Insights

COVID-19 and the Evolving Global Security Threat

Todd Millay, managing director of Choate Investment Advisors, is joined in this episode of the Choate Family Office Podcast Series by Dr. Taylor Fravel, director of the MIT security studies program. They discuss the current global security situation and what it means for investors while focusing on three broad themes: increasing fragility of multilateral institutions, deteriorating U.S.-China relations, and the rise of nationalism/populism around the world.

Transcript

Todd Millay: I’m Todd Millay, managing director of Choate Investment Advisors.  Today I’m pleased to be joined by Dr. Taylor Fravel of MIT for a discussion of the current global securities situation and what it means for investors.  At MIT, Taylor is the Arthur and Ruth Sloan Professor of Political Science and is the director of the MIT Securities Studies Program.  Taylor graduated from Middlebury College and earned his Ph.D. from Stanford University.  He also has graduate degrees from the London School of Economics and Oxford University where he was a Rhodes Scholar and where we were classmates.  Taylor currently serves on the Editorial Boards of several prominent journals and is a member of the Board of Directors for the National Committee on U.S./China Relations.  He recently published a book on China’s military strategy since 1949 titled “Active Defense”.  Taylor, thank you so much for talking with me today.

Dr. Taylor Fravel:  It’s great to be here Todd.  Thank you very much.

TM:  I’d like to start by asking you to tell me about the securities studies program at MIT that you lead.

TF:  Great, yeah, thank you.  So the MIT securities studies program is a research and educational program within the Massachusetts Institute of Technology focusing on international security.  We have about almost 50 people in the program including roughly ten faculty members, five senior fellows, which at MIT we have to describe as senior research scientists, and about ten post-doctoral fellows and then other members would be our graduate students.  We try to do 2 things.  The first is to produce policy-relevant but rigorous academic research on pressing security problems of the day focusing on four areas in particular.  The first would be Asian security covering China, Japan and South Asia.  The second would be weapons of mass destruction with a particular emphasis on nuclear strategy and nuclear proliferation.  The third area is civil wars and ethnic conflicts where they might arise around the world but particularly in the Middle East.  And the fourth area is U.S. grand strategy and foreign policy more generally.  In addition to our research in these areas though, what we have really try to do is train the next generation, scholars and policy analysts who go to our Ph.D. program.  So you typically have 25 – 35 students within the political science department at MIT who choose to focus on securities studies.  So we divide our time on the one hand doing our own research and then perhaps even more of our time, on the other hand, trying to train the next generation of students to carry out the same kind of policy-relevant but rigorous work on kind of pressing security problems of the day.

TM:  Thank you.  So given that broad perspective that you have, I was hoping that you could just give your overall view on the current global security situation and particularly what security issues do you think have the greatest potential to affect the global economy and markets.

TF:  Sure, we are in a moment of absolute, unprecedented, change in world politics created by the onset of the coronavirus pandemic and how it is reverberating through all aspects of international relations from diplomacy to security to human issues such as climate change.  So, I guess I’ll highlight a couple of areas.  The first would be, at least at the moment, the weakening or the fragility of multi-lateral institutions and multilateral cooperation.  I think this was witnessed in the role that the World Health Organization played in the coronavirus pandemic, but really is emblematic of a broader wave, in which I think, these Institutions of global governance have been under stress whether it’s the United Nations, the World Trade Organization and the World Health Organization.  The second factor would be that we have the rise of a much greater and sharper competition between the United States and China the world’s two largest economies which I think from an investing point of view, but also just from a much broader political point of view could have the greatest impact on international politics will develop.  The U.S.-China relations have sort of been deteriorating slowly by subtly in the last several years really perhaps since 2015.  But that deterioration took or accelerated if you will in the last 6 months as the global pandemic began to spread and it now touches all areas to include trade between the two countries, I think as the President indicated, he no interest in pursuing a Phase 2 trade deal.  I’m not sure that he ever really did, but he sort of made that much more explicit than before.  In the military arena, you see greater competition between the U.S. and China particularly in the waters of the Western Pacific and the South China Sea and in many other areas as well.  So I think that has the potential to really reshape a number of different arenas.  One I think the area of technology you see a much greater push on the part of the United States to try to decouple if you will especially in the technological domain from China.  You also see a push by the United States to encourage other countries to pursue a similar decouple, at least as far as 5Gs particularly buying telecom, other equipment from the Chinese company Huawei.  And so I think really just in the last 2 weeks you see a number of countries which a year ago were pretty adamant they were going to go ahead with a five year equipment such as Great Britain or Italy are now announcing that they, in fact, will not.  And so, this competition between the U.S. and China is really broad based.  It’s a military competition focusing on Asia, it’s a much broader global economic competition, and then it’s also a technological competition.  The second aspect I wanted to focus on also is that increasingly countries may feel as if they’re going to be forced to choose sides between the United States and China and that has a potential, especially in light of the weakening of institutions, multi-lateral institutions in particular, to create much greater volatility and uncertainty in international politics international relations.

