A new Cold War?

US-China confrontation may spill over from trade

The trade war between the US and China has entered a new phase, one in which the earlier hopes of a compromise are rapidly receding. After coming close to an agreement, the US side accused the Chinese side of reneging on large parts of the agreed-upon deal. As a consequence, President Donald Trump’s threatened escalation of tariffs on Chinese goods has kicked in. Beijing has retaliated in kind, saying it would raise tariffs on nearly $60 billion worth of US exports to China, including alcohol, apparel, and liquefied natural gas. The Trump administration had already increased tariffs to 25 per cent on $200 billion of Chinese exports to the US, and has released a plan to impose similar tariffs on the remaining $300 billion. 

Altogether, there will now be price increases on goods across the board. And the price of this trade war will be paid by consumers and companies in both countries. American consumers will face higher prices on basic goods. Meanwhile, American producers of key goods such as soybeans in politically sensitive states that are crucial to Mr Trump’s re-election prospects will be hurt by Chinese retaliation. American companies producing in China will be hurt, but so will their Chinese-owned subcontractors. These are two very integrated economies. Under these circumstances, some wonder if the trade war makes political sense for either side, but particularly for the US administration — and therefore these people doubt that it will be followed through on with energy. However, there is every reason to believe that Mr Trump intends to prosecute this war to the fullest — it was a leitmotif of his political campaign and indeed a constant refrain of his even before he entered politics. The Chinese president will also be facing pressure at home to avoid being seen to back down. Under such circumstances, some economic pain will be seen as politically bearable by both sides. 

However, it is unlikely that this confrontation will now remain limited to the trade sphere. In order to sell the economic pain to their domestic constituencies, both leaders will have to re-invigorate a narrative of strategic rivalry. Pocket-book pain is politically palatable when it is seen as being part of a larger national cause. The concern, therefore, must be that in other areas, in particular maritime security, the US and China will now increase their level of confrontation. Hopefully, countries will not be asked to “pick sides”. Yet, it is likely that India, which has made a mantra of strategic autonomy, will have to manage a much more tricky international situation. There may, of course, be benefits to be garnered: Markets may be opened to Indian exports by Beijing at a much more rapid pace than earlier, in order to ensure that Washington DC does not build a coalition of countries dissatisfied with Chinese trade practices. But confrontation in the South China Sea and in Eurasia more broadly might become more visible. A new Cold War looms on the horizon.