The Tribute System: The New World Order

On Chinese Culture, the Tribute System, the 100 Years of Humiliation, The Art of War, “One China with Taiwan Part of China,” Where We Are Now, and Where We Are Headed

A shorter version of this note first appeared in the Financial Times.

Where We Are Now

I recently spent a month in Asia, including 10 days in China, where I met with senior policy makers in several countries, and I found that over the past few months there has been a big shift in the world order because:

1) The United States’ handling of Iran’s taking of the Strait of Hormuz has led global leaders, especially those in Asia, to conclude that the American public does not have the willingness to endure the discomforts of war and that the US doesn’t have the resources to fight wars on two or more fronts, so it doesn’t have what it takes to fight to maintain its empire. This situation looks a lot like the British handling of Egypt’s taking of the Suez Canal, which signaled the end of the British Empire. More specifically, it is now inconceivable that the American public would support an American military response to Chinese pressures a) aimed at Taiwan or b) against countries that are trying to contain China. This has changed the thinking and actions of leaders in countries that are US allies and that are hosting American bases as a counterweight to China under the assumption that the US will protect them. Obviously, this has big implications for the world geopolitical order, especially for Taiwan, Japan, the Philippines, and, to a lesser degree, other Asian countries. This change has been reflected in the many visits to Beijing by heads of state and their delegations to build tribute-type relationships with President Xi, but the most significant reflection of this shift was President Xi making clear to President Trump, in the form of a veiled threat, that planned US arms sales to Taiwan would not be appreciated by China.

2) It has also become clear that the Chinese are earning huge amounts of money from their exports, which is leading to Chinese companies and policy banks building up huge capital surpluses that give the Chinese very large buying power. This is exerting upward pressure on the Chinese renminbi relative to the US dollar. Also, the use of the renminbi for trade and capital transactions is growing quickly relative to the US dollar, and China’s banks, capital market companies, and capital markets themselves are becoming strong competitors to their American counterparts at a time when the Chinese are understandably reluctant to accumulate American assets that can be sanctioned. We are certainly seeing China’s economic and financial powers growing rapidly.

Because most countries’ leaders now believe these two points to be true, we have been seeing several world leaders, in addition to President Trump, paying visits to President Xi to build good relationships and do deals (i.e., to “pay tribute”), and we are now seeing a softer tone and more cooperation coming from the Trump administration (e.g., reflected in Defense Secretary Hegseth’s speech at the Shangri-La Dialogue and a US visit by the Taiwanese Kuomintang political opposition party head, who is in favor of much closer relations with China). Based on these developments, I think we are in the very early stage of a shift to a tribute-system-type order in the Asia region and even beyond.

As a global macro investor who needs to understand how the chess pieces (or Go pieces) are moving and what will probably happen, and as someone who strives to improve mutual understanding, especially between the US and China, I believe that it is essential to understand what China will do in light of this and how things will go. From my visiting China for over 40 years, having gotten to know and learn from senior Chinese leaders over those many years, and having studied Chinese history going back to its unification in 221 BCE, I have come to believe that understanding the Chinese leaders’ perspectives, what is now going on, and what is likely to happen requires understanding eight things:

1) Chinese culture

2) The tribute system

3) Chinese thinking about the “art of war”

4) The 100 Years of Humiliation

5) The view that “there is one China and Taiwan is part of China”

6) The change in relative economic and military powers and geopolitics from 1945 to the present

7) The political and personal views of President Xi and President Trump in the context of the changing world order and the changes that lie ahead

8) Where the current economic, political, geopolitical, technological, and acts of nature influences are—and where they are headed

Based on my understanding of these things, to summarize my view in one sentence:

I believe we should expect that the Chinese culture and President Xi’s leadership—together with China’s increased economic, military, and geopolitical powers and political realities in both the US and China—will lead to the rectification of the 100 Years of Humiliation through China becoming strong and largely self-sufficient, through its increasingly exercising its sovereign authority over Taiwan (where most of the world’s AI chips are produced) and asserting itself over opposing countries using techniques of pressure and deception described in The Art of War without initiating head-on military attacks, and through the emergence of a modern-day version of the tribute system, with significant progress toward all this coming while President Xi is in office.

As promised, that was one sentence, though a long one.