TM:  Well there’s a lot to cover there.  I’m interested in your observations about the effect of the virus.  Do you see the virus as sort of accelerating trends that were already happening or is the virus fundamentally changed things?

TF:  I think in the context of the U.S. and China it just rapidly accelerated a trend that was already taking place and you saw that in sort of March and April.  In particular, U.S. diplomacy was focused on trying to rename the virus to call it the Chinese virus or the Wuhan virus.  The National Security Council, I think even on its Twitter account at one point called it the Kung Flu.  I think this idea that if you give it a Chinese name that it somehow underscores China’s culpability for what happened.  And then around the same time the U.S. diplomacy spent a lot of time trying to convince the world that the virus somehow escaped from a laboratory, sort of a Class 4 laboratory in Wuhan.  I think that simply hardened our perceptions on both sides that really there was no going back to the relationship that might have existed between the U.S. and China say a decade ago.  And of course, this is on top of a lot of other frictions that were already in play.  The situation in the South China Sea was already quite tense by this point.  Our greater concerns over Taiwan and many of the other issues between the U.S. and China.  But certainly, I think that the virus sped up, perhaps by a number of years, the way the U.S./China relations were deteriorating.  This is in a very stark way which I think creates less flexibility for managing our relationship in the coming four year period.  I think in terms of the weakening of international institutions this has also been a trend that has been underway.  I think that one trend I should have mentioned before that I didn’t is simply kind of the rise of populism or nationalism in many countries around the world.  But I think cast merits of international or altruistic cooperation in a new light and makes it seem somehow less nationalistic if a country is internationalist.  So we saw this with Brexit.  One could say we saw this in the United States given the factors, the root that led to the election of Donald Trump as president and many other countries around the world.  And so, one problem with this sort of rising nationalism or populism is we see it in China and India and elsewhere right this is where this is not just a dynamic in industrialized economies.  One problem is that it really does lead to the adoption of sharper rhetoric, more colloquial ways of assessing one's interest and sometimes it’s a much higher sort of baseline probability for a crisis for tensions to escalate in ways that may have not been the case say five years ago. 

TM:  And for multi-national companies, obviously this is a real problem because they were set up really with supply chains assuming that there was going to be almost frictionless commerce around the world.  What do you see as you mention these two spheres developing?  What does that mean for multi-national firms?

TF:  Well I think the big open question is to what extent is decoupling between the U.S. and China limited to technology versus to what extent does is spread far beyond technology into other areas.  And as you know, there is so much manufacturing in the world and the attendant supply chains are sort of focused on Asia and China in particular and it’s hard to see how these would be reworked in a way that these could be reworked or rejiggered in a short period of time.  So I think for multi-national corporations they’re going to start hedging their bets probably think about creating new manufacturing plants in different parts of the world.  So Apple’s considering, for example, putting some production in India.  They’ve already moved, I believe, some production into Vietnam and of course Mexico, I think, stands to benefit as a way of manufacturing even more goods for sale into the U.S. market.  But I think it poses real challenges for multi-nationals which do want to sort of see stability in international politics and international economics and now there is much less stability but it’s not necessarily clear how far it will go and if given a timeframe it will take to reconfigure a supply chain and manufacturing facilities.  I think we may see a lot of groping through the dark, if you will, just to try to see what is possible while waiting for kind of the politics to play out and to see where it lands.  But I certainly think that going forward you’ll see many companies probably think twice about whether or not they want to add new capacity in China versus adding new capacity in other countries, other markets.

