We’re already seeing a return to Cold War era containment strategies as the relationship between the world’s two largest economies deteriorates, argues Ian Bremmer, president of the Eurasia Group and author of 'Every Nation for Itself: Winners and Losers in a G-Zero World.'

ChinaFotoPress / ZUMA PRESS A J-15 fighter jet lands on China's first aircraft carrier, the Liaoning, Nov. 24, 2012.

This is a “what if” interview from the World Economic Forum’s Risk Response Network. To view the rest of the series, click here.

We’re already seeing a return to Cold War era containment strategies as the relationship between the world’s two largest economies deteriorates, argues Ian Bremmer, president of the Eurasia Group and author of Every Nation for Itself: Winners and Losers in a G-Zero World. The World Economic Forum, in collaboration with TIME, quizzed Bremmer on the nature of U.S.-Chinese tensions and what can be done to soften them.

Why is the specter of U.S.-China confrontation so real?

We’re in a situation where the world’s largest economy is not doing so well, the world’s second largest economy is still growing very strongly, albeit at a slower rate, and the two countries have totally incompatible economic and political systems. The relationship between China and America is only becoming more problematic. In the foreign policy debates ahead of the US presidential elections, Obama referred to China as an “adversary” for the first time. It’s not just about political posturing. China is the single biggest challenge to US foreign policy, in that Americans mostly see foreign policy in terms of how it impacts the American economy, and China is increasingly a market that many people believe is not playing by the rules, from intellectual property to state capitalism to cyber attacks.

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Similarly, in Chinese state media, you’re seeing much more assertiveness, more talk of the Americans trying to contain China, the Americans “not wanting us to be world beaters”, “not wanting us to be number one”. There’s no question that the Americans and the Chinese at the highest level do understand that it’s dangerous for both countries to allow their relationship to be a disaster, so they’re trying to avoid unnecessary conflict. But the problem isn’t really unnecessary conflict—it’s that the necessary conflict over huge structural issues like currency and trade is building up.

What warning signs have you seen?

There’s the massive increase in tensions between China and Japan: in the last few weeks, there were anti-Japan demonstrations in about 100 cities in China, Japanese car sales in China were down 49% last month, and every CEO I spoke to at the recent IMF meeting in Tokyo said that this issue would dramatically change their view on doing business in China. This is significant because, ultimately, America is Japan’s defence policy: they have a strategic alliance, so if there is a problem between Japan and China, we know where the US is going to come down.

How does China’s holding of U.S. government debt affect the relationship?

The Japanese are actually on track to become the largest holder of US debt, externally, not China. China is trying to decouple from the dollar. If you look at what they’re doing in building domestic consumption and expanding South-South trade, then it’s clear they want to be in a position where there’s less mutual dependence with America. But that’s a long way off, and China is still very much America’s banker.

What about China’s political succession?

In China, you don’t have strong individual leaders, you have government by consensus, so as a consequence the actual composition of the leadership is not going to influence foreign policy too much. What you do have are a lot of moving pieces. There’s the Bo Xilai scandal, there’s the way Xi Jinping disappeared off the scene for a couple of weeks: these things cause all kinds of rumours, and then the government becomes more risk averse as a result. Both because of the political transition and the slowdown – globally and in China – Chinese government officials are less willing to take risks, and those risks include the transition of their economy and their political system towards more structural reform. That’s what’s needed for China to have a better relationship with the US, and it’s absolutely not happening.

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If the relationship were to deteriorate further, how would this happen?

It’s already becoming a new kind of cold war. What this means is that the Americans and the Chinese will be frenemies. They’re not going to become enemies, because that’s not possible, but they’re not friends any more, either. All of America’s allies are very much afraid of China’s rise, so they’re begging the US to play a more significant role in Asia. You can see what the Americans are doing in response: in South Korea, they sign a new ballistic missile deal, in Indonesia they send over fighter aircrafts, in Australia they send a whole bunch of marines to Darwin, and on and on. There have been lots of joint military exercises in Vietnam and the Philippines. Then there’s also the question of cyber attacks: China is America’s principle enemy in this area, and vice versa.

The big question is to what extent all this is going to bleed over directly into the economic relationship. It’s already starting to, in that a lot of American firms are saying “We don’t have the access we used to into China, and furthermore the Chinese are stealing all our stuff.” As the Chinese firms get larger, that will start to have a greater impact on trade. The Doha round of international trade talks was meant to include China, but that’s dead, and China isn’t part of the Trans Pacific Partnership (TPP) trade agreement. On a big strategic level, all this is increasingly looking like cold war, like containment.

What would be the next phase?

You’d start to see more tit for tats on new trade tariffs, and new sanctions between the two countries. America would press its allies much harder to align their investment policies with the US. You’d start to see US corporate leaders publicly coming out and taking an anti-China perspective, while the Chinese would be more aggressive about the need to work away from the dollar as the reserve currency.

On a cultural level, in America you would see fewer Chinese students, fewer Chinese people buying properties there. And Lord knows, there is always the potential for xenophobia: you only have to think back to the Japanese internment camps. Anti-Chinese sentiment would be a dangerous and an ugly thing, especially if you continue to have this growing divide between the rich and poor. On the other side, it’s not unthinkable that a Chinese government under pressure domestically would push anti-American sentiment as a palliative.

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The original Cold War was a clash between two clearly opposed ideologies. Is that the case here?

America’s ideology has not fundamentally changed, though it’s not as palatable or powerful as it used to be. It’s all about individual freedoms and liberties, democracy and free market enterprise. Over recent years, the U.S. has taken many hits on this, whether you look at the financial crisis, or human rights abuses at Guantanamo and Abu Ghraib, or the incredible power of corporate interests in its elections. But having said all that, you still can’t compare where the U.S. stands on these issues and where a country like China does.

China has no rule of law. It is an authoritarian political system and a state capitalist system. It’s not as if the Chinese are publicly promoting the notion that everyone should be authoritarian or that everyone should be state capitalist: Chinese ideology is about the Chinese state. It does not develop allies based on shared values; it develops allies based on shared interest. This is not true for the US: of course it has allies based on interest, but historical allies based on shared values play an oversized role, whether we’re talking about Britain and the US, or Israel and the US.

In this context, what would be the equivalent of a Cuban missile crisis?

Either a massive cyber attack, or the United States stepping in to defend the Japanese if they got into a conflict with China over contested territories. But there we’re talking about a cold war spilling over into a hot war, and I think the likelihood of that is very, very low, because national security today is driven much more by economics rather than geopolitics.

How well prepared are we for the challenges of a new cold war?

We’re not. The old, US-driven institutions like the G20 are no longer functioning adequately.

What are the solutions?

Don’t allow the great to be the enemy of the good. Allow more manageable, smaller organisations with more like-minded countries and more like-minded actors (like corporates, NGOs and individuals) to provide some form of leadership to respond to these issues. Ultimately, if the US is going to have a productive relationship with China, which is what everyone wants, you have to have strong baseline organisations that the Chinese want to join. When the WTO was created, nobody thought that China would ever be a member, but it became so strong and inclusive that the Chinese decided that the opportunities of joining outweighed the risks. We need institutions in place that will become attractive to the Chinese government, as their population gets wealthier and more people would support the rule of law. Ultimately, you need to create the kinds of clubs that the Chinese feel they need to join.

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