In the rest of today’s note, I will first describe these eight influences and the impact I expect they will have on Chinese thinking and actions. I believe that it is very important to understand them. Then I will cover what I think is likely to happen.

What I’m going to say won’t be totally, always, or precisely true, but I believe it will be by and large true. Of course, as with all topics, many others will have different views, so take what I am saying with a grain of salt.

1) The Chinese Culture

I believe it is correct that “culture is destiny,” so, if one understands Chinese culture, one can pretty well understand what Chinese leaders will do to address their issues. That is because cultures, like religions, deeply ingrain in people’s brains ideas of how they should behave. That is especially true of the Chinese culture’s influence on the Chinese people, because it has been reinforced for thousands of years, making it almost imbued in their DNA. Chinese leaders believe that their culture is their destiny and the most powerful force driving people’s behaviors. They point to how different geographic areas have somewhat different cultures by pointing to how cultures and ways of operating are different in the different parts of China, like they are different in the different parts of Europe and like the Chinese culture is different from the Western culture, which is based on its Mediterranean roots. I think their perspective about that is obviously true.

I will now attempt to briefly describe the Chinese culture as it has been described to me by Chinese leaders, and as I have seen it operate over the last 42 years. It is mostly about how to achieve order.

The Chinese approach is primarily Confucian, which is a hierarchical, family-like approach to achieving order by everyone knowing their roles and what to do in those roles. This Confucian approach extends beyond the family so that the Chinese use it in dealing with all others, including people in China and in other countries. Reflecting this is the fact the word “country” in Chinese is made up of two characters—“state” and “family”—so in China, “country” means “state family.” It is based on filial piety, which means those who are on top of the hierarchy (the parents of the family and the leaders of the country) have unlimited devotion to give those they are responsible for (children of the family and the citizens of the country) guidance, protection, discipline, and moral upbringing. Likewise, those lower in the hierarchy (the children and the citizens) show unlimited devotion to give those higher in the hierarchy (the parents of the family and the leaders of the country) obedience, care, and respect. In other words, it is a system of hierarchical, reciprocal, moral, and power-based relationships.

The Chinese’s ultimate goal is to have order, (ideally) harmony, and prosperity for most people, and their path for achieving these is via a paternal relationship between the leaders of the state and the people they are responsible for governing.

You can see the obvious differences between Chinese culture and Western culture (which the Chinese call the “Mediterranean culture” because the Mediterranean is where it emanated from). This Chinese culture/system is almost the opposite of the Western culture/system, especially the US culture/system, which is more bottom-up than top-down, more revolutionary than obedient, more in favor of the well-being of the individual and of individualism over that of the collective, and more capitalist than communist. This approach of favoring the interests of the majority over those of individuals is why China can build high-speed rail and other infrastructure projects (which require moving many people), while the US can’t. It also affects what is state-owned and what is privately owned and shapes the big differences in Chinese and American views about private property ownership.

This approach has been pretty much the same for thousands of years. China is now viewed as being in the latest “dynasty,” which began in 1949. Chinese leaders are very aware of the lessons from history and the timeless and universal truths that come through them.

To be clear, while operating in the way I just described, there are also significant variations among the Chinese in their ways of operating. Leaders can have varied styles of leadership just as parents have varied styles of parenting, from strict to liberal. For example, Mao and Deng Xiaoping had very different approaches to leadership, though they were both very Chinese. Also, as with all countries, in China there are of course variations in the cultures by location, tradition, and ethnicity—e.g., Legalist, Confucian, Taoist, Buddhist, Marxist, Han Chinese, many other ethnic groups, etc.—so what I described is not 100% true.

Similar to the United States, China struggles with and argues about how to get the best balance between rightist capitalism and leftist socialism in deciding how to foster development and rewards, though with a much stronger skew to socialism/communism. For example, while Chinese economic policy makers now want entrepreneurship to help with inventiveness that can raise living standards for the whole, they don’t want it to the extent it increases the wealth gap and greediness, so they struggle with how “capitalist” to be and how much independence to allow. As in the US, there are political arguments, though they have typically occurred in secret settings within a very top-down, hierarchical, disciplinarian system—or they are not verbalized at all.

