The idea of a rising China has become so entrenched in the Western imagination that it can seem inevitable. But economics rarely operates in straight lines, and in China, the government of Xi Jinping is right now making decisions about China’s economic relations with the world that are bound to alter its trajectory.

Xi, the most dominant political figure in China in half a century, would like his country to overtake the United States as the world’s premier superpower. In that pursuit, he is reorienting his country’s trade and investment away from the West and, in certain respects, looking inward to strengthen China’s economic defenses. China’s leaders argue that such decisions were forced upon them by a hostile Washington intent on maintaining its hegemony. In taking this course, they are also contributing to a larger shift in global affairs, as the post–Cold War moment of globalization has given way to a new era in which geopolitical competition and security concerns drive economic policy.

[Read: How China wants to replace the U.S. order]

The story of China’s rise (so far) has been all about its relationship with the West, and especially the United States. More than 40 years ago, the paramount leader Deng Xiaoping introduced a free-market reform program that connected China’s destitute and largely agrarian populace to global supply chains through bonds of trade and investment with the U.S. and its partners. In flowed foreign capital and technology; out came manufactured goods for wealthy American and European consumers. Growth roared, and with it, incomes. None of that would have been possible without the West’s cooperation.

Beijing and Washington were once willing to set aside their numerous political disagreements in the pursuit of economic benefits that both believed were necessary for the future. But today, the two countries have come to see their ties as a source of risk and vulnerability. Xi fears that Washington can exploit its economic leverage to suppress his country’s rightful rise into a global superpower by withholding crucial technology or imposing punishing sanctions, such as those the U.S. slapped on Russia after its armies invaded Ukraine last year. He has sought to protect China by channeling enormous state support into developing homegrown technologies and by shifting China’s economic energies toward countries, including Russia, that are not perceived as threatening.

Washington, for its part, worries that China can use its dominance of certain supply chains, such as the production of rare earth minerals, to stymie U.S. industry, or that Beijing will capitalize on access to advanced American technology to enhance its own military capabilities or undercut U.S. economic competitiveness. Both the Trump and Biden administrations sought to curtail business with China through tariffs, export controls, and other measures, and encouraged investment in manufacturing at home.

Mike Gallagher, chair of the U.S. House Select Committee on the Chinese Communist Party, sees these shifts as commonsensical in many ways. “There are some people who want to go back to the halcyon days of economic engagement, in the hope that that might improve the U.S.-China relationship. I just think that represents the triumph of delusion over experience,” Gallagher told me. “We need to take off our golden blindfolds when it comes to the risks associated with doing business” with China, and “we need to reinforce our economic sovereignty in concert with our allies.”

And so the economic relationship between the U.S. and China—arguably the most influential of the past half century—is beginning to unravel. U.S. investment into China has been on the decline. In 2017, American companies invested $14.1 billion into China; in 2021, only $8.4 billion, according to the research firm Rhodium Group. In a recent survey of U.S. businesses conducted by the American Chamber of Commerce in China, 51 percent of the respondents said that their current plan was either not to increase their investment in the country or to decrease it, while another 26 percent said that the environment was too uncertain to decide.

Executives in Europe are hardly more enthusiastic. “While a handful of large firms, many of them German, continue to pour money into their China operations, many other firms with a presence in China are withholding new investment,” Rhodium Group explained in a 2022 report. “Virtually no new European firms have chosen to enter the Chinese market in recent years.”

Foreign investment suffered globally during the coronavirus pandemic, but China was hit harder than other countries and regions, according to a study that the International Monetary Fund released in April. The IMF noted that, during the pandemic period (roughly 2020 to 2022), compared with the preceding five years, the United States and the advanced European economies made significantly fewer “greenfield” investments into China—the term for when a company starts a new operation in a foreign country from scratch. Such investments into other regions, including emerging markets in Europe, held up much better. The study also revealed that foreign-investment flows are becoming more concentrated among countries that share similar geopolitical viewpoints. The IMF calls it the “fragmentation” of foreign-investment flows, but what it really means is that the decades-long love affair the West’s CEOs have had with China is coming to an end.

[Read: China’s mistakes can be America’s gain]

Chinese companies are withholding their money as well. The U.S. had been the most popular destination for China’s capital, with $193 billion invested since 2005, according to the American Enterprise Institute. Now Chinese investment in the U.S. has all but evaporated. Though it ticked upward in 2022 from the year before, to $3.2 billion, that’s a mere fraction of the nearly $54 billion invested in the U.S. in 2016.

