Gray Rhinos and Black Swans: Making Sense of Rising China-U.S. Tensions

Lindsay: There are troubling signs emanating from China: growing aggression in the South China Sea; saber-rattling around Taiwan; giant investments in strategic technologies like semiconductors and even high-end weapons; and ominous rhetoric from Chinese leader Xi Jinping. What threat does China perceive? What do Chinese rhetoric and actions mean for the United States and our allies?

Over the past two years, Talking Policy has sat down with leading China experts to understand where China is going on the global stage and what this might mean for the Indo-Pacific and for the rest of the world.

Today we’re joined by Jimmy Goodrich, a leading expert on technology, geopolitics, and national security with a focus on China and East Asia. Jimmy is affiliated with IGCC, as well as RAND and the Center for Strategic and International Studies. Today, I’ll talk with Jimmy about what’s happening, how we got here, and whether there’s a way back from the brink. Jimmy, welcome to Talking Policy.

Jimmy: Thanks. It’s great to be here, especially in sunny La Jolla.

Lindsay: All right, so the rhetoric coming out of China seems to be increasingly dire and even alarming. Xi Jinping has referred many times to extreme situations, and he’s warned that China needs to be prepared for dangerous times ahead. What’s going on?

Jimmy: Well, I mean, obviously there’s been discussion: is China preparing for war?

Everyone’s asking that big question, and what I tried to do is answer that by looking through all the different speeches and documents that have come out of the last couple of years in terms of the leadership, and particularly Xi, and how he perceives risk and the international environment. And so, one big takeaway is that there’s no explicit statement from the Communist Party of China saying they’re preparing for war.

But what they are saying is that the future is going to be faced with increasing geopolitical risks that the external environment surrounding China, whether it’s declining U.S.-China relations, whether it’s border disputes, or even, frankly, some domestic challenges. These might all create, quote, “extreme risks” for China moving forward, and as a result, they need to make their country more hardened to be able to overcome some of these risks that they perceive might be on the horizon.

In fact, Xi has been talking about this concept for quite some time, dating back almost a decade where he’s been mentioning changes unforeseen in more than a century that are rearranging the global geopolitical order that are going to bring challenges to the party. The need to have a bottom line, or Dixiàn (底线), or also extreme case outlook, Jixian (极限), and that party members need to be prepared for crises.

In fact, he’s called them, in 2019, gray rhinos and black swan events that might happen over the horizon that China needs to be prepared for.

Lindsay: So this security-oriented outlook, and focus on self-reliance, on not being dependent on the rest of the world, building up this “fortress” as your recent paper for IGCC is titled, “Fortress Economy.”

I want to ask you, where did this all start? When did it begin? A lot of us think about the heightened tension between the U.S. and China as maybe having its origins during the Trump presidency, or maybe it’s COVID-19, or maybe it was when Russia invaded Ukraine, but you date it back even further.

Can you kind of walk us through, step by step, the origin story of this, almost a severe outlook on what the world looks like and where it’s going?

Jimmy: Well, in China, striving to be self-sufficient, resilient, secure and controllable; mastering their own destiny over their economy and supply chains, food security has long been a concept within China.

Frankly, in some cases, since the beginning. Mao talked about food security during the cold war period, China was very focused on technology, self-sufficiency. And then we had this big period of reform and opening up, China engaging with the world, China connecting into the global economy.

And also, China’s been trying to promote technology self-sufficiency first under the Indigenous Innovation Platform in 2006, the Made in China 2025 initiative in 2015, more recently in the 20th Party Congress, China has promoted, technology self-reliance as a really key concept. So that is not new, but what is new over the last decade is Xi stressing the urgency of the task because of this perception that the global international environment is not conducive to a stable environment for China’s own development.

And that some of these issues, in fact, he stated directly, could directly interrupt the great rejuvenation of China, which is, you know, one of his hallmark slogans. And so, you know, he assesses that these risks are severe enough to their overall goal of becoming more self-sufficient, more secure—whether it’s in food security, energy, resources—that they need to accelerate these efforts, and then it really was, in that time period, you saw a significant down spiral in U.S.-China relations, under the backdrop of the previous Trump administration, but also more aggressive behavior from China, and then also COVID-19 hit. So it was this sort of perfect storm of events where Xi had long been, warning of major cataclysmic events that could disrupt the party’s agenda, disrupt China’s economic development, and frankly, pose an existential crisis for the party.

