[Analytics] The chill ahead in the Second Cold War

US President Donald Trump stands with US Vice President Mike Pence at the White House in Washington, US, 14 January 2019 (Photo: REUTERS/Joshua Roberts). Sketched by the Pan Pacific Agency.

In the year 2018 — 99 years after the end of the First World War, 73 years after the end of the Second and 26 years after the end of the first Cold War — US Vice President Mike Pence announced a Second Cold War: This time with China. How and when it will end is anyone’s guess. The weapons, for the moment, are trade, investment and technology. In 2020 and beyond, the trajectory of the Second Cold War will challenge leaders in Asia and elsewhere. Gary Clyde Hufbauer specially for the East Asia Forum.

President Donald Trump’s rhetoric towards China blows hot and cold depending on his daily mood. But Trump’s overriding goal for 2020 is a glowing economy — without that his re-election prospects will take a dive. The economy is far more important to Trump’s political future than impeachment.

Yet, the trade war’s economic toll has largely offset stimulus from the 2017 tax cut. The Tax Cut and Jobs Act of 2017 increased the federal budget deficit by almost US$800 billion annually and cut the corporate tax rate to 21 per cent in line with other advanced countries. But unfortunately, trade wars fostered business uncertainty worldwide and eliminated the investment boost that the lower tax rate would have generated.

Trump can scold Federal Reserve Chairman Jerome Powell, but he cannot command negative interest rates. What Trump can do is dial back his trade wars. Accordingly, the near-term outlook is no escalation. Instead, partial rollback of existing tariffs in exchange for assured US agricultural exports seems possible.

But Trump’s near-term trade war tactics are a mere blip in the Second Cold War. Whether Trump is re-elected in 2020 or a Democrat prevails makes little difference. Trump and his Democratic rivals have all convinced themselves — and a majority of Americans — that China is the threat of our era.

But there are differences of degree. Some US political leaders, like Republican and Democratic senators Marco Rubio and Charles Schumer, respectively, characterise China as an existential threat. Others, like Republican Senator Rob Portman, favour targeted responses to specific trade and investment grievances. Henry Kissinger’s calming voice and warning that the United States and China have reached the ‘foothills of a cold war’ find much less resonance in today’s political environment.

During 2020 and beyond, bilateral US–China trade seems destined to stagnate or shrink, but technology will be the lead weapon of ‘decoupling’ — a soft description of the Second Cold War. The United States has already severely restricted US tech companies from selling to Huawei. Not surprisingly, Huawei is already making smart phones without US components.

For a short period, enhanced technological deprivation will slow China’s industrial aspirations. But this will not last. Instructive is the first Soviet atomic bomb explosion in 1949, a mere four years after Hiroshima. To be sure, Soviet scientists were aided by spies at Los Alamos, but China is no slouch when it comes to commercial espionage and Chinese scientific and technological talent and capacities today are far better than those of the Russians in the 1940s.

While the United States is busy decoupling, China has mounted an economic charm offensive. At a time when openness to trade has become too toxic for most world leaders to swallow, President Xi Jinping has repeated a plea for China to welcome more imports. Speaking at the second China International Import Expo (CIIE) hosted in Shanghai over November 5–10, Xi not only called for China to import more, he extolled the World Trade Organization (WTO) and likened globalisation to a mighty river, unstoppable despite many shoals.

American sceptics will scoff at Xi’s speech, but they should ask what other leader of a major economic power is calling for enhanced imports. Not President Donald Trump. Not Chancellor Angela Merkel of Germany. Not Prime Minister Shinzo Abe of Japan.

The Second Cold War confronts Asian leaders with challenges akin to those European leaders faced in the first Cold War. Asian countries nearest China are clear targets of its geopolitical ambitions. Chinese influence travels alongside the Belt and Road Initiative, together with less obvious, and less expensive, covert measures. But China is already a much bigger economic partner for Asia than the United States. Unless China’s ambitions take overt military shape or China’s response to Hong Kong or the Uyghurs becomes visibly bloody, few Asian countries are going to join Washington’s decoupling crusade.

Trump has yet to take measures familiar in the arena of economic sanctions — using secondary trade or financial restrictions to deter third countries from doing business with the adversary. A looming question, in 2021 and beyond, is whether Trump or his successor will take such measures to deter technologically advanced countries in Asia and elsewhere from sharing technologies with Chinese firms. A taste of this option was the largely unsuccessful US diplomatic effort to deter European countries from buying Huawei’s wares. Stay tuned.

Gary Clyde Hufbauer is a non-resident Senior Fellow at the Peterson Institute of International Economics (PIIE).

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