Overview
Ray Dalio, founder of Bridgewater Associates and author of Principles for Dealing with the Changing World Order, published this newsletter essay on June 18, 2026, following a month-long trip to Asia that included 10 days in China with senior policy makers. His central argument is that the world is undergoing a fundamental shift in power -- away from US-led multilateralism and toward a China-centered hierarchical order that closely resembles the historical Chinese tribute system.
Two developments triggered this shift, in Dalio's view. First, the US handling of Iran's seizure of the Strait of Hormuz has convinced Asian leaders that America lacks the will and resources to fight wars on multiple fronts -- a dynamic he compares to Britain's failure to respond to Egypt's nationalization of the Suez Canal in 1956, which effectively ended the British Empire. Second, China's massive export surpluses are generating capital power that is now funding Chinese financial institutions and exerting upward pressure on the renminbi relative to the US dollar.
To explain what China will do next, Dalio unpacks eight lenses: Chinese culture (Confucian, hierarchical, family-based), the tribute system (2,000 years of hierarchical foreign relations), the Art of War (non-violent pressure as the preferred instrument of power), the 100 Years of Humiliation (1839 to 1949, a defining national trauma), the One China principle regarding Taiwan, the shift in relative economic and military power since 1945, the politics of both Xi and Trump, and current economic conditions inside China.
Dalio's one-sentence forecast: China will rectify the 100 Years of Humiliation by becoming self-sufficient, asserting sovereignty over Taiwan through pressure rather than direct military attack, and establishing a modern tribute system -- most of it happening while Xi Jinping is still in power. The war, he warns, may be so subtle that no one sees it being fought.
Why This Matters
This essay is not a think-piece -- it is a geopolitical and investment framework from one of the most consequential macro investors alive, written after direct engagement with senior Chinese policy makers in mid-2026. Dalio has been visiting China for over 40 years. His access to Chinese leadership circles is genuine, and his analysis of cyclical power dynamics has been built over decades of portfolio management that required him to understand how empires rise and fall in real time, not in textbooks.
The tribute system concept is the key intellectual contribution here. Most Western observers frame China-US competition in terms of alliance systems, military deterrence, and rules-based international order. Dalio reframes it entirely: China is not trying to build an empire in the Western sense. It is reverting to a 2,000-year-old model in which the central power receives deference, provides stability, and applies non-violent pressure to enforce hierarchy. Understanding that framework changes how you read current events -- Xi's meetings with visiting heads of state, the Taiwan arms sale pressure, Hegseth's conciliatory tone at Shangri-La, the KMT visit to Washington.
For investors, the semiconductor and AI implications are direct and near-term. Taiwan produces the world's most advanced AI chips. China plans to be self-sufficient in chip production by late 2027. A blockade threat -- even an implied one -- could reshape AI stock valuations, supply chains, and geopolitical alliances faster than most market participants currently price. Dalio is not predicting that blockade. He is identifying it as a credible pressure point whose mere existence is already shaping behavior.
For anyone tracking the changing world order, this piece serves as a clear-eyed primer on how Chinese civilization thinks about power, hierarchy, and conflict -- and why those frameworks are likely to govern Chinese behavior over the next several years more reliably than anything produced by Western foreign policy institutions.
Key Points
- The US response to Iran's seizure of the Strait of Hormuz has convinced Asian leaders that America cannot or will not fight to maintain its empire -- a signal Dalio compares directly to Britain's failure at Suez in 1956.
- China's export surpluses are generating massive capital accumulation, pushing up the renminbi, expanding Chinese financial institutions globally, and reducing Chinese appetite for US-sanctionable dollar assets.
- The tribute system -- China's 2,000-year model for managing foreign relations -- is returning as the organizing framework for Asian geopolitics: hierarchical, non-violent by default, with rewards for deference and pressure (not force) for non-compliance.
- Chinese culture is fundamentally Confucian and family-based. The Chinese word for "country" combines the characters for "state" and "family." This shapes everything from governance to foreign policy to how China views Taiwan -- as a wayward family member, not a sovereign nation.
