Financial markets were cheered recently by the news that the US and China have reached a “phase one” deal to prevent further escalation of their bilateral trade war. But there is actually very little to cheer about. In exchange for China’s tentative commitment to buy more US agricultural (and some other) goods, and modest concessions on intellectual-property rights and the renminbi, the US agreed to withhold tariffs on another $160 billion worth of Chinese exports, and to roll back some of the tariffs introduced on 1 September.
The good news is that the deal averted a new round of tariffs that could have tipped the US and the global economy into recession. The bad news is that it represents just another temporary truce amid a much larger strategic rivalry encompassing trade, technology, investment, currency and geopolitical issues. Large-scale tariffs will remain in place, and escalation may well resume if either side shirks its commitments.
As a result, a broad Sino-American decoupling will likely intensify over time, and is all but certain in the technology sector. The US regards China’s quest to achieve autonomy and then supremacy in cutting-edge technologies—including artificial intelligence, 5G, robotics, automation, biotech and autonomous vehicles—as a threat to its economic and national security. Following its blacklisting of Huawei and other Chinese tech firms, the US will continue to try to contain the growth of China’s tech industry.
Cross-border flows of data and information will also be restricted. And owing to increased US scrutiny, Chinese foreign direct investment in America has collapsed by 80% from its 2017 level.
The US has also grown more suspicious of US-based Chinese students and scholars who may be in a position to steal US technological know-how or engage in outright espionage. China, for its part, will increasingly seek to circumvent the US-controlled international financial system, and to shield itself from America’s weaponization of the dollar. To that end, China could be planning to launch a sovereign digital currency, or an alternative to the Western-controlled Society for Worldwide Interbank Financial Telecommunication (Swif) cross-border payments system. It also may try to internationalize the role of Alipay and WeChat Pay, sophisticated digital payments platforms.
In all of these dimensions, recent developments suggest a broader shift in the Sino-American relationship toward de-globalization, economic and financial fragmentation, and balkanization of supply chains. The 2017 White House National Security Strategy and the 2018 US National Defense Strategy regard China as a “strategic competitor” that must be contained. Security tensions between the two are brewing all over Asia. The US fears that Chinese President Xi Jinping has embarked on a strategy of aggressive expansionism. China, meanwhile, fears that the US is trying to contain its rise and deny its legitimate security concerns in Asia.
It remains to be seen how the rivalry will evolve. Unfettered strategic competition would almost certainly lead eventually from an escalating cold war to a hot war, with disastrous implications for the world. What is clear is the hollowness of the old Western consensus, according to which admitting China into the World Trade Organization and accommodating its rise would compel it to become a more open society with a freer and fairer economy. But, under Xi, China has created an Orwellian surveillance state and doubled down on a form of state capitalism that is inconsistent with the principles of free and fair trade. And it is now using its growing wealth to flex its military muscles and exercise influence across Asia and around the world.
The question, then, is whether there are sensible alternatives to an escalating cold war. Some Western commentators, such as former Australian prime minister Kevin Rudd, advocate a “managed strategic competition.” Others speak of a Sino-American relationship built around “co-opetition.” These are all variants of the same idea: the Sino-American relationship should involve cooperation in some areas—especially where global public goods are involved—while accepting that there will be constructive competition in others.
The problem is US President Donald Trump, who does not seem to understand that “managed strategic competition” with China requires good-faith engagement and cooperation with other countries. To succeed, the US needs to work closely with its allies and partners to bring its open-society, open-economy model into the 21st century. The West may not like China’s authoritarian state capitalism, but it must get its own house in order. Western countries need to enact economic reforms to reduce inequality and prevent damaging financial crises, as well as political reforms to contain the populist backlash against globalization, while still upholding the rule of law.
Unfortunately, the current US administration lacks any such strategic vision. The protectionist, unilateralist, illiberal Trump apparently prefers to antagonize US allies, leaving the West divided and ill-equipped to defend and reform the liberal world order that it created. The Chinese probably prefer that Trump be re-elected in 2020. He may be a nuisance in the short run, but, given enough time in office, he will destroy the strategic alliances that form the foundation of American soft and hard power. Like a real-life “Manchurian Candidate”, Trump will “Make China Great Again”.
