By Richard Hubbard
The U.S.-China trade dispute is currently one of the greatest threats to the global economy.
But amid all the talk of on-again, off-again tariffs, there is a danger of missing a more fundamental change in international relations.
While to U.S. President Donald Trump tariffs may be “a beautiful thing”, to observers of geopolitical trends they are symbolic of a bigger shift. Some academics say we are watching the emergence of a possible Cold War-style relationship between the world’s two largest economies.
To date, the U.S. has imposed more than $250 billion worth of tariffs on Chinese goods, with much more threatened. China has retaliated with tariffs on U.S. goods worth $110 billion.
Tariffs can increase the cost of goods to the end consumer, so the U.S. consumer is paying at least part of the price of the tariffs on Chinese imports. But China’s economy is hurting, and workers there will be feeling the pinch.
The Chinese are not taking the threat lying down.
Chinese exports to the U.S. have fallen for five consecutive months. They were down 9.7% year-on-year in the first four months of 2019. Meanwhile, the International Monetary Fund has said the U.S.-China tariffs will cost $455 billion in lost production globally next year.
“The Trump administration clearly sees the current strength of the U.S. economy as a window of opportunity to counter China’s rise as a superpower. Whatever the short-term cost to the U.S. economy,” said Stéphane Monier, chief investment officer for French asset manager Lombard Odier.
While Trump threatens but has yet to impose more tariffs on Chinese goods, the Chinese are not taking the threat lying down. They have been quietly and gradually implementing their response.
What observers are noting is that this trade confrontation is actually expanding into other economic areas. And it may have already reached a point where neither side can back down.
Beijing recently announced plans to publish a list of “unreliable” foreign companies and individuals, which would be subject to restrictions on their business. This is a direct threat to companies looking to tap China’s expanding domestic markets.
The government has also indicated it would weaponise its dominance in the supply of so-called rare earth metals. The U.S.’ technology industry is heavily reliant on these metals.
“This escalation likely has legs.”
Trump, meanwhile, has moved to blacklist the Chinese telecom firm Huawei. It is also pressuring U.S. allies to follow suit. During Trump’s recent visit to the UK, one British newspaper summarized the move as: “My Way or Huawei.”
The president has also revived talk about China’s moves to devalue its currency, which makes Chinese products cheaper in world markets. The Trump administration has laid out plans to let U.S.-based companies seek anti-subsidy tariffs on products from countries that the Treasury Department has found to be engaging in competitive devaluation of their currencies.
“It feels that the two sides have retrenched into positions that will be pretty hard to reverse anytime soon, and as such this escalation likely has legs,” wrote Jim Reid, research strategist at Deutsche Bank, after the Huawei move.
What students of international politics should now watch out for are such things as Washington or Beijing withholding licences for companies operating in their countries; initiating regulatory investigations; slowing down customs clearances; or using health and safety rules to stifle a company’s operations.
These could be followed by broadening conflict in other areas. For example, in reduced or halted exchanges in academics, culture, arts and military. All of these have been hinted at in recent moves to tighten or delay visa applications for such exchanges.
Evidence of these moves would be confirmation that the feared new cold war has begun.
Formally, the next key event will be at the G20 Summit scheduled for June 28-29 in Osaka, Japan. There are hopes that Trump and Chinese Premier Xi Jinping will reach some kind of resolution to the current dispute. Potentially, they’ll achieve this in a face-to-face meeting during the summit.
Any new pauses in tariff hikes would certainly be positive. But the rivalry between the newly emergent powerhouse of China and the old ruler of the global financial system is unlikely to go away, regardless of what happens.
(For an article by News-Decoder correspondent Alan Wheatley on the benefits of trade, click here.)
THREE QUESTIONS TO CONSIDER:
- If the U.S.-China trade war continues, what can we expect from China going forward?
- Which U.S. companies are most exposed to the trade war?
- With U.S. elections looming in 2020, how long might we reasonably expect such economic threats to continue?
Richard Hubbard is a finance and economics journalist with more than 30 years reporting from Australia, the UK, Asia and the United States. He is currently group editor for Last Word, an independent publishing company based in London. Richard was formerly Global Markets Correspondent for Reuters. He covered the Asian financial crisis of the late 1990s from Hong Kong and Singapore, and later the run up to the 2008 financial crisis and its aftermath.