Much has been written about the economic wisdom and potential effects of the Sino-American trade war. Yet few understand that the trade war is just one front in what we should view as the Second Cold War.
China seems to be in the lead in developing and employing technologies like artificial intelligence, hypersonic missiles, and 5G (which has extensive defense and intelligence system applications). Together, these technologies could create a strategic military advantage for China as early as the next decade, putting China in a position to challenge or even defeat the United States.
The Trump administration may well view tariffs as the easiest lever to pull in hopes of slowing the rate of Chinese economic growth, forcing the Chinese to redirect resources away from developing valuable strategic technologies. However, the communist government’s primary concern remains to quell internal dissent.
For example, China has developed a sophisticated, Orwellian surveillance system that grades citizens on a “social credit score.” This score determines what Chinese subjects may purchase, where they may travel, and even what schools they and their children may attend. Additionally, China is incarcerating and attempting to “re-educate” their Muslim population in what the U.S. government describes as concentration camps.
Targeting China’s Economic Growth
China has experienced 30 years of unbridled economic growth. Since the government hasn’t had to deal with serious economic downturns during that time, Chinese authorities are now concerned with how the population would react to a genuine recession. If the regime feels the need to implement an oppressive surveillance state when economic times are good, what might it look like when things are bad?
The Chinese government fears a scenario whereby discontent becomes widespread. A billion and a half unhappy people is an unmanageable problem. The Trump administration seems to be counting on the Chinese government expending more resources to placate the population, which could slow the regime’s ability to develop strategic technologies long enough for the United States to catch up.
The critical question is, will it work? China’s economy is taking hits. Its official manufacturing index dropped into negative territory in May, and new American tariffs haven’t even fully taken their toll yet. China’s second-quarter gross domestic product growth was the slowest in 27 years. It’s unknown how the Chinese people will react—not to mention how the Peoples Liberation Army (PLA) will respond.
Chinese President Xi Jinping has attempted to consolidate power over the PLA, but we should remember this was during a period of robust economic growth and easy financial decisions. If Trump’s policies produce an economic downturn for China, the resulting difficult financial and domestic decisions accompanied by increased confrontation with the United States will likely test the relationship that Xi has developed with the PLA.
If all of this looks more to you like a Cold War than a trade war, you would be correct.
It’s More than Just a Trade War
The Chinese have been in a cold war with the United States for more than 20 years. The American public has been slow to grasp this reality because the conflict looks very different than the Cold War with the Soviet Union. Unlike the U.S.S.R., China has used markets, debt traps, and trade to acquire market dominance, politically valuable positions, and militarily applicable real estate around the globe.
A Cold War with China differs significantly when compared to the Cold War with the U.S.S.R. because of the financial ties between the two nations. The United States and China are the world’s largest economies, and the direct and indirect ties between them are vast and complicated. The United States simply cannot afford to economically crush China without triggering repercussions to the global economy that would hurt Americans as well.
The economic squeeze that the Trump administration is putting on China via tariffs will reduce the volume of dollars flowing to China at a time China still needs to expend dollars to purchase oil and defend the yuan. The United States has within its grasp the strategic ability to raise oil prices, compelling China to spend foreign reserves to continue protecting the yuan.
This, in turn, would increase the number of dollars China must expend. Foreign reserves are essential to the Chinese economy, and these moves would force China into a difficult position. All of this helps explain why China referred to the Trump actions as “naked economic terrorism.”
There is a lot of geopolitical sense in Trump’s renewed coziness with Saudi Arabia and other Gulf States. These nations would be the most likely candidates to pick up the slack and purchase American debt if China were to fall into economic decline.
There Are Inevitable Limits To a Trade War With China
In the short term, the United States can tighten the squeeze on China’s economy. In the long term, however, China will likely find other arrangements. Realistically, this strategy cannot and will not last long. History shows us that a limiting factor of weaponizing tariffs is that people will always find alternative markets. For example, in response to new tariffs, China has already replaced U.S. soybeans with soybeans from Brazil.
China has threatened to withhold rare earth metals from the United States, which would cause serious disruptions in the manufacture of everything from cell phones to solar and wind energy to aircraft and missiles for the U.S. military. Fortunately, the United States currently possesses one rare earth mineral mine and others can be opened. Another plant to process rare earth minerals is being built in Texas. Issues like these can be worked around eventually, but short-term any solutions would be arduous and require precious time to develop.
If trade wars persist, they could be very painful for the American economy. Small and medium-sized businesses would be particularly hurt. General Motors has the wherewithal to acquire new suppliers and to move production while remaining in business, while many smaller businesses do not.
With its current tariff strategy, the Trump administration is walking a very thin and unstable line. China has numerous cards left to play, the results of which would range from pain to outright disaster for American businesses that are dependent on importing Chinese products. Many small or medium-sized businesses could become insolvent before they can arrange for any necessary new suppliers. Additionally, as mentioned before, Trump must avoid any significant negative global economic repercussions.
The Trump tariff strategy is a gambit with a limited life span. There may very well be enough margin to force China to redirect resources away from developing strategic technologies and toward placating their population, but it must be managed closely and wisely.
The United States does not want to find itself strategically inferior to China in the 2020s. However, the prospect of the world’s two largest economies entering an economic war would be unlikely to produce a happy ending for anyone involved. The risk to the American and global economies is immense. Either way, change is coming.