TM:  And can we talk a little about the fault lines in Asia in particular.  You mentioned China and India obviously there are tensions that have been rising at the border there.  There are tensions between China and several of its neighbors.  What’s the calculus there for these countries, living in a world with this dichotomy?  How do they strike the balance between their own security interests and obviously co-existing with China?

TF:  Sure, what you see in many of these countries, it is a bit of an exception perhaps maybe because their economies are so large.  But what you see in general is none of these countries seeking to break economic ties with China because it’s far too important for their own economies to maintain those economic relationships with China.  But you do see them increasingly turning to the United States or wanting to maintain a robust security relationship with the United States and this could possibly work for some countries.  It could sort of preventing them from choosing but if U.S./China relations get really intense for example it may be that either the U.S. or China asks them to choose and then they’re faced with a really challenging choice.  One could see that in some ways many of these countries are going to be guided by their economies first and foremost and so may tend to drift more toward China especially if they don’t have sort of active territorial disputes or very challenging territorial disputes with China.  Japan for example still is in dispute with the Senkaku Islands.  China and India have a big dispute on their border that’s erupted into violence in the last month or so and so these countries I think and being larger economies can maybe sort of be in a position to sort of seek other sources for their economies but small or relatively smaller economies in the region such as Vietnam or Indonesia or others Thailand or the Philippines I think are going to be still drawn to the attraction of the China market to the degree that it benefits their own economies.

TM:  Even a long standing U.S. ally, the United Kingdom waivered a bit on Huawei before ultimate deciding to side with the United States.  So, I guess that’s an illustration that these economic considerations might not be as clear as we think they are.

TF:  No because in the case of Great Britain, all the major phone companies already use a lot of Huawei gear I understand and so the cost for them to reconfigure their network is quite substantial and I think they thought that with the same agreements they had with Huawei in terms of setting up the security lab and kind of conduct a third party evaluation or at least a quasi-third-party evaluation of Huawei products and software they would be able to manage the security risks.  But the way in which the U.S./China relations have deteriorated and how sort have left countries to make a starker choice and so certainly I think that those that are a bit farther away from China and sort of less dependent on China like the European countries have been able I think to take actions on Huawei 5G that we might not see countries in Asia take simply because they might feel China exercises too much economic influence over them and they can’t kind of make that decision.

TM:  So what should investors be watching in terms of assessing this situation and deciding is it getting worse.  Are there certain litmus tests or flash points that you think people should have their eye on?

TF:  With respect to the U.S. and China or more generally?

TM:  I guess with respect to the U.S. and China and then more generally as well.  To think are we truly entering a kind of a deep globalizing world?  You know this sort of two spheres, two poles you know are there particular countries that seem to be on the pivot point of that and depending on which way they go that’s going to be an indicator.

TF:  That’s a really good question.  I think I don’t actually have a good answer for you.  Just because these relationships are complex and I don’t think necessarily there’s one or two indicators you could necessarily look to.  But I think one would be especially in East Asia whether or not countries decide to reduce the presence of U.S. troops if they’re treaty allies or trying to reduce their security engagements.  I think that will probably be the sign that they have started to choose that they have been faced with pressure to choose and they are choosing.  Now as an indicator of course, it may not be readily apparent, these things often are not sort of front and center in the news, but I think if the competition deepens and if China wants really to strengthen its position in the Asia region it probably at some point decide that it wants to be the only major power in the region and the U.S. should leave.  We would see this sort of filtered through our alliances with Korea with Japan.  But then also the ways in which the U.S. maintains our military access to countries that it doesn’t have formal treaties with such as Singapore, Malaysia and others.  So I would suspect that would be probably the best indicator in light of the certain dynamics that popped up.  I suspect too that we would not see Australia which is also a very rumbustious ally shift towards China.  But I think Australia is choosing to shift the other way in terms of some of the public statements that it’s made.  And perhaps just the willingness to use Huawei and other perhaps other sensitive Chinese technologies in their computer networks, national phone networks and other networks might also be a sign that in some ways that they’ve chosen and here you do see a pretty clear cut between kind of the enhanced industrial democracy that in general appear to be trying to avoid Huawei and the developing economies and it is in part India is really interesting because India is moving to a place where will also try to work to prevent Huawei from being a part of its 5G network.  But there the cost advantage is going be really consequential for India in a way that should may have been second last consequential for more advanced economies.

