Winter 2018

A New Cold War Between the US and China?

Guy De Jonquieres

Churchill’s warning presaged more than 40 years of confrontation and rivalry between Washington and Moscow, and a contest for international supremacy that divided much of the world into capitalist democracies and states ruled by authoritarian regimes beholden to Communist doctrine and the Soviet Union.

Echoes from that period resonate in Pence’s speech: angry condemnations of Chinese territorial expansionism, of fifth column” infiltration of western institutions and society, and of a Chinese agenda reminiscent of Nikita Khruschev’s threat to bury” the US. However, any similarities with Churchill’s speech, and with the era in which it was given, are greatly outweighed by the differences. Three stand out:

First, the Fulton address was a rallying cry for enlightened multilateral co-operation within the framework of post-war institutions and rules established under US leadership. President Donald Trump, in contrast, has taken a sledgehammer to that global architecture and to the system of international alliances that has long underpinned US foreign policy. As the rifts with long-standing allies in Europe and elsewhere widen, what started as America First” looks increasingly like America Alone”.

Second, in 1946 the US economy was two to three times bigger and far stronger than Russia’s, which was heavily reliant on agriculture, ravaged by famine and devastated by war (though it went on to recover unexpectedly fast). Today, China boasts a GDP by some measures almost as large as that of the US, is a manufacturing powerhouse, and is rapidly accumulating scientific and technological strengths.

Third, the US-China conflict is not rooted in a clash of ideology or even of political systems. Ostensibly, it is about economics: a persistent imbalance in bilateral trade and US complaints that China has profited by cheating. But at a deeper level, it is increasingly apparent that this is a raw power struggle, motivated by Trump’s determination to check or reverse China’s rise and its ambitions to dislodge the US from global pre-eminence.

Shares of China and US in World Trade
Shares of China and US in World Trade

Source: World Trade Organisation

In some ways, Trump’s assault on China resembles US trade friction” with Japan in the 1980s. Japan, too, stood accused of undermining US technological and industrial leadership through unfair trade practices and by keeping its markets closed. Then, too, the US threatened (though less often implemented) tough retaliation. Just as today, its approach commanded strong bipartisan support in Congress and in the country at large – memorably symbolised by the smashing by US lawmakers, to popular applause, of a Toshiba radio on the steps of the Capitol in 1987.

However, post-war Japan never posed a military threat to the US, nor was it bent on territorial expansion. Instead, it was a close ally that relied heavily for its defence and security on the US, which had been instrumental in shaping Japan’s post-war constitution, political and economic systems and foreign policy. America’s shock at Japan’s emergence as a challenger was that of a teacher discovering that a hitherto obedient pupil had suddenly turned into an upstart classroom rebel.

The story with China is different. After the Communist takeover in 1949, it was long regarded in Washington as an adversary, beyond the US sphere of in uence. Richard Nixon’s historic Beijing visit in 1972 opened up new lines of communication and a measure of co-operation. Then came what many in the west greeted as a decisive breakthrough: Deng Xiaoping’s economic reforms, liberalisation of markets, pragmatic pursuit of growth as a national priority and opening up to foreign trade and investment.

From that moment on, a belief took hold in Washington that economic liberalisation would ineluctably beget political liberalisation, in time eroding the Communist party’s monopoly on power and the cautious introduction of some limited form of democracy. In other words, that China would become more like us”. As China’s integration with the global economy deepened, so did US efforts to engage Beijing in permanent dialogue.

Since 2012, the installation of Xi Jinping as President has changed all that. Far from loosening the Communist party’s reins of power, he has tightened them, harshly repressing dissent, crushing political opponents and reviving Mao-ist rhetoric and ritual. Economic reforms, promised early in his term, have ground to a standstill, while control by the state – or, more correctly, by the party — over the economy has expanded. Meanwhile, foreign investors whom China once welcomed with open arms now complain bitterly that it is giving them the cold shoulder and elbowing them out in favour of local competitors.

Under Xi, nationalism, never far below the surface in China, has enjoyed a resurgence. Mirroring Trump’s pledge to make America great again”, he has made his stated mission the great rejuvenation of the Chinese people”. He has overseen a rapid military build-up while launching Made in China 2025, an ambitious state-led programme intended to surpass the US and achieve Chinese global dominance in advanced technologies.

Xi’s authoritarian stance at home and his muscular championing of an assertive China first” approach abroad have come as a double shock to the US. First, because they undermined the basis of its policy of steady engagement with Beijing. But more fundamentally – and more painfully — because that policy is now perceived to be the result of a US misjudgement of historic proportions. The result has been a violent swing of the American political pendulum against China, with nobody in Washington prepared to speak out in its defence.

Beijing has contributed to that shift by misplaying its hand. Initially, its leaders misread Trump, airily dismissing him as someone who spoke loudly but carried a very small stick. As a consequence, the vigour of his trade offensive threw them o balance and left them ill-prepared to respond.

