The U.S. and China fall victim to Thucydides’ Trap

War between the U.S. and China is not inevitable, but it may be more likely than we think. Thucydides’ Trap provides a lens for understanding conflict between the U.S. and China. Both countries have fallen victim to a recurrent dynamic in which the emergence of a rising power instills fear in the ruling power. In the history of 16 of such rivalries, only 4 averted war. What lies ahead?

Observations

  • In the book Destined for War: Can America and China Escape Thucydides’ Trap? author Graham Allison explores the history of conflict between ruling powers (like the U.S), and rising powers (like China). He argues that the U.S. and China are currently on a collision course for war – unless both parties take difficult and painful actions to avert it. His argument is based on the history of 16 rivalries of which 12 ended up in war.
  • Since the turn of the century, U.S. foreign policy has slowly shifted to a more confrontational approach towards China. The Trans-Pacific Partnership, introduced by president Obama, was already designed to contain China’s growing economic power, just like president Trump’s more aggressive trade war.
  • The decoupling of the U.S. and Chinese economies has also been underway for some time. It has already occurred in terms of the internet and GPS: China has banned U.S. tech companies for years, mandates that certain data be stored on Chinese servers and recently completed its 35-satellite network. Financial decoupling is also underway: U.S. senators introduced legislation last June to force Chinese firms to comply with regulations or withdraw from U.S. financial markets.
  • Through territorial disputes, trade wars and military build-ups, the center of global geopolitical friction has already moved to East Asia.
  • The RAND Corporation publishes the “S.-China Military Scorecard”, which examines U.S. and Chinese military capabilities. The report finds that China already has an “advantage” or “approximate parity” in 6 of the 9 areas of conventional capability: for instance, in achieving air superiority and preventing an opponent from using space-based weapons.
  • We have previously noted that during hegemonic shifts of capitalism, the ruling financial power clashes with the rising economic power.

Analysis

The idea of Thucydides’ Trap, based on the ancient Greek soldier Thucydides who, during the Peloponnesian Wars, believed that conflict between ruling Sparta and rising Athens was inevitable, may sound deterministic. However, we should take Graham Allison’s argument seriously: war is not inevitable, but both the U.S. and China have to take extremely difficult measures to prevent war. Currently they are not doing so, which means they are on a collision course for war.

In the history of the 16 rivalries between ruling and rising powers, the same psychological dynamic has unfolded. As the rising power grows more confident, its emergence instills fear in the ruling power. The former believes that it is not treated fairly because the international system, dominated by the latter, does not reflect the new balance of power. As the rising power believes that its rise is harmless and others have nothing to fear, it is increasingly blind to the fear of the ruling power. In this situation, hubris clashes with paranoia. Both powers are increasingly prone to take measures that (sometimes unintentionally) signal malicious intent to the other. Take, for instance, the lead up to the First World War. A British weapons program built new battleships (the Dreadnought) in 1906. This led Germany to widen the Kiel Canal, allowing German battleships to move quickly from the Baltic to the North Sea. A British Admiral (John Fisher) predicted that war with Germany would come when the widening of the canal was finished – the war began one month after the canal had been completed. As ruling Britain and rising Germany collided, the latter took a measure to protect itself, which the former interpreted as an existential threat. As both countries did too little to avert war, their collision became violent.

Hubris clashes with paranoia. Both powers are increasingly prone to take measures that (sometimes unintentionally) signal malicious intent to the other

Four rivalries did not end up in war and they provide some clues for the future of the U.S. and China relationship. First, in the late 15th century, Portugal and Spain averted war because there were plentiful resources to be divided: Pope Alexander VI drew a line to divide the Western Hemisphere into Portuguese and Spanish territories. Second, in the early 20th century, Britain and the U.S. averted war because the ruling power was confronted with a bigger threat: the rise of Germany pushed Britain to accept U.S. hegemony. Third, during the Cold War, war was averted because both countries transformed a tense dynamic with a high risk of escalation into a diplomatic framework with recognized spheres of influence underpinned by mutual assured destruction (MAD) – until the rising power collapsed. Fourth, after German reunification, war between a rising Germany and Britain and France was averted because Germany was embedded in international European institutions.

