The Grand Test: America’s Skirmish Era with China
This article was sponsored by David P. Willard, Founder & Chief Executive Officer of 52 Capital Partners, LLC.
This new era is marked by unprecedented levels of uncertainty with respect to the destiny of U.S.-China economic relations. Bi-lateral tariffs perpetuate an ongoing trade war. Economic sanctions abound. Capital flows and investment activity proceed with caution. Financial networks and capital markets in both countries reflect increased volatility. Concerns around intellectual property infringement, forced technology transfers and cyber-conflict risks emanating from China elevate to deliberations of U.S. economic security. Ten years on from the Global Financial Crisis, fresh anxieties accumulate around the probability of imminent economic slowdowns in the United States and China.
While America’s new era with China is not a Cold War, it is most certainly a grand test facing both countries. We could even call it The Grand Test of our time. And that test consists of two questions: Can the world’s most dominant pluralistic economic superpower—the United States—and an economically resurgent nation-state—China—accommodate one another in peace? And, if such peaceful accommodation is attainable, then what must be done to maximize its likelihood of success?
AMERICA’S JOURNEY WITH CHINA
America’s journey with China has undergone extraordinary transformation. That transformation demonstrated itself in a succession of three pivotal eras. I will call them, respectively: the Sphere Era, the Standoff Era, and the Stakeholder Era.
The first major era of U.S.-China relations—the Sphere Era—lasted from the mid-1800s to 1949. During the Sphere Era, several defining features shaped the relationship between the United States and China. Most salient was the predominant American perception of China as a substantial, untapped market for American enterprises. That view garnered affirmation through China’s entry into commercial treaties, which opened its trade to major industrial powers, including the United States.
Following Japan’s defeat marking the conclusion of the Second World War, an explosive civil war in China ensued. That conflict pitted Chinese Nationalist forces led by Chiang Kaishek against Chinese Communist forces led by Mao Zedong. In 1949, Mao’s Chinese Communist Party emerged victorious. And the People’s Republic of China was established. The Sphere Era thus gave way to the second major era of U.S.-China relations—the Standoff Era.
During the Standoff Era, the relationship between the United States and China endured an extraordinary transformation. For much of the period, hostility between the United States and China sustained a profound level of economic isolation. Commercial relations were virtually non-existent. Domestically, China veered into economic chaos stemming from Mao’s Great Leap Forward. Years later, China’s decade-long Cultural Revolution—aimed at purging “capitalist elements” from the country—paralyzed China’s economy and further deepened its economic isolation from the United States.
The Standoff Era ultimately witnessed a major transformation in the economic relationship between the United States and China. Rapprochement with China during the latter half of the Standoff Era reflected a pivotal shift in U.S. policy, which accounted for America’s commercial aspirations in East Asia. For the United States and China, the dawn of the Standoff Era was marked by war and suspicion, while its sunset offered the specter of hope and prosperity.
The third era of U.S.-China relations—the Stakeholder Era—was thus born. Lasting for four full decades—from 1978 to 2018—the Stakeholder Era witnessed the fostering of a closer relationship between the United States and China. Most importantly, during the Stakeholder Era, the United States and China resolved to restore bi-lateral economic engagement and commercial relations—and in unprecedented fashion.
Catalyzed by Deng Xiaoping’s economic reform and “opening up” policies in 1978, China experimented with greater levels of privatization. This experimentation contributed to increases in labor, agricultural and industrial productivity. Cross-border capital flows and direct investment between the two countries increased during the Stakeholder Era. Major U.S. investment firms and multi-national companies grew more confident in the Chinese economy as an imperative destination for American capital, products and services. China’s incremental reforms to its legal and regulatory systems increased the transparency and efficacy of China’s financial and capital markets.
If ideological isolation defined Mao’s China from which U.S. policymakers sought rapprochement in 1971, then economic hyper-interconnectedness characterized Xi’s China within which American bankers and corporate executives transacted in 2017. The engagement between American and Chinese financial networks evolved into real-time interactions. High-speed trading platforms and the flicker of Bloomberg terminal screens came to replace the lengthy scrolls of U.S.-China business communiques of a bygone era.
