Ian Bremmer

This piece originally appeared in Reuters Magazine.

As Europe’s leaders struggle to restore confidence in the single currency and America’s economy limps ahead at a painfully slow pace, China’s economy continues to power forward at its now characteristically strong clip. For the past three decades, China has been the world’s fastest growing economy—and within the next several years, the People’s Republic will overtake the United States as the world’s largest. Some economists have even argued that, measured by purchasing-power parity, China has already pulled ahead. Such prognostications, accurate or not, have led to dire warnings that liberal capitalism’s best days are behind it, that the future lies with authoritarian market managers who are able to relocate populations and move mountains by decree. For the moment, at least, state-managed capitalism appears to be triumphant.

Such appearances, however, are misleading. The appeal of state capitalism lies in its ability to withstand the occasional crises that afflict market systems, thus shielding the general population from politically inconvenient disruptions. It is a system in which the state uses state-owned enterprises, national champion firms, sovereign wealth funds, and politically loyal banks to dominate the process of domestic wealth creation. To be sure, this is not communism; significant segments of state capitalist economies are in private hands. But the state plays the largest role in ensuring that market forces serve political ends—by ensuring that, profitable or not, businesses invest in projects that bolster social stability and protect the ruling elite’s political control.

China is not the only state capitalist economy producing impressive results. As the Arab world continues to contend with the risks of political turmoil, Saudi Arabia and the United Arab Emirates have stockpiled the cash they need to maintain stability by controlling much of the wealth produced by national oil companies. Even some emerging democracies have begun to flirt with limited forms of managed capitalism. Brazil’s private sector remains crucial for the country’s expansion, but its government leans on state-owned energy firm Petrobras and privately owned mining champion Vale to help create jobs. President Dilma Rousseff’s government won’t milk cash from these firms as President Hugo Chávez has done with state-owned oil company PDVSA in Venezuela, but Petrobras is already at risk of becoming a much larger, less efficient, and thus less profitable company.

State control is not the future of capitalism. It is a dead end from which China will have to free itself if it is truly destined to dominate the world economy. As a system and by design, state capitalism ensures that wealth creation does not threaten the leadership’s hold on political power. Its ability to stimulate growth and general prosperity is a secondary benefit. Forced to choose between public wealth and political survival, state capitalists will always protect their own interests first. In China, as elsewhere, commercial activity depends on access to information, and the Internet provides the best and most efficient access to it. Yet if the Internet threatens to enable popular resistance to China’s authoritarian government, and if political officials have the means to shut the Internet down, even temporarily, they will do just that.

State capitalism’s greatest weakness lies in its intolerance of “creative destruction,” a process that invests liberal capitalism with vital self-regenerating momentum. The liberal capitalist model makes it possible for the workers, resources, and ideas invested in a dying industry to spontaneously recombine in novel configurations to produce goods and services that satisfy emerging demand. But the economic engineers of state capitalism fear any form of destruction that develops beyond their control. This is why state-owned companies, which build influence within government over time, often succeed in resisting the need to adapt to changing times.

Then there is the question of openness. Within autocratic state capitalist systems, government-owned companies like China National Petroleum Corporation and some of the Arab world’s sovereign wealth funds shun the transparency that long-term resilience and adaptability demand. This opacity can benefit a country’s ruling elite by hiding unsuccessful investment decisions, but it is very harmful for the system’s long-term health. When such institutions can hide their failures, they are free to inflict much more lasting harm than they otherwise could.

Managed capitalism also falls short when it comes to exploiting innovation, though government-directed investment can play an important role in the development of new technologies. The Internet arose from a U.S. government subsidized defense project, but it was profit-driven companies that developed and reimagined the Internet and thus transformed the world. History shows that over time state officials never value assets and allocate resources as efficiently as market forces can.

Even in China, state officials understand that citizens are the engine of economic vitality. That is why the state has embarked on an historic and ambitious plan to shift wealth from China’s largest companies to the country’s consumers. China’s leaders know that the next generation of economic growth must be less dependent on exports to Europeans and Americans; creating domestic consumer demand is crucial. Thus the process of empowering Chinese consumers will undermine state capitalism’s appeal even within the country that has made this system so seductive.