Instead, Chinese firms are redirecting their investment to the global South. Last year, the two largest recipients of Chinese foreign investment were Saudi Arabia and Indonesia. Countries associated with Xi’s pet infrastructure-building program, the Belt and Road Initiative, accounted for less than a quarter of total outward Chinese investment in 2017, Derek Scissors, an AEI senior fellow, estimates. Last year, their share reached 60 percent (albeit of a smaller total amount). Though this shift reflects Xi’s foreign-policy preferences, it also shows how Chinese money is being scared off by a suspicious reception in the U.S. “Until that changes,” Scissors wrote in a January report, “investment will continue to shift to poorer countries.”

Although China’s trade with the United States and Europe remains immense, its exchange with the developing world is also growing. China’s largest trading partner is now not the U.S. or European Union, but the 10-country Association of Southeast Asian Nations—which includes Indonesia, Vietnam, and Thailand—with $975 billion worth of goods passing among them in 2022. China’s share of sub-Saharan Africa’s merchandise trade rose from a mere 4 percent in 2001 to more than 25 percent in 2020, surpassing that of both the U.S. and EU, according to a 2023 study from the Atlantic Council.

The shift in China’s global focus is likely to continue because it serves Beijing’s political interests. The new avenues of trade and finance Xi has opened through his Belt and Road program are designed to become routes of political influence. And a big reason Xi has been deepening relations with Russia is to secure sources of energy and other raw materials safely out of Washington’s reach. Trade between those two countries increased by more than a third last year, to a record $190 billion. Now Russians feeling the sting of U.S. sanctions are turning to the Chinese currency, the yuan, in preference to the dollar—furthering Xi’s goal of weakening the global influence of the greenback.

Washington’s position is hardening as well. Former President Donald Trump broke with decades of Washington policy by treating China as a potential adversary rather than partner. President Joe Biden has not only continued that approach, but sharpened it. His administration imposed tough controls on the export of advanced semiconductors and the equipment to manufacture them to China and is mulling new regulations that would curb U.S. investment in China in certain technologies.  

Gallagher said that “restrictions on capital outflows to China make a lot of sense,” and that he thinks Washington may have to take a “sector-by-sector approach” to prevent American money from flowing into Chinese firms affiliated with the military or involved in developing sensitive technology, such as artificial intelligence.

The other advanced democracies appear headed in a similar direction. The hot term in Western capitals with regard to China policy is de-risking: not the extreme “decoupling” of the Trump era, which implied a harsh severing of ties, but a somewhat more moderate effort to counter Chinese threats to security and industry. De-risking could mean diversifying supply chains to make sure that Beijing’s position in them isn’t so strong as to afford it leverage over the West, for example. The language of de-risking was central to the communiqué that emerged from the May summit of the G7, as well as to a speech that Ursula von der Leyen, president of the European Commission, gave in March.

Detachment from the West would be a major shift in itself, but it is not the only one that China has undertaken. The country’s companies and banks are also, in many respects, scaling back their engagement with the world. A few years ago, Chinese firms were “going global” at a torrid pace. Now that outreach has become much more measured. AEI data show that total Chinese investment abroad has shrunk dramatically, from a high of $174 billion in 2017 to only $42 billion in 2022. The story of Chinese lending to developing countries is similar: From 2008 to 2021, the two Chinese state banks that support government-policy priorities issued $498 billion in development finance for 100 countries, according to Boston University’s Global Development Policy Center. That’s not far off the amount lent by the World Bank. But the loans began to taper off in 2018 and sunk to a mere $10.5 billion for 2020 and 2021 combined.  

“We’re very much at a crossroads,” Rebecca Ray, a senior researcher at Boston University who tracks Chinese lending, told me. China’s retrenchment could reflect a decision to prioritize its domestic economy, which sagged amid the coronavirus pandemic and a property-market slump, she pointed out. But it is also possible that pragmatic concerns have led Beijing to pause its lending program before rebooting it to focus more on quality than quantity of development projects.

Whether these trends fully reflect a deliberate economic program remains unclear. The country’s strict COVID-prevention controls, which made cross-border business extremely difficult, may be skewing the numbers, and perhaps, with those restrictions lifted, China’s economic outreach to the world will rebound. Or Beijing may be at a transition point, with leaders looking to expand the country’s economic influence abroad, but with greater precision and effectiveness. But China is almost certainly amid a crucial strategic shift in its economic relations with the world.

