29 May 2020, NIICE Commentary 4920
Dr. Aneek Chatterjee
The outbreak of Coronavirus not only affected global health and economy, but it has put Sino-American relations under severe strain in recent times. The US President had openly retaliated China of mishandling COVID-19 issues, which China vehemently opposed. In the wake of the COVID-19i, President Trump also revived a two-year old issue, first proclaimed in 2018, about engaging in a trade war with China. The American administration revived allegations about unfair trade practices by China, which the later strongly opposed. Allegations and counter allegations between the two top powers of the world had fueled speculations about an emerging Cold War in the near future. In order to put psychological-political pressure on China, a bill has also been introduced in the US Congress to recognize the independence of Tibet. Would there be a new Cold War between the US and China? If yes, what would be the nature of the new Cold War? This article intends to analyse, whether the US and China would engage into a Cold War in the near future.
Chances of Cold War
The Cold War that the world had witnessed for four and half decades from 1945 to 1991 between the US and the erstwhile Soviet Union, started as an ideological-political rivalry but gradually transformed into a pathological disliking of each other in all gamut of life. Both nations tried to spread their respective spheres of influence in different parts of the globe, while trying at the same time to thwart the other from influencing countries and their people. Thus, the West Bloc and the East Bloc were created and patronized by the US and Soviet Union respectively. In effect, the whole world, including the non-aligned nations, came under the pervading influence of the two super powers during the Cold War period. Military blocs like NATO and Warsaw Pact were sponsored by the two superpowers, and economic packages were provided by them to their protégés. Action – counter action and Threat – counter threat by the two super powers in different regions of the world, were routine affairs during these four and half decades. Finally, with the disintegration of Soviet Union in 1991, the Cold War came to an end.
Any future Cold War, if taking place, will not be the same again. Ideological issues have taken a back seat and given way to economic issues in contemporary times. Therefore, a socialist versus liberal democratic (or capitalist, if you prefer) ideological tussle will not be prominent in any future Cold War, although there could be latent existence of such issues. Instead, trade and commercial issues will rule the roost. And the two top economies of the present-day world order, China and the US, will vie for economic gains. If the earlier Cold War was more political, the next cold war will be predominantly economic. In this context, the much talked about trade war, which began in 2018 between China and the US needs attention. A trade war refers to actions of a nation in imposing tariffs or quotas on imports; and when other countries retaliate with similar forms of trade protectionism, tension mounts. Such trade practices are followed by nations with a view to protect domestic industry and create jobs. For the American administration, a huge trade deficit with China over the years was a matter of concern. President Trump wanted to lower and finally wipe off this trade deficit where American imports from China remained higher than American exports to China. Therefore, from 2018 America imposed tariffs on imports from China, and as a consequence, trade deficit lowered significantly in the year 2019. In the year 2018 American trade deficit with China was USD 419 billion, but it came down to USD 346 billion in 2019, a plunge of nearly 18 percent over the previous year. The US administration wanted to continue with slapping tariffs on Chinese imports in order to boost domestic industry and create jobs. In retaliation China also imposed heavy tariffs on imports from America, and the trade war escalated. There are other components of the trade war, most notable of which is the currency war. The Americans have been alleging that China purposefully devalues its currency Yuan to reap benefit in its exports with the world, including the US. Washington dubs it as unfair trade practice, although China claims that Yuan is valued as per international currency standards. Currently, China is world’s largest exporter of goods.
Whither Trade War
Will this trade war lead to another Cold War where the two nations vie for supremacy in other areas, including military and politics? Will these countries try to control, in their own ways, the course of world politics, and thwart the other from spreading its influences? Many believe that a full-fledged Cold War between the two is unlikely, due to many stakes the two countries have with respect to the other. Both China and the US are dependent on each other as far as their trade and commercial relations are concerned. China is the second-largest foreign holder of the US Treasury securities. It accounts for more than 15 percent of the public debt held by foreign countries. China buys US debt to support the value of the dollar. Although China has been reducing its hold of American Treasury securities since 2011, to make the Yuan more attractive globally, it is still (in 2020), the largest banker to US public debts. Future Chinese actions on these public debts (i.e., if China wants to call in its debts, all at once or slowly) will have profound repercussions on the US economy and public life, including a plummeting of the dollar in global markets. Moreover, China is currently the world’s principal manufacturing supply chain, and the US gets hugely benefitted by these supplies ranging from domestic products to medical equipments to industrial instruments.
On the other hand, China reaps huge amount of money through its flourishing trade with the US, which is currently China’s top export destination. America ranks sixth in China’s imports from overseas. American private business is greatly invested in China, while common man in the US invests more and more money in Chinese stocks. Although the outflow of American Foreign Direct Investment (FDI) to China is decreasing, the later still enjoys the status of second most attractive business destination after the US, by the UNCTAD. According to the US Bureau of Economic Analysis (BEA), American FDI to China in 2018 was USD 7.6 billion, down by 22.9 percent from 2017. This fall in American FDI could be attributed to the call of a trade war by the American administration. Therefore, if the US is adamant about continuing a trade war, China will face some hardships, if not acute trouble. The two sides met in January 2020 to sort out trade related problems, but the follow up actions could not be taken by both nations due to the outbreak of the pandemic. However, at the same time American companies find it easy to do business in China because of the existence of cheap labor, less unionism, good infrastructural facilities and a huge consumer base.
Therefore, the two countries are currently engaged in a strong trade relationship. If the American concerns for trade deficit are carefully addressed by China, the trade war that the world is talking about may not be intense. It is believed that China will take up the matter of trade deficit quite seriously in the coming years, after heated rhetoric calms down. On their part, the Americans must also show some degree of flexibility as far as trade-related issues are concerned. When their economic interests will be at stake, both sides would become flexible gradually. A trade war will ultimately be detrimental for both nations, and it will reduce global trade as well. Actually, a trade war works well in the short run. Tariffs initially give some advantages to domestic producers. Prices of products on which tariff is imposed, get lowered by comparison. As a result, producers receive more orders from local customers. With the growth of local business, jobs are also created. But in the long run, a trade war costs jobs because it affects economic growth for countries involved, as well as for the whole world. It leads to severe inflation because tariffs increase the prices of imports. Hence, a trade war benefit none.
Realism Will Prevail
But who cares when national interest gets hurt? During the Soviet-American Cold War, neither side conceded any ground when its national interest was at stake. But it must be remembered at this point that Soviet Union and the US had negligible trade relations throughout the Cold War period. As a consequence, political rivalry between the two reached its peak. In the case of Sino-American relations, economic interests will dominate over political differences. Heated rhetoric apart, when economy of both nations gets depressed and growth potentials affected due to trade war, they will gradually shift from hard stances to more realistic negotiations. Realism will ultimately prevail over rhetoric in future Sino-American relations. The current trade war will continue for some time, but gradually it will weaken when trade and economic interests of these top powers get affected. There will be Cold War like vibes, but no continuous Cold War between the two.
