US economy

China and the US: trade war or cold war?


It is interesting that the strains in US-China relations have been framed around the idea of an outbreak of a trade war. I think this characterisation is incorrect. The tension over trade is just one front, or battle, in a broader conflict or war for hegemony now beginning between the US and China.

We can indeed think of various fronts or battles, including trade, cyber, defence/security (South China Sea), AI/technology (5G). But this is a war between a global superpower in decline (the US, overstretched in the Middle East) and one on the rise (China).

In the battle over trade, the market is looking for a deal on tariffs or market access to bring resolution and allow it to move on. One can imagine a US victory where, after the 90-day cooling-off period agreed at the G20, some kind of deal can be reached by which China concedes ground on trade access, or makes other efforts to rebalance its trading relationship with the US.

But I think it would be totally wrong to think of any such deal as bringing a final resolution, or a declaration of peace. Indeed, this could (and is likely to) be the first of many future battles on trade. And I am now near certain that this is only one front in the US-China war for hegemony, and that we will see scraps across the board in the months and years to come, be that over 5G, AI, Taiwan, the South China Sea, the Belt and Road Initiative and Chinese loans versus the IMF.

The key point is that we must recognise that the fundamental basis for the relationship between the US and China has changed. Before President Donald Trump, the relationship was inclusive, symbiotic even, at least from the US perspective, with the idea that helping China to develop by bringing it into the global economic and financial architecture would bring a win-win, and that a stronger/richer China would be good for everyone.

The idea was that China could be made to be like “one of us”, like the west.

After Mr Trump (or during the administration of Mr Trump), I think there is a recognition, even a growing consensus in the west, that the inclusive approach to China by previous administrations has in fact failed. It may have facilitated faster global growth through globalisation, but China has been the disproportionate winner, overwhelmingly so.

Rather than symbiotic, the relationship has been parasitic or anti-biotic: China is killing the US (death by China) in terms of its global hegemony. So this has to stop — or that, at least, is the growing consensus in the US and, I think, the west.

The conclusion is that while short-term deals on trade might be done, we are in for a long period of competition, even conflict, between the US and China, across all the fields (and more) mentioned above. This could be very disruptive to global markets.

Returning to the G20, you have to ask what would be the benefit to the US of a definitive deal with China on trade, Surely this would just return the US-China relationship to the inclusive/symbiotic one of the past, which, from a US strategic viewpoint, failed?

What seems more likely is that the Trump administration will take whatever China has to offer this time around — but that any deal will be temporary, with the US strategy likely to be to keep China uncertain, on edge in terms of the relationship, not only on trade but also on the other areas of tension.

By keeping China and the markets uncertain as to the state of the relationship, the Trump administration is likely to create a crisis of confidence around China — for both local and foreign investors. This would be the best defence to counter the hitherto one-way growth trend achieved by China over the past few decades. Perhaps we are already seeing this in anecdotal information coming out of China.

It is interesting to think back to the last cold war between superpowers, the US versus the Soviet Union, which lasted for more than 40 years. For much of this period, the two sides knew each other’s red lines, but only after they had been tested, for example, in the Berlin Airlift, the Cuban missile crisis, the 1956 Soviet intervention in Hungary, the Prague Spring of 1968, etc.

These were episodes of high tension at the time but, through this, each side learnt the other’s red lines. As a result, by the 1980s something of a balance had been reached, which provided a degree of stability. This was only broken by the Thatcher-Reagan-inspired arms race, which encouraged Moscow’s intervention in Afghanistan, that militarily over-extended the Soviet Union, exposing its weak economic underbelly, and the rest (Gorbachev, Yeltsin, et al) is history. The US was able to declare victory over the USSR.

This suggests that in the new cold war between the US and China, we are going to experience mini-crises as each side works out the other’s red lines. We are also likely to see proxy battles played out between them, which might provide further flash points. It is unclear who the ultimate winner will be.

Timothy Ash is senior sovereign strategist at BlueBay Asset Management



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