And very quickly, you can see that he’s capitalized on these events and starts to promote the new economic strategy of dual circulation; writes in the concept of national economic security into the 14th Five-Year plan; the 20th party Congress sees all of these new types of extreme case risks and thinking incorporated into party documents.

And now more recently in the last 12 months, we’re seeing actual implementation. A lot of these concepts from discussion and talking points when Xi visits provinces and cities to actual action plans being promulgated by the state council and funding being allocated for fortress economy efforts.

Lindsay: So your new paper for IGCC, which is called China’s Evolving Fortress Economy, documents this actually kind of remarkable consistency in the rhetoric coming out of China since Xi Jinping became the leader in 2013. The rhetoric is ominous. there are words like “calamity”, “unstable”, and “unpredictable international environment”. So it’s like scary kind of language. It feels extreme. You touched on this a little bit in your last answer, but I want to unpack, what exactly is the threat here?

Jimmy: Well, what’s interesting is that the initial discussion, the much more acute discussion in 2019, was under the backdrop of a minor economic crisis where markets were tumbling, and there was a lot of focus on the real estate market and hidden debt, and Xi holds this meeting and he talks about gray rhino and black swan risks, and that the party needs to be better assessing the risks.

At the time the commentary was focusing, well, he’s talking about economic crises. But if you look at whether it’s extreme situations or gray rhinos or black swans, bottom line thinking, extreme case thinking, kind of all the different concepts that I identified, they’re usually linked together with the international environment, whether it’s changes unforeseen in 100 years, which is Xi’s reference to moving from a unipolar to a multipolar world where there’s more instability, or whether it’s threats from pandemics or even, frankly, U.S.-China relations, which he’s referred to directly. And he consistently refers to these kind of risks over the horizon as international origin, but also systematic for China. So a systematic or a systemic risk is going to be a much larger crisis, that the party is going to face, sort of an existential test.

So what I tried to do is look at all the different party speeches, the sort of turgid documents that are released, the Xinhua News summaries of different Politburo meetings or leading small group meetings, and what was really interesting is that much of this was just in plain sight. They’re really talking about openly building a fortress economy where, of course, when they talk to global investors and businesses, whether it’s at Davos or hosting CEOs coming to Beijing, there’s none of this discussion around China closing up the drawbridge and creating a fortified economy, it’s much about, “oh, we’re still integrating with the global economy.”

So there’s a message that China wants the global community to hear, but the message they’re telling their own stakeholders, the party, government officials, state media is certainly a different message. It’s one of a dark, dangerous future that’s going to require a sense of determination, a fighting spirit, which Xi’s referenced many times. And this is kind of consistent where, you know, Xi’s view for the future is one in which it’s quite gloomy and grim. He’s talked about the need to eat meat from the bone, when talking to college students, or how party cadres need to think about the worst things that could possibly happen and prepare for them, be prepared to suffer.

And certainly, China did suffer significantly, as did everyone, during COVID-19. So this was all happening as well under the backdrop of these lockdowns,  where people were being put under quite extreme situations where they couldn’t leave their home and all that rhetoric was happening at the same time.

And so I think it has had an imprint on the psyche of Chinese who read this and see it and assume, “Well, something quite ominous is going to happen to us in the future.”

Now, everyone’s asking the question, does this mean that China is going to, or is preparing for war? And, to be clear, there’s really nothing from Xi himself that says an extreme situation is war. However, we have seen commentary from the Global Times, from party journals, where researchers, scholars have said, by the way, this does mean war. So, it’s interesting, it’s almost like a code word that they’re using to communicate to the party, to their population around these extreme risks, and that the risk of war over the horizon is increasing, and so they need to take these adequate steps.

Lindsay: Yeah, and you say in your paper that, China is taking practical steps to invest in its national and its economic security, that are consistent with a country that thinks there is an increased risk of war. Can you walk us through some of those practical steps, like how is this playing out in real time?