The Stakeholder Era also witnessed an equally important transformation in U.S.-China relations. Specifically, as China’s economic prominence and global interconnectedness increased, other major economies—including the United States—recognized the importance of formalizing China’s greater stake in the international economic system. U.S. policymakers encouraged China’s assumption of responsibilities proportionate to its ever-increasing stake in a world order predicated on adherence to, and enforcement of, international law.
THE NEW ERA TAKES SHAPE
Today, the Stakeholder Era has given way to a new era in U.S.-China relations. This new era sprang from the culmination of two major developments. The most significant was the onslaught of the Global Financial Crisis, which destabilized the U.S. financial system, which necessitated an aggressive series of U.S. government policy responses. The crisis revealed a panoply of excesses that had accumulated across the American economy.
While the United States struggled to revitalize its economy and capital markets in 2009, the Global Financial Crisis was less acutely felt in China. The Global Financial Crisis had a profoundly negative effect on the perceived international economic standing of the United States. At the same time, China’s effective weathering of the Global Financial Crisis, coupled with economic downturns in the United States and Western European economies, reinforced the growing perception of China’s elevated prominence as a major stakeholder in the international economic system.
The second major development was the emergence of shifting domestic politics in the United States and China. The outcome of the 2016 U.S. presidential election ushered in a resurgence of domestic populism and nationalism in the United States. At the same time, the Chinese government—led by Xi Jinping—adopted a more assertively nationalistic tone with respect to articulating China’s role in international affairs and global commerce. That nationalism reflected itself in newly implemented, wide-ranging domestic regulatory policies aimed at curbing foreign investment in the Chinese economy and promoting the advancement and protection of Chinese domestic enterprises.
THE SKIRMISH ERA
In 2018, the relationship between the United States and China departed the Stakeholder Era and entered a new era: the Skirmish Era.
The Skirmish Era is unprecedented in both the character and magnitude of uncertainties affecting the economic relationship between the United States and China. U.S.-China economic relations are defined now by acute, frequent antagonisms that strain the countries’ interactions. These “skirmishes”, in the aggregate, produce heightened uncertainty at virtually every node in the bi-lateral relationship. “Skirmishes” in this new era implicate trillions of dollars in assets underpinning regional financial systems and major securities markets. And they affect the well-being and jobs of tens of millions of Americans.
In the Skirmish Era, uncertainty in the U.S.-China economic relationship manifests itself in the areas of trade and finance. An ongoing bi-lateral trade war persists in the wake of new tariffs and other protectionist policy measures. Economic sanctions proliferate. Regulators in both countries increasingly block cross-border M&A transactions on the grounds of national security. Investment activity and cross-border capital flows proceed at a slower pace. Heightened volatility impacts financial networks and capital markets in both countries.
In addition, the risks of rampant intellectual property infringement, forced technology transfers and cyber-attacks emanating from China are no longer confined to debates among American private sector executives. In the Skirmish Era, those risks inform deliberations of the implementation of U.S. defense measures to protect critical American infrastructure, including energy grids, utilities, communications, digital networks and transport systems.
Contemporary history has demonstrated the perils associated with economic rivalry between an incumbent pluralistic economic superpower and an economically resurgent illiberal nation-state. Those perils became self-evident in the lead-up to the First World War. Economic interconnectedness among major powers defined a Pax Brittanica beneath which geopolitical rivalries simmered with growing ferocity.
As a nascent parliamentary democracy predicated on principles of representative government, Great Britain consolidated its influence through the reinforcement of strategic alliances and economic arrangements in territories across the British Empire. At the same time, following the Unification of Germany in 1871, Imperial Germany began to emerge as an increasingly assertive strategic economic power globally. An incumbent Pax Britannica confronted a nascent Pax Germanica.