What is the most likely timeline for the coming years? In the short-term, tensions are likely to remain high as both countries are testing the waters: U.S. assertiveness, decoupling and military investments will accelerate. In the medium-term, it is possible that the relationship reaches a phase of stabilization, similar to the Cold War and the Thirty Years’ Peace between Athens and Sparta, which will always be a “fragile peace” because the underlying power dynamics do not change. However, before conflict will stabilize, the U.S. and China will focus on defining their spheres of influence, which will raise tensions especially across East Asia (e.g. Korea, Taiwan, Japan, and later, Southeast Asia).

Implications

  • The coming years will determine the spheres of influence of the U.S. and China. Currently, the U.S. holds significant influence in Korea and Taiwan. As China grows more powerful, it will try to pull these countries into its sphere of influence.
  • As there will be no continent to be divided (i.e. Portugal versus Spain), there will be no bigger threat to the U.S. than China (i.e. Britain versus the U.S.), and there will be no constraining multilateral institution (i.e. Germany versus Britain and France), it is likely that conflict will only be stabilized through diplomatic frameworks that divide spheres of influence (similar to the Cold War).
  • In the absence of attempts to stabilize the relationship (e.g. Trump puts more pressure on China after he gets reelected), the likelihood of a violent incident (e.g. in the South China Sea) will grow ever more likely.

The implementation of 5G is important for the upgrade of Alibaba & Tencent’s services

5G is the next generation of ultra-fast wireless technology, offering faster data rates, reduced latency, energy savings, cost reductions, higher system capacity, and massive device connectivity. It is expected to power industrial applications such as smarty city infrastructure and the industrial internet, but can also impact consumer services. For example, 5G will enable Tencent’s gamers to seamlessly stream PC and console-quality games on their smartphones without sacrificing processing power or battery life. For Alibaba’s short-video platform Youku, a 5G connection would mean that users can send high-resolution 4K video within a few seconds.

In fear of dependency on Western hardware, Alibaba has set up a semiconductor division

Resembling the States’concern, both Ma’s have outspoken their fear of western depencency when it comes to core technologies:

Alibaba’s Ma:

If we do not master the core technologies, we will be building roofs on other people’s walls and planting vegetables in other people’s yards.

Tencent’s Ma:

[China]’s digital economy will be a high-rise built on sand and hard to sustain if we don’t continue to work hard on basic research and key knowledge, not to mention the transformation from old to new forms of drivers or high-quality development.

In reaction, Alibaba’s R&D arm DAMO (Academy for Discovery, Adventure, Momentum, and Outlook) has set up its own semiconductor manufacturing business and unveiled its chip in July 2019. The chip is designed to process AI tasks such as image, video and voice analysis and will be used for tasks such as autonomous driving, smart cities and smart logistics.

 

Listen to this podcast for more information about 5G in China:

The implementation of 5G is important for the upgrade of Alibaba & Tencent’s services

5G is the next generation of ultra-fast wireless technology, offering faster data rates, reduced latency, energy savings, cost reductions, higher system capacity, and massive device connectivity. It is expected to power industrial applications such as smart city infrastructure and the industrial internet, but it can also impact consumer services. For example, 5G will enable Tencent’s gamers to seamlessly stream PC and console-quality games on their smartphones without sacrificing processing power or battery life. For Alibaba’s short-video platform Youku, a 5G connection would mean that users can send high-resolution 4K video within a few seconds.

In fear of dependency on Western hardware, Alibaba has set up a semiconductor division

Similar to the state’s concerns, Tencent’s and Alibaba’s Ma’s have expressed their fear of western dependency when it comes to core technologies.