In China, as in all countries, the monetary orders, domestic political orders, and international geopolitical orders have gone through Big Cycles that always inevitably led to their weakening and breaking down. Unlike most Western counties’ leaders, especially US leaders, Chinese leaders are very aware of these Big Cycles and the lessons in history. When a dynasty is in decline and there is a breakdown of the order, which they have historically called “losing of the Mandate of Heaven,” the turbulence naturally leads to a fight for control. Sometimes the dynasties survive the challenges and sometimes they are overthrown, which produces new leaders and new dynasties. Periods of turbulence in China, as in most other countries, have happened when there was bad leadership combined with great challenges, which typically were the result of classic timeless and universal causes: 1) the monetary orders broke down because of too much indebtedness, 2) the domestic political orders broke down because of large irreconcilable wealth and values differences, 3) there were fights with those from outside (e.g., the invasions of the Mongols, the Manchus, and the foreign powers in “the 100 Years of Humiliation”), 4) acts of nature—droughts, floods, and pandemics—produced terrible conditions, and 5) radically new and disruptive technologies were used for conflict. When the aggregate of these five forces is improving, there is an increase in health and power, and when the aggregate is declining, there is a loss of health and power.

This is the Big Cycle that is timeless and universal and that I have described probably more times than you care to hear. These forces have led to changes in the leadership and governance system from one domestic order (i.e., dynasty) to another throughout Chinese history. When, after the wars, the winners and the new leaders of the new dynasties (the new emperors) took control, it was the new leaders’ (the new emperors’) responsibility to bring about the well-being of the people. Typically, political fights happened in private and were very vicious. When disorderly shifts from one order/dynasty to the next took place, they typically happened over many years, such as when the Song Dynasty replaced the Tang Dynasty, which took 50 years. The fact that Chinese leaders have studied this history provides them with lessons that guide their approaches.

2) The Tribute System

I recommend that you learn more about the tribute system because I believe that the Chinese will gravitate toward it and that the new world order will increasingly look like it, especially in Asia.

The tribute system, which characterized Chinese foreign relations through multiple dynasties for the 2,000 years from roughly 200 BCE until the late 19th century, is the way Chinese leaders are inclined to interact with other countries, which is a natural extension of Confucian traditions, in which order comes from clearly defined hierarchical roles. It is based on ideas of how the family should be managed and how families should deal with other families. The Chinese view it as a very practical system because it recognizes the reality that there are differences in power and provides good ways for countries to deal with that reality, avoiding violent fighting while using pressure in the ways conveyed in Sun Tzu’s The Art of War.

In the tribute system, relations are not between equals, but between superiors and subordinates that recognize their relative positions in the hierarchy. The more powerful ones are to treat the less powerful ones well, and the less powerful ones are to treat the more powerful ones well, so that there is harmony. If an inferior power treats the superior power inappropriately, the more powerful power punishes the less powerful one in some way, typically not violently but through pressure like denying them what they want, though occasionally the punishment can be violent to “convey lessons.”

As an extension of this cultural belief system, the Chinese do not believe in building empires in which other countries are occupied and controlled by them because they believe that doing so is painfully ineffective, like trying to occupy and control other families. It’s difficult enough to take care of one’s own family, and because the values and cultures of others are so different, it would be like trying to mix oil and water. They point out how badly that has gone for the United States in Vietnam, Afghanistan, etc. So, their approach is quite different from a Western/ Mediterranean approach, which is based on fighting and taking over others’ territories and trying to control others. This difference is the main reason why the US has 700 to 800 military bases in 80 other countries while China has only one.

While the Chinese rulers generally preferred indirect influence historically, in some cases, especially with border states, they took control when they believed it was strategically, economically, or politically necessary.

3) The Chinese Thinking About the “Art of War”

You need to understand how the Chinese like to fight wars, which is described in Sun Tzu’s The Art of War (a book you should read if you haven’t).

Their approach is an extension of their previously explained cultural and tribute system inclinations in that it is first and foremost nonviolent. As Sun Tzu wrote, “to subdue the enemy without fighting is the acme of skill.” Violent war is a last resort. They believe that violent war hurts those in it, and that parties that must resort to violence were not smart enough to win without it. It is through deception and pressure that one should fight and win. For example, in its pursuit of reunification with Taiwan, China will likely attempt to win via behind-the-scenes maneuvers that are never seen. In tomorrow’s part of this note, I will explain how this might go.