The turn could ultimately be an inward one. Xi’s economic philosophy is based not on integrating with the world but on strengthening the homefront and marshaling Chinese resources for national endeavors and competition with the U.S. His mantra is “self-reliance,” by which he means eliminating his country’s vulnerabilities to the outside world, and especially the West. Doing so requires China to substitute imports with homemade alternatives. He may look for China to export its new high-tech products abroad but purchase as little as possible in return. Such a China will be one that doesn’t contribute as much as it could to the economic progress of its trading partners, and one that is less, not more, important to the global economy overall.

[Read: Breaking China’s hold]

But an insular turn is not the only possibility. Xi is also detaching China from the West in favor of links to the global South. He’s taking a risk in doing so. The United States, Japan, and other advanced economies still account for nearly 60 percent of global output, while the developing world (excluding China) produces less than a quarter. That means that consumers in the global South, though they are becoming richer, cannot afford to buy as much from China as those in the West and other advanced economies. Nor can the global South offer the technology that the West can.

Thus, Xi’s fixation on security and power over economic efficiency is leading him to alienate the trading partners that can provide what the Chinese economy needs most for its growth, such as advanced technology, in exchange for ties to countries (like Russia) that cannot replace what is being lost. Whether China can continue its ascent under these conditions remains to be seen. But Xi’s choices are likely hindering, not helping, China in its effort to join the ranks of the world’s richest countries.

China’s current trajectory may make it a less formidable competitor to the U.S. economy. But American companies will likely lose out on profitable opportunities too. The costs of a separation between China and the West are potentially huge for the entire world, with all sides paying a price for determining economic policies based on who is friend and foe.

A new cold War has come to seem all but inevitable. Tensions between China and the United States are mounting in step with Beijing’s growing power and ambition. Russia’s invasion of Ukraine has poisoned its relations with the West and pushed Moscow and Beijing closer together, pitting a democratic bloc anchored by the United States against an autocratic one anchored by China and Russia. Much as it did in the 20th century, Washington is teaming up with allies in Europe and Asia to contain the ambitions of its rivals.

But a cold war between the United States and a Sino-Russian bloc could be even costlier and more dangerous than the original standoff between America and the Soviet Union. Rather than embrace the prospect, Washington needs to take a step back, think through the stakes, and come up with a plan to avoid a geopolitical rupture that would substantially raise the risk of a great-power war and leave a globalized world too divided to manage shared problems. Moscow has already thrown down the gauntlet by invading Ukraine. But ties between the United States and China are not yet beyond repair—and China’s mounting economic and military strength makes it the more significant competitor.

[Anatol Lieven: Cold War catastrophes the U.S. can avoid this time]

China is in fact a more formidable rival than the Soviet Union ever was. Soviet GDP topped out at about 60 percent of U.S. GDP. In contrast, China’s economy, on its current trajectory, is set to overtake America’s during the next decade. And whereas the Soviet Union was never able to keep pace with the West’s technological advances, China is developing a high-tech sector on par with that of the United States. Yes, China’s economy is slowing and will be weighed down by domestic debt and demographic decline. But with a population that is more than four times larger than that of the United States, China will likely pull significantly ahead of America in economic output by the second half of the century.

China lags way behind the United States when it comes to geopolitical heft and reach. But history makes clear that when major powers ascend economically, expansive geopolitical ambition always follows. China is well on its way. Its navy has more warships than the U.S. Navy and its air force is the world’s third largest. The Chinese military is already capable of holding its own against the U.S. military in the western Pacific. China is on course to eventually take its place alongside the United States as one of the world’s two full-service superpowers.

China’s strategic position will also benefit from its teamwork with Russia. For most of the Cold War era, China and the Soviet Union were at odds, dividing the communist bloc. Moscow couldn’t work with Beijing against the West. But today, China and Russia are close partners. Russia, now economically and diplomatically isolated from the West, is ever more dependent on China, a dynamic that could afford Beijing leverage over the Kremlin for the foreseeable future.