“If we do not master the core technologies, we will be building roofs on other people’s walls and planting vegetables in other people’s yards.”
– Jack Ma (CEO Alibaba)

“China’s digital economy will be a high-rise built on sand and hard to sustain if we don’t continue to work hard on basic research and key knowledge, not to mention the transformation from old to new forms of drivers or high-quality development.”
– Pony Ma (CEO Tencent)

In reaction, Alibaba’s R&D arm DAMO (Academy for Discovery, Adventure, Momentum, and Outlook) has set up its own semiconductor manufacturing business and unveiled its chip in July 2019. The chip is designed to process AI tasks such as image, video and voice analysis and will be used for tasks such as autonomous driving, smart cities and smart logistics.

Alibaba and Tencent and Censorship

Within their services and products, Tencent and Alibaba help the government by censoring keywords deemed politically sensitive, while in-house censors also delete posts and accounts. Tencent is quite active in censoring, as the company scored a zero out of 100 for WeChat’s lack of freedom of speech protection and lack of end-to-end encryption in a 2016 Amnesty International report on user privacy.

Alibaba and Tencent have high hopes for the cloud

For Tencent and Alibaba, the cloud started as a crucial component of their internal economy. Over the past few years they have branched out, offering their in-house products to businesses.
Today, Alibaba dominates cloud computing in China with a 43% market share. Under Jack Ma, Alibaba made cloud computing a key priority, and CEO Daniel Zhang plans to make cloud computing technologies an even bigger part of Alibaba’s corporate focus over the next couple of years (for more information see Alibaba’s company profile).
Tencent’s cloud business is the second largest in China, with an 11% market share, according to industry researcher IDC. The company entered the ‘cloud-game’ relatively late, and recently announced to spur its push in cloud computing by investing billions of dollars. This move can be seen as part of its overall strategy to shift focus from its consumer-faced business to the industrial internet. Its cloud-computing business should cater to industries such as retail, mobility, healthcare, and education.

Alibaba and Tencent are members of the National AI Team

Starting in 2017, the Chinese government recruited Alibaba, Tencent, Baidu and iFlyTek to lead key projects in the development of next-generation AI technologies. Alibaba’s cloud computing division was tasked with a smart city project to improve urban life (see Smart Habitat layer for more details), while Tencent has been designated to become a leader in AI-assisted medical diagnosis.
Government endorsement helped Tencent to launch its AI Medical Innovation System, an AI-powered diagnostic medical imaging service. The technology currently has accuracy rates of over 90% for preliminary diagnoses of esophageal cancer, 95% for lung sarcoidosis, and 97% for diabetic retinopathy. Several of Tencent’s AI departments, such as the AI Lab and Tencent Youtu Lab, collaborated to develop the image recognition, using the over 1 billion images on the company’s social network. After the success in healthcare, Tencent is looking to apply its AI knowledge to other applications, such as transportation solutions, security, and protection, as well as voice recognition.

In this episode of the ChinaEconTalk podcast, China expert Jeff Ding of the Future of Humanity Institute discusses the detour Tencent is making from the national champion designation [12:18-13:35]:

Alibaba and Tencent are working on the city of the future…

ET City Brain
The Chinese government designated Alibaba with the task of applying innovative technology to improve urban life. This resonated in Alibaba’s cloud-powered and AI-driven urban project “ET City Brain,” which aims to use AI to optimize city-services in real-time. One of Alibaba’s first pilots focused on reducing traffic congestion in Hangzhou. The video below shows how innovations within several layers of the Stack (think of Cloud Computing, Facial Recognition, and AI) are merged to improve traffic speed up to 11%.

PATH
A joint effort in the smart city area is PATH (Ping An, Alibaba, Tencent, Huawei), a smart city initiative in which these four Chinese tech giants apply their core technologies and an investment of 50M RMB in order to propel China into the global smart cities race (and of course to counter some major problems such as air pollution and congestion).

