

China’s Potential Path to Becoming the World’s Largest Chip Manufacturer by 2030 (% share of global semiconductor manufacturing)

_{Source: Semiconductor Industry Association.}
* Forecast

Just as worrisome is the degree to which vital U.S. military platforms and weapons systems rely on China’s supply chains. Between 2005 and 2020, the level of Chinese suppliers in the U.S. supply chains quadrupled.⁵ It is estimated that approximately 41% of DOD weapons systems and infrastructure supply chains rely on Chinese semiconductors, posing a significant threat to U.S. national security.⁶

The U.S. military also relies on Chinese supply chains for rare-earth materials used in important weapons systems, such as F-35 aircraft, nuclear submarines, and unmanned aerial vehicles.⁷ Currently, China makes most of the world’s rare-earth magnets, with 92% of the global market share, necessitating measures to build “mine-to-magnet” domestic capacity in order to address the risk of disruptions that challenge U.S. military and security goals.⁸

Relative Power Differentials—Still Favors the U.S.

Despite China’s recent advances, the U.S. remains well ahead of its rival on major metrics of national strength, including nominal GDP, national wealth, and oil production, amongst other factors.⁹

Even on the highly contested technology front, the U.S. maintains key advantages. For example, the U.S. accounts for 42% of the manufacturing of chip-related equipment that is particularly R&D intensive compared to a 3% share for China, as observed in Figure 3.

Figure 3

The U.S. Maintains a Sizable Lead in R&D Intensive Processes (% share of global manufacturing)

_{Source: U.S. Department of Defense, Sipri}

Alliances and Global Institutions—Fragmented, but Advantageous to the U.S.

China has used its economic, military, and technological power to expand its regional and global diplomatic influence. At first, Beijing sought to create a favorable security environment in Asia while also engaging with the West. These diplomatic efforts led to China joining regional organizations such as APEC and ASEAN in the early 1990s and the World Trade Organization (WTO) in 2001.¹³

But as China’s diplomatic confidence grew, so did its use of coercive statecraft to punish countries that were perceived as acting against Beijing’s national narratives and interests. In 2019-2020, state-issued threats and trade restrictions surged amidst the U.S. trade war, the COVID pandemic, and the heightened tensions regarding Taiwan (the second installment in our series addresses the role of statecraft).¹⁴

Similarly, China has increasingly used its global weight in an attempt to reshape the international order. In addition to more frequent use of its veto power at the UN Security Council, Beijing has also capitalized on its growing importance in the UN system to advance its “shared future” vision—an agenda that downplays universal values in favor of championing the primacy of states (Figure 5).¹⁵

Figure 5

Number of UNGA Resolutions Mentioning China-promoted Phrases

_{Source: The Lowy Institute}

However, Beijing’s diplomatic power has limits. China only has one treaty ally, North Korea, and a handful of informal allies, such as Russia, Pakistan, Iran, etc., whose direct military support cannot be relied upon in any eventual global crisis. China-led organizations, such as BRICS or SCO, are too divided over values and interests to give China a distinct upper hand against the U.S.^{16, 17, 18}

Even the “no limits” partnership between Russia and China has been under recent strain due to Russia’s invasion of Ukraine. The U.S., on the other hand, maintains an expansive and coherent network of formal alliances and partnerships (e.g., AUKU.S., QUAD as well as trilaterals, such as U.S.-Japan-South Korea, and U.S.–Japan–Philippines) that could collectively counter China’s military advances in the region (Figure 6).¹⁹

Figure 6

U.S. – Indo-Pacific Security Partnerships

_{Source: Eurasia Group}

Constraints to Conflict—Prohibitive Where it Matters

Constraints that prevented the rivalry between the U.S. and Soviet Union from devolving into militarization also exist in the current iteration of the great power competition. For example, the U.S. and China are both nuclear powers, making the cost of war mutually prohibitive, even though the U.S. has a significant nuclear gap against China. Advances in weapons and military technology renders battlefield outcomes less certain, despite uneven diffusion of military power.

But unlike the Cold War, other factors may disincentivize and/or constrain the U.S. and China from engaging in a direct military confrontation. Ideological fault lines between China and the U.S. are not yet as stark, irrespective of widely different regime characteristics. China remains deeply integrated in the global economic and financial system, offering the U.S. (and the West) significant leverage vs. China. Supply chain disruptions from a potential militarized competition could cause political and economic headaches that both governments seek to avoid. Meanwhile, Global South countries—which both the U.S. and China want to keep in their orbit—fear the impact of intensified U.S.-China rivalry on their economies and insist their competition be managed responsibly (a future installment of our series addresses the rising prominence of the Global South). And both China and the U.S. share interest in addressing some global issues, such as climate change and global health.

Conclusion

The four-lenses approach to analyzing the extant GPC leads us to the following conclusions. First, while the economic, military, and technological gap between the U.S. and China has narrowed over the last decades, power convergence is far from being achieved (Figure 7). Furthermore, the U.S. continues to maintain a comparative advantage in most measures of comprehensive national power, suggesting that China "may never tilt the balance of power decisively in its favor and supplant the United States."²⁰

Figure 7

The U.S. Maintains a Notable Lead vs. China in a Few Key Areas

_{Source: The Lowy Institute}

Second, the U.S. and China will continue to perceive each other as existential threats to their respective national security interests. Yet, they will likely seek to avoid military confrontation given the prohibitive costs and the pushback from Global South countries.

Finally, while the participants in the current, intensifying rivalry are new, the concept of GPC is not. As an epilogue to past GPC, the U.S.-China rivalry will likely result in more frequent skirmishes and proxy conflicts, broader use of potent statecraft, and less cross-border risk management.

In a world already beset by major wars and heightened conflict, these developments will further increase the level of complexity in what is likely the most fraught geopolitical environment since WWII. Investors need a way to see through the fog, and additional insights will follow.