TM:  So just turning away from China for a second there are many other security issues in the world like I guess we could talk about but as you look across and think about the ongoing simmering tensions with Iran or cybersecurity threats from places like Russia or North Korea.  Are any rise to the level where it’s quite acute and people aren’t sort of paying enough attention to the potential disruption from that.

TF:  Let me take the Iran one first.  I mean I think the situation with Iran is sort of gotten much more complicated especially with the U.S. decision to withdraw offering the agreement that the Obama administration had reached with the Iranian government.  So this has led Iran to embark upon a series of counter measures and responses include most recently enough this week a long term kind of cooperation agreement with China the details of which are still unclear.  But is in fact has sort of potential to maybe reshape partly this part of the world.  But I think that depending on the outcome of the election in the United States there’s a chance that a different administration might come in and pursue a different approach to Iran.  On the cybercrimes it is, on the one hand, it sort of permeates everything and on the other hand, it’s very hard to see, one of the great challenges with cyber is that you could be hacked and you wouldn’t even know it right until after the fact.  Whereas in the more traditional role of securities that I grew up in if you’re attacked by another country you know it because they’ve started firing artillery shells and missiles at you and things explode and people die.  It’s pretty clear.  On the cyber front, I guess I would say a couple of things, I mean first what has to distinguish between are the cyber activities a state actor versus a non-state actors and clearly, with respect to non-state actors and criminal activity, we’re going to see even more and more cyber-related crimes whether is phishing attacks or ransomware or any of these things that have sort of made headlines.  I’m sure their many more of these kinds of stories that haven’t made the headlines but there is oftentimes companies don’t want to reveal when they’ve been attacked.  So on the nation stateside one wants to distinguish between three different kinds of cyber activities.  The first would be a cyber-theft to include the theft of industrial secrets.  The second would be sort of more traditional state to state espionage activities and the third would be military activities.  And certainly, with some countries like China, the state is clearly behind sort of decades long effort to steal industrial secrets from other countries.  Also, again just using China as an example because it’s a case I know well.  China’s been very active on the cyber dimension in terms of using cyber tools to conduct a traditional forms of espionage most notably in 2015, I believe it was the Office of Personnel Management database was hacked.  This database was strictly important because it contained all of the applications for security clearances from everyone who had ever held a security clearance investigate the country who accessed that information which everyone believes to be China.  Some pretty detailed information about us for personnel in the U.S. government.  I suspect that will only become more common especially as cyber tools tend progress.  And then the third area being cyber-attacks.  Here I actually think there are some really significant risks in terms of escalation and attribution and so sometimes when you’re attacked with a cyber-weapon, it can be hard to tell who attacked you.  And thus it’s hard to counterattack and moreover it’s harder to deter that attack it the first place.  It’s sort of referred to as the attribution problem.  And it’s a really important problem.  On the other hand, sort of cyber tools in some way are sort of blunt instruments, this is from a war fighting prospective.  We often talk about sort of cyber Pearl Harbors, sort of an attack on a security grid or major infrastructure in the United States or in another country.  That would also be seen sort of in part of the nuclear strategy as a counter value attack.  Not on soldiers but actually on its population.  And that one has a really high sort of escalation I mean states will take that very seriously.  Probably try to carry out a proportionate response.  So the cyber sort of, the military domain of cyber apart from the way that cyber would play a role in certain intelligence surveillance and reconnaissance.  But on the actual warfighting side, I think that one of the great powers there is certainly room for some kind of deterrence along the lines that we saw in the cold war with respect to nuclear weapons.  You know the fourth cyber area I should have mentioned earlier but the fourth one would be basically the role of cyber in what are sometimes described as misinformation operations or political interference.  And this really sort of appeared in the 2016 election and some activities that were attributed to Russia and I think this is an area where sort of there was a proof of concept in the 2016 election. If often relies upon exploiting very insecure personal networks or private networks of institutions such as think tanks or political parties that are not nearly as robust say as network security of a big bank right.  One single cyber event could really lead to the bankruptcy of the bank right.  So it’s unclear exactly how this is going to play out but it kind of contributes to some of the themes that we’re talking about at the start of our conversation in terms of the growing kind of instability of international politics and the weakening of institutions sort of seems to be accompanied by a great willingness or at least a having in one’s possession tools that make it more easy to interfere using cyber means in politics of other countries.  At the moment, Russia really seems to be the lead actor in this regard.  But I think they may be introducing the rest of the world to techniques that could be used in other countries.  So that’s a really important area to watch as well.