…but rural areas are also a key priority for Alibaba and Tencent

While smart digital applications are often first rolled out in #tier 1 or 2 cities, both Alibaba and Tencent are currently working on a Rural Strategy. Especially Alibaba sees tier 3, 4 and 5 cities and rural areas as an important new addressable market.
Striking examples are:

•  Tencent-backed WeDoctor and Alibaba’s Good Doctor are making healthcare more accessible for patients in tier 3 and 4 cities.
•  Alibaba invested 716 million USD in Huitongda Network, a platform that offers a variety of business models to help offline stores sell goods via e-commerce offerings, and also help online retailers sell directly to rural residents.
•  Alibaba launched Rural Taobao in 2014, allowing rural residents to buy and sell items online through the company’s Taobao online marketplace. Since its creation, Rural Taobao has expanded steadily, growing to cover 29 provinces, more than 700 counties, and over 30,000 villages.
•  Juhuasuan is Alibaba’s group-buying and flash-sale platform and will be repositioned as an online marketplace for consumers in tier-4, tier-5 cities and rural areas.

“China is experiencing an ongoing consumption upgrade as people look for different ways to enhance their lifestyle. (…) We are now seeing more and more consumers in China’s less-developed regions becoming sophisticated shoppers. They are demanding the same high-quality products as those in top-tier cities.”

– Jiang Fan, President of Tmall and Taobao

Tencent and Alibaba aim for a friction-free consumer interaction through voice

Both Alibaba and Tencent are investing in new consumer interfaces. For example, they are discovering the power of voice as an interface, and more specifically the smart speaker;

Alibaba’s voice assistant is called Tmall Genie. The device is on the market as a regular speaker since 2017 but is also available as a mirror (Tmall Genie Queen) as a device in connected cars (Tmall Genie Auto), and with a built-in monitor (Tmall Genie Family).

The Voice Assistant will become an increasingly important player in our life. I believe that in the coming decade, it will be connected with more devices and be the point of connection for different scenarios in our life, using voice commands to control our homes, vehicles and our personal devices.”

– Miffy CHEN, General Manager, Alibaba AI Labs

Two years after Alibaba, Tencent launched its smart speaker Xiaowei. The launch of Xiaowei is seen as a move of Tencent into diversifying its products and services into more business and industries (such as the B2B and IoT market). Besides, Xiaowei (in English ‘WeChat italking’) will link WeChat users with Tencent’s services available through QQ and WeChat.

Tencent and Alibaba are investing in facial recognition technology

Based on the number of facial recognition patents, Tencent is more active in the field of face recognition than Alibaba. Nevertheless, both companies have already implemented facial recognition in real-life situations.
Tencent is working closely with government in implementing facial recognition. For example, some provinces are issuing electronic identification cards for their citizens using WeChat’s facial recognition technology. The mobile IDs can be used for authentication instead of carrying physical ID cards – mandatory for citizens at all times in China – for travel booking, real name registration at internet cafés, and other security checks. Furthermore, amid tighter scrutiny by the Chinese government, Tencent uses facial recognition to detect minors in relation to concerns that excessive video gaming is damaging public health.

In 2017, Alipay unveiled its facial recognition payment service ‘Smile to Pay.’ The company says that as facial recognition technology takes the place of QR codes, “paying by smiling” will most likely experience explosive growth over the next three years. Statistics from Alibaba during 2018’s shopping festival around singles day also suggest that payments through the face and fingerprint scans now make up 60% of all transactions.

Alibaba’s Smile To Pay system in KFC:

Alibaba and Tencent are developing their own social credit systems

The best-known private system is Sesame Credit, developed by Ant Financial, an affiliate of Alibaba. Sesame Credit is a scoring system that generates individual credit scores for consumers by tapping into Alibaba Group and Ant Financial’s vast online ecosystem and other personal credit information sources. Sesame Scores, which range from 350 to 950 points, are calculated based on five factors – credit history, behavioral preference, fulfillment capability, personal attributes and social network – and are indicators of the users’ creditworthiness. Although the system’s focus is on creditworthiness, a low score can have an impact beyond loans (e.g. being banned from certain hotels) and a government blacklist has also been integrated. At the same time, a high score gives members the possibility to relax in special lounges at China’s train stations or to use bike sharing platforms HelloBike and Ofo deposit free.