Everyone knows the world’s economies are becoming ever more intertwined, but we’re only just starting to understand the ripple effects.

Welcome to the new global economy: One guy sneezes, and someone else gets a cold. That’s what we’re seeing in the slowdown now happening in the U.S., in Europe and in emerging market countries all around the world. Barring some kind of radical decoupling, the tight correlation in fates between these economic titans is a phenomenon we had better get used to, and understand, because it’s not going away. Indeed, this fact by itself – that our world is operating more and more like one big system every day – is not all bad news. However, a word of caution: Where interconnectedness yields benefits, it also creates pitfalls. Let’s look at a few examples of how this global system is actually working in our favor.

First, take the recent drop in U.S. Treasury yields. This is the more important macroeconomic story in America right now. Can any politician, with a straight face, continue to claim that getting the Simpson-Bowles recommendations passed into law was any kind of imperative for Congress or the president? The continual driving down of lending costs for the U.S. has made a mockery of credit-rating agency warnings and any perceived threat that a downgrade once held for the U.S. economy. Indeed, it takes some of the air out of the big debt-ceiling showdown that is set to take place between Democrats and Republicans in January 2013, when the $110 billion-dollar budget reduction is set to take automatic effect. It becomes increasingly hard to argue that reducing the deficit is priority number one to getting the country back on track when the cost of lending is so incredibly cheap and when the world’s investors are telling the U.S. they want more, not less of it.

Now, the low cost of lending today is not to say that the U.S. should be running up the debt, nor does it mean Washington can avoid addressing its structural spending issues – it very much can’t. But is now the right time to do that? For those who claim we should be listening to the signals the markets give us, it’s clearly not the right time to be cutting back on spending.

But now let’s consider the U.S. debt ceiling in light of the never-ending drama that is the euro zone crisis. There’s a growing sense in the U.S. and on the Continent that America has wasted its financial crisis. Its banks are bigger and seemingly more powerful than ever. (See Jamie Dimon’s Senate testimony, where he mostly had our public servants, some of whom are his former employees, wrapped around his little finger.) Meaningful financial regulatory reform still feels ephemeral at best, the economy is recovering only in fits and starts, and yet the entire country seems indignant that the whole thing isn’t moving along faster. In Europe, to the contrary, nothing is healed, and little has been reformed, and politicians there, led by Germany’s Angela Merkel, continue to insist that no zone-wide bailouts are coming until the peripheral countries set their own fiscal houses in order.

In other words, we’re seeing two very different approaches to the same basic problem of structural, long-term overspending play out in the US and Europe (though the two crises are very distinct on a number of levels). It’s too early to tell if the European approach will work better than the U.S. one, but the Europeans have already managed to install technocratic governments in Italy and Greece, force austerity measures on to much of the periphery, and change the very tone of the discussion from a short-term bailout to a long-term structural fix. It seems that although it was Rahm Emanuel urging President Obama to never let a crisis go to waste, his message actually reached the ears of Merkel and Italian Prime Minister Mario Monti instead.

Here’s the thing: Even if the tables were turned, and the U.S. was squeezing banks incrementally while Europe took on a trillion-euro bailout in one fell swoop, neither economy would likely be much further along on recovery than it is today. These things simply take time – national economies, like aircraft carriers, don’t turn on a dime, and the crossover effects from one economy to the other might take years to manifest themselves. In that way, there’s a measure of safety in our mutual crises and the journey out of them, as the worst (and best) outcomes are softened.

But remember those potential pitfalls of our newly interconnected world?

The economy that should scare us the most right now is the Chinese one. The country is slowing down, and that’s precisely because of the halting recovery and weakness in the U.S. and European systems, and the fact that the sputtering has been going on for some time. The U.S. and Europe can wait out our own recoveries. Our advanced economies are resilient. Even in the depths of our crises, the economic suffering, though real, has been muted. But China, despite its rapid modernization, is still, structurally, an emerging market. It’s far more vulnerable to economic shocks. And its political system, already facing turmoil in advance of that country’s leadership changeover later this year, is far more unstable than those in the West. If the developed world stops buying the stuff that China makes, it will force China to turn inward and double-down on state capitalism.