When they tried to do so, they discovered that previously valuable US interlocutors, such as former Treasury Secretary Hank Paulson, had lost in uence or were not ready to intercede on China’s behalf. Meanwhile, China’s increasingly unfriendly attitude towards US businesses has cost it the support of a powerful lobby that had long sought to defuse tensions in bilateral relations.

Xi himself has not escaped criticism at home for mishandling the conflict. Worse still, it comes at a difficult moment economically, as China’s policymakers strive to deal with a massive debt overhang caused by a reckless credit binge since 2008, without provoking a sharp downturn in the GDP growth rate that could dent public and political con dence in the Communist party’s competence in economic management.

US versus China GDP
US versus China GDP


That is proving an uphill struggle. Much of the progress achieved in debt de-leveraging since 2016 has been reversed since late last year, when the authorities turned the credit taps back on in an effort to forestall a looming economic slowdown and a slump in the property market, in which a large chunk of Chinese household savings is invested.

Warnings have multiplied, from within and outside China, that failure to solve its economic policy dilemma will lead, sooner or later, to a financial crisis. While China’s closed and heavily state- controlled financial system means that a crisis could probably be contained, it would still come at a cost: a serious dampening of growth for years to come that could prove a political headache for a Communist party that has long tied its political fate to delivering ever higher living standards.

All this suggests that the US holds the upper hand, at least for the moment. However, Washington also stands to lose from the conflict. Like Xi, Trump measures his political popularity by the state of the economy and the stock market — and these could take a hit. Though the impact of higher tariffs has so far been quite limited it has still to work through fully in inflation and growth.

While some US businesses have applauded Trump’s tough stance towards China, the unpredictability that makes him so hard for Beijing to deal with is creating uncertainty in American boardrooms. That unease can only grow if the hardliners in his administration persuade him to ratchet up the pressure on China by decoupling” its economy from the US by blocking trade and investment flows between them.

That would be likely to send shockwaves through financial markets, not least because so many US companies still earn sizeable profits from their China businesses. It would also strike a big blow against the complex cross-border supply chains through which much of international trade is conducted nowadays. And it would probably not achieve its desired objective.

In today’s highly integrated global economy, it is simply not feasible for the US single-handedly to mount what would effectively be an economic blockade against China. It would need help from elsewhere. However, Mr Trump’s willingness to tear up agreements with long-standing allies, in the west as well as in Asia, makes it unlikely that it would be forthcoming.

That is a particular concern for east Asian governments. Many are suspicious of Beijing’s intentions and would instinctively prefer to rely on the US to guarantee their national security. But they are also acutely aware that their economies’ prosperity depends increasingly heavily on staying on good terms with China. If they no longer trust US ability to provide stable leadership in the region, they will find China’s gravitational pull even harder to resist.

Furthermore, while Trump’s offensive may damage China, the US may gain little from it economically. Though the erection of US import barriers is causing companies to re-think their dependence on production in China, the evidence so far suggests that they are more likely to move plants to other low-cost locations in Asia rather than re-shore” them to America. That would dash Trump’s hopes of creating more jobs in the US and merely re- distribute its trade deficit with China geographically across a wider group of nations.

Rational analysis and economic self-interest suggest that both sides have much to lose from allowing their conflict to grow. Perhaps that will lead to efforts to patch up their differences over trade, though dealing with the political tensions that underlie them will be a taller order. Or maybe Trump will sense that this is ultimately an unwinnable battle and will simply declare victory and move on, as he has done when placed in a tight corner before.

However, the risks of escalation are also large – not least because Trump and Xi share so many similar traits. Both portray themselves as strongman” leaders who alone are capable of taking decisive action. Both present themselves as the founts of political power and have assiduously created personality cults for themselves. And both have spun popular narratives of nationalism and national victimhood.

With so much prestige invested in success and in their own claims to infallibility, it will be difficult for either leader to back down without losing face. By personalising power and decision-making in themselves, they have made it hard credibly to shift responsibility to scapegoats at home if things go wrong. Rather, their nationalist instincts seem more likely to incline them to blame foreigners and hence to seek further validation of the rightness of their cause.

In the current febrile climate of US-China relations, the dangers of mis-steps and over-reach are high. It is all too easy to imagine how they might occur: a naval confrontation in the South China Sea that ared into outright conflict; or a violent reaction in Washington to fresh revelations of covert Chinese interference in US politics or of cyber-espionage aimed at undermining US national security; or, possibly, a provocative action by China, intended to show that it would not bow to US bullying.

If that happened, the big question would no longer be whether the two sides were sliding towards a cold war but whether they were about to plunge into a hot one. That prospect, thankfully, still appears remote. However, it cannot be entirely discounted, when Beijing has repeatedly misread Washington’s intentions and is engaged in what many in the US view as a bare-knuckle contest for global dominance.

Graham Allison, the American political scientist, has identi ed sixteen cases in which a rising power has challenged the supremacy of an incumbent one in the past: in only four was the result not war. History, as Twain observed, may not repeat itself. But Allison’s findings, which have attracted much attention from US policy analysts of late, are hardly an encouraging omen.

The writer is a former Financial Times World Trade Editor and Asia commentator, and co- founder of the UK Trade Forum.