The differences between the Western/Mediterranean and Chinese ways of fighting are roughly analogous to the differences between chess and the game of Go. In chess, the goal is to kill your opponent, while in Go the goal is to limit your opponent’s area of influence relative to your own. Because of the strongly held hierarchical, nonviolent beliefs reflected in the Chinese culture, I expect them to use their powers to create a hierarchical order, with them being the central power (the Middle Kingdom) in their region and using peaceful and indirect pressures to achieve their goals. And I expect that to happen in a classic tribute system/art of war sort of way—by showing power and exerting firm, behind-the-scenes pressure that includes giving rewards for good relationships and punishments for bad ones, only displaying these pressures and punishments openly when needed.

4) The 100 Years of Humiliation

The full story of the 100 Years of Humiliation remains vivid in Chinese leaders’ and most Chinese people’s minds and is a big driver of their thoughts and actions, so it’s important to understand. It is a dramatic and important story that I’m going to explain in 600 words. (It will take you just a few minutes to read, but if that’s too much for you, skip ahead.)

In brief, in 1793, a British delegation traveled to meet the existing Chinese emperor (Qing) because the British wanted tea, silk, and porcelain from China. At the time, the Chinese and the Chinese emperor were on top of the world and expected foreign states to participate in their tribute system. In a famous letter to George III, the Qianlong Emperor essentially said that China possessed all things in abundance and had no need for foreign products. Nonetheless, from 1793 to 1839 the British and other foreign powers traded with China and, because the Chinese had more to offer the rest of the world than the rest of the world had for it, they ran big trade surpluses, which led to silver—the money at the time—flowing from Britain into China to pay for Chinese goods. Britain’s unsustainably large trade deficit led it to take opium that was grown in British-controlled India and sell it in China, which rectified the trade and capital imbalance and led to addiction problems in China. Chinese leaders viewed the trade as both a social disaster and a national security problem, so, in 1839, the Qing government moved to stop this by confiscating and destroying large quantities of British-owned opium in Canton. In 1839 (the year that began the 100 Years of Humiliation), the Qing Empire was still one of the world’s most successful, largest, and most populous states and perceived itself as the greatest world power. But because the Chinese hadn’t fought wars in a long time and the British were experts at it, Britain easily defeated China. The British imposed the Treaty of Nanking, took control of Hong Kong, and opened Chinese ports to foreign trade. France, Russia, and Japan soon joined the exploitations and wars, and over the following several decades, China suffered additional defeats and was forced to sign more unequal treaties that granted foreign powers special privileges inside China. Simultaneously, China’s domestic conditions deteriorated, the monetary order broke down, and a terrible civil war (costing between 20 and 30 million lives) occurred.

The next great shock to China came in the First Sino-Japanese War when Japan, which had modernized, defeated China decisively. In 1895, Japan took control of Taiwan. It also forced Chinese leaders to recognize the independence of Korea (which soon fell under Japanese domination) and pay large indemnities. The existing Qing dynasty officially retained power but was greatly weakened and humiliated. It had clearly lost control. In 1900, there was a big anti-foreign, anti-Christian rebellion (the Boxer Rebellion), which led to an eight-nation alliance of foreign powers occupying Beijing and imposing further penalties. The Qing government collapsed in 1911 (with the Xinhai Revolution), leaving China fractured. Much of China fell under the control of competing warlords, while foreign powers continued their exploitations. Then Japan seized control of Manchuria and launched a full-scale invasion in the Second Sino-Japanese War. Cities were devastated, millions died, and atrocities such as the Nanjing Massacre became enduring symbols of national trauma. When World War II came and ended with a Japanese defeat in 1945, the winning powers declared at the Cairo Conference and again via the Potsdam Declaration that the territories taken by Japan from China, including Taiwan (Formosa), “shall be restored to the Republic of China.”