- The 100 Years of Humiliation (1839 to 1949) remains a live wound in Chinese national consciousness. Rectifying it -- restoring China's sovereignty, territorial integrity, and central position in Asia -- is not just policy; it is civilizational imperative for Xi and the CCP.
- Taiwan is not a separate question for China. It is part of the unresolved civil war. The Cairo Declaration and Potsdam Declaration both stated Taiwan would be returned to China after WWII. From Beijing's view, unresolved reunification is an ongoing occupation by a renegade province.
- China is significantly more powerful than the US economically and militarily within East Asia. The US is simultaneously unwilling and structurally unable to sustain a military conflict in that theater. This changes the calculus for every US ally with bases in the region.
- The Art of War principle -- subdue the enemy without fighting -- is the operating playbook. China will use behind-the-scenes pressure, implied threats, economic leverage, and diplomatic positioning rather than direct military force wherever possible.
- Taiwan's semiconductor chip production is the single most important pressure point in the global economy -- more important than oil, in Dalio's framing. China's plan to achieve chip self-sufficiency by late 2027 means the leverage window is finite and they know it.
- The 2026 US midterms (likely Republican House loss), the 2027 Chinese Party Congress, the 2028 US presidential election, and the 2028 Taiwan presidential election create a compressed political window in which major moves on Taiwan reunification are most likely.
- Xi Jinping is expected to want meaningful progress toward reunification during a potential third term beginning in 2028. The KMT opposition party in Taiwan -- which opposes independence -- is positioned as the dialogue channel.
- The war Dalio describes may never look like war. It will be fought through veiled threats, implied blockades, diplomatic arm-twisting, and economic pressure -- and it may succeed so quietly that observers only recognize it in retrospect.
Quotable
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Ray Dalio
"There is a good chance that the war will be so subtly fought that we won't see it being fought."
The closing line of the essay and its most memorable sentence. It captures the entire thesis in one image: a conflict that bypasses the battlefield entirely and operates through pressure, deception, and implied threat. It is a direct application of Sun Tzu's "subdue the enemy without fighting" to the present moment -- and a warning that the absence of visible conflict does not mean the absence of conflict.
Ray Dalio
"In AI is everything, and AI without Taiwan is nothing."
Dalio uses this compressed formulation to explain why Taiwan is not just a geopolitical question but a global economic chokepoint. The world's most advanced AI chips come from Taiwan. A blockade or supply disruption would not just affect military capability -- it would crash AI stock valuations and reshape the global economy. The phrase is blunt and designed to make the stakes immediately visceral to investors.
Ray Dalio
"Culture is destiny."
A short premise that underpins his entire analytical framework. Dalio argues that Chinese culture -- reinforced for thousands of years -- is so deeply embedded that understanding it is the prerequisite to predicting Chinese behavior. He is not making a deterministic claim; he is saying the operating system is more stable than Western analysts assume, and that Confucian hierarchy, filial piety, and tribute-system logic will govern Chinese foreign policy decisions more reliably than any contemporary political calculation.
Sun Tzu (quoted by Dalio)
"To subdue the enemy without fighting is the acme of skill."
Dalio introduces this line to explain why China's preferred mode of power is not military -- and why that makes it harder to see and harder to counter. The Art of War preference for deception, pressure, and indirect action over direct military confrontation is not a weakness or an avoidance of conflict. It is, in the Chinese view, the most sophisticated expression of power. Western powers that look for tank columns and carrier groups as signals of threat are looking in the wrong place.
Ray Dalio
"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."
This explains why implied threats are so central to Dalio's forecast. China does not need to blockade Taiwan's chip exports. It only needs to make the threat credible enough that the US delays arms sales, allies recalibrate their commitments, and smaller powers quietly reorient toward Beijing. The power is in the threat, not the execution -- and that makes it nearly impossible to call out without looking like the aggressor.
Concepts
Core Frameworks
The Tribute System
A 2,000-year-old Chinese model for managing foreign relations that dominated from roughly 200 BCE to the late 19th century. Relations in the tribute system are not between equals -- they are explicitly hierarchical. The more powerful state (historically China) provides stability, protection, and trade access. Less powerful states offer deference, symbolic tribute, and recognition of China's central position. Compliance earns rewards; non-compliance earns pressure. Violent punishment is a last resort and a signal of failure, not strength.