That would be dangerous for U.S.-China relations for a dozen reasons. Here are two of them: If China increasingly looks to state capitalism to sustain its growth, it will put it more at odds with free-market capitalism abroad – and thus, the United States. On top of this, any domestic instability could lead to a more bellicose Chinese foreign policy to drive nationalistic sentiment. The bottom line: We’d see an economic problem start to turn into a political one. The West can limp along, in other words, for some time. It can bungle parts of the recovery, make mistakes, watch job numbers grow and shrink, and still, in all likelihood, come out all right in the end. But when Europe sneezes, it’s not the other developed economies in the world that will fall ill. What we haven’t yet seen happen in this truly global crisis is the contagion spread from the developed world into still-developing economies. Europe and the U.S. might be sneezing, but if they don’t get themselves on the mend, it’s China – the single biggest buyer of U.S. debt, mind you, that might end up contracting the flu. And that’s just one, knowable risk of our new global economy. Who knows what others there may yet be?

This essay is based on a transcribed interview with Bremmer.

Is China’s system of capitalism better than that of the United States? That depends — do pigs fly? While I have no question in my mind that the U.S. is still the paragon of success when it comes to the capitalist system, lately a strange coalition of think-tankers, investors and politicians have been advancing the idea that China is eating our lunch when it comes to deploying capitalism.

More specifically, this bunch claims that China’s unique brand of centrally planned capitalism is working better than the U.S.’s overregulated, bloated, inefficient and slow-growing economy. They say that our capitalism has been so bogged down by our developed-nation cost structure that we’ll never again be a competitive center of investment for the great global pools of money in search of a safe investment out of which to make a parking spot.

Baloney.

China has indeed grown by leaps and bounds over the past decade. That’s a huge credit to a country that has modernized and industrialized on a previously unseen scale. And because of its 1.3 billion citizens, China has quite a bit of growth (read: catching up) still to come. China’s style of governance leaves the country light on regulation. However, it’s also light on rule of law, transparency, freedom of speech and several other key features that make the U.S. economy go ’round. Just because the Chinese government can move a village and build a road without holding a single hearing doesn’t mean the free market has taken hold. Indeed, it shows the opposite: China’s economy is largely state-planned, state-owned and state-run. The government uses capitalism only as a tool to reach its ends, not as a true expression of a free market.

Worse, where the Chinese government compromises the free market, it does so to fulfill its own desires of effective control over the entire country. It’s capitalism of the state, by the state and for the state, where the state is the principal economic actor. That’s in marked contrast to where the U.S. compromises on “pure” capitalism, adding things like the social safety net, worker safety, product safety, health insurance and retirement planning.

While China has a lot more growth to go, there’s another problem with its unique system of capitalism: Its outputs are far more volatile, and far less predictable, than our own. Consider where the Chinese central bank chooses to park its own money — in U.S. Treasuries, perhaps the safest investment that can be made in large enough quantities. If the Chinese could find a better place for their cash reserves, they would surely try it, but they really can’t. And if other Asian countries thought China had it all figured out, why would they all — even the reclusive Myanmar — have warmly welcomed the U.S.’s recently announced plans to solidify its presence in the Asian sphere?

A recent study showed that over 50 percent of Chinese millionaires prefer to live in the United States. Now, let’s assume these millionaires are rational actors: Their desire for a stable living situation, improved economic opportunity and access to capital not controlled by the government brought them here. These are the lucky few who have profited most from China’s economic boom. So if they’re smart, they choose to live in the U.S., giving us a clear sign our country’s system is better. If they’re not that smart, then China’s most successful choose to live in the U.S., and we should question by what form of corruption or perverse reward system they managed to do so well in China!

