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US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War

  • The US has re-established itself as the 'global policeman', using sanctions much more than its military power

  • Germany is re-arming and leading Europe, for now aligned with US, but this may not always be the case

  • China is building itself up within the global system for now, but Russia's fall confirms its need to break away

US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
26 March 2022
Published byTellimer Research

The Tripolar World*, centered around the US, Europe and China, is still some way off. But the financial devastation visited upon Russia will accelerate a transition to tripolarity that will affect all other countries.

Short of Armageddon wars involving nuclear weapons, these are arguably the only three geopolitical blocs large enough that, should they come into conventional economic or military conflict, they would inflict sufficient mutual damage to create an incentive to avoid that conflict in the first place.

That does not mean there will be a cosy co-existence, particularly for China, as long as the US and EU are relatively aligned and China's economy is still reliant on exports to those two blocs. But it was only a couple of years ago that the US and EU relationship was weakening. Under a different US president or when Germany starts seriously re-arming, those interests could again diverge.

The implications for countries sitting beneath these three blocs is that, sooner or later, they may have to pick a side. In the US-USSR Cold War, smaller countries could play the two superpowers off each other because, in that Bipolar era, the two superpowers were economically disconnected. But going from the Globalisation era (cooperate for greater gain) to the Tripolar era (isolate for greater resilience) will involve reintroducing disconnection.

Long-term global growth is lower in a disconnected world: smaller addressable markets, more local regulation and customisation, and a higher cost of capital. And the adjustment from a connected to a disconnected world is inflationary: re-shoring from cheaper locations, less cheap immigrant labour, more segregated and duplicated supply chains, less sharing of the best technology.

And, at very short notice, sanctions can freeze a country. The social media court of public opinion can make a country unpalatably unethical in a matter of days, which matters in an era when customers like to think of themselves as ethical. And this applies not merely to the target country but to countries that continue to do business and be geopolitically aligned with that target country.

For global investors and multinational corporates, brought up on three decades of globalisation, this is going to be a very challenging shift.

Trump's 'America First' strategy and trade war tactics and China's Belt and Road provided a preview. The incredibly quick shut down of Russia for investors and corporates, at least those from the sanctioning countries, provides the first act of this story.

Perhaps, the segregation into two worlds (with the US and Europe on one side and China on the other, and with other countries seeking non-alignment) and then into three worlds (with the US, Europe and China each in separate camps, and with no space left for non-alignment for the rest) will provide the second and third acts.

The silver lining for a portion of emerging markets is that a world that is more disconnected in terms of manufacturing supply chains and energy trade brings opportunities for those offering alternative low-cost manufacturing destinations in Asia and Africa and those offering the key commodities, like copper and lithium, needed for the transition to self-sufficient and renewable energy, in LatAm and Africa.

And a world where parking capital overseas is riskier might persuade more high-net-worth individuals to keep their wealth locally invested or repatriate it back 'home'.

Tripolarity: Comparing the 3 blocs

We compare power (or vulnerability) across size, currency, trade, military, technology, economic self-reliance (based on internal consumption and fuel inputs), social stability and climate factors of these tripolar centres.

Global dominance by the 3 blocs

We also include a range of middle-size, or regional, powers to demonstrate the chasm between them and the three main power blocs.

Tripolar World: (1) Economic and Population Scale

Tripolar World: (2) Sanctions Capability

Tripolar World: (3) Global Trade Dominance

Tripolar World: (4) Military Threat Credibility

Tripolar World: (5) Technology Development Capability

Tripolar World: (6) Influence in Existing Global Institutions

Relative resilience among the 3 blocs

In addition to the global scale metrics above, we compare the relative resilience of the three blocs as a subset in terms of economy (consumption-driven, low trade dependence, fuel independence), demographics, social stability (youth unemployment), technology innovation and climate risk (susceptibility to extreme weather).

Fortress Economy (1):Consumption-led

Fortress Economy (2): Trade-dependent

Fortress Economy (3): Fuel Vulnerability

Demographic Asset or Liability

Social Stability Risk

Climate Risk

Technology Innovation: Incentives, Protection, Capability

Geopolitical outlook and risk in a Tripolar World

US – 'Nuclear sanctions'

The US has re-established itself as a 'global policeman', using financial and trade sanctions much more than its overwhelming military power. Russia’s access to a 'war chest' of foreign reserves built up over six years of fiscal conservatism has been prohibited at a stroke.

For a while, the 'nuclear sanctions' that the US has deployed to stifle Russia may restore an international order where the US is the ultimate arbiter. There is still sufficient strength in its economy and currency to do so.

The two problems with 'nuclear sanctions' are as follows.

  1. Not a multiple-repeat weapon: You cannot keep using them because, eventually, the countries on which they might be applied will shift their trade, assets and arms purchases away from those subject to US sanctions; and

  2. Everyone is hurt: Those sanctions have also caused damage, in the form of much higher commodity prices, to countries that do not regard themselves as a party to the Russia-Ukraine War – poor populations and poor countries globally will be hurt permanently and some governments will not survive the repercussions of inflation, currency pressure and mass discontent.