Listen to this NPR podcast on the rollout of a Chinese Social Credit System and the role of Alibaba in it:

Tencent is also testing a credit scoring feature for WeChat Pay. Similar to Alibaba’s Sesame Credit, its score is calculated based on WeChat Pay’s pool of data, particularly on personal consumption behaviour. According to Tencent, the purpose is to “provide services that make people’s lives simpler and more convenient.” Users with high scores will be rewarded with perks such as waiving of deposits for rental services and hotels, and paying for services and goods after delivery.

Tencent and Alibaba contribute to the State’s innovation goals

Although Tencent and Alibaba are originally consumer-focused companies, they are expanding their businesses to the ‘industrial internet’, which involves the broader adoption of advanced consumer and industrial applications that take advantage of next-generation technologies for business purposes.

For instance, Tencent is teaming up with Huawei Technologies, a Chinese multinational technology company that provides telecommunications equipment and sells consumer electronics, to accelerate innovation in core technologies, such as AI and cloud computing.

Meanwhile, last year Alibaba’s CEO Jack Ma called for Chinese traditional manufacturers to fully embrace what he called the “New Manufacturing” model. New Manufacturing involves a transformation of traditional manufacturing industry by integrating technology capabilities in the internet, data, AI, cloud computing and IOT. “Proposing the New Manufacturing model is not because Alibaba plans to enter the manufacturing industry, but rather to help manufacturing companies to innovate and upgrade,” Ma said during the 2018 Cloud Computing Conference in Hangzhou. “During this shift, the current manufacturer-oriented industry will transition to a new era led by customers, where small and medium-sized enterprises can benefit the most.”’

Incubators
Furthermore, both Alibaba and Tencent invest heavily in startups and support emerging companies with incubator programs. Tencent’s WeStart for example operates innovation spaces where it offers start-ups office space to rent and incentives such as tax exemption for three years and favorably-priced access to Tencent’s products and infrastructure. Furthermore, the company assists start-ups to target government-backed support programs. Meanwhile, Alibaba’s Cloud division teamed up with the U.S. workspace operator WeWork to develop an incubation program for 20 foreign startups to enter China, and assist 30 Chinese companies to expand overseas.

Alibaba and Tencent investments in electric vehicles

Alibaba, Tencent and several other Chinese companies have joined efforts to meet China’s ambitions concerning green growth of the automotive industry. They have setup car-sharing services T3, which is powered by renewable energy, called T3.

Other examples of investments in the green future of this industry are Alibaba’s leading role in the 2.2B RMB funding round in Xiaopeng Motors, a Chinese electric car maker that aims to speed up the development of electric vehicles. Alibaba elaborates on this investment: “As a clean energy vehicle start-up, the investment in Xiaopeng Motors fits with Alibaba’s strategic focus in the automotive sector. Under our open-platform approach, we will continue to work with a range of automotive manufacturing partners to benefit Chinese consumers”.

Alipay and Wechat transformed China’s Digital payment landscape

China is a country where Visa and Mastercard are (still) banned, and it has an underdeveloped banking system. As a result, Chinese society remained largely cash-based for a long time. Nevertheless, when China started to manufacture cheap mobile phones, Alibaba and Tencent successfully set-up their own mobile payment solutions known as Alipay (by Alibaba) and WeChat Pay (by Tencent).

Users of these payment solutions link their bank cards to the wallet inside the app. Once linked, they are able to use the wallet as a debit card for direct payments in stores or for online purchases. Furthermore, users can transfer money from their bank account to create a balance on the wallet.

The digital solutions provided by Alibaba and Tencent made it extremely easy for consumers to pay with their mobile phone. In 2018, over 85% of purchases made in China were on mobile payment platforms.
In physical shops, merchants offer consumers the opportunity to pay with WeChat Pay and Alipay mostly with QR codes.

Alibaba and Tencent are incorporating the next wave of Chinese entrepreneurs

Established in the late nineties, with founders around 50 years old, Alibaba and Tencent are classic examples of companies that stem from the previous generation. Alibaba and Tencent realize though that today’s wave of entrepreneurs is bringing products and services that appeal to Generation Z, and this is the reason they are heavily investing in innovative startups within and beyond the Chinese border. Furthermore, to arm themselves against newcomers, Alibaba and Tencent are combining their strengths to secure their position (see section 1).