Dalio argues this system is re-emerging because it fits both Chinese cultural preferences and the current power realities in Asia. It explains the stream of heads of state visiting Beijing, the softening of US tone in defense dialogues, and the implicit arm-twisting around Taiwan arms sales -- all without a single shot being fired.
The Big Cycle
Dalio's overarching framework for understanding how civilizations and empires rise and fall. Five forces drive the cycle: monetary order breakdown (too much debt), domestic political breakdown (wealth and values gaps), external conflict (invasion or geopolitical challenge), acts of nature (drought, pandemic, flood), and disruptive technology used for conflict. When these forces are improving in aggregate, power grows. When they are declining, power erodes.
Dalio applies this to both the US (declining: debt, political division, military overextension, technology competition) and China (rising: export surpluses, capital accumulation, political stability under Xi, advancing technology). The current moment is a classic Big Cycle inflection -- the passing of dominance from one major power to another.
Art of War as Geopolitical Operating System
Sun Tzu's principles are not historical curiosities in the Chinese context -- they are active operating doctrine. The core preference is for achieving objectives through deception, positioning, and pressure rather than direct confrontation. The ideal outcome is for the adversary to comply without the need for force. Dalio draws the analogy to chess versus Go: chess aims to eliminate the opponent; Go aims to limit their influence and expand your own.
This framework predicts that China will pursue Taiwan reunification through diplomatic maneuvering, economic leverage, behind-the-scenes pressure on US allies, and implied threats to critical supply chains -- not through a direct military invasion that would be costly, visible, and counterproductive.
Historical Context
The 100 Years of Humiliation (1839 to 1949)
A defining national trauma spanning from the First Opium War (1839) to the founding of the People's Republic (1949). During this century, China was defeated by Britain, France, Russia, Japan, and an eight-nation alliance; forced to sign unequal treaties; stripped of territory including Taiwan; and subjected to atrocities including the Nanjing Massacre. A civilization that had considered itself the center of the world was reduced to a semi-colonial state.
Dalio emphasizes that this is not historical background -- it is active motivation. Xi Jinping and the CCP explicitly frame their governance in terms of reversing the humiliation. Every action toward Taiwan, every push against US containment, every economic milestone is understood in Beijing as a step toward restoring China's rightful place. Western analysts who dismiss this framing as rhetoric misunderstand the depth of its grip on Chinese political psychology.
The Suez Parallel
When Egypt nationalized the Suez Canal in 1956, Britain and France attempted a military response and were forced to back down under US pressure. The episode is widely recognized as the moment that revealed the end of the British Empire -- not through defeat in war, but through the exposure of a gap between Britain's self-image as a global power and its actual capacity to project force.
Dalio draws a direct parallel to the US and the Strait of Hormuz. Iran's seizure of the strait and the US failure to mount an effective response has sent the same signal to Asian leaders: America's imperial reach is exceeding its reach. The Suez parallel is not a prediction of US collapse -- it is a marker of the moment when the direction of the cycle became undeniable to informed observers.
Confucian Hierarchy and Filial Piety
The organizational logic underlying Chinese culture, governance, and foreign policy. Confucianism structures all relationships as hierarchical and reciprocal: those above provide guidance, protection, and care; those below provide obedience, respect, and loyalty. This extends from the family unit to the state and from the state to the international order. The Chinese word for "country" literally combines "state" and "family."
This framework explains why China does not seek to build a Western-style empire with occupied territories and imposed governance. It prefers a system where relationships are clear, roles are defined, and subordinate states are treated well in exchange for deference -- the tribute system in its modern form.
Strategic Observations
Taiwan as Civilizational and Geopolitical Chokepoint
Taiwan operates on two registers simultaneously in Dalio's analysis. Culturally, it is the unresolved remnant of China's civil war -- a renegade province building military capability with foreign support to resist reunification with the motherland. Geopolitically, it sits atop the world's most critical semiconductor manufacturing capacity. Taiwan produces chips that underpin nearly all advanced AI systems globally.