One of the major problems China has had with its economic model is that at nearly any time, the majority owner of most of its economy — the state — can jump into an enterprise and distort it for its own purposes. It can cook the books, it can pull out profits, it can hide losses, it can launder money and it can even shut down a company altogether. While China does have tech companies that mimic the features of Google, Facebook and Twitter, note that those Western companies haven’t been able to operate in China. What China wants is not an environment where tech revolutionaries can flourish; it wants Chinese, state-run versions of these startups, which means it will never foster the entrepreneurial spirit that makes companies like these possible.

That desire — that seemingly irrepressible urge of the Chinese to copycat everything foreign, from cars to watches to iPhones to social networks, is ultimately why no matter how good the Chinese get at tweaking state capitalism, it will never match up to the promise of a truly free capitalist economy.

Here in the U.S., we don’t know what the next huge industry will be, and that’s great. Silicon Valley could invent another new gadget. Oil sands or fracking could benefit from more extraction breakthroughs. Electric cars or solar panels could jump an order of magnitude in a generation. One of our philanthropic billionaires — Bill Gates, say — could invest in some promising new technology tomorrow. Some other completely unknown idea could erupt from a university or government lab. But whatever the manifestation, our economy holds the promise of such discoveries. Those ideas are where real new pools of capital are created and how a country becomes wealthy. Cranking out iPhones might employ more people, but it’s not the foundation for a new kind of industry or economy we’ll need in the 21st century.

In short, it’s become fashionable to look at the rough stretch of the past few years and wonder if the industriousness and resilience of the American economy is at an end. But look around the world. While one could make a viable argument that some are doing capitalism better than us (look at our neighbors to the north), a state capitalist country like China doesn’t compare. Sure, we’re at a crossroads — but that’s a lot different from being at the end of the road.

America does creative destruction — that mystical economic force of continuous reinvention — as good as any country in the world. Our game-changing innovations go on to change the entire world, again and again. What China has found is that it can shoehorn a crude version of a beautiful financial system into its state-controlled economy and get some good results; it can bite off small pieces of capitalism and enrich itself. But ultimately state capitalism is just a pale imitation of the real thing, where there’s neither the ability nor desire to fall back on totalitarianism when the going gets tough. Like that knockoff iPhone, China’s form of capitalism might look the part, but that’s where the similarities to the world’s still-largest and preeminent capitalist economy — our own — end.

This column is based on Bremmer’s remarks in the recent Intelligence Squared Debate: “China Does Capitalism Better Than America,” held in New York on Mar. 13.

DAVOS–If 2011 was the year of the protestor, 2012, at least where the World Economic Forum is concerned, is the year of the reckoning. Through the events of the Arab Spring, major power vacuums have been created in countries all over the Middle East. More governments, such as Syria’s, are likely to topple. But the time to start thinking about what’s next for countries like Egypt is already here.

The thing is, it’s coming at an inconvenient time for Western democracy. Having long held themselves as the global models for governance and economic structure, Western Europe and the U.S. have in recent years shown their warts as never before. That has opened the door for state capitalist models — like China’s — to take the stage. And the simple fact that new models for how countries and economies should work are even being considered is a blow to the Western world’s power and prestige. Obviously, well before the G-7 system broke down, China was already on a path of state capitalism, and that has turned out to be a successful course for that country to chart. But here’s the problem: While it has led to wealth and a rise in living standards for the Chinese, it hasn’t led to more democracy.

Here at Davos, and in capitals around the world, the paths countries should chart for themselves in the future is always topic A, and what we’ve learned over these last years is that transforming those countries and indeed the world is about a lot more than simply swapping out the players who legislate and lead. Look at the precarious situation in Egypt. Consider Putin’s long hold on power in Russia. For that matter, look at the situations in many countries on the euro zone periphery. Going down that list, nations that have simply replaced one power-grabbing leader with another are in trouble. (In Russia’s case, that leader has simply replaced himself.) Countries that have revolved leadership without addressing deeper institutional weaknesses are not setting themselves up for success in the long run.