Jimmy: Yeah, so they actually spelled this out quite clearly in the 20th Party Congress and the 14th Five Year Plan and more of the recent policy documents from China’s National Development Reform Commission, which is really kind of the nerve agency that’s been tasked with formulating this fortress economy policy, and that makes sense because the NDRC used to be China’s economic planning agency. But they still they manage China’s energy affairs, they manage the grain and food storage, they manage civil defense mobilization. And the NDRC leadership has sort of been the spokesperson below Xi for a lot of these efforts.  In fact, China’s Vice Premier Liu He (刘鹤) and also the current NDRC minister have spoken about the need to be able to operate the economy at a middle level under an extreme situation. Essentially, what that means, what I’m inferring is, if there’s a war, China needs to be able to maintain some sort of stable economy, be able to maintain the production of goods, the distribution of food, the distribution of energy supplies on a reliable and continuous basis.

And so now we see a number of very specific activities that they connect to this effort directly. So as I mentioned, one is food security. Second is energy and resource security. Third is supply chain security. Fourth is National Reserve, think your coal and energy reserve. And then also emergency preparedness. What’s interesting is, we don’t see a lot of references to financial security. You would think that in a crisis situation where maybe Western countries might be, in counter-response or response, sanctioning China, but that doesn’t seem to have a lot of direct relationship.

So I think the fortress economy concept, as sort of China discusses it, as more focused on the real economy:  the basic necessities and goods that a nation would need under a protracted type of conflict.

Lindsay: You are a leading global expert in China and in the semiconductor industry, which is obviously a key prong in this global battlefield particularly between China and the U.S. Can you talk to us about why semiconductors matter so much in this competition?

Jimmy: Well, I mean, semiconductors are one of the most foundational inputs to the modern economy. Think about your car, laptop, PC, frontier AI systems, military systems, tanks, bombs, missiles. Everything has a chip in it, whether it’s a 50 cent basic chip or a $50,000 advanced chip for AI processing, and, you know, the pandemic really underscored for everyone because you couldn’t purchase your washing machine or you had a long delay trying to get a new car or if you got your car, you’d realize, it would be half the functionality disabled, like your heated seats, because the chips weren’t available. So China, like everyone—frankly, the United States learned a lesson of just how important chips are. And also, it was under the backdrop of the U.S. imposing a wave of export controls on China’s chip making and chip design capability for fear that they were going to be used for military applications like weapons simulations or modernizing China’s nuclear arsenal. So, you know, there’s kind of a million reasons for why China if we put ourselves in their shoes, would want to develop their own domestic indigenous sector.

But they were trying to do that even before then. So 2014, China had a big plan for semiconductors. They’d set up their big fund, this multibillion-dollar fund to invest in the chip industry. But now they’re really kind of going at a breakout pace of development. If you look at the data, it shows that China’s now the number one country importing semiconductor manufacturing equipment in the world for the last several months. And that’s a good indicator of the pace of development because, the machinery is the critical building block to actually produce the tools that go in the factories to produce the chips, and China today is the world’s largest importer of that.

And so this is a signal that China is fearful that, whether it’s worsening U.S.-China tensions or some sort of extreme situation on the horizon, they need to buy up and stockpile as much as possible, and that’s clearly what’s going on in the semiconductor space, but it’s happening in other areas, too.

You know, The Economist recently had a good piece that talked about how China’s average length of stockpiles for things like basic goods: grains, food, energy, liquid natural gas (LNG) is doubling from, say, 15 days to 30 days. Now, that could just be a sign that they’re trying to manage pricing in the market and have more stability for the domestic economy. But it’s also under the backdrop of this fortress economy discussion that we’ve seen.

Lindsay: This is a big economic upheaval, as you said, from 1978, opening up market reforms. Incredible economic growth, China becomes the world’s second largest economy. So many are lifted out of poverty. This sort of incredible success story. And then the last ten years, being kind of a hard right turn from that towards increased government steering of the economy, as our colleague Barry Naughton has written about for IGCC.

And these giant investments, really significant sweeping investments in building up this fortress economy. What are the impacts of these actions for China’s economy? Like, how are Chinese people, what is this like for them?

Jimmy: Well, you know, that’s a huge question, one that I did not address in the paper, which is how much does this all cost and what kind of tax is this going to impose or is imposing on the Chinese economy?

And certainly this isn’t free. China has to allocate money that it could spend in other areas like public health, education, basic research, transportation, infrastructure, public housing, social security, pensions, all the different areas that they have many priorities in. But this is one of their top priorities.