China's plan to achieve domestic chip self-sufficiency by late 2027 means the current leverage window is temporary. Before that window closes, Taiwan's chip dependency gives China a credible economic threat that does not require military action -- just the implied possibility of a blockade is enough to reshape US arms sales decisions and global AI investment calculations.
The Political Window (2026 to 2028)
Dalio identifies a compressed two-year window in which major moves on Taiwan reunification are most plausible. The 2026 US midterms will likely cost Republicans the House, further weakening the Trump administration's appetite for international conflict. The 2027 Chinese Party Congress will likely extend Xi's leadership. The 2028 US presidential election and Taiwan presidential election follow in succession.
The KMT -- Taiwan's opposition party, which favors closer relations with Beijing and opposes independence -- could emerge as the governing party after January 2028. If so, Dalio suggests a peaceful, negotiated path to reunification similar to the Hong Kong model becomes conceivable -- without US military intervention ever becoming relevant.
China's Dual Economy
Dalio distinguishes between China's internal economy (weaker than desired, with stressed local governments, depressed real estate, and a struggling old economy sector) and its external economy (China Inc., which is generating enormous export surpluses, accumulating financial assets, and expanding its global financial footprint). The internal weakness is real but managed. The external strength is accelerating.
This dual structure explains why Western observers who focus on China's property crisis and debt problems miss the geopolitical picture. China's capital accumulation from exports gives it foreign leverage even while domestic conditions remain uneven. What China does with those accumulating financial assets -- and where they are deployed -- will be a major determinant of global market dynamics.
Power Without Use
One of the essay's central strategic insights: the most effective form of power is power that does not need to be used. China does not need to blockade Taiwan's chip exports to achieve its goals. It only needs to make the threat credible. The US does not need to be defeated militarily for its influence to erode -- it only needs to be seen as unwilling to fight. The tribute system operates on this logic: hierarchy is maintained through demonstrated capability and implied consequence, not through constant enforcement.
Dalio applies this to his forecast for US arms sales to Taiwan: he expects Trump to delay and ultimately not proceed, because the cost of proceeding (a Chinese demonstration of power that roils markets and creates a confrontation the US cannot win) outweighs the benefit. The threat does the work.
Implementation
AI-generated from source material. Verify important details against the original source.
Learn the tribute system framework before reading any China news
Most Western media analyzes Chinese foreign policy through an alliance and rules-based-order lens that is fundamentally mismatched to how China thinks. Before reading coverage of Xi's diplomatic meetings, Taiwan developments, or Chinese economic moves, internalize the tribute system logic: China seeks hierarchical deference, not territorial occupation; it prefers indirect pressure to direct force; it treats relationships as reciprocal rather than adversarial. Filtering news through this lens reveals patterns that otherwise appear random or opaque.
Map the five Big Cycle forces to current conditions annually
Dalio's five forces -- monetary order, domestic political order, external conflict, acts of nature, disruptive technology -- provide a structured checklist for assessing any major power's trajectory. Apply them to the US and China separately each year. Track whether each force is deteriorating or improving. The aggregate direction tells you more about long-term power shifts than any single news event. Document your assessments so you can track drift over time and identify when your priors need updating.
Monitor the semiconductor supply chain as a geopolitical early-warning system
Taiwan chip production is Dalio's central pressure point. Track TSMC capacity, Chinese domestic chip progress, and US export controls as leading indicators of geopolitical temperature. Watch for any Chinese government statements, military exercises near Taiwan, or diplomatic signals related to chip supply as potential precursors to escalation. China's self-sufficiency target of late 2027 creates a finite window -- the leverage calculus changes when that target is hit, and market positioning should reflect that transition.
Track the 2026-2028 political calendar as a geopolitical timeline
The compressed sequence of elections and party congresses Dalio identifies -- 2026 US midterms, 2027 Chinese Party Congress, 2028 US and Taiwan presidential elections -- creates a structural window for major Taiwan-related moves. Build this timeline into your monitoring framework. Watch for: Republican House losses weakening US resolve, Xi consolidating a third term, KMT gaining ground in Taiwan polling, and any informal China-Taiwan dialogue channels activating. Each event narrows or widens the window Dalio describes.