Europe – Reasserting the second pole, with the US for now

Germany, in a reversal of decades-old policy is re-arming and sending lethal hardware to a conflict zone. It is also in its interests to take on the difficult task of more assertively leading Europe.

That remains a difficult challenge both because of the European Union's institutional weaknesses (eg the principle of unanimity, the lack of coordinated fiscal policy within the eurozone) and the competition for that leadership with France.

In the face of the existential threat it faces from Russia, the interests of Europe are both internally united and aligned with those of the US.

But Europe's interests have not and will not always align with those of the US. It was only four years ago that, under Trump, the issues of the Iran Nuclear Deal, European defence, and China trade and investment were pulling Europe and the US apart.

China – Establishing the third pole as long as it has the room to do

Xi Jinping has already signaled he does not wish to be a part of the 'Western' alliance against Russia.

For now, he will continue building China up within the global system, exporting manufactured goods to US and European consumers, retaining foreign capital and technology inflows, and parking excess reserves in non-yuan currencies.

But the Russia precedent confirms its need to break away.

The moment its economy is driven more by domestic consumption than exports and the military-industrial complex is self-sufficient in terms of technology, it may be in a position to do.

China far from a domestic consumption-driven economy

Russia – Relegation from the global power league confirmed

Terminal decline, due to persistent reliance on commodity exports, vulnerable borders, aging demographics, brain drain and succession risk has been reinforced. Russia has leveraged its local military superiority in many successes over the past 15 years in its 'buffer states'.

But, as a result of its difficulties on the ground militarily in Ukraine, the unification of a wide range of opposing powers against it and the implosion of its economy caused by the sanctions imposed by those powers, its credibility as a mid-size global power capable of projecting power beyond its borders is severely impaired. It no longer matters that Russia's economy and military is bigger than those on its periphery.

It also likely does not matter that Russia possesses nuclear weapons. Unless it is prepared to use them in a mutually destructive war then having a thousand weapons is no better than having one. And having one does not make you even close to a global superpower if you do not have the trade, financial, economic and technological strength to go along with it. Just look at the examples of Pakistan or North Korea, which are very hard to invade because of their nuclear weapons – but that does not give them the capability to project much power outside their own borders.

Russia's conventional military is much bigger than those in its "buffer region" but dwarfed the more global the conflict

Japan – More assertive, aligned with the US, fearful of China

The Russia-Ukraine War has turned Japan towards a more confrontational foreign policy. Japan echoed US sanctions on the Russian central bank, has sent non-lethal military equipment to Ukraine, may implement sanctions on Russia gas imports and has publicly reiterated its claims of sovereignty over the Kuril Islands, which have been subject to a dispute with Russia, dating back to the Second World War.

This is the transition to tripolarity in action: Japan's actions are motivated by the fear that sanctions, which have led oil companies to withdraw from the Kuril Islands, will present an opportunity for Chinese companies to enter.

There is also a domestic political angle at play: Prime Minister Fumio Kishida is attempting to establish his own profile outside the shadow of his predecessor Shinzo Abe (who, by the way, is calling for an even greater shift to tripolarity by lobbying for Japan to host US nuclear weapons).

United Kingdom – Brexit shifts its pole to the US

Brexit and the efforts to establish even closer relations with the US have already demonstrated how the UK, at least under Prime Minister Boris Johnson and the Conservatives, sees its future in a tripolar world.

The UK's complete military alignment with the US in Ukraine confirms this and any sign of European division (either internally or from the US) will likely reinforce this.

In some respects, the UK represents the 'pivot state' choice in the transition to tripolarity faced by much of the rest of the world, given its spread of trading and financial reserves across the US (more of its foreign reserves sit in the US dollar than any other single currency), Europe (currently its largest trading partner) and China (on its way to becoming its largest source of imports).

UK split of trade and FX reserves

Rest of the world – Decreasing space for the non-aligned

At the UN General Assembly at the start of March 2022, 27% of countries abstained, did not register a vote or opposed the resolution condemning the Russian invasion of Ukraine.

Global disunity exemplified by the UN vote on Russia

There will come a point in time and an issue or conflict – eg China-Taiwan, China-India, skirmishes between two middle-sized powers such as Turkey-Russia or Iran-Israel, the suppression of popular protests or minorities by authoritarian governments, or political assassinations – where the scope for not choosing sides, specifically not siding with the US, is too narrow.

Whether rich, developed countries like South Korea, or middle-power emerging countries like Brazil, India, Iran, Israel, Saudi Arabia, South Africa or emerging and frontier countries that are small (eg Chile, Malaysia, Poland, Qatar, the UAE) or poor (eg Egypt, Indonesia, Nigeria, Pakistan), the neutral ground to navigate between the three major power blocs is going to shrink. Examples include the following.

  • Asia: Asian countries outside China may not be able to call upon US security cover without answering US calls to disconnect its supply chains from China or pulling back from closer trade links with China (eg Malaysia's recent ratification of RCEP).

    Consider the example of Vietnam, which is militarily now aligned with the US, largely because of its South China Sea territorial dispute with China, and enjoys relatively low tariffs to the US (eg on average half of those faced by Bangladesh in the garments sector). And Vietnam enjoys a free trade agreement with the EU.