Because as Xi has said, you know, the risks that China could face from one of these existential crises is so great that it warrants this investment that they’re making. So, we don’t really know the true numbers behind any of this. In many cases, China is not disclosing investment numbers. They did mention that they’re going to allocate over $100 billion in long term special bonds for establishment of many of these different fortress economy projects over the next couple of years. That’s the first time we’re starting to see some numbers. But I think this is an area where, you know, from Xi’s perspective, well, maybe he has two percent less growth, but it’s worth it for the larger strategic aim that he will have at the end, which is a robust, resilient economy.

It’s a bit ironic and perhaps inconsistent, but, you know, his vision is that there is a domestic economy that, if needed, can be closed, can circulate domestically, and then has a backup source for each and every one of the industrial inputs that it would need that may not be the best but are good enough to keep the economy operating.

Those are actually his own words. He’s also said that China needs to research a series of “locks and glass doors” that can be opened and closed at different points in time, indicating that he wants some sort of sophisticated control mechanism to keep China open and closed during different periods of increasing risk. But then also talking about the need to really have a sense of urgency and make a lot of these investments quickly. But the total cost, we just don’t know yet. But certainly it’s not free.

Lindsay: Is there buy-in among the Chinese population for this?

Jimmy: Well, I mean, I think certainly he’s trying to create the narrative that it’s needed, in references to great power competition, and his references to the so-called pressure campaign from the United States, that he said directly at the 20th party of Congress, and then certainly when COVID came and Russia’s invasion of Ukraine that just underscored for the audience that he’s preaching to of why this is needed.

And frankly if we put ourselves in their shoes, many of these decisions, perhaps one would be making if they were in charge as well. The U.S. is making many of its own efforts to also build a more resilient economy. Some of that includes, for example, the CHIPS and Science Act. So, you know, just as China is worried that it will lose access to Western chips, U.S. policymakers are worried that in a Taiwan contingency, we will lose access to chips too. And so that’s what drove the initial investment around the CHIPS and Science Act. It’s what drove Congress to pass that. And now a lot of the funding and quite clearly, you know, when the Secretary of Commerce talks about how they allocate funding decisions, it’s around national security and the risks of possible crises.

So, you know, there’s some parallels to what the U.S. is doing in thinking about also perilous times ahead. If there’s a rocky road for U.S.-China relations, well, both nations need to be prepared. And so if you take a step back, it’s actually quite scary that both sides are looking at this thinking well, the risk of conflict is increasing.

What’s also interesting is that this is all happening when China’s going at, according to U.S. government estimates, the fastest pace of nuclear modernization in the history of the People’s Republic of China, building out a capability to match a perception of capabilities in the United States. So you see China saying, well, if they’re going to be in this great power competition where the U.S. is the primary competitor, if not adversary—and at the minimum, the U.S. is viewing now China as an adversary, so China has to look at the world through that lens—then they need to do everything they can to be as robust and resilient as the United States, so that if there ever was a crisis, that moving up the escalatory ladder, whether it was energy, food, water, military, that China would be on par with the U.S.

Lindsay: And we had Brad Roberts of Lawrence Livermore National Lab on the podcast about a year ago, talking about China’s ambitions in the nuclear weapons domain.

The title of your paper, “fortress” suggests to me something kind of defensive. You’re defending yourself from some kind of a threat. Is all of this defensive or is China, like, creating the problems that it’s predicting?

Jimmy: Well, you know one’s defense might be interpreted as offense. It’s a blurry line between offense and defense and, if one were considering sort of preemptive military activity at some point, you would also be undertaking many of these exact same things.

However, certainly in all of the different policy rhetoric and documents that I looked at, it was very much a defensive and reactive strategy, meaning: risks are increasing, the world is changing, so we need to do X, Y, Z. U.S. Ambassador to China, Nick Burns, has mentioned—he’s written a few op-eds and editorials—and said the challenge that China poses to the United States is going to be the greatest challenge of the next several decades. And I think Chinese leaders, at least from their own rhetoric, certainly seem to agree.

Lindsay: What are some of the actions that the U.S. has taken that are perceived by the Chinese as escalatory? You mentioned, export controls, but what else is going on?