Understand the 100 Years of Humiliation as motivational infrastructure
Chinese foreign policy statements about Taiwan, territorial integrity, and containment resistance are not propaganda -- they are sincere expressions of a century-long civilizational project. When Xi says reunification is inevitable, he is not bluffing and he is not posturing. Build this motivational infrastructure into your analysis of Chinese decisions. When assessing how far China will push on any given issue, ask: does this relate to reversing humiliation? If yes, the commitment is deeper and more durable than Western rational-actor models suggest.
Watch renminbi trajectory and Chinese capital deployment as macro signals
Dalio highlights China's growing export surpluses and capital accumulation as structural power factors, not cyclical ones. Track renminbi appreciation pressure, Chinese capital flows into non-US assets, and the expansion of Chinese financial institutions globally. These are not just economic data -- they are geopolitical capability indicators. Where China deploys surplus capital signals which relationships it is building and which pressure points it is developing. Follow the money to understand the tribute network forming.
Read Sun Tzu's Art of War as a current events decoder
Dalio recommends the book directly. Read it not as ancient philosophy but as operational doctrine for interpreting Chinese government behavior. Apply its principles to current events: where is China creating ambiguity? Where is it exerting behind-the-scenes pressure rather than overt force? Where is it rewarding deference and punishing non-compliance through economic means? The chess vs. Go analogy -- killing the opponent versus limiting their influence -- helps reframe what victory looks like from a Chinese strategic perspective.
Portfolio stress-test for a Taiwan chip supply disruption scenario
Dalio does not predict a Taiwan blockade -- he identifies it as a credible implied threat. But the implied threat has real market implications. Stress-test any portfolio with significant AI, semiconductor, or tech exposure against a scenario in which Taiwan chip supply is disrupted for 6 to 12 months. Which holdings are most exposed? What hedges exist? The goal is not to predict the event but to ensure you are not in a position where a predictable risk -- even an unlikely one -- creates irreversible damage. Dalio's framing suggests the risk is higher than markets currently price.
Tools & Resources
Mentioned Resources
| Resource | Description |
|---|---|
| Ray Dalio on LinkedIn | Dalio's primary publishing platform for his Principled Perspectives newsletter series, where this essay was originally published. |
| Principles for Dealing with the Changing World Order (Dalio) | Dalio's book-length treatment of the Big Cycle framework, covering how empires rise and fall, with deep analysis of the US-China power transition. Directly referenced in this essay as background for the relative power analysis in section 6. |
| The Art of War (Sun Tzu) | Dalio explicitly recommends this text as essential reading for understanding how China approaches conflict. Central to section 3 of the essay on Chinese strategic doctrine. |
Suggested Resources
| Resource | Description |
|---|---|
| Destined for War -- Graham Allison | Harvard political scientist's examination of the "Thucydides Trap" -- the historical tendency for rising powers and incumbent powers to go to war. Complements Dalio's power cycle analysis with a detailed examination of historical precedents and what the US-China case shares with them. |
| The Chinese World Order -- John King Fairbank (ed.) | The foundational 1968 academic work on the tribute system, edited by Harvard's leading China historian. Provides the scholarly grounding for understanding how the tributary model operated across dynasties and what its re-emergence could look like in practice. Out of print -- Goodreads listing includes reviews and links to used copy sources. |
| Bridgewater Research and Insights | Dalio's institutional research platform. Longer-form macro research that underpins the frameworks described in this newsletter, including detailed analysis of debt cycles, reserve currency dynamics, and the Big Cycle in historical context. |
| When China Rules the World -- Martin Jacques | Detailed examination of what a China-centered world order would look like culturally and institutionally. Jacques argues China will not simply replicate Western institutional models -- it will reconstitute the world in its own image, consistent with Dalio's tribute system thesis. |
| Principles for Dealing with the Changing World Order -- YouTube (Dalio) | Dalio's animated video summary of the Big Cycle framework, referenced directly in section 6 of this essay. A concise visual primer for the power-shift analysis underlying the entire piece. |
Source Material
Title and Attribution
The Tribute System: The New World Order
Ray Dalio -- Published June 18, 2026
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, and 8) where the current economic, political, geopolitical, technological, and acts of nature influences are and where they are headed.