In early 1910s, increasingly protectionist trade policies on the European continent exacerbated tensions. At the time, most major powers accepted the classical gold standard, which pegged their currencies to gold as an effort to stabilize international trade channels. However, from 1913, major industrialized powers began to abandon that system in favor of devaluing their currencies, with the objective of competing for export markets. Tariffs and a global trade war ensued. War ultimately struck in late July of 1914. Pax Brittanica and a nascent Pax Germanica ultimately were incapable of accommodating one another in a lasting peace.
In the two decades following the end of the First World War, economic developments preceding the Second World War demonstrated an escalation bearing comparable characteristics. Currency devaluations in the United States and Europe were met with trade protectionism. Defensive regulatory measures manifested themselves in the United States in 1930 following major dislocations to U.S. financial markets in 1929. Trade counterparties to the United States, including many U.S. trade partners, retaliated with tariffs and other protectionist measures. Cross-border capital flows and investments dropped substantially. With the seizing up of U.S. capital markets and an accompanying spike in unemployment and insolvencies among private enterprises, the Great Depression deepened.
Economic dislocations during the Great Depression were met with antagonisms in Asia and Europe. Imperial Japan embarked on a campaign of militarization and industrialism, culminating in Japan’s invasion of Manchuria in 1931 and all of China in 1937. An economically resurgent, illiberal Germany invaded Poland in 1939, and followed that invasion with an assault on the rest of Europe. The escalation sparked conflict across Europe and Asia by 1940. Japan’s attack on Pearl Harbor in 1941 promptly secured the entry of the United States into the Second World War. Visions of securing a peace gave way to civilization’s most costly war.
In the Skirmish Era, the present crossroads in U.S.-China economic relations necessitates an important recognition among executives and policymakers in both countries. That recognition must include an acknowledgement in the United States and China that escalations of bi-lateral economic tensions, even if constituting “skirmishes” initially, can propel a sequence of intractable developments that devolve into something far more serious.
Given the economic interdependence of the American and Chinese economies conflict is an untenable scenario. Reconciliation of today’s most dominant pluralistic super-power—the United States—and the world’s largest economically resurgent, illiberal nation-state—China—through co-existence remains the only practicable option. Aspirations in the United States and China must converge to avoid the tragedies that befell prior generations. In the 21st Century, Pax Americana and a nascent Pax Sinica must yield to Pax Magna—The Grand Peace.
Attaining Pax Magna necessitates a renewed joint commitment by the United States and China to call upon international law in resolving disputes in the Skirmish Era. In the wake of the Second World War, international rules and norms shaped decades of U.S.-led engagement among major powers. Through the second half of the 20th Century, that constructive engagement sustained a U.S.-led world order that became committed to open markets, the rule of law and political liberalization in developing countries.
Continued engagement with today’s multi-lateral institutions and international dispute resolution mechanisms remains an imperative for the United States and China. Retrenching from international law heightens the probability that the two countries will resort to ad hoc, high-risk maneuvers to advance their respective national interests and economic security. To secure Pax Magna in the Skirmish Era, brinkmanship must yield to patient dispute resolution pursuant to recognized international norms and rules.
At the same time, Pax Magna does not mean that the United States should retrench from affirming its exceptionalism through American policymaking and diplomacy. In the Skirmish Era, traditional mechanisms of economic statecraft will remain essential to securing Pax Magna. Ever since the resumption of U.S.-China economic relations nearly five decades ago, U.S. public servants have been charged with the great task of crafting and managing U.S. policy toward China. In doing so, they have championed America’s exceptionalism, rooted in principles of free and open markets, individual rights, and the rule of law. U.S. public servants also have remained stalwart advocates for the advancement of greater individual rights in China—including the rights of women, minorities and the disabled. Attaining Pax Magna necessitates nothing less than this same commitment from Americans in public service.
Yet, the Skirmish Era will require more. Stated simply, the breadth and complexity of U.S.-China economic relations in the Skirmish Era underscore the impracticability for U.S. public servants to be expected to shoulder substantially the responsibility of managing the bi-lateral relationship with China. The reality is that the world’s two largest economies in the Skirmish Era are inextricably linked beyond the confines of conventional policymaking channels.
