Us-china trade standoff lays the foundations for a new iron curtain
After her visit to Beijing earlier this year, Theresa May confidently proclaimed the start of a new “golden era” in UK relations and trade with China. America, by contrast, has virtually declared war on the place. President Donald Trump wants to halt the country’s progress in its tracks.
What do these differing approaches mean for the economy and markets? David Lipton, deputy managing director of the International Monetary Fund, has called it the “three Ts” – trade, technology and trust.
It’s hard to know exactly what’s causing the current slowdown in global growth, but one of the more plausible explanations is that international business has been seriously unnerved by rising trade and geopolitical tensions; investment plans are being pared back accordingly.
It’s possible the US is a minor beneficiary of this phenomenon. Where international supply chains are threatened, US corporations seem minded as a precautionary measure to invest more heavily in the US instead – a victory, if you like, for Trump’s America First policies. Yet it is proving uncomfortable for everyone else.
If anyone thought the high-level delegation Trump sent to Beijing last week was intended as an olive branch, they were in for a rude awakening.
The Mnuchin, Ross, Lighthizer and Navarro roadshow rolled into town with a lengthy list of demands, including that China reduce its trade surplus with the US by $200bn (£148bn) a year and that all Chinese government support for advanced technologies should be abandoned.
The demands presage a complete breakdown in trust between the two superpowers. Provocative they certainly were, but it is also hard to avoid the impression that they were deliberately designed to be unacceptable. The US must know that unconditional surrender is not in president Xi Jinping’s playbook. It’s already being called a new “cold war”, only worse because at least in the days of the iron curtain everyone knew roughly where they stood, there were reasonably effective forms of communication and dialogue, and the prospect of “mutually assured destruction” actually worked quite well in keeping the peace.
In some respects today’s world looks rather more unstable and fragile. We must assume that Peter Navarro, the president’s trade adviser and author of a book on the Chinese threat called Death by China, largely wrote the script for last week’s standoff.
In so far as we can figure out precisely what he is after, it is not only that China slashes its trade surplus with the US, but that it also scraps its “Made in China 2025” industrial strategy, and refrains from investing in semiconductors, aerospace, electric cars, robots, artificial intelligence and anything else that might possibly give it a lead over the US. I exaggerate only a little.
As I’ve written before, I don’t quarrel with Trump’s complaint; China has been ruthless in exploiting Western “openness” to further its own economic and geopolitical ambitions, conspicuously abusing the system to steal technology, jobs and markets. The World Trade Organisation has proved spineless in defending free and fair trade from the Chinese onslaught.
What’s more, the evident contempt with which China’s elites hold the West plainly poses some sort of threat to our institutions and way of life.
Trump is determined to nip that threat in the bud. After initially starting out all soft and cuddly with China’s Jinping, the US president has – by appointing the China hawks John Bolton as national security adviser and Mike Pompeo as secretary of state – returned to the hardline position of the campaign trail. American economic and geopolitical hegemony is to be defended to the last. A recent US security strategy report warned that the belief that China could be turned into “benign actors and trustworthy partners” had been proved comprehensively wrong.
Of particular concern is China’s goal of becoming the “primary” centre for innovation in artificial intelligence by 2030, and the potentially hostile uses this leadership might be put to.
In retaliation, the Pentagon has its own “Third Offset” strategy, signalling a new battle for technological supremacy reminiscent of the space and arms races of the Fifties and Sixties. In The Thucydides Trap,
Graham Allison postulates that when a rising power threatens to displace an existing hegemon, it almost always leads to war. I’m not a great fan of this theory, if only because the Peloponnesian War, which Thucydides chronicled, was essentially just a local, tribal conflict.
What’s more, there are many examples in history where the rising power dynamic does not lead to war. But you can see why so many have embraced it as a parable of our times.
I doubt it will lead to outright war this time around, but some kind of rupture, a Yalta style dividing up of the world into separate spheres of influence and trade, the creation of some new form of iron curtain in other words, seems more than possible.
And if it comes to that, which way will Britain jump? If the multilateral world the UK has long championed is dead, it cannot be good for our post-brexit ambitions as an open, free-trading nation.
Supermarket merger mania
We’ve been here before. A bit like the big banks, and once upon a time, the major brewers, Britain’s leading supermarket groups are always trying to merge with one another. Safeway and Asda held serious merger discussions back in the Nineties but abandoned the chase after being warned the competition authorities would never allow it.
That combination, by the way, was a lot smaller than the one proposed today. When finally Morrisons plucked up the courage to take a pop, everyone piled in on top – Tesco, Sainsbury’s, Asda, KKR, Philip Green, Uncle Tom Cobley and all. For Tesco’s Terry Leahy, without a hope in hell of getting competition clearance, it was only a frustrating action.
He needn’t have bothered. Morrisons so catastrophically mismanaged the subsequent integration that Tesco was able to double down on its pre-existing dominance regardless. The rise of Amazon makes Asda and Sainsbury’s believe this time they’ll be allowed to get away with it.
I doubt the CMA’S new chairman Andrew Tyrie will be that naive. If it looks like a monopoly, and walks and talks like one, that’s what it is.
‘Some kind of rupture, the creation of some new form of iron curtain, seems possible’
After a promising start, relations between China’s Xi Jinping and US president Donald Trump have cooled