Yes, the Global Order Is Unraveling. Just Not Today.

President Biden appeared unannounced in Kyiv to declare “Putin’s war of conquest is failing.” The Russian president, for his part, denounced “neo-Nazis” in Ukraine and insisted it is “impossible to defeat Russia on the battlefield.” Washington formally accused Russia of “crimes against humanity” and warned Beijing against providing lethal aid to Russia. China’s top diplomat met Putin and Moscow said it would stop implementing the last remaining nuclear arms agreement with the United States.

If it feels like the world’s geopolitical fabric is unraveling fast, rest assured it isn’t. But the global order is unraveling slowly, and investors need to understand just how political disorder could swamp economic growth in the years ahead. Military escalation in Ukraine or global mischief from a beleaguered Russia may trigger brief market reactions. The real risks, however, stem from a protracted struggle between China and the West that will make all global commerce more difficult, expensive, and risky.

As to why Armageddon isn’t imminent, it’s important to unpack the recent headlines. The Biden and Putin speeches were dramatic mostly because they were so close in time and distance. Neither leader said much new. The reports on China’s potential lethal aid may refer to a flow of dual-use technology that China has long sent to Russia as part of their burgeoning economic and political relationship, rather than any recent decision to bolster Putin’s forces. As for the suspended New Start Treaty, Moscow also announced it would stick to the current limits for now.

Make no mistake, tensions are rising. But it’s important to understand which dynamics will drive up everyone’s blood pressure and which will have a fundamental impact on global growth.

The immediate risk, of course, comes from escalation or expansion of the fighting in Ukraine. Moscow has reminded everyone more than once about its nuclear arsenal, but firing a tactical nuclear weapon risks losing Russia’s remaining friends without delivering actual territorial gains. An accidental engagement in neighboring Poland is slightly easier to envision, triggering quick retaliation from NATO. But even this kind of escalation doesn’t seem likely to expand into a much broader conflict. Russia’s having a hard enough time protecting its current gains and America clearly has little stomach to send its own troops.

Much more likely, Ukraine and Russia will continue to engage in exhausting, tragic fighting that doesn’t move the line much. Ukraine may achieve some better success with the arrival of German tanks, but even Russia’s hapless and disorganized military effort isn’t about to pack up and go home.

Second, there are separate, if related risks, from what will likely be Russia’s long political and economic exile. Even with trade flows continuing with China or India, the loss of Western energy markets, industrial parts, and advanced technology puts the Russian economy on a path to slow impoverishment and autarky. In many ways, the impact of sanctions is only beginning to bite.

But if much smaller regimes in Iran and North Korea can cause havoc from their isolation, imagine what an angry and resentful Russia might try in the Middle East, the Balkans, or cyberspace. Again, Moscow lashing out would trigger political turmoil and market volatility. Tighter enforcement against Russian commodity exports may also roil those markets temporarily, but few of the most obvious scenarios seem likely to have a lasting impact.

What will have a lasting impact on global growth and political stability, however, is the continuing disintegration of the already fragile relationship between the U.S. and China. This dynamic carries both political consequences, economic risks and important dangers for investors.

Clearly, China shows little enthusiasm for Russia’s unilateral invasion. Beijing continues to call for a negotiated settlement and most Chinese firms have been careful to avoid activities that might draw Western sanctions. Indeed, even if Russia were actually headed for military defeat, it’s hard to imagine China actively joining the fight at the risk of losing access to its largest global markets in the U.S. and Europe. The shape of a post-Putin Russia is highly unpredictable, but it’s hardly likely to turn toward Jeffersonian democracy and away from China.

If the “no limits” relationship has limits, however, there is still plenty of room for rhetorical support, economic engagement, and continuing a longstanding trade in dual-use technology. As long as the West doesn’t sanction Turkey and India for their commercial relations with Russia, China looks much more protected.

The problem is that China’s strategic ambiguity becomes less tolerable in a world of heightened risks and dwindling trust. When a mysterious Chinese balloon blows across the continental U.S. and scuttles the latest attempt at talks, almost anything is possible. The next senior U.S. official to visit Taiwan or the next naval challenge in the South China Sea can trigger both an immediate political crisis and—crucially for the global economy—mounting calls to dismantle the largest trading relationship in the world.

Americans and Europeans are obviously careful about self-inflicted damage from sanctioning China, but there’s a long ladder of potential escalation from the current limited constraints on advanced technology sales. And historians are quick to remind us that the extensive trading relationship between England and Germany before World War I ultimately failed to keep the peace.

Investors need not react now since this slow boil of tensions may continue indefinitely without disrupting current flows of money and goods. Indeed, the Chinese economy looks set for an impressive recovery after three years of lockdown. But they should watch closely where the risks are highest. Next on the menu of potential sanctions, more restrictions on technology sales seems logical as Washington seeks to exert pressure on Beijing. From there, a U.S. administration might restrict oil and petrochemicals exports, then advanced industrial goods, and eventually aircraft. Financial sanctions might escalate from smaller Chinese banks close to the military to larger state-owned institutions. At some point, smaller countries caught in the middle of the rising conflict could become targets, too.

This is how escalating political tensions send the global economy into extended recession or worse. Recent market moves have more to do with higher inflation jitters than the battle for Bakhmut. The real risks, however, lie in a slow deterioration of the global order that no central bank can repair.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.