OPINION: US-China Hostilities Risk Leaving US Economy Cold

OPINION: US-China Hostilities Risk Leaving US Economy Cold
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A new Cold War was not inevitable but now that it's here the US would do well to focus on fostering its technological prowess.

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By Gary Clyde Hufbauer, PIIE

Amid the chaos of the Trump presidency, Vice President Mike Pence’s declaration of a new Cold War with China on Oct. 4, 2018, is by far the administration’s biggest departure from business as usual. The declaration came after Trump’s tariff war was well underway and the U.S. Treasury had issued regulations to screen inward investment tightly, pursuant to the new Foreign Investment Risk Review Modernization Act. For good measure, the U.S. Commerce Department will also screen corporate technology flows destined for China, pursuant to the updated Export Administration Act.

Economic sanctions are the front line of the new Cold War, unlike the U.S.-Soviet confrontation of yesteryear. But military escalation cannot be far behind. Since the United States and China already possess enough intercontinental nuclear missiles for "mutually assured destruction," and since the United States would be hopelessly outnumbered in conventional land battles, military escalation will focus on naval power and hypersonic short-range missiles.

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Credit: Reuters / TPG
An unarmed Trident II D5 missile is test-launched from the Ohio-class US Navy ballistic missile submarine USS Nebraska off the coast of California.

This should be good news for shipyards in both countries. The United States will build submarines, destroyers and aircraft carriers to prevent Chinese dominance of the South China Sea, and China will enlarge its fleet to defend its claimed islands and assert sovereignty over the seas within the nine-dash line.

Meanwhile the United States will ramp up its economic war with China, with the goal of securing a commercial divorce from China. The immediate provocations are China’s persistent merchandise trade surplus with the United States, and China’s appropriation of U.S. technology as the price of admitting U.S. corporations to the Chinese market.

But if these provocations were the whole story, U.S. trade and investment tactics would be different — sabres, not sledgehammers. The underlying provocation of economic war is Trump’s fear that China will overtake the United States, economically and technologically. The 21st century ‘Thucydides Trap’ is unfolding.

In terms of sheer GDP, China’s overtaking seems almost inevitable, even if its growth slows to 4 percent from the currently advertised 6 percent. At best, the U.S. economy will grow at 3 percent over an extended period. So it’s just a question of arithmetic whether China’s overtaking of the United States will happen in 2030 or 2050.

Technology is another matter. If the United States embraces sensible steps, it could maintain a technological lead for the indefinite future. One step, unfortunately not aligned with Trump’s agenda, would put out the welcome mat for scientific talent from abroad. Another step would significantly enhance federal funding for basic science and related education. A third step would enlarge tax credits for private research and development outlays.

Instead of these steps, the Trump administration, with enthusiastic support from Congressional Democrats, decided to stress the interruption of technology flows to China. A prevailing myth is that China’s technological prowess depends almost entirely on theft from the West. Before long, Americans will discover that China excels at home-grown technology. By that time, China’s technological overtaking will be nearer reality than fantasy.

The new Cold War is not being fought on trends favorable to the United States. For sure China will suffer, but it will respond by building alliances in the immediate Asian neighborhood through institutions like the Regional Comprehensive Economic Partnership and the Asian Infrastructure Investment Bank, and through its own Belt and Road Initiative. China may also choose to cement its relations with Russia, and reach out to advanced nations – Europe, Japan and South Korea. Whether the Trump administration or its successor will reinvigorate traditional U.S, alliances remains to be seen.

Two other basic questions must be asked. Is the new Cold War necessary? No. Instead, either the Obama or the Trump administration could have created a powerful but informal entente with China — a ‘G-2’ arrangement. Was the new Cold War inevitable? Probably yes, once Hu Jintao stepped down from the Chinese presidency in 2013. His successor Xi Jinping is turning back the clock on market-oriented reforms and fostering state control of the economy, centralizing political power and driving domestic technological advancement through the Made in China 2025 plan. This direction and its consequences for China’s dealings with the United States over the past several years set the stage for conflict.

En route to the November 2018 APEC summit in Papua New Guinea, Pence told Chinese leaders that it is China’s responsibility to avert a Cold War by dramatically revamping its economic model and abandoning its territorial claims in the South China Sea. Speaking at the Shanghai Import Exposition conference earlier in November, Chinese President Xi Jinping defended the world trading system and outlined China’s reforms in broad strokes. His remarks, welcome as they were, came nowhere close to meeting Trump’s demands.

The 2016 U.S. presidential election proved that blaming foreigners generally, and China specifically, was a vote-catching theme with bipartisan appeal. Democrats envied Donald Trump for so successfully capturing this piece of political thunder. Since the election, many senior Democrats have applauded Cold War themes, in substance if not in name. Come 2021, a Democrat in the White House is not likely to reverse Trump’s policy. Nor is President Xi likely to pursue conciliation rather than confrontation.

During the years ahead, pleasant phrases and smiling photos will be interspersed with hostile rhetoric. Whatever the distractions, the new Cold War promises to be an enduring feature of the world economy and the political landscape, and a lasting legacy of presidents Trump and Xi.

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

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