The new Cold War: US-China tensions are escalating fast

Any consideration of the US-China relationship must now accept that we are entering a period of protracted strategic rivalry. The way in which they view and approach each other has fundamentally shifted, and after the coronavirus pandemic the world faces a new era of struggle for global power and influence between its two great superpowers.

A recent Hinrich Foundation report, authored by Dr Alan Dupont, argues that US-China competition has intensified to such a degree that it should now be called a new Cold War. This is worth taking seriously as a starting point. It seems implausible that the conflict between Washington and Beijing can now be resolved through a well-crafted trade deal.

The degree to which this era of rivalry will be characterised either by hard decoupling and further deteriorating trade relations, or managed decoupling and grudging coexistence, is yet uncertain.

There is a wide spectrum of possibilities. Dupont believes that a degree of economic decoupling is necessary to “preserve the integrity of an open, robust trading system and a liberal international order.” This leaves a lot of potential room for a serious escalation of the trade war.

Yet in the immediate term, the US retaliation over Hong Kong is unlikely to be so severe as to scupper the phase one deal and reignite the trade war. President Trump faces a November election, and with a battered economy and a resurgent pandemic, the agreement remains a touting point for him. Some have gone so far as to speculate that the reason the Chinese Communist Party (CCP) took such harsh action on Hong Kong in the first place is because they calculated that the US would never respond so aggressively as to jeopardise the phase one agreement.

So far, the US has introduced limited measures such as export controls on military and high-tech products to the Special Administrative Region. Sanctions are on the table, with a bill advocating their use reaching Donald Trump’s desk on July 2. The broad assumption, however, is that the Trump administration is likely to be measured in their actual implementation. They are unlikely to immediately jeopardise Hong Kong’s ability to function as a financeable hub, at least.

Peering beyond Hong Kong, however, it is clear that an escalation remains very much on the cards, and 2020 is set to be pivotal in deciding how the new Cold War plays out. Over the next 6 months, in both the US and China, two key choices, heavily affected by Covid-19, will be made. These will determine how severe and volatile this new era of strategic rivalry will be for the foreseeable future.

First, there is the choice faced by the American public in this year’s presidential election. Even in February, many election-watchers were betting on a second Trump term. Now, five months later, Covid-19 has changed everything. The race is competitive, and those election models already up and running put Biden ahead.

The fundamental American structural position on China is now bipartisan. But the potential differences in strategy and approach of this year’s presidential candidates cannot be overstated. Who Americans choose as their President will have a significant impact on the US’ approach to China.

A second Trump term would see his administration continuing to challenge China unilaterally, mobilising US economic leverage and resulting in the continuous threat of a re-escalation in sweeping tariffs.

A Biden administration, on the other hand, would see a more multilateral approach to China, repairing relations with allies and building a coalition to place joint pressure on the CCP. The Trump doctrine would create volatile trade patterns; the Biden approach would be no less tough, but it would also be more stable and consistent.

Ultimately, whoever wins the race, tensions in the South China Sea are likely to persist. While Secretary of State Mike Pompeo has just made the unprecedented move of openly declaring Chinese territorial claims to be unlawful, this policy would likely continue into a Biden administration, even if it may be pursued in a more nuanced way.

Meanwhile, across the Pacific, China’s leadership faces a choice on whether to follow through on long-promised market reforms. Triggered by the economic crisis wrought by Covid-19, such reforms were raised on May 18 in a document promulgated by both the Party Central Committee and State Council. As former Australian Prime Minister Kevin Rudd has eloquently laid out in recent weeks, the Chinese leadership now sits at an “economic crossroad,” facing the choice of genuinely strengthening private markets and levelling competition, or continuing debt-fuelled state dominance.

The path dependence set in motion by Xi Jinping’s government this year will be instrumental in deciding the US-China relationship post-2020. This is because, as much as the question of economic reform is a domestic decision on how to reignite growth, it also indirectly offers a pathway to aligning Chinese economic practices more with global norms and what the United States may find acceptable in a trade partner.

Of course, some trade differences over issues such as data flows may remain irresolvable. But should China genuinely implement reforms levelling the playing field for economic actors and reducing state intervention, this could go some ways towards reducing the gap of disagreement between the US and China, at least by alleviating trade tensions somewhat.

Putting these two choices together, a horizon with many different potential futures emerges – a matrix formed of varying combinations of choices on both sides of the Pacific. One scenario would see Joe Biden win the election and China engage in a difficult yet necessary reform pathway. The world would see a stable rivalry, with some economic decoupling, and reduced trade flows.

Another, in which China would double down on its economic habits, and President Trump would remain in the White House, could see a deteriorating feud and volatile trade relations. In this scenario, the countries fail to find common ground as the American administration continues to employ heavy-handed tactics. Between these extremes lie a range of intermediate outcomes, based on different combinations and variations of these choices.

Which future we will face is yet to be determined. That the world is in for an extended period of great power rivalry is certain. However, it is becoming increasingly clear that anyone wishing to glimpse the trajectory this rivalry will take should monitor closely the fundamental choices to be made in each country this year.

Gidon Gautel is the China Foresight Project Coordinator and Economic Diplomacy Commission Project Manager at LSE IDEAS (The London School of Economics’ foreign policy think tank).