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.
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.
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.
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. Periods of turbulence have happened when there was bad leadership combined with great challenges: 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, 4) acts of nature -- droughts, floods, and pandemics -- produced terrible conditions, and 5) radically new and disruptive technologies were used for conflict.
2) The Tribute System
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. 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."
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. 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.
3) The Chinese Thinking About the "Art of War"
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.
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. 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 -- by showing power and exerting firm, behind-the-scenes pressure that includes giving rewards for good relationships and punishments for bad ones.
4) The 100 Years of Humiliation
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. 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 flowing from Britain into China. Britain's unsustainably large trade deficit led it to sell opium grown in British-controlled India into 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. Britain easily defeated China. The British imposed the Treaty of Nanking, took control of Hong Kong, and opened Chinese ports to foreign trade.
The next great shock came in the First Sino-Japanese War. In 1895, Japan took control of Taiwan. The Qing government collapsed in 1911, leaving China fractured. 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 ended 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 and 1949, 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. 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.
For the Chinese, especially President Xi, the time for cross-strait reunification is rapidly approaching. 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.
6) The Changes in Relative Economic and Military Powers (1945 to Present)
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.
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. 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. Notably, the Chinese have a plan to be self-sufficient in chip production by late 2027, while the US and the world will still be dependent on Taiwanese chip production. AI is everything, and AI without Taiwan is nothing.
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.
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. The next presidential election in Taiwan is expected to take place in January 2028. This set of conditions could favor orderly movement toward eventual reunification, which could look a lot like the China-Hong Kong reunification.
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. In my view, the internal economic and social conditions are by and large being dealt with reasonably, while the 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.
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.
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. 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 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.
AI Prompt
AI-generated from source material. Verify important details against the original source.
AI Implementation Prompt
CONTEXT This prompt is grounded in "The Tribute System: The New World Order," a newsletter essay published June 18, 2026 by Ray Dalio, founder of Bridgewater Associates and author of Principles for Dealing with the Changing World Order. Dalio wrote this following a month-long trip to Asia, including 10 days in China with senior policy makers. His central thesis: the global world order is shifting from US-led multilateralism to a China-centered hierarchical system that closely resembles the historical Chinese tribute system -- a 2,000-year model of foreign relations built on Confucian hierarchy, reciprocal deference, and non-violent pressure. Two catalysts triggered this shift: (1) the US failure to respond effectively to Iran's seizure of the Strait of Hormuz, convincing Asian leaders the US cannot or will not fight to maintain its empire, and (2) China's massive export surpluses generating capital power, renminbi appreciation, and expanding Chinese financial institutions globally. To explain what China will do, Dalio frames eight lenses: Chinese culture (Confucian, hierarchical, family-based), the tribute system, Sun Tzu's Art of War (non-violent pressure preferred over force), the 100 Years of Humiliation (1839 to 1949 -- a civilizational wound still driving Chinese policy), the One China / Taiwan position, the power shift since 1945, the political contexts of Xi and Trump, and China's dual-track economy (weak internally, surging externally). His one-sentence forecast: China will rectify the 100 Years of Humiliation by becoming self-sufficient, asserting sovereignty over Taiwan through pressure not military attack, and establishing a modern tribute system -- most of this occurring while Xi Jinping is in office. His warning: the war may be so subtle that no one sees it being fought. KEY PRINCIPLES 1. Culture is destiny -- Chinese Confucian hierarchy has been reinforced for thousands of years and governs how China relates to all other states, including Taiwan. 2. The tribute system is returning -- China seeks deference and stability, not occupation. It rewards compliance and applies pressure (not force) for non-compliance. 