Alibaba and Tencent are SOE-investors

As a testing-ground of the mixed-ownership reform, Tencent and Alibaba have both invested in China Unicom, the country’s second-largest wireless telecom operator. These investments are financial, but are also intended to improve the services of state firms. For example, Alibaba and Unicom launched a cloud knowledge venture in order to meet demand from SOEs and governmental institutions in China for innovative technology solutions. Tencent and China Unicom are amongst other things, working on a network security platform.

Tencent’s hometown is a Special Economic Zone

Tencent’s hometown Shenzen was appointed one of the first Chinese area’s to be a SEZ. Tencent – founded in 1998 – witnessed the effects of the nomination: the share of high-tech industries in its total industrial output increased from less than 10% in 1990 to nearly 40% in 1998. Companies could make use of incentives such as access to quality infrastructure, corporate income tax exemptions, exemptions from tariffs on high-tech equipment and special treatment for employees. Other companies that arose in this area were Huawei and ZTE ( global telecommunications equipment, networks and mobile devices company).

Alibaba and Tencent endorse the Communist Party

Tencent released a mobile game titled ‘Clap for Xi Jinping: An Awesome Speech’, in which players have 19 seconds to generate as many claps as possible for Xi.

In 2019, Alibaba reportedly developed the popular Communist Party propaganda app ‘Xuexi Qiangguo’ (in English: study to make China strong). Alibaba staff is said to be responsible for developing and maintaining the app that includes news, videos, livestream and community comments.

Confucian philosophy & Daoism underlie Alibaba’s corporate culture

Without the philosophy of Buddhism, you cannot do well when your business grows to a certain extent. If you do not know the philosophy of Daoism, you have no chance of winning during competitions. If you do not understand Confucian philosophy on the construction of organizational system, you have no chance to be sustainable when your company grows to a certain size.”

– Jack Ma, Founder and CEO Alibaba

Alibaba’s Founder and CEO is strongly influenced by China’s idea of the good life. He always carries a copy of the Tao Te Ching, the foundational text of Taoist philosophy, is a big fan of Tai Chi, and has held meetings with the senior executive team of the company in a temple. Under the eyes of Buddha, the focus would naturally be how to help others, to help ever more people.
Furthermore, Ma actively spreads the Taoist way of thinking among company employees. In the early days, all of them had a Kung Fu nickname (Kung Fu and Taoism are closely linked), Jack Ma’s being “Feng Qingyang”, which refers to an “unpredictable and aggressive” swordsman.
According to Brian Wong, Alibaba’s vice president of global initiatives, an understanding of the principles behind the philosophies do help in having a better grasp of why the Chinese tech market works the way it does. “China is much more about integrating as opposed to taking over or competing in the traditional sense,” Wong explains. “We want to create and integrate.”

Rare earths are none of Tencent’s and Alibaba’s business

Rare earths are none of Tencent’s and Alibaba’s business. Apart from Alibaba’s semiconductors, both companies do not produce goods, and therefore they are not investing in, or owning, rare earths.

Tencent has dipped its toes in vertical drama

Tencent first dipped its toes into the vertical drama category in 2018, releasing short series like My Boyfriend-ish Sister and My Idiot Boyfriend. These entertainment shows are specifically designed for the mobile screen.

Example of vertical drama by Tencent
Source: V.QQ (2018)

Alibaba and Tencent go big on blockchain

Alibaba and Tencent, together with internet giant Baidu and telecom company Huawei, have all filed information about their blockchain cloud services and issued white papers that stress the importance of developing blockchain-based cloud services as internet providers for third parties. Last year, Alibaba topped the list of the most patent applications focused on blockchain-related technologies in the world, with over 90 patent applications.

Tencent has been building blockchain services since their first white paper in 2017, and developed their TrustSQL platform as a product, service, and an application layer to provide digital asset management and authentication. Furthermore, Tencent has partnered with Intel to develop a blockchain for Internet of Things applications, while starting to test blockchain financial applications with the Bank of China in 2017.