That’s why changing not just the leaders at the table but the system by which the country is governed is such a real and important goal — it reconfigures the country’s “end result” trajectory. When countries like China and Russia become economically important, they of course support the models that made them powerful: strong authoritarianism and state capitalism. Specifically as China gains more and more economic power, it continues to improve its bargaining position with the West — that is, it can get away with bargaining less and less. And China’s ability to eschew compromise will only grow as its position in the world continues to get stronger — so why would the Chinese negotiate about anything? When their growth starts to level off or their cost structures begin to match the West’s — a change that will be measured in decades, not years — they’ll be willing to cooperate more. But not before.

If you believe in the values of Western democracy — equality, fairness, opportunity and freedom — that’s precisely why the West must rise to the occasion and continue to challenge state capitalism and press Arab Spring countries to fight for democratic institutions in their new national orders. Otherwise the fate of the West will be to represent an important but diminishing subset of the global economy — and to have almost no sway over a group of countries whose economic fortunes are on the rise. And that’s not just about prestige — those are the countries with weaker values. For example, the New York Times has published a devastating series on the Foxconn factories that assemble Apple products, highlighting worker abuses, deaths and practices that would have been outdated in the U.S. even a century ago. Those workers might be making state-of-the-art products, but they live as though they are indentured servants, or worse. It would be naive to think Foxconn is an isolated incident. In China, Foxconn is a success story of state-directed capitalism. Will the West tolerate Foxconn? And if so, how many more Foxconns will it tolerate?

It’s pointless to worry about China stealing U.S. manufacturing jobs — China has taken far more jobs from Mexico than it has from the U.S., by some measures. What the West should worry about is the manner in which those jobs are performed and what our tolerance of that says to the parts of the world that are today at a crossroads.

This essay is based on a transcribed interview with Bremmer.

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By Ian Bremmer
The opinions expressed are his own.

There are many surprising things about Kim Jong-il’s sudden death, not the least of which is that it took two days for the rest of the world to hear about it. Yet most surprising is the sanguine reaction of the global and especially the Asian markets. On Monday, or actually Sunday as we now know, the world woke up to its first leaderless nuclear power. Coming as close as anyone could to filling his seat was his youngest son, who is in his late twenties. There’s no way these facts were accurately priced into markets that took just a relatively minor dip as a first response. The news from North Korea appears to have been taken far too lightly, and just a few days out, it’s disappearing from the front pages.

While Kim Jong-un’s status as heir apparent seems to tie a nice bow around the situation, let’s get real for a moment. The son of the elder Kim only appeared on the North Korean stage after a stroke necessitated succession planning in Kim Jong-il’s regime in 2008. Consider that founder of the country Kim Il-sung put his son, Kim Jong-il, in front of the citizenry as his heir for more than a decade before his 1994 death. That decade was precious time; time Kim Jong-il spent consolidating power and putting his own people into high government office— and he was over 50 years old when his father passed away. Kim Jong-un has been deprived of that head start; he’s got to rely on whatever ground his dead father managed to clear for him since his 2008 stroke. A couple of years at his father’s side — and a promotion to four star general — is scant time for the younger Kim to have developed a real plan for ruling, or real allies in government.

That said, don’t expect Kim Jong-un to be deposed. There won’t be a North Korean spring — for real or for show — anytime soon. The country is too backward and too brainwashed to mount any sort of populist opposition to the ruling regime, and its people have little if any knowledge of the outside world. Even if Kim Jong-un proves unable to consolidate and retain power, all that would replace him as the head of state is a military junta or strongman; there’s no democracy on the horizon, given the country’s current sorry state of affairs.

The important relationship to watch going forward will be between North Korea and China. Kim will want to impress his people by letting more food into the markets and increasing their terrible standard of living in whatever marginal way he can. He’ll need cash to do so, and will probably call upon China to help. China is North Korea’s last substantial benefactor in the world. In a classic diplomatic sense, because North Korea is America’s enemy and South Korea is America’s friend, China has little choice but to keep propping up the North. If China changes its tack now, it could find North Korea inching towards reunification with the South, putting a firm American ally right on its border. The question is, will China support Kim Jong-un wholeheartedly, or will it too take a step back and see what emerges from the power struggles sure to be playing out behind the scenes at this very moment?