3. Art of War is current doctrine -- "subdue the enemy without fighting is the acme of skill." China prefers deception, positioning, and indirect pressure to direct military confrontation. 4. The 100 Years of Humiliation is active motivation -- rectifying it is a civilizational project, not just policy. Xi's commitment to reunification is sincere and deep. 5. Taiwan is both family and chokepoint -- culturally, it is a renegade province. Geopolitically, it hosts the semiconductor production that underpins global AI. 6. Power without use is the most effective power -- China does not need to blockade Taiwan; it only needs to make the threat credible enough to change behavior. 7. The Big Cycle is in transition -- the US is declining on multiple cycle forces; China is rising. The shift is structural, not cyclical. 8. The 2026 to 2028 window is the highest-risk period -- compressed political calendars in the US, China, and Taiwan create conditions for major moves. 9. China's external economy is surging even as its internal economy is uneven -- do not confuse domestic stress with strategic weakness. 10. The renminbi and capital deployment are power indicators -- where Chinese surplus capital flows signals the tribute network being built. KEY LEVERS - Taiwan semiconductor supply: the single most important pressure point -- a blockade threat alone shapes US and global behavior - Renminbi and capital accumulation: China's financial leverage growing relative to dollar-denominated assets - Political calendar: US midterms, Chinese Party Congress, Taiwan election create a compressed action window - KMT as dialogue channel: Taiwan's opposition party provides a "peace through dialogue" track that bypasses US military guarantees - Implied threat credibility: China does not need to act -- it needs to be believed WHAT THIS IS NOT - Not a prediction of imminent military conflict -- Dalio explicitly expects China to avoid direct military force wherever possible - Not a claim that the US is collapsing -- it is a claim that the US is declining relative to China and unwilling to fight in East Asia specifically - Not a symmetric competition -- China is not trying to replicate US-style global military dominance; it is rebuilding a hierarchical regional order - Not deterministic -- Dalio states he is wrong roughly a third of the time and explicitly invites skepticism - Not a short-term trading call -- this is a multi-year structural framework, not a near-term market timing thesis IMPLEMENTATION MODES 1. Apply -- map current events (Taiwan, chip policy, diplomatic visits, arms sales) to the tribute system and Art of War frameworks to interpret what is actually happening 2. Analyze -- assess any geopolitical development against Dalio's eight lenses: culture, tribute system, Art of War, humiliation, Taiwan position, power shift, politics, economics 3. Research -- extend the analysis with primary sources: Art of War, Dalio's Changing World Order book, Graham Allison's Destined for War, academic work on the historical tribute system 4. Stress-test -- apply the Taiwan chip disruption scenario to investment portfolios, supply chains, or business dependencies to assess exposure 5. Forecast -- use the Big Cycle and political calendar frameworks to identify the most likely sequence of events from 2026 to 2030 6. Decode -- interpret Chinese government statements, diplomatic moves, and military posturing through the tribute system and Art of War lens rather than Western alliance frameworks 7. Teach -- explain the tribute system, 100 Years of Humiliation, or Big Cycle to an audience unfamiliar with Dalio's framework 8. Challenge -- identify where Dalio's framework may be overconfident, where Chinese domestic constraints are underweighted, or where US resilience is underestimated 9. Connect -- draw links between Dalio's analysis and other frameworks: Thucydides Trap, reserve currency cycles, technology competition, energy transition 10. Monitor -- build a structured watchlist of indicators (renminbi, TSMC capacity, KMT polling, chip self-sufficiency milestones, Party Congress signals) to track how the framework is playing out in real time AI OPERATING INSTRUCTIONS Stay grounded in Dalio's eight-lens framework. When analyzing current events, explicitly identify which lens or lenses are most relevant rather than applying the framework as a vague background assumption. Prioritize practical and investment-relevant implications -- Dalio is a macro investor and the essay is written for people who need to act on this analysis, not just understand it. Avoid generic geopolitical commentary that could apply to any China analysis. When the user's situation is ambiguous, ask what specific decision or question they are trying to inform. Challenge weak assumptions, especially any that treat Chinese behavior as irrational or purely reactive rather than strategically deliberate within the tribute system logic. Draw connections to Dalio's broader Big Cycle work when relevant. Acknowledge explicitly where Dalio's own uncertainty applies. GUIDED DISCOVERY Ask me up to three questions, one at a time, to determine: (1) what I am trying to accomplish -- investment positioning, strategic analysis, content creation, or something else, (2) which of Dalio's eight lenses or key levers is most directly relevant to my situation, (3) how the tribute system or Art of War framework could be applied most effectively to my specific context. Once you understand my situation, help me build a practical implementation plan.