5) “There is One China and Taiwan Is Part of China”

Between 1945 (the end of World War II) and 1949 (when the PRC was born), there was a classic civil war between the hard-right, rich capitalists and the hard-left, poor communists. It led to the Chinese Communist Party taking control of the mainland and the Chinese KMT capitalists taking control of Formosa/Taiwan. So, while everyone agreed that “there is one China and Taiwan is part of China,” there was an argument over which side rightfully ruled China. As it increasingly became clear that the People’s Republic of China, ruled by the Chinese Communist Party, was in control of most of China, and with the gradual integration of the PRC into the world community, it was agreed that there should be peaceful reunification. The overwhelming majority of the Chinese and Chinese leaders believe that and view Taiwan as part of the Chinese family. More precisely, they view it as a renegade province that is building up its military with American support in order to remain independent.

To quickly bring this story from 1949 up to the present, the PRC under the Chinese Communist Party and Mao chose isolation and experienced extended periods of hardship. China’s involvement in the Korean War was to keep out foreigners, who were viewed as threats. Eventually, the Soviet Union threatened China, which led to Mao and Zhou Enlai on the Chinese side, and Nixon and Kissinger on the American side, bringing about the opening of China. Mao died in 1976 and was replaced by Deng Xiaoping in 1978, which led to China opening the door, reforming the system, and quietly gaining great power. When President Xi came to power and consolidated power, he said he was doing so in anticipation of what he described as challenges of the sort that we haven’t seen in the last 100 years. This is what we are now seeing.

For the Chinese, especially President Xi, the time for cross-strait reunification is rapidly approaching. I am not alone in suspecting that, should he take up another term beginning in 2028, President Xi would like some form of reunification to happen during that term. Given all that has happened, I expect he feels that he and China are in a strong position to push for that and also break other countries’ containment polices. So, in his meeting with President Trump, President Xi made clear that the reunification issue must be dealt with and that he does not want the US to sell Taiwan the powerful arms that it was promised. He is now clearly moving ahead diplomatically, applying pressure to enable reunification without a big military fight.

Consistent with this, Cheng Li-wun, the current head of Taiwan’s KMT party, which is against Taiwan’s independence and in favor of much closer relations with China, met with Xi Jinping in Beijing in April and just completed a two-week trip to the United States, where she met members of Congress and foreign policy figures. You can imagine what they talked about. It is the “peace through dialogue” alternative.

6) The Changes in Relative Economic and Military Powers and in Geopolitics from 1945 to the Present

To use President Trump’s wording, it looks like China “has the cards.” Obviously, there has been a great shift in relative powers with the US’s relative power declining and China’s rising in the classic ways that relative powers are measured. These ways are covered in detail in my book and YouTube video “Principles for Dealing with the Changing World Order” and in my other writings, so I’m not going to digress into them now. My main point is that China is now a nearly comparable power to the United States overall (ahead in some areas and behind in others), is significantly more powerful economically and militarily than the US in its own neighborhood (East Asia) and is growing and accumulating wealth at a faster rate. At the same time, the US is unwilling and ill-prepared to enter into a fight with China in East Asia. That is where things now stand.

For those reasons, the world order is now in the process of changing from a US-led, multilateral, rules-based order to a bipolar, power-based, hierarchical order, and we should understand how the Chinese will probably approach shaping this new world order.

While Chinese leaders hope that the US and China will use their powers to produce peace and prosperity and that there will be significant movement toward cross-strait reunification and the elimination of efforts to contain China, if that is not done cooperatively, it will be done the way the Chinese handle such things—through the “art of war” and the tribute system. The Chinese have many levers of power to use. For example, Chinese, American, and other leaders are mindful that microchips are the most important economic asset—more important than oil—and that the world depends on chips from Taiwan, which the Chinese can threaten to curtail in one way or another. Notably, the Chinese have a plan to be self-sufficient in chip production by late 2028, while the US and the world will still be dependent on Taiwanese chip production. In the markets and in the economy, AI is everything, and AI without Taiwan is nothing. So, it is easy to imagine what a Chinese blockade of chips coming out of Taiwan would do to the stock market and world economy. That is just one of many potential pressure points China has. I am sure the US has some too. Since nobody wants the conflict to come to that, it probably won’t materialize, though the threats are real and the risks are high. As always, politics will play a big role, so let’s look at it.

7) What Politics in Both China and the United States Look Like

While politics in both countries are brutal, in the US, brutal politics are much more open and are leading to more open fighting that is likely to intensify heading into and after this year’s midterm elections, when the Republicans will almost certainly lose the House—and might lose more. By contrast, there is much less risk of political disorder in China. The risk of political disorder in the United States, together with the other risks (financial, geopolitical, technological, etc.), will likely make the period between the 2026 midterm elections and the 2028 presidential elections very risky, especially when considering that elections in China and Taiwan will follow in subsequent years. Since international conflicts are not popular, the existence of these elections will likely further weaken the Trump administration’s willingness to fight.