TM:  You mention the contrast between cyber warfare and actual shooting warfare and I did want to ask you whether you thought there was much prospect of escalation getting out of hand and any of these flashpoints around the world or whether that’s something you would regard as relatively low risk.

TF:  I would say it’s not low risk at all.  Although we are in an era where the dances in warfighting mean that conflicts very quickly become quite destructive so there’s great attention on all sides when there’s an issue that could escalate to controlling the escalation.  I guess I’ll offer the following comments and they are from a great power prospective.  The greatest opportunities for escalation at the moment are probably between the U.S. and China and this could start smaller.  It could be a collision at sea between two ships.  But especially say that collision led to the loss of life could lead to a series of steps that one can’t predict in advance.  But that could result in a much higher intensity war between the two countries.  Today basically, the three most competent militaries around the world would be the Chinese, Russian and American armed forces.  In some ways China is even is starting to pull ahead of Russia in certain areas and.  So anything that can lead to a clash between the U.S. and China is one we would want to treat with great concern.  Some of this could also have political triggers.  So for example, in the case of U.S. and China, many people like myself tend to focus on the prospects for some kind of armed conflict over the status of the island of Taiwan which China believes is or should be a part of China and to which basically Taiwan believes it should sort of maintaining its de facto independence or even pursue formal independence.  And the United States has made certain commitments to come to Taiwan’s aide or at least allow Taiwan to resist sort of having its political future being coerced by another state especially in this case by of course China.  And this of course is a huge issue for the Chinese government because national unification lies at sort of the very heart of the legitimacy of the Chinese Communist Party.  And it’s increasingly being viewed in the United States as a test of a democracy, which Taiwan is, facing off against a sort of a much larger autocracy or nondemocratic state such as China.  So that’s an issue which would not be started by accident such as a maritime scenario I discussed a few minutes ago but would actually result from sort of greater political tensions over the future of the Island which we may not be able to predict entirely in advance, but clearly one could see the broad fault lines given the ways in which Taiwan and China see their futures and the United States getting involved.  That is one issue, China has not use of force, has made very it will use force under certain conditions.  Now it’s made those statements to deter countries from getting involved.  But the way in which U.S. China relations are worsening it may be the case if there’s even greater pressure for the U.S. to get involved in sort of coming to Taiwan’s defense than ever before.  And then of course just to continue the China threat because you know it can do many things, there are other countries in the region who are treaty allies of the United States.  The United States has pledged to defend and could find themselves in disputes with China.  The most important ones here would be on Japan, that we discussed briefly, particularly the dispute over the Senkaku Islands in the East China Sea but also the Philippines.  The United States has sort of clarified with respect to its treaty with the Philippines to try to suggest that it would be more willing to get involved if the Philippines clash with China or were there disputes over the sovereignty of the Spratly Islands in the South China Sea.  So here you have two treaty allies who have their own disputes with China and the ways which could bring the United States.  And just to round it out because that’s not enough we have North Korea.  And with the Korean situation, in some ways is a bit more stable than before because I think the North has developed nuclear weapons and is not going to give them up so you sort to have to deal with that reality and I think the United States can deal with it through deterrents.  But if there is significant regime instability in the North or uncertainty about sort of politics in the North or it collapses you could see a situation which all of a sudden you had U.S. and Chinese troops on the Korean peninsula once again as was the case in 1950 after the outbreak of the Korean war between North and South Korea.  So many opportunities offer conflict between the U.S. and China and again I should have mentioned this earlier but you just said that the basic sort of structural dynamic right of a rising power abutting up against sort of dominant power.

