United States-China relations have taken a turn for the worse with Nancy Pelosi, Speaker of the US House of Representatives, visiting Taiwan earlier this month. With the clash of the two superpowers, the economic implications of this friction could be much worse than the Russia-Ukraine war, according to billionaire investor Ray Dalio. In a blog post this week, Ray Dalio explained how the global economy would suffer if relations between the two countries take a similar trajectory to the US-Russia relations. Beijing is outraged by the move made by Washington, as it sees Taiwan as a part of China and not as an independent country.
Clash of larger superpowers
“If events continue to follow this path, this conflict will have a much larger global impact than the Russia-Ukraine war because it is between the world’s leading superpowers that are economically much larger and much more intertwined,” said Ray Dalio, Founder and Co-Chief Investment Officer of Bridgewater Associates – the world’s largest hedge fund. He said that the Russia-Ukraine war has had terrible consequences, but warned of much worse implications if China and the US tread on the current path.
Ray Dalio reinforced his argument highlighting that China’s share of world trade is over seven times larger than that of Russia, and constitutes about 19% of all American manufactured goods imports. “Imagine if importing goods from China and doing business with China became the same as they are with Russia now. Imagine what the supply chain and economic impacts on the world would be,” he said.
Russia-like sanctions on China to hurt more, may prompt economic warfare
The recent sanctions on Russia imposed by the US and other allies of the western power did result in supply chain disruptions; such sanctions on China could make things worse. “Imagine what sanctions on China would be like for the world. Supply chains would collapse, economic activity would dive, and inflation would soar. And that’s just what would happen to economies due to economic warfare which would pale in comparison to the impact that military warfare, which we are obviously dangerously close to, would have,” Dalio added.
As a response to Nancy Pelosi visiting Taiwan, China has been conducting multiple military drills around the island of Taiwan. The situation has escalated, and Ray Dalio believes the situation that now exists between the United States and China is very similar to that which existed between powers immediately prior to World Wars I and II and many other immediate pre war periods. His conflict gauge reading of the tensions between the two countries stands at 1.2 standard deviations. For context, the tension between UK and Germany before world war one was at 1.3 according to the index.