The rapid development and potential escalation of a trade war between the United States and China goes beyond economic issues to raise profound questions about the future of the world's most important bilateral relationship.
Whether China can develop its vast potential peacefully and cooperatively with the US will set the terms of this century’s international politics. The Trump administration’s maximal demands that China must stop technology transfer, cease manipulating its currency and balance its trade with the US arise from a zero sum view effectively requiring China to reverse its huge modernisation programme. No Chinese leadership could agree to such unrealistic demands.
A ban on investment both ways would undermine the commercial models of many US companies which have outsourced production to China
Last week the US added a further 25 per cent increase of tariffs on Chinese goods, bringing those affected in trade both ways to some $100 billion since July. The logic of escalation and retaliation could see that extend rapidly to most of the trade between the two states, up to 10 times that amount. If events go in that direction both economies would be badly hit.
A ban on investment both ways would undermine the commercial models of many US companies which have outsourced production to China, while Chinese investment in US companies now amounts to one of its largest sources of international finance.
The deep interdependence between them created by China’s development is illustrated by figures showing its GDP, amounting to 20 per cent of the US economy in 2000, is estimated to have reached 66 per cent in 2017. By 2030 China may overtake the size of the US economy.
To say that is not to agree that they will be of similar strength, since US income per capita is six times China’s and its innovatory capacity remains world beating. Trump’s effort to protect those features by opening up conflict with China is misconceived as well as unrealistic. Economic, technological and financial flows are far more open than before, creating the international infrastructure that underpins relations between the two economies.
China is now strong enough to seek allies against such an escalation, but in doing that it must make concessions itself
China's development programme foresees it playing a leading role in high technology by 2025. That has led to an aggressive search for global investments and acquisitions and protectionist ways to ensure it benefits from international investments. Its chosen path is understandably competitive and often treats partners unfairly. Other world powers and blocs like the European Union make this case without resorting to the Trump administration's demands.
China is now strong enough to seek allies against such an escalation, but in doing that it must make concessions itself on open access to its markets, and a more shared approach to its economic development. Such cooperation could head off Trump’s unilateralism but will require more initiative and leadership from all those affected than has been apparent so far.