NEW COLD WAR HOTS UP
Internationally, all eyes are on Russia and Ukraine. But global politics may take a decidedly frigid turn if the US and China ‘decouple and that seems increasingly likely
You wouldn’t think it to read the latest trade statistics, but the US is in a trade war with China. It’s the war launched back in 2018 by then president Donald Trump, which seems to have been fully taken on by his successor, Joe Biden.
In February Americans imported $42.3bn worth of goods from China, but exported only $11.6bn to the Asian giant, leaving a deficit of $30.7bn in just one month’s trade. That’s little different from the levels that prompted Trump to launch the war in the first place.
In a bid to counter or at least slow Chinese imports, Trump in 2018 imposed tariffs on a range of products. Unsurprisingly, China shot back with tariffs of its own. Trump responded with more tariffs; China did likewise.
The tariffs helped push up costs for consumers, but appear to have had only limited effect on overall trade — and on hefty Chinese trade surpluses.
Economically, the general conclusion is that the tariffs — many of which were on intermediate products used as inputs for further manufacturing — have done nothing more than bump up the cost of manufacturing in the US, giving an advantage to manufacturers elsewhere. And, sadly for US workers, there’s been very little sign of the “onshoring” Trump promised.
Frustration at the lack of progress and growing hostility between the two powers has raised the prospect of a 21st-century Cold War, with commentators talking of a “decoupling” that would unravel much of the trade developments of the past 30 years.
It is the ultimate omelette to be unscrambled. Unlike the first Cold War, when there were no commercial ties between the warring parties, the economies of the US and China are closely intertwined.
Rhetoric aside, Martyn Davies, MD of emerging markets at Deloitte, believes things may not change too much. “There will certainly be decoupling in the realm of technology and related defence sectors, but China is essentially ground zero of the global supply chain,” he tells the FM.
Davies explains that globalisation has been driven by China’s mercantilism over the past 20 years — to the enormous benefit of consumers across the world. “Thanks to China, a whole swathe of tradeables — furniture, cellphones, TVs, toys — are now cheaper than they were 20 years ago.”
Steven Kuo, adjunct senior lecturer at the University of Cape Town’s Graduate School of Business, also believes there’s a range of tamer possibilities in the offing. “Japan and China are at each other on a regular basis, but they still manage to do plenty of trade,” he says.
Still, a 2021 report by Boston Consulting Group (BCG) reckons a decoupling is no longer “implausible”, and warns of the considerable challenges of “unwinding commercial ties that took decades to build”. It will be costly and pose significant risks to both US and Chinese companies, says BCG, adding: “Our analysis suggests that US companies, because of their strong push over the years to source and sell in China, collectively have far more to lose in the near term.”
(So far, the decoupling debate does not include any reference to the trillions of dollars of two-way equity, bond and US treasury securities investments.)
The consulting firm explains that US companies have about $400bn of revenue at risk in China, while Chinese firms have three to five times less exposure to the US market. Crucially the overall trade figures — showing a permanent surplus in China’s favour — camouflage the fact that huge volumes of goods are built in China on behalf of US companies and then exported back to the US. They also don’t include all the products US companies make in China for that market.
So Trump’s battle for US jobs might have been better directed at US CEOs than the Chinese Communist Party (CCP). It also suggests current tensions are more geopolitical than economic.
Former Australian prime minister Kevin Rudd has described how in a few short months in 2018 “decoupling” became the “term du jour” of US-China relations. In a nod to the Cold War, he has warned of the dangers of plans being activated in response to even the slightest evidence of hostile action, “thereby creating a cycle of action and reaction which eventually spirals out of control”.
How did things change so dramatically? For decades the US governing elite seemed happy to indulge China’s idiosyncratic adherence to the rules of the World Trade Organisation (WTO). This was hardly surprising, given the
profits to be made in transferring manufacturing capacity to China and serving an increasingly wealthy Chinese consumer base. But towards the end of president Barack Obama’s second term, the mood changed. Americans were getting angry.
In December 2017, the White House National Security Strategy claimed China and Russia sought to “challenge American power, influence, and interests, attempting to erode American security and prosperity. They are determined to make economies less free and less fair, to grow their militaries, and to control information and data and to repress their societies and expand their influence.”
And that was four long years before Russia invaded Ukraine.
Rudd believes the US got frustrated because of what it sees as China’s broken promises to reform. “In Washington’s view, the US extended WTO membership to Beijing on trust, only to see that trust in large part dishonoured when China decided instead to set out eating America’s economic, technological and strategic lunch.”
Deloitte’s Davies presents a more nuanced take on China’s assertiveness. It’s an attempt to secure the standing the country has long felt it deserves. And China also wants to be able to influence the system it joined in 2001.
“The real competition is in standard-setting by international bodies such as the WTO, International Monetary Fund, World Bank, UN. The US currently dominates this and doesn’t want to give up that power,” he says.
Inevitably things between the US and China became even frostier after Covid spread across the globe. And any hopes that Biden might be less confrontational were dashed when, weeks after his inauguration, five major Chinese telecoms companies were blacklisted by the US telecoms regulator. More sanctions and blacklistings followed, with US regulators citing national security concerns and alleged human rights abuses in Xinjiang.
It was hardly surprising, then, that the US Chamber of Commerce’s China Centre last year said the prospect of a US-China decoupling “has never been more real”. But it warned of a steep price tag — so steep that a partial rather than a full decoupling would better serve US interests.
It hasn’t been a one-way street. Indeed, some China analysts reckon things were bound to turn sour after Xi Jinping was appointed president and leader of the CCP 10 years ago. And they’re unlikely to improve while he remains in control.
By 2017 Xi had made clear that the CCP was at the centre of the state and the state at the centre of the economy as China sought to secure its position as a superpower. This, his “China dream”, seemed to make little room for the unprecedented entrepreneurial energy that had helped drag almost 1-billion Chinese out of poverty and transform one of the world’s poorest countries into its second-largest economy. In that 30-year process, inequality thrived as millionaires were created seemingly overnight; the market took centre stage and the CCP seemed on the wane.
At the same time, Xi warned that China should prepare for 30 years of sustained struggle with the US. The country’s industrial policy masterplan laid the foundations for such a struggle. But its “dual circulation” strategy to insulate China from US coercive action didn’t get much airplay until it began to sound like Washington’s “decoupling” strategy.
The US’s weaponisation of the dollar and Swift payment system after Russia’s invasion of Ukraine will simply have reinforced China’s resolve.
Sadly, neither Kuo nor Davies holds out much hope of SA deftly navigating such tensions to its benefit. SA’s twoway trade with China is more than double its US trade, and the past weeks have shown where the ANC’s instinctive loyalties lie. But there is scope for more effective diplomacy.
“We need to be more agile in determining what benefits we can get from China’s ‘belt and road initiative’ as well as the US’s ‘build back better’ programme,” Kuo says.
There is also a risk of Africa being marginalised in the superpower battle. “Under Xi there’s been more accountability for taxpayers’ money and that means less tolerance for fancy foreign projects,” says Davies, adding that China’s interest in Africa is now much more focused generally on critical minerals.
From SA’s perspective, it seems that if there is a global political crisis on the horizon, it’s one that will be wasted.