TM:  The so-called Thucydides trap.

TF:  Personally I avoid using the that term because I think it’s a little too simplistic, but clearly we know that rising powers tend to create more friction and uncertainty in the international system.  I don’t think their destined to war.  I take some exception to some of the recent ways in which it has been talked about.  But yes that’s right.  But then you have United States and Russia which is not necessarily or doesn’t have as many flashpoints as the United States and China do in East Asia, but clearly you have it expanded North American Treaty Organization that could find itself in a variety of ways, if one or more of its members in a real conflict with Russia that would probably it would certainly trigger the treaty and lead to a much greater U.S. involvement.  And in some way that may be the less appreciated risk going back to the earlier part of our conversation because I think if there is a new administration in the United States next year I think you’ll see a very different approach to Russia and I think some of the potential challenges with Russia that haven’t received much attention will receive more attention

TM:  Meaning there could be an escalation with Russia under a new administration?

TF:  I think the probability probably goes up.  Right because at least now under President Trump there’s been basically at the Presidential level a desire to maintain very good tides with Russia and not really challenge Russia but I think within Europe and in other parts of the U.S. government, Russia’s treated with much more concern and alarm than is probably being reflected in the U.S. policy today.  So you could see to start right just a more robust U.S. posture toward Russia and other than that we’d have to see how that would play out.  But in some ways that’s been the other great power conflict that hasn’t necessarily received as much attention today part because of the way in which there is sort of this peculiar U.S./Russian relationship.

TM:  So maybe the last question, perhaps to end on a little more positive note.  Are there any areas where you see actually improvement or where your research is seeing a path forward toward the situation getting better?

TF:  I have a colleague Barry Posen, who is a scholar of military affairs in particular and he had a very interesting take on the whole pandemic.  Which is that overall it has the potential to perhaps create more stability in international relationships because you’re going to have more countries much more inordinately focused than before, less willing to spend money on defense.  More willing to spend on social welfare, public health, educational all the things that are being sort of identified as priority areas now in societies around the world and so it’s a bit of contrarian take, but nevertheless one that if he is correct and he is often correct that could sort of suggest, you know it will still be messy kind of international politics but not necessarily one that would be as prone to escalating perhaps even in some of the areas that I’ve discussed and I may be a bit more of a pessimist here, but an optimist, but it does say that right nation states have lots of different things that they have to worry about.  In a pandemic the most important thing that they have to worry about is what happens in their domestic societies and the way in which the pandemic challenges in different societies around the world requires a lot of attention and a lot of resources and to a degree that’s true, then state are going to be inordinately focused and less inclined to really get involved in situations that could escalate out of control.  So I suppose from a scholar’s perspective that’s a positive note, but I think that we tend to think about the worst things that could happen and then try to understand why they might happen and we can probably focus less on the good things that are happening in the world because the consequences are already quite good for the good things.  But the consequence for the bad things are the ones that we really do worry about.  

TM:  It sounds like you and your program are going to be quite busy.

TF:  Yes I think, I often remark to my wife, “what’s bad for the world is good for business.”  It’s in the business of doing this kind of research, so there really in some ways I’m not sure we really understand what the future looks like, it’s pretty easy to speculate, but when you’re in the midst of a storm you don’t really know what kind of storm you’re in until it’s over so its’ going to be very interesting to see what happens in the next couple of years.  

TM:  Well Taylor thank you so much for talking with me today.

TF:  Thank you.

 


The information provided in this recording is for informational purposes only.  While Choate Investment Advisors makes every attempt to present accurate information, the information in this recording may not be appropriate for your specific circumstances and it may become outdated over time.  The views expressed on this podcast are personal opinions only and should not be construed as financial advice for your given situation.  Moreover, the views expressed by Dr. Taylor Fravel are not necessarily endorsed by Choate Investment Advisors and Choate Investment Advisors may decide to select investments on a different basis at any time without prior notice.  Finally, as everyone should know past performance is not a guarantee of future performance.