U.S., China are locked in a Cold Peace

Tensions between the United States and China have risen substantially. The Trump tariffs remain firmly in place. Washington is searching for ways to limit the spread of Chinese technology companies while giving funds to U.S. firms. China is trying to curtail its vulnerability to the United States’ long reach. In this atmosphere, one might imagine that trade between the two countries has plummeted. In fact, it recently reached an all-time high.

Welcome to the strange new world we live in. China and the United States are becoming more adversarial toward one another in every way, and yet they are both part of a global economy that is deeply interdependent and has a dynamic of its own. Tensions rise but so does trade. It’s not just with the United States. China and Australia have seen growing disputes, attacks and counterattacks. Last year, China publicly aired 14 grievances with Australia and warned it not to “make China the enemy.” And yet, Chinese purchases of Australian goods recently hit a record high.

This is why analogies to the Cold War don’t really capture the unusual nature of today’s great power competition. During the Cold War, the United States and the Soviet Union traded at best a few billion dollars’ worth of goods every year. Today, the United States and China trade that much in a matter of days.

The Soviet Union barely existed on the economic map of the free world. It presided over a tightly controlled economic bloc of communist countries that had few connections — in trade or travel — with the rest of the planet. Mostly, its economy was about resources — oil, gas, nickel, copper, etc. China, by contrast, is deeply integrated into the world economy. It is now the world’s leading trading nation in goods. Twenty years ago, the vast majority of countries traded more goods with the United States than with China. Today, it has flipped. Last year, China replaced the United States as the European Union’s largest trading partner in goods.

China needs U.S. consumers for its economic growth. But conversely, many of the United States’ largest companies — from General Motors to Apple to Nike — need the Chinese market. The Walmart effect — the availability of low-priced goods of every kind to Americans — has been closely tied to sourcing from China. Even when you look at something such as the United States’ expanding green economy, you find the shadow of China behind it. Those solar panels you see everywhere have become so affordable and thus ubiquitous because many are made in China. And then there is the roughly $1 trillion worth of American debt that China holds.

The United States will need a strategy that mirrors the complexity of this relationship, one in which China is part competitor, part customer, part adversary. Some of this the Biden administration has done very well, bringing America’s allies together in a more united front against China, such as for its human rights abuses. But Biden is also confronting the reality that the United States’ allies have close economic ties with China. (In Asia, most countries have China as their largest trading partner.) They would like to have both strong trading relations with China and strong geopolitical ties with the United States. Forcing them to choose might create more problems than it solves.

Adding even more nuance, China is strong but it is not taking over the world. It faces substantial challenges ahead. It is graying quickly because of the legacy of Beijing’s one-child policy. It has still not shown that it can avoid the “middle income trap” faced by rising economies that aspire to join the ranks of rich ones. Chinese President Xi Jinping is nurturing the state sector and unleashing regulators on private companies. And China’s new assertive foreign policy has caused a backlash from its biggest neighbors, from India to Australia to Japan. Last week, the Philippines renewed a defense agreement with the United States that it had long announced it was planning to end.

Can Washington embrace the complexity of this challenge? It is facing an economic powerhouse that, unlike Germany and Japan, is not dependent on the United States for its security. It faces a new great power that is not a democracy and has different values and beliefs, and yet has not occupied and controlled countries as Stalin’s Russia did during the 1940s (which is what triggered the Cold War).

And this is all happening in a world in which international trade has rebounded to pre-pandemic levels. It’s not a new Cold War but something much more complicated: a Cold Peace.