The U.S.-China Cold War: Narrative or Reality?

Robert Fragnito | Chief Operating Officer

It seems the Cold War wonks are at it again! Excuse the sarcastic tone in my opener, but as a student of international affairs, I have always been amazed by recurring attempts by experts to resurrect the “glory days” of the Cold War.

Who can blame them? The world was much simpler then. The geopolitical stage was defined by two ideologies competing for global supremacy. It was a bipolar world where democratic capitalists in the west led by the U.S. were at odds with authoritative communists led by the Soviet Union in the east. Both sides engaged in high-level diplomacy and third-party proxy wars, but never directly fought a war against each other. The conclusion: the west won, the east was in pieces, and the world was left with one super-power, the United States of America.

In the modern era, the ascent of the east is apparent with the People’s Republic of China leading the charge. Although China was an ally of the Soviet Union during the Cold War, it shifted its approach in the early 1970s from a command-economy to a limited free-market-economy while still maintaining the communist party apparatus under the direction of reformer Deng Xiaoping.

Considering this transformation, China rose to power with its capability of providing cheap goods to satisfy the needs of western consumers and corporations. For the most part, relations between the U.S. and China have been steady since the establishment of relations during the Nixon administration.

The Narrative

It appeared this all changed three weeks ago after U.S. Vice President Mike Pence delivered a striking speech calling China out for its practices on the geopolitical and global economic stage. For commentators, the Trump administration declared the start of the Second Cold War.

As markets faced tailspins in recent weeks, the U.S.-China Cold War narrative gained traction on both sides of the Pacific. Despite this evolving trend, the U.S. Vice President’s speech, and a naval incident in the South China Sea; the narrative from the press and statements from policy makers in Beijing and Washington are at odds.

Our assessment in monitoring the rhetoric in the Chinese press offered a signal of where this war of rhetoric is headed. If you causally scroll through articles featured on Alibaba owned South China Morning Post’s dedicated page on the U.S.-China Trade War, you see that the tone on the subject has mellowed significantly. We also noted there is very little rhetoric in examining the official state-run media outlet Xinhua.

It all came into perspective when China’s ambassador to the U.S., Cui Tiankai, gave an interview with Chris Wallace on Fox News Sunday. Cui was clear—in a soft tone—China is prepared to respond to any trade war or violation of its sovereignty. At the same time, he refused to acknowledge the cold-war rhetoric and stated plainly, trade wars are not in anyone’s interest. What was striking was his emphasis on the confusion surrounding who in the administration really speaks for Trump.

Cui’s interview in our view, attempted to soften tensions or at least ease markets, but it delivered little success in both the U.S. and China. Efforts by his counterparts in the Chinese securities regulatory commission and the central bank also tried to ease fears citing assurances that China has the tools to deal with economic headwinds, but it yielded little results.

Recent moves on the part of U.S. officials are also noteworthy. The U.S. Treasury last week did not label China a currency manipulator, despite Trump’s position on the matter. Treasury Secretary Steven Mnuchin warned China is still under scrutiny in addition to five other economic partners: Germany, Japan, Switzerland, Korea and India.

Michael Pillsbury, a man who Donald Trump considers the “leading authority on China,” said on the Fox Business Network that the end goal for the U.S. President is to achieve a trade deal with China. More importantly, Pillsbury along with other experts are concluding that China’s President, Xi Jinping and his advisors were not expecting the Trump administration to follow through on what then candidate Trump was saying during the campaign.

Pillsbury also criticized Larry Kudlow, the director of the U.S. National Economic Council, for harsh comments against China. Kudlow accused China of not responding positively to requests by the U.S. in trade talks, and he went on to call China an unfair and illegal trader. He again reiterated this accusation over the weekend in an interview with the Financial Times.

This course of events provides further indication of where relations between the world’s largest economies are headed – the necessity of a trade deal, even if the White House ordered more than US$250 Billion worth of tariffs on Chinese exports in September. Noting that China countered increasing its total tariffs against the U.S. to US$110 Billion.

The Reality

For starters, we need to step back and understand exactly what a cold war is. A cold war is conflict between nations not involving direct military confrontation. Although the conflict can manifest in indirect confrontation using proxies, political and economic means or “soft power” are more heavily used in this competition.

By this definition, one could make the argument that the U.S. and China are engaged in a Cold War, but they are missing one critical element – cold wars are established within the context of competing ideologies. In this case, both the U.S. and China are effectively capitalists, and as a result, both nations are far more interconnected than the Soviet Union and the United States ever was.

Data recently released last week showed that the Chinese economy slowed in the third quarter due to weak industrial production failing to meet expectations. The Chinese government blamed the current “severe international situation” for the lack of growth. In addition, the effects of overall picture for U.S.-China relations have also take a toll on U.S. markets, but in comparison to the Chinese markets, the U.S. has fared better.

Reality is settling in for the Chinese, they are neither militarily or economically comparable to the U.S. Considering recent economic data in China, the Chinese political apparatus is planning its next steps to ensure economic longevity carefully. The South China Morning Post reported on Friday that a source confirmed that Trump and Xi will meet at the G20 summit in Argentina at the end of November. This coincided with recent statements by Liu He, China’s Vice-Premier and a top economic aid. He confirmed that Washington and Beijing are “contacting each other at present.”

Implications

As we approach the U.S. midterm elections, we are very interested in seeing where relations with international trading partners are headed. The outcome of these elections will give a clearer understanding of strategies employed by foreign trading partners and potential future trade agreements setting the tone in global economy.

We expect that investors will continue to see volatility in the coming weeks, but we remain confident that a future trade agreement with China is likely if the Republicans manage a victory in November. This outcome displays to China that a Trump presidency is secured at least until 2020, and they cannot afford to wait that long without a resolution to this trade war.

The G20 summit will be an excellent venue to announce such a deal, provided there are no major complications. In addition to monitoring U.S.-China trade relations, China-Europe trade developments are also of interest if China is seeking counter measures in global trade.

We can say with certainty that we are venturing into a new frontier of international affairs. It is the first chapter in new form of geopolitics more closely resembling a competition between corporations rather than dueling super-powers. As it stands, it is still a unipolar world, and the U.S. is still the sole super-power. Many agree that China still has a long way to go before considering itself a Cold War, “Sovietesque” power, but this does not mean that China is not seeking to rival the U.S. either.

One must remain confident that increased economic cooperation leads to a more peaceful world. If the last forty years of relations between China and the United States has proven anything, it is this. Spectators and influencers must refrain from trying to employ theories of the past to explain present realities. We should also be reminded of how much history rhymes, and if we keep this mind, then “Only Nixon could go to China.”

What We’re Following:

Videos to Watch:

China's ambassador to the US talks trade tensions (Fox News Sunday)
US takes jabs at China ahead of G20 summit (Interview with Michael Pillsbury)

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