Importantly, that linkage consists of regular commercial engagement among private sector executives and advisors from both countries. Entrepreneurs and innovators in both countries seek new customers, capital and contracts from across the Pacific. Vital supply chains and logistics systems from China support the growth and sustainability of tens of thousands of American enterprises of all sizes and industries—and vice versa.
Never previously in modern U.S.-China economic relations has a more opportune moment emerged for American private enterprises to engage in frank dialogue with Chinese counterparts to find common ground in resolving shared challenges. Securing Pax Magna will require the participation and commitment of American executives, advisors and entrepreneurs in sustaining open channels of engagement with China.
In the Skirmish Era, the American private sector has a pivotal opportunity to reinforce America’s exceptionalism while engaging in vital perspective-sharing and dialogue with counterparts in China. Importantly, the humbling lessons from the Global Financial Crisis provide American executives with a unique opportunity to share valuable perspectives with Chinese policymakers and executives. Today, China confronts a growing collection of domestic economic strains, including an overheated real estate market, an overly leveraged financial system and an accumulation of public and private debt with no historical precedent. The probability of those strains precipitating a major economic slowdown in China—with systemic risks on par with the economic recession that ravaged the U.S. economy ten years ago—is not inconceivable.
American executives who lived and worked through the Global Financial Crisis possess a wealth of perspective with respect to the perils of overextended corporate balance sheets, flawed regulations and credit bubbles tied to real estate asset values. That perspective can help inform Chinese counterparts about prospective mechanisms to contain excesses that are accumulating in the Chinese economy. This form of perspective-sharing can form a highly constructive forum for dialogue for American and Chinese executives as they continue to transact commercially in the Skirmish Era. Pax Magna will necessitate this type of constant engagement among private sector executives in both countries.
Attaining Pax Magna also will require more Americans becoming proficient in Mandarin. The number of American private sector executives today who possess any sort of proficiency in Mandarin is a small fraction of our total population compared to the number of Chinese executives with English proficiency. There is no quick fix. The American private sector must become committed long-term stakeholders in this effort. The sustainability of the 21st Century—rooted in Pax Magna—will hinge, in part, on the ability of private sector leaders in the United States and China to forge constructive partnerships. Mandarin proficiency among American private sector executives will be critical. More Americans with Mandarin proficiency in industry and finance will more effectively ameliorate bi-lateral flashpoints with China during the Skirmish Era. It’s not only sound policy; it’s smart business.
Finally, American private sector executives should exercise leadership in encouraging their employees, officers, directors, partners and other stakeholders to acquire greater understanding of U.S.-China economic relations. That enhanced proficiency should encompass greater knowledge of the myriad challenges—economic, regulatory, geopolitical, legal, environmental and otherwise—facing both countries. Private sector participation in conferences, panels, trade organizations and humanitarian initiatives that focus on China will increase a shared acknowledgment of the importance of sustaining constructive U.S.-China economic relations—and seeking Pax Magna—in the long-term.
With the dawn of the 21st Century’s third decade approaching, this new era in U.S.-China relations—the Skirmish Era—will require the United States and China to jointly forge constructive relationships that withstand the test of time. Such a commitment tragically eluded prior generations of leaders. Amidst today’s confluence of economic uncertainties facing the United States and China, it is imperative for both countries to buck a foretold destiny. Aspirations must converge to secure Pax Magna for generations to come.
David P. Willard is the Founder, Chief Executive Officer & Managing Partner of 52 Capital Partners, LLC. David P. Willard is the Founder, Chief Executive Officer & Managing Partner of 52 Capital Partners, LLC. David is responsible for all major aspects of the firm’s executive management, strategy, client development, investment process and thought leadership, including his roles as creator of The 52 System™ and chair of The 52 Forum™, The 52 Institute™ and 52 Gives™.
During his career as an M&A advisor and finance executive, David has executed and participated in landmark M&A transactions and other significant corporate matters at firms in the United States, Europe and Asia, including Goldman, Sachs & Co. and Cravath, Swaine & Moore LLP, closing 52 transactions totaling over $150 billion in aggregate deal value.