Jimmy: Yeah, well, certainly over the last couple of years, whether it’s been sanctioning of officials for human rights issues, whether it’s been trade matters like the tariffs that the Trump administration imposed on China, the 301 tariffs, whether it’s been export controls, the crackdown on Chinese researchers here in the United States that may have had defense and military relationships, you know, all that kind of put together from I think China’s perspective is sort of, you know, the U.S. is out there to get them. But much of this, again, I think it’s just a natural reaction to policy decisions that China has made.

Lindsay: What are you most worried about, like personally? I mean you’ve been saturated in this world. You’ve been thinking about, studying, visiting China for a long time.

So what kind of conflict are you most worried about? And I mean, there’s this sort of flavor to what you’re saying that suggests that maybe both the U.S. and China see this as somewhat inevitable. Are there ways to avoid this kind of escalation into deeper, worse conflict?

Jimmy: Well, you know, stepping back a little bit, I think that one of the most important things and one of my biggest worries is that while the policy community that is doing great work thinking about U.S.-China relations, thinking about how to stabilize the relationship, that there’s not enough resources on this issue (fortress economy) and that, as a result, the level of analytical understanding of what’s happening in China is simply just not sufficient.

You know, the number of Americans studying Chinese has declined over the last decade. Certainly since the COVID pandemic, it’s been difficult for Chinese to come to the U.S., for Americans to go to China. Arguably, it’s more difficult, though, for Americans to go to China. The number of students studying there is now in the hundreds as opposed to the thousands, prior to the pandemic.

And so this is just not a good sign that if we’re going to be in a competitive relationship with the second largest country in the world economically, then we need to be able to understand what’s happening. We need to travel there. We need to have interaction with China. And certainly China is not making it easy, where it’s closing off access to journalists, scholars, embassy officials. So to some extent, even if we want to try and understand more, it’s very difficult to do so.

But I would say one thing that is concerning is that the policy community, China scholars, are rightly also focused on the military balance across the Taiwan Straits. But I think we’re also, as a result, missing out on these broader economic, industrial, and technological issues and changes that are happening in China, that do have an impact on U.S.-China relations, that do have an impact on some of these geopolitical and security issues. And, you know, I think they’re quite overlooked.

I think there needs to be a much more comprehensive effort to assess, what’s the state of the fortress economy in China? I just don’t think there is a well-funded systematic effort to understand the scope and pace of what’s happening in China.

I think this is an area where the U.S. needs to have a more granular and finite understanding. And it’s why places like the UC San Diego China Center and IGCC, think tanks in Washington, universities, organizations like RAND, are starting to think about what are these non-military aspects of the U.S.-China relations that are going to matter for great power competition? Because, if anything we learned from the Cold War, and I’m not saying this is a new Cold War, but one interesting parallel is that it was a full spectrum competition: ideology, economics, defense industrial base, technology, science. And certainly, the competition with the PRC is already in many domains and probably going to escalate to more over time.

Lindsay: Yeah. There’s an alternative explanation to Xi Jinping’s sort of aggressive fortress economy outlook and implementation, which suggests that Xi is using this threat as a kind of specter to solidify his power domestically and justify an increasingly autocratic rule. Or maybe that he interprets this resilience that China is aiming towards to be a deterrent against a sort of hostile action taken by an adversary of China. Do you think that either of those two is a legitimate kind of explanation for this?

Jimmy: Yeah. You know, I think certainly an unstable and risky world, or at least the creation of the perception of that type of dangerous world certainly benefited Xi’s consolidation of power. It certainly helps to have sort of an enemy out there that you perceive in order to justify some more extreme measures, more draconian anti-corruption arrests and other type of activity. That has certainly allowed Xi, amongst many, many other factors, to strengthen his power base.

But, you know, what is interesting is that a lot of the really dramatic shift in the more acute rhetoric where Xi starts talking about extreme situations and pretty much directly talking about the threat of war when he says extreme situations, those really don’t happen until 2020. And by then he had already secured his third term and had become one of the most powerful leaders that China’s ever seen in decades. So it’s clear that he’s continuing on this messaging campaign of a dangerous outlook for China, and to some extent, he’s said it so many times, one has to think he probably believes it.

