November 21, 2018
...[D]ecoupling or divorce from China, Cold War-style, is an option that would threaten economic and political turmoil and promise a global winter of discontent that stretched the Asia Pacific order to breaking point”.
Maybe US Vice President Mike Pence didn’t mean to fire the opening shots in a new Cold War with China in his 4 October speech at the Hudson Institute, but the global policy community can be forgiven now for taking the proposition seriously.
The idea of a new Cold War is of course not new: it had been canvassed in security circles in Washington and the chill has been cultured actively by some in allied capitals for some time. A range of President Donald Trump’s advisors and former advisors, Steve Bannon, Peter Navarro, John Bolton and Robert Lighthizer, all identify as proponents of political and economic decoupling from China to a more-or-less extreme degree. Navarro most recently advocated the idea in its most extreme form at his CSIS speech about how China was undermining US national security, giving the impression that an economic ‘self-sufficiency’ strategy, like that which has been so disastrous in North Korea, was the only way to keep America secure. Larry Kudlow, Director of the President’s National Economic Council, disavowed that thinking with an unequivocal declaration that Navarro had misspoken and had no authority to speak on the matter on behalf of the Trump administration.
The new Cold War narrative gained traction as President Xi Jinping consolidated his power and began to assert the discipline of the Chinese Communist Party across the government and society in China. It has been accompanied by a discernible shift right across the political spectrum in the United States towards a hard-line posture on China. The conflation of frustration with China’s military assertiveness in the South China Sea and the perception that its Party dominated political system qualified every commitment China had made under international law to the rules-based international economic system has been an easy logical slide even for those in the US policy community who had been architects of China’s entrapment within that system.
Make no mistake. There are real issues on the agenda for negotiation in securing a more efficient and more equitable foundation for the next phase of the economic and political relationship between China and the United States. China is no longer a poor, developing country aspirant to membership of the WTO but a very large, upper-middle income economy that is the largest trader in the world. While China’s entry to the WTO was on terms that were more onerous than that even advanced and established members of the WTO had to bear, issues beyond the coverage of the WTO, with respect to its foreign investment regime for example, and new issues, such as those related to digital trade, beg negotiation. Contrary to much of the new American narrative, it is not that China has flagrantly flouted the rules of the system to which it and its partners signed on in 2001 — it is rather that it has outgrown them bigtime.
Many of the issues for negotiation now that have the highest priority — to do with treatment of foreign investment, intellectual property, industrial subsidization and competition policy — were encompassed within the negotiations that had been on-going between China and the United States over a Bilateral Investment Treaty, that have now been suspended. There is also the issue of further trade liberalisation and industrial reform that the absence of progress with multilateral negotiations through the WTO has left unattended. Attending to these issues is not only in the interests of the United States and other countries, it is also in the interests of China in prosecuting the reform agenda that it has articulated as the path towards catching up with at least lower-end advanced industrial economies and avoiding the middle income trap.
All these things would seem eminently negotiable, if only President Xi and President Trump could agree to sort them and some others things out.
But as Gary Hufbauer warns in our lead essay this week, the Pence declaration last month represents a significant departure from ‘business-as-usual’.
‘Economic sanctions are the front line of the new Cold War, unlike the US–Soviet confrontation of yesteryear,’ says Hufbauer. ‘But military escalation cannot be far behind. Since the United States and China already possess enough intercontinental nuclear missiles for “mutually assured destruction”, and since the United States would be hopelessly outnumbered in conventional land battles, military escalation will focus on naval power and hypersonic short-range missiles.’
Hufbauer worries that the United States will ramp up its economic war, with the goal of securing an economic divorce from China. While the immediate complaints from the Trump administration are about the persistent US trade deficit with China and the appropriation of US firms’ technology, the real story is simply fear that China will overtake the United States economically and technologically as the arithmetic, however manipulated, suggests it will by 2030 or 2050, take your pick.
Hufbauer sees American attempts to decouple from the Chinese economy and the close down of US trade and technological ties as a loser’s game — a national science and technology strategy that stayed open to scientific and technological links would more likely keep the United States ahead of the game, incorporate less risk of pushing China back into a corner from which it posed a bigger threat and strengthen US economic and political security, he suggests. But he rates the chances of this outcome low, barring unlikely conciliation from Xi’s China. The new Cold War promises, he assesses, to be a lasting legacy of presidents Trump and Xi.
Yet, in a hard-headed if gloomy assessment of where China and the United States are at right now, Henry Paulson, Secretary of the Treasury under former US President George W Bush and leading US China expert, sounds a strong warning on the decoupling strategy.
Decoupling, he says, is easier when you’re actually a couple. But the United States and China are not a couple. They are part of an international economy that is multilaterally integrated on an unprecedented scale, especially within Asia.
The United States might well continue to pursue divorce through cutting back trade, capital and technology flows, but that’s a cost no Asian country, including US allies, can readily afford, Paulson says. The cost is a function of their geography, of economic gravity and of the strategic reality in which they live day-by-day.
Many countries around the world may share many of Washington’s present concerns. But decoupling or divorce from China, Cold War-style, is an option that would threaten economic and political turmoil and promise a global winter of discontent that stretched the Asia Pacific order to breaking point.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.