If a new cold war emerges, the West will likely face an autocratic bloc that stretches from Europe to the Pacific, compelling the United States to split its forces between two distant theaters. Russian and NATO forces are now cheek by jowl in Europe, and U.S. and Chinese forces are in similarly dangerous proximity in the Pacific. A strategic landscape that is already daunting and dangerous is poised to grow only more so.

Washington would be mistaken to presume that a new cold war would play out much like the 20th-century version, with democracies on one side, autocracies on the other, and the West enjoying the upper hand. During the last round of East-West rivalry, bipolarity made geopolitical competition predictable and tractable. Stability emerged naturally from balancing between two dominant poles of power; the United States and the Soviet Union compelled most of the world’s countries to align with one camp or the other. The democratic camp ultimately outmatched its autocratic competitor, enabling the West to prevail.

In contrast, today’s world is becoming more multipolar than bipolar; even if the globe is again afflicted by a new bout of East-West rivalry, many countries, including emerging heavyweights, will likely refuse to take sides. Western democracies will find it more difficult to amass a preponderant coalition against their autocratic challengers in this multipolar world. The international system will also be much messier and more unpredictable, and thus harder to manage and stabilize, than the two-bloc world of the 20th century.

[Tom Nichols: I want my mutually assured destruction]

Russia’s war against Ukraine has provided a glimpse into this future. Despite the Kremlin’s bald act of aggression, more than three-quarters of the world’s countries have opted to stay on the sidelines, hoping to ride out the war’s disruptive effects on food and energy supplies while avoiding ensnarement in a new round of East-West rivalry. Some countries, such as Israel and Turkey, are protecting their relationships with Moscow. Many others are staying in the good graces of China, which has substantially increased its economic and political leverage across the global South through its Belt and Road Initiative. Some two-thirds of the world’s countries now trade more with China than with the United States. In many parts of the developing world, China has become the lender of first resort.

The fence sitters include major democracies such as India, Indonesia, and Brazil. During the second half of this century, India’s economy is likely to become the world’s second largest after China’s, Indonesia’s is set to become the fourth after America’s, and Brazil’s will likely be in the top 10. Should rivalry build between the United States and China, Washington simply cannot assume that such prominent powers, whether or not they are democracies, will be by its side.

Despite its democratic credentials, India is aligning with neither West nor East but instead seeking to serve as a bridge and broker between the two. India’s foreign minister, S. Jaishankar, recently explained that an “order which is still very, very deeply Western” is coming to an end and will give way to a “multi-alignment” world. In light of its proximity to and trade links with China, Indonesia will probably tilt more toward Beijing than toward Washington. According to a recent report from Australia’s Lowy Institute, the United States has been losing influence to China across Southeast Asia. Brazilian President Luiz Inácio Lula da Silva has declared that his country’s relationship with China is “extraordinary,” and warned that “nobody can stop Brazil from continuing to develop its relationship with China.”

At least for now, the United States can count on such long-standing partners as the United Kingdom, France, Germany, and Japan to be staunch allies. But their global sway is on the wane. When the Cold War wound down, the United States and its partners commanded almost 70 percent of global wealth. In contrast, projections show that Western democracies will account for less than 40 percent of global GDP in 2060. That may seem like a long way off, but if a new cold war materializes in this decade and lasts as long as the last one, it would not begin to wind down until around 2070.

Furthermore, America’s traditional allies may not be willing to throw their collective weight against China forever. Many European countries maintain lucrative trade links with China and are keeping their distance from the geopolitical duel building between Washington and Beijing. Germany’s Chancellor Olaf Scholz and France’s President Emmanuel Macron have both made recent trips to Beijing, accompanied by dozens of German and French CEOs. Macron caused a stir during his visit by stating that Taiwan is not Europe’s problem, and that “the worst thing would be to think that we Europeans must be followers and adapt ourselves to the American rhythm and a Chinese overreaction.”

Even if the West does hang together against China, it must factor in its own political weakness. The West was, for the most part, politically healthy during the original Cold War: Ideological moderation and centrism prevailed in liberal democracies on both sides of the Atlantic, buttressed by broadly shared prosperity. Such solid economic and political foundations produced a steady and purposeful brand of grand strategy that enabled the West to prevail against the Soviet Union.