David was previously the Vice President of Sage Capital LLC, a middle-market private equity firm, where he sourced, evaluated, structured, negotiated and executed acquisitions and investment opportunities, and contributed to the strategic management and financial oversight of five portfolio companies. Prior to Sage Capital, he worked as a corporate lawyer at Cravath, Swaine & Moore LLP in New York City, where he advised Fortune 100® multi-national companies, financial institutions and private equity firms in connection with mergers and acquisitions, leveraged buyouts, debt and equity offerings, spin-offs, credit facilities, intellectual property matters, special situations, Board-level strategic considerations and risk management.
In addition to executing 42 transactions while at Cravath, David was requested by the U.S. Chamber of Commerce and the former Director of the U.S. Patent & Trademark Office under President Obama to author and file a strategic advisory brief in the Supreme People’s Court of China—the country’s highest court—on behalf of NBA basketball legend Michael Jordan and Nike, Inc. in support of Mr. Jordan’s final appeal to protect Mr. Jordan’s trademark rights in China from long-running infringement by Qiaodan Sports, a Chinese sportswear manufacturer. David’s advisory brief for Mr. Jordan is notable for being the first-ever to be successfully filed in, and accepted by, a Chinese court in the history of China’s modern judicial system. His advisory brief is credited for catalyzing the Supreme People's Court of China to ultimately rule in favor of Mr. Jordan in December 2016, overturning the Chinese lower-courts’ decisions and establishing a ground-breaking judicial precedent for multi-national companies seeking trademark protection in China.
David began his career in investment banking at Goldman, Sachs & Co. in London, where he advised multi-national companies in connection with mergers and acquisitions, leveraged buyouts and capital markets transactions in the United Kingdom and continental Europe. Thereafter, David worked at Pantera Capital Management LP in San Francisco, where, as a member of the firm’s Investment Committee, he assisted in managing the firm’s $1+ billion AUM global macro portfolio and was the lead China analyst and portfolio manager of the firm’s emerging markets Foreign Exchange Fund.
David is a member of the National Committee on United States-China Relations. A nationally-recognized expert on China matters, he speaks regularly on U.S.-China M&A and investment topics, including with Princeton University, New York University School of Law, Haas School of Business, Washington University School of Law and the Harvard Project for Asian and International Relations. Prior to his career in finance and law, David served as a Fellow at the Committee on Capital Markets Regulation in Cambridge, as a Law Clerk at the District Attorney’s Office of Los Angeles County and as an analyst at the Delegation of the European Union to China in Beijing. He also previously served as a researcher at the Council on Foreign Relations in New York City and in the White House Office of Intergovernmental Affairs under President George W. Bush. David was appointed to, and served on, the Advisory Committee of the USS Gerald R. Ford Aircraft Carrier Commissioning Project in connection with the launch of the U.S. Navy’s newest super-carrier.
David serves as an advisor to Capital Innovators, a nationally-recognized seed accelerator program serving early-stage ventures in North America. He has held leadership positions with the Princeton Alumni Association in San Francisco, New York City and London. David is admitted to the Bar of New York State. He is a member of the Alumni Board of St. Louis University High School. David's career in mergers and acquisitions and his China expertise have been featured in Forbes, Bloomberg, Financial Times, Intellectual Asset Management Magazine, Business Today, The Naples Roundtable, U.S.-Asia Law Institute and eFinancial Careers.
David holds an A.B., magna cum laude, Phi Beta Kappa, from Princeton University, where he was an Academic All-Ivy midfielder on the Varsity Lacrosse Team and competed in two NCAA Division I Final Four Championships. David completed the year-long advanced Mandarin exchange program, the Inter-University Program for Chinese Language Studies, at Tsinghua University. He also completed the Princeton-in-Beijing Chinese Language Program at Beijing Normal University and served in China as a Fellow with the Princeton-in-Asia Program. David received his J.D., cum laude, from the New York University School of Law, where he was an Articles Editor on the Law Review.
David resides in the San Francisco Bay Area with his wife and son. David was born in St. Louis, Missouri.