Lindsay: Everyone’s thinking about the U.S. presidential election. It’s been a tumultuous summer here in the U.S. What impact do you think the outcome of the election might have on this whole situation, this great power conflict? Or does it actually not matter which candidate wins? Is this sort of going to happen and keep proceeding apace no matter what?

Jimmy: Yeah, so certainly Chinese academics, including Wang Jisi, a scholar from Peking University, recently published a paper in Foreign Affairs saying China doesn’t prefer either candidate, that either one they perceive to kind of continue in this more hostile outlook towards China, and that China needs to be sober in assessing that the United States is going to, for a foreseeable period of time, treat China as a primary competitor /strategic adversary.

Everything they’ve said so far is that no matter who is in that office, there might be some deviation, but overall, even if there is a president who wants to be more pro-engagement or find more ways for collaboration with the PRC while also managing competition, that there’ll still be a hawkish Congress. There’ll still be a media that they perceive as unfavorable to them. So I think they see that it’ll be really difficult to have a fundamental shift in U.S. perception and policy towards China with either candidate.

Lindsay: Last question: Wars are incredibly costly. They disrupt lives. They ruin lives. They’re not something to be taken lightly. None of us do. And IGCC, of course, was founded as a center for peace research.

If you were advising the presidential teams for, you know, the number one or two things they should be thinking about to reduce the likelihood of conflict with China, between China and the U.S., what would you tell them?

Jimmy: One thing that’s really important is to understand Chinese perception of the outside world, Chinese perception of U.S. actions. We may be doing things that we think have no relations to U.S.-China affairs, but they may perceive it’s part of some broader strategic plan by the U.S. to engage in competition with China. So for example, clarifying what is our policy is really important, clarifying strategic intentions, maintaining dialogue, even though the U.S. and China are adversarial in many areas, it’s important to have those open channels because even during the height of the Cold War, the U.S. was talking to the Soviet Union.

So I think continuing the type of diplomatic channels that have been set up by the Biden administration are really important so that you can eliminate misunderstandings and clarify intentions, that’s really important. It’s not a negotiation, it’s not giving away U.S. interests. It’s ensuring that there aren’t accidental misinterpretations.

And then also, looking at the broader industrial, economic, and technological landscape as part of the framework for U.S.-China competition. That’s certainly how China views it. I think we’re starting to view it that way in the U.S., certainly with respect to semiconductors, batteries. But also, thinking more broadly around what type of manufacturing economy do we and our allies need?  And frankly, also thinking innovatively. We don’t, and we cannot, do everything in our own borders. That’s why the CHIPS Act, for example, is partnering with Korean, Taiwanese, Japanese companies. We’re seeing investments in Singapore, Japan that benefit resilience in the U.S. And so thinking about the strength of our allied relationships is really, really important. It’s not just important on the military domain, but it’s really important in the economic and industrial and technological domain, where China might be a really large country: they can do amazing things; they’re mobilizing their nation to build this fortress economy, to increase self-sufficiency. At the end of the day, the Chinese economy cannot compete with a global economy in which many U.S. and its allied partners are united. I think that’s the ultimate strength that the U.S. has, is a vision for working with allies. And so I think as well, continuing those partnerships is really important, and frankly, in many times, it just makes plain old economic sense. If the U.S. takes unilateral action, in some cases it may work, but in many cases it may not, and it ends up harming U.S. companies and their economic interests.

These are all things I think we’re doing now, and even if you look at the House China Committee, for example, in Washington, which is bipartisan, it’s quite diverse, the types of topics that the committee is looking at. So I think that’s a sign that policymakers, scholars, academics are starting to think about this broader concept of U.S.-China competition: what it means, how do we be competitive, but also how do we manage the risk at the same time?

Certainly nobody wants conflict. I don’t think Chinese leaders are hoping for conflict. I don’t think any U.S., Western leader is pushing for conflict. And so at the end of the day, it’s looking at, well, how can each side be clear-headed and understanding of their intentions so that they can avoid those type of accidents.

Lindsay: Jimmy Goodrich, thank you for being with us on Talking Policy.

Jimmy: Great. Thanks. Awesome to be here.

Lindsay: Thank you for listening to this episode of Talking Policy. Talking Policy is a production of the University of California Institute on Global Conflict and Cooperation. This episode was produced and edited by Tyler Ellison. To ensure you never miss an episode, subscribe to Talking Policy wherever you get your podcasts.