Those days are now gone. Automation and globalization have taken a heavy toll on the economic welfare of workers in the West, undermining the social contract of the industrial era. Illiberal populism is on the loose on both sides of the Atlantic, and ideological moderation and centrist consensus have given way to bitter polarization and legislative dysfunction. Strategic steadiness has been replaced by inconstancy; U.S. foreign policy is regularly engulfed in political gamesmanship. Unless and until the United States and Europe bounce back politically, democracy will struggle to reclaim its global appeal, and Presidents Xi Jinping and Vladimir Putin will continue to have grounds for arguing that the West’s best days are behind it.

Democracies have time and again demonstrated their resilience and capacity for self-correction, a track record that provides cause for optimism that the West will eventually restore its political health. But in the meantime, the stumbling of liberal democracy weakens the allure of the Western model and its ability to outmatch autocratic alternatives. For now, the West’s top priority must be to get its own house in order—yet another reason to avoid the drain on resources and political capital that would accompany the arrival of a new cold war.   

Today’s world is far more interdependent than the one the first Cold War cleaved in two. The return of geopolitical fracture would therefore do far more damage. In the 20th century, western economies were able to thrive despite minimal economic intercourse with the Soviet Union. Today, by contrast, China is deeply integrated into international markets. Severing commercial ties between China and the West, should it come to that, would wreak havoc on the global economy. Already, the United States has taken steps to move select supply chains from China to friendly nations, and to deny China access to high-end technology. This measured economic distancing from China will likely accelerate, becoming a broader economic detachment, if rivalry continues to mount.

[Radio Atlantic: This is not your parents’ Cold War]

In this interconnected age, major powers need to work across ideological dividing lines not only to manage global commerce but also to address other shared priorities, such as arresting climate change, preventing pandemics and promoting global health, avoiding nuclear proliferation and arms races, governing the cybersphere, and managing migration. The heating up of great-power rivalry would put out of reach the collective governance needed to tackle these pressing transnational problems.

History makes clear that contests between rising challengers and reigning hegemons tend to end in war. That is not good news, given the high probability that China’s raw power will soon catch up with and then surpass America’s.

As China’s strength and ambition continue to grow, Beijing and Washington will inevitably compete for primacy. At present, ideological excess and zero-sum thinking in both the United States and China are fueling a spiral of mutual hostility.  In the United States, neither Democrats nor Republicans are ready to acknowledge or even contemplate the potential end of America’s long run of primacy. A blustery nationalism similarly informs China’s politics; Xi Jinping has been using the struggle against the United States to consolidate his rule and tighten his grip at home.

[From the July/August 2022 issue: We have no nuclear strategy]

A new cold war is likely unavoidable if China follows in Russia’s footsteps down the path of military aggression, whether against Taiwan or other targets. But we are not there yet. The United States and China still have an opportunity to shape the tenor and intensity of their competition and channel their relations in a more positive direction.

To arrest and reverse escalating hostility, Washington and Beijing will need sustained, constructive dialogue, and could even strive to devise a model of shared global leadership. But heading down this path would require a change of mindset in  Washington. The narrative of American exceptionalism leaves virtually no room for a peer competitor, and the prospect of a new cold war fits too readily into the prevailing paradigm. President Joe Biden foresees a century defined by a “battle between democracy and autocracy,” insisting that “autocrats will not win the future. We will. America will. And the future belongs to America.” The United States and its allies handily won Cold War 1.0. Washington can now dust off the same playbook and win Cold War 2.0.

But it will not be that easy. For the first time since World War II and the arrival of Pax Americana, the United States is about to meet its match. If the United States and China are to avoid going head to head and instead work together to tame a world that will be both multipolar and interdependent, the two countries will need to learn to live comfortably alongside each other in a global system that is ideologically diverse and politically pluralistic. Americans will need to take a leap of political imagination in order to coexist with a great power whose political system they find threatening and at odds with their messianic commitment to spreading democracy. The alternative is intractable geopolitical fracture and deepening global disarray.

China’s potential intransigence, mixed with the confrontational nationalism that infuses debate in both Beijing and Washington, may force the United States to aim lower. If so, Washington  should at least seek agreement with Beijing on guidelines for limiting and managing competition. The two countries could regularize military-to-military contacts, for example, and cordon off discussions of transnational issues, such as climate change, global health, and trade, from those of tougher issues, such as Taiwan and human rights.

Whether Washington pursues shared global leadership or only managed competition, the moment for opening a dialogue is now, while the United States still enjoys economic and military superiority, and while the two superpowers of the 21st century can still avoid the dangers and disorder that come with geopolitical rupture.