    But Vietnam got a scare when it was investigated for currency manipulation amid Trump's efforts to close the US trade deficit with Vietnam, not to mention when Biden launched his foreign policy with a human rights wrapper.

    And Vietnam, at least currently, is not simply a low-cost, manufacturing goods substitute for China. Vietnam's largest single-country source of imports (38%) and destination for exports (17%) is China. The tech hardware assembly (almost 50% of exports) and garment stitching sectors (almost 20%) supply chains are deeply connected with China with intermediate inputs.

  • Middle East: Saudi Arabia and the GCC may not be able to call upon US security cover without answering its call for oil output changes (instead of determining this in an oligopoly with Russia that sits outside US influence) or retaining the US dollar as the main currency of oil trade even when the largest growing customers would prefer their own currencies (eg the recent move to shift a portion of Saudi-China oil trade to Renminbi).

    However, these countries also recognise that that the US support for Turkey in Erdogan's early years, for the Muslim Brotherhood around the 'Arab Spring' and the re-engagement with Iran during the first Nuclear Deal signifies that US security cover does mean the US always acts in a manner that it views as aligned with their interests.

    Cultivating closer relations with the EU and China is necessary, particularly, given their trade links across the region, but what happens when the three blocs do not see eye to eye on an issue of importance to the Middle East?

  • LatAm: LatAm countries may be pulled closer into the US orbit, even recent pariahs, in US eyes, such as Venezuela, if recent overtures from the Biden administration to Nicolas Maduro are a sign of things to come.

    How will LatAm square the circle of closer relations with the US when, during the course of its electoral cycles, those relations are often part of the debate between incumbents and challengers and leftists and rightists, and when the recent example of the Trump shows how quickly the US can turn on its closest allies in LatAm (the precedent of his efforts to impose higher tariffs on exports from Argentina, Brazil and Mexico among others)?

  • Africa: African countries may find it ever more difficult to draw in investment and loans from China as well as military support from the US amid this modern-day scramble for Africa.

    African leaders may enjoy the financial flows from China without the political strings attached (assuming they manage well the risks from taking on too many of them) but they also value the defence capability against non-state actors and, in some cases, neighbouring states, and US support (or protection from censure) in international multilateral organisations (eg UN, IMF-WB, Paris Club, FATF, ICC).

  • Offshore financial centres: The offshore finance centres of Cyprus and the Bahamas are already under greater threat and scrutiny because of the size of investment flows from Russia in recent years.

    The UK (London) has quickly gone from embracing Russian oligarchs to sanctioning them. The UAE has recently been placed on the "Grey List" of the FATF. Offshore financial centres, in general, may find the rules of the game increasingly determined by geopolitical as much as technocratic considerations and the fragility to their status as safe havens for financial wealth may reduce their appeal anyway.

  • Other 'blocs', eg OPEC and OIC: One of the reasons for Saudi and UAE reluctance, thus far, to join in on US- and EU-led sanctions on Russia is their overlapping interest with Russia in regulating supply in the global crude oil market.

    After the transition to King Salman and Crown Prince Muhammad bin Salman, most have focused their analysis of Saudi foreign policy on the Yemen War, the Khashoggi Affair, relations with Israel and Iran, and increasing friction with the US. However, one overlooked change is the unprecedented cooperation with Russia within an expanded OPEC+ framework, following an initial mutually damaging price war over market share.

    Again, this is an example of a move to a tripolarity, with OPEC responding to its largest growing customers in Asia (China and India) and attempting to navigate some middle ground between the larger blocs for as long it has the room to do so.

    The Organisation of Islamic Countries (OIC) – a group of 57 majority-Muslim states, founded in 1969, with members drawn mainly from Asia and Africa – remains more of a talking shop than a coordinated bloc capable of leveraging its scale to wield global influence or simply to arbitrate disputes among its own members.

    However, its recently concluded annual conference included, as usual, Russia as an observer, and, more significantly, the Chinese foreign minister as a special guest. This signifies the OIC is thinking, as a bloc, in terms that increasingly resemble realpolitik, ie putting interests above ideals.

  • Belt and Road Initiative focus countries, eg Pakistan, may not be in a position to take in both Chinese investment and loans, as well as financial assistance from multilaterals where the US has a large vote, eg the IMF.

And the US electoral cycle, eg from Obama to Trump, or from Trump to Biden, has demonstrated that where the US draws its geopolitical red lines and how it enforces those red lines is, by no measure, fixed.

The basis for choosing sides will not be the emotive, romantic notions of morality-based foreign policy, espoused by Biden and Blinken in the current US administration, but the pragmatic interests of realpolitik.

The same applies to investors looking at countries in this increasingly tripolar world – see When countries behave badly: The tortuous morality of ESG investing (March 2022).

US Military "pivot East" finally follows the "War on Terror" and consistent with the shift to Tripolar World (China focus)

*Tripolarity is a concept discussed in geopolitical terms by Parag Khanna (The Second World, 2008) and in global investment terms by Jay Pelosky (Tri Polar World Framework, 2015). Jay's work is available through Tellimer Insights, here.