At the same time, President Xi’s current five-year term will transition at the 21st Party Congress, which will probably take place in the autumn of 2027 (most likely in October), with a new term for him potentially beginning in early 2028. It is a very popular view among all the relevant Chinese parties that strong leadership should continue and that there should be clear progress toward cross-strait reunification.

Soon after these American and Chinese changes in governments, the next presidential election in Taiwan is expected to take place in January 2028. The two Taiwanese political sides have very different views about independence, with the head of the KMT, Taiwan’s main opposition party, supportive of closer relations with Beijing and opposed to independence for Taiwan. This set of conditions could favor orderly movement toward eventual reunification, which could look a lot like the China-Hong Kong reunification. It is conceivable that reunification will happen smoothly, without the US playing a big role. What exactly that will mean for semiconductor chip production, I can’t say.

8) Current Economic Conditions

As I see it, there are two Chinese economies: 1) the internal economy of people and entities dealing with each other within China and 2) the external economy in which the aggregate of the people and entities of China (which I will call “China, Inc.”) are dealing with other countries as aggregates. This perspective is recognized by the Chinese via their “dual circulation” perspective.

In my view, the 1) internal economic and social conditions are by and large being dealt with reasonably, with there being plenty of both bright and dark spots (as is now true in most countries) though in aggregate weaker than desired, while the 2) external economic dealings are doing great. China Inc. is selling large volumes of goods with good margins, so it is highly profitable and building up financial assets. What they do with that money is going to have a big effect on the markets and the world.

Within China, there are also two different economies; let’s categorize them as old and new economies, with the old economy (e.g., the highly indebted local governments that have inefficient businesses) on life support from the central government and the depressed real estate and retail consumption areas, while the exciting new economy is vibrant and making fast progress. I think the central government is trying to balance individual incentives and collectivism well and is improving at that—e.g., they are dealing with “involution,” profits, and the stock market in improved ways. Unlike in the United States, where the prospect of profit is what directs resources, in China, prospects for broad-based productivity and benefits are the main drivers of resource allocations. While capitalists think that is inefficient, Chinese leaders typically justifiably think the opposite is true, when their approach provides access to broad-based, inexpensive productivity-enhancing items (like electricity and AI). After all, look at the productivity increases that China has enjoyed since its open-door and reform policies began.

So, in aggregate, the Chinese have been productively and financially successful and seem to be on a trend to be more so.

What I Suspect Will Happen

While I have learned humility by being wrong about a third of the time in the markets—and there is a significant chance that I am wrong now—I will pass along what I think will happen.

I expect to see China gradually exert more tribute system and art-of-war-type pressures in pursuit of reunification with Taiwan and in opposition to those who are seeking to contain China.

For example, in response to President Xi’s request that President Trump not go through with planned arms sales to Taiwan, I expect President Trump to delay and eventually not make the sales because, if he does make them, China would probably follow with a powerful demonstration of power, something like that which followed former House Speaker Nancy Pelosi’s visit to Taiwan, though more so. We might even see a veiled threat to blockade the flow of chips coming from Taiwan, which would have big disruptive effects on world stock markets (especially AI stocks). The threat only needs to be implied to have the desired effect. My bet is that you will likely see more of those types of pressures having effects like President Trump not making the arms sales.

In other words, my guess is that the shift in power that I described will most likely increase Chinese efforts to move toward reunification with Taiwan and reduce US-led containment policies by implicitly threatening to, but not needing to, put the US in the awkward position of having to choose between either fighting or not fighting. For example, it is unimaginable that President Trump would send US military forces to counter Chinese actions against the Philippines or Taiwan, especially if these actions are small ones. So, China can gain ground by simply making the threats and not facing resistance.

My point is that just having power, showing it, and not having to use it is very effective and in keeping with the Chinese approach, and I expect that we will increasingly see Chinese power exerted in that sort of tribute system/art of war way.

There is a good chance that the war will be so subtly fought that we won’t see it being fought.