Meanwhile, the U.S. has taken the right approach to this complicated situation: the White House has decided to sit back, watch and wait. It could, and likely already is, offering behind-the-scenes humanitarian relief to the North Korean people. It should continue to offer any such assistance that it thinks will be accepted. The Obama administration should not by any means be applying diplomatic pressure to restart six party talks or anything else of the sort. In essence, the free world should be rooting for Kim Jong-un to stabilize the country so that it can again try to bring North Korea out of the dark ages in an orderly fashion.

The British SAS used to say that when securing a dangerous environment, you should shoot the first person who makes a move (hostile or otherwise) to ensure authority. While I’m not advocating violence, one has to hope Kim Jong-un can consolidate power sufficiently, so that the world at least knows who it’s dealing with when it comes to North Korea. We don’t know what kind of leader he’ll be, or if he’ll even be a leader for very long, but a country that treats its rulers as gods needs someone at the top of the pyramid to keep from devolving into chaos. Otherwise, the world is back to where it was the day after Kim Jong-il died — a day in which no one knew whose finger was on the North Korean nuclear button.

This essay is based on a transcribed interview with Bremmer.

Photo: New North Korean ruler Kim Jong-un (C) pays his respects to his father and former leader Kim Jong-il (R) who is lying in state at the Kumsusan Memorial Palace in Pyongyang in this still picture taken from video footage aired by KRT (Korean Central TV of the North) December 20, 2011. REUTERS/KRT via REUTERS TV

By Ian Bremmer
The opinions expressed are his own.

Though I’ve already written about the recent Munk debate in Toronto elsewhere, it’s worth taking some space to expand on my position, and why the U.S. truly is not going to experience a Japan-style lost decade of economic stagnation.

(The debate was on this resolution: Be it resolved North America faces a Japan-style era of economic stagnation. I joined Larry Summers in arguing the Con side against Paul Krugman and David Rosenberg.)

Let’s start with the political realities: Japan experienced 50 years of single-party rule. In the last 22 years, the country has had 17 prime ministers. Recently, the Democratic party there defeated the long-time incumbents, the Liberal Democrats, only to find that they had no idea how to govern the nation. They had no idea how the ministries worked, no relationships with industrialists or financial institutions, no grasp on the levers of power in society, and no strong policy apparatus. If the U.S.’s political situation looks bleak, consider that alternative.

In fact, the political situation in the U.S. may not be pretty or easy to watch, but it’s functioning. The President and Republicans continue to hammer out centrist deals on issues like tax hikes and the debt ceiling, albeit at the last possible minute after much gnashing of teeth. Ignore naysayers who say that budget supercommittee doom is coming; a deal will likely get done. And after the presidential election, things will get even better. That’s because Republicans are almost certain to retain the House and take the Senate. Whether Obama or the likely GOP candidate Romney wins the election, their dealings with a unified legislative branch will become far easier than the current divided government.

Our stable government is why foreign investors continue to flood into the dollar. Paul Krugman may have argued at the Munk debate that a strong dollar is what’s harming the U.S. economy, by making the country less internationally competitive, but I believe the confidence that foreign and sovereign investors continue to show in US debt outweighs that negative. Ask yourself what the better scenario is: a strong dollar that puts us at a slight relative disadvantage, or a pullout of investment dollars in the U.S. altogether? Investors continue to make bets in dollars, and that’s good for us. Yes, gold has risen dramatically in recent years, but “gold” is not a country. When investors need security and stability in currency, only the U.S. can still claim to provide it.

Krugman is also frustrated that the U.S. can’t move on a dime to enact policies needed to slam the country out of its current GDP growth lethargy. Looking around the world, there are only a couple countries of size that I can point to with that ability. One is Russia. Vladimir Putin has positively gutted that Moscow’s fledgling institutions to let his will be done. Their growth rate has been phenomenal, but at what cost? No one can say what will happen to Russia when Putin exits the stage, and that’s not a situation the U.S. will ever be in. Our institutions endure.

