Much has been written about the economic wisdom and potential effects of the Chinese-American trade war. But few understand that the war is just a front in what we should see as the second cold war.
China seems to be in the lead in developing and using technologies such as artificial intelligence, hypersonic missiles and 5G (which has extensive defense and intelligence applications). Together, these technologies can create a strategic military advantage for China as early as the next decade, enabling China to challenge or even defeat the United States.
Trump administration can see tariffs as the easiest lever to draw hope to slow down Chinese economic growth, forcing the Chinese to redirect resources away from developing valuable strategic technology. However, the primary concern of the Communist government is still to cut internal disagreement.
For example, China has developed a sophisticated orwellian surveillance system that characterizes the citizens of a "community credit". This point determines which Chinese subjects can buy, where they can travel, and even which schools they and their children can attend. In addition, China is in jail and is attempting to "re-educate" their Muslim population in what the US government describes as concentration camps.
Targeted China's Economic Growth
China has experienced 30 years of unbroken economic growth. Since the government has not had to cope with severe economic downturns during that time, Chinese authorities are now focused on how the population will respond to a real recession. If the regime feels the need to carry out an oppressive surveillance state when economic times are good, what can things look like when things are bad?
The Chinese government fears a scenario where discomfort is widespread. One billion and a half unhappy person is an unmanageable problem. The Trump administration seems to expect the Chinese government to use more resources to rid the population, which can slow down the regime's ability to develop strategic technologies long enough for the US to get started.
The critical question is, will it work? China's economy hits. Its official production index went down in negative territory in May, and new US tariffs have not even fully taken their tolls yet. China's second quarter gross domestic product growth was the slowest for 27 years. It is unknown how the Chinese people will react, not to mention how people's liberation arms (PLA) will react.
China's President Xi Jinping has tried to consolidate power over the PLA, but we should remember this was in a period of robust economic growth and simple economic decisions. If Trump's policies make a financial downturn for China, the resulting difficult economic and domestic decisions accompanied by increased confrontation with the United States are likely to test the relationship that Xi has developed with PLA.
If all this looks more to you as a cold war than a trade war, you would be right.
It's more than just a trade war
The Chinese have been in a cold war with the United States for more than 20 years. The US public has been slow to understand this reality because the conflict looks very different from the cold war with the Soviet Union. Unlike the Soviet Union, China has used markets, debt traces and trade to gain market dominance, politically valuable positions, and military-usable property worldwide.
A Cold War with China differs significantly from the Cold War with the Soviet Union because of the economic ties between the two nations. The United States and China are the world's largest economies, and the direct and indirect ties between them are large and complex. The United States simply cannot afford to economically crush China without triggering consequences for the global economy, which will also harm Americans.
The economic pressure that Trump administration puts on China through tariffs will reduce the volume of dollars flowing to China at once China still needs to spend dollars to buy oil and defend the yuan. The United States, in its understanding, has the strategic ability to raise oil prices, forcing China to use foreign exchange reserves to continue protecting the yuan.
This will again increase the number of dollars China must use. Foreign reserves are crucial for the Chinese economy, and these moves will force China into a difficult position. All of this helps explain why China referred to the Trump actions as "naked economic terrorism."
There is a lot of geopolitical reason in Trump's renewed well-being with Saudi Arabia and other golf states. These nations would be the most likely candidates to retrieve slack and buy US debt if China were to fall into economic downturn.
There are inevitable limits to a trade war with China
In the short term, the United States can tighten the pressure on China's economy. In the long run, however, China is likely to find other arrangements. Realistically, this strategy cannot and will not last long. History shows that a limiting factor for arms prices is that people will always find alternative markets. For example, due to new tariffs, China has already replaced US soybeans with soybeans from Brazil.
China has threatened to withhold rare earth metals from the United States, causing serious disturbances in the production of everything from solar cell phones to wind energy to aircraft and missiles for the US military. Fortunately, the United States currently has a rare earth mineral mine and others can be opened. Another plant for treating rare earth minerals is being built in Texas. Questions like these can be worked in the past, but in the short term any solutions will be difficult and require precious time to develop.
If the commercial war persists, they can be very painful for the US economy. Small and medium-sized businesses will be particularly damaged. General Motors aims to provide new suppliers and to move production while still in business, while many smaller businesses do not.
With its current tariff strategy, the Trump administration runs a very thin and unstable line. China has many cards left to play, and the results will vary from pain to direct disaster for US companies that rely on Chinese product imports. Many small and medium-sized businesses can become insolvent before they can arrange any new suppliers. In addition, as previously mentioned, Trump must avoid significant negative global economic consequences.
The trump tariff strategy is a gambit with a limited lifetime. There may well be enough margin to force China to redirect resources away from developing strategic technologies and toward placing the population, but it must be managed closely and wisely.
The United States does not want to find itself strategically inferior to China in the 2020s. However, the prospect of the world's two largest economies entering an economic war is unlikely to end happily for everyone involved. The risk for the US and global economies is enormous. Whatever change comes.