U.S., China move back from ‘brink’, says Ray Dalio, as ‘different type of war’ begins

“The realizations by both sides that they were at the brink and the looking over the brink into the abyss scared the leaders on both sides so, starting in June, there were a number of interactions designed to pull back from the brink, including beginning working toward a good APEC meeting between President Biden and President Xi, which will lead to some modest increased cooperation,” Dalio wrote in a LinkedIn post on Tuesday.

Dalio argues that the conflict between the U.S. and China is changing in a way that reduces the odds of a “military war,” though the new type of war between the two powers “will remain very intense and threatening.” For his part, Dalio says his “very rough estimate” of the probability of U.S.-China military combat is around 35% over the next 10 years.

This new type of war isn’t so new. Dalio says it should be familiar to anyone who’s read Sun Tzu’s “Art of War,” a roughly 2,500-year-old treatise on warfare.

“This type of war is fought by using deception, by having the other side expend resources while saving one’s own, and by using the opponent’s own circumstances to weaken them and take advantage of their weakness,” Dalio wrote.

According to the hedge-fund titan, how well each side manages its own financial, economic, technological and social strengths relative to the opposition will be more important than building up and using one’s military strengths. Military strengths, however, are still important for intimidating one’s enemy and possibly using them if the nonmilitary strategy fails.

History has shown that the winner of the “technology war” will be the winner of the “economic and geopolitical wars,” Dalio said. That usually takes the form of developing new technologies used to make weapons, such as the U.S. development of the atomic bomb during World War II.

“We can see this technology war principle playing out today with chips and AI, quantum computing, and many other technologies, including those we don’t know about,” he said.

As Xi and Biden prepare to meet, expect to see a superficial improvement in US-China relations and a stepping back from the brink of military war, Dalio said, but don’t look for a return to the period of openness and cooperation that prevailed when the US. was the clearly dominant power and U.S.-China relationship was more symbiotic.

“Rather, we should expect to see a more behind-the-scenes, Cold-War-style great power conflict,” he warned.