Finally, let’s look at the U.S.’s secret weapon when it comes to avoiding a lost decade: its demographics. With healthy immigration and a fertility rate that hovers around replacement levels, our outlook for population and labor force growth beats that of Japan, the EU, and even China. We’re going to have workers that are educated and capable of entrepreneurship in a way that other regions of the world will not. They will continue to follow our lead, but the innovations will come from the U.S. and North America.

Ultimately that’s the most important point of all. Nearly twenty years ago, the rise of the Internet, which was a long-gestating government and university networking project, began to reshape the world. Today, we don’t know what the next Internet-like innovation is going to be. It could be 3-D printing, or laser fusion, or nanotechnology, or something none of us has ever heard of. But we do know that it’s almost certainly going to come from the United States. If that was not the case, 50 percent of Chinese millionaires wouldn’t want to actually live in the U.S. rather than China.

Our biggest economic competitor over the coming decades will be China. But in China, 1.3 billion people are in the process of industrializing. We’ve seen the industrial revolution in England and in the U.S. It’s necessary, but not pretty or simple. Check the air quality in Beijing for proof of that. The decision among the world’s elites as to where they want to locate themselves will always be a relative question. And relative to the rest of the world, the United States continues to stand alone.

This essay is based on a transcribed interview with Bremmer.

Photo: Japan’s Prime Minister Yoshihiko Noda (L) talks with China’s President Hu Jintao (2nd R) at the start of their meeting on the sidelines of the APEC summit in Honolulu November 12, 2011. REUTERS/Kyodo

By Ian Bremmer
The views expressed are his own.

All eyes should be peeled on China, but not for the reason you think. While the biggest structural risk right now is global rebalancing, especially between China and the U.S., there is another important threat from China: cyberwars. Cyberattacks are one of the biggest fat tails (along with climate and North Korea).

It’s no surprise that the latest Google hack attack came from China. The presumption is that the vast majority of cyber attacks hitting the U.S. are coming from the Chinese government. It’s very hard to know where threats are originating – country-wise and/or person-wise -- because it’s very difficult to go back and figure out the paper trail. But at a minimum, there is an environment in China that tolerates cyber attacks.

Proprietary information around technologies – gaining profit shares, increasing revenues – allows a country to be much more economically competitive. China has leverage because everyone wants to get into China. If you want to make something in their country, you have to share the technology.

The Chinese government can really benefit from having access to proprietary data, whether it’s about Exxon's oil reserves or pricing of commodities of proprietary technologies, such as American telecommunications. China’s become much more competitive and therefore has become much more of a threat. If it’s using a non-judicious system to gain economic advantage, we need to take that very seriously.

China did something similar with high-speed rail – and that was through legal means. They undermined German and French companies in order to gain access to the technology and they now have built the best high speed rail system. If they can access that kind of information through hacking, that’s going to be seen as a direct threat.

This isn’t to say that the Chinese are evil. Historically, Western institutions invested in China, but then took the money back West. China obviously wants a good chunk of that action.

The question for Western companies and governments is: What is the appropriate way to respond to what is essentially asymmetric warfare? Cyberattacks could start affecting day to day lives of people if, for instance, a company is brought down by it. Those companies employ people and have share prices. They are a big part of American wealth.

There are ways, however, to protect yourself -- and your portfolio -- against such attacks. Look at companies that are most exposed as cyberattacks like Google, and companies in sectors where the Chinese are trying to gain an advantage – telecommunications, IT firms, commodities.

It’s extremely hard to prepare for the known unknowns until you take them seriously. But you should try to make sure you’re not in a position where you are angering folks connected to the inside of Chinese government, which Google is now learning. Also, you should work closely with home governments, like the NSA in the U.S. You need to share your data with them because you may need political leverage.

Cyber threats are probably going to have to get worse before the issue gets policy traction in Washington, and at that point the U.S. will have to make them a priority. When the U.S. does, it will lead to big tensions. But it’s really important for governments to be transparent, and at least officially committed to the rule of law.

Note: This essay is based on a transcribed interview with Bremmer.