Economic Warfare: The Growing Tension between USA and China

  01-Jun-2018 05:43:31

usachinaeconomic warfare

It has been more than seventy years since the beginning of the last Cold War, and now a possibility for a new one arises.

Ever since Mr. Trump was elected as President of the United States in 2016, tension has been mounting between the geo-political giants, USA and China. The circumstances however, are quite different from the ubiquitous tension of the past century. The twentieth century saw the clash of two contrasting and opposing ideologies: Capitalism and Communism-Socialism. The United States and Western Europe practiced Capitalism, which focused on liberty through free markets, and the Soviet Union and China practiced Communism-Socialism, which advocated state involvement to engender equality. Although there was rarely a head to head skirmish between USA and USSR, many wars were fought through a wide range of proxies in other countries; the famous nuclear arms race and even a race to the moon! On the other hand, this century sees warfare on the economic front. Predominantly, with the two biggest economies going head to head for stakes in the world market.

If you kept up with the 2016 elections, you must know that President Trump made his anti-China stances quite clear. In almost every one of his speeches he was quoted as saying China has greatly mistreated America and promised citizens that he will ensure China is swiftly dealt with. He goes as far as to say that China is committing "trade rape", which is the "greatest theft in the history of the world". Colourful language aside, Trump promised to update many trade deals in order to combat the 500-billion-dollar trade deficit the USA has with China.

It's important to remember however that there's often a great disparity between what Mr. Trump says and actually does. Compared with the loud, bold and sometimes outright outrageous remarks from his Twitter and campaign speeches, his actual policies and White House addresses tend to be more dialled-down and practical. That being said, China and the American economy are at the centre of the Trump promise, and we can be sure that some action will take place.

So why exactly is Trump so hot-headed over China?

Trump accuses China of currency manipulation. This is an economic principle where China cuts the value of it's currency in order to increase exports. As other countries buy Chinese goods, the currency price naturally increases, however China supposedly manipulates this and makes the currency cheap so that they are still able to competitively export goods. Trump labelling China a currency manipulator has little practical effect, but he can use this designation to justify costly fees on imports from China. Since China is perpetually continuing to grow more dominant economically and has a domestic impact in the United States, it makes sense for the United States to have an offensive policy. During the election campaign, Trump threatened to impose a 45 percent tariff on Chinese imports. If one takes this as more than mere election rhetoric, this could drastically alter the world market and effectively start economic warfare between the two nations. Since USA is the largest trade partner of China, this will damage their economic growth.

If Trump carried through with his tariff threat, there would be significant suffering due to the collapse of businesses and job losses in China, with economists estimating that China's gross domestic product could be trimmed by 4.8 percent. Furthermore, a full-blown trade war between Beijing and Washington could encourage other countries to become hostile to Chinese products, thus wrecking China's powerful export machine. The United States has a large influence over other nations, hence markets such as the European Union are likely to follow in the United States' footsteps and further damage China's power. China can retaliate in the trade war, for example China is Apple's largest foreign market, hence China could too damage US markets, however the effect will be minimal compared with the devastation the United States could impart.

This is quite relevant to India as they are politically in between the two nations. Near the beginning of Prime Minister Modi's election, there was a clear tone of appeasement from the Indian side. PM Modi made it clear he wanted a positive and open dynamic, expressing how he looked up to what China has achieved as a developing nation.

Chinese media quoted President Xi Jinping saying "Cooperation is the sole correct choice between the two nations."

Modi went as far as to ease market sanctions, making Visa formalities more lenient, and even downplaying meetings with the Dalai Lama in an attempt to create a healthy relationship with China. However, after their first visit (where Modi broke protocol to meet Xi in Ahmedabad) in 2014, the tone slightly changed. Modi became more open about their differences with China and stated that there was only a limit to which the nations can cooperate. Tension started to emerge and continue to persist.

The tension could stem from multiple sources but is most likely due to China pursuing relations with Pakistan, India pursuing relations with USA and Japan, and perhaps even issues with Tibet and border confrontations. This tension between the two nations places India in a strong position with the United States. A former senior official of India called the shared concern and uncertainty US and India have about Chinese intentions the strategic glue in US-India relations. There seems to be a lack of trust and knowledge between India and China, and there is an impression that China is not willing to give India its space to grow and develop; they don't want to see India emerge as a possible competitor.

Considering how China is India's largest trade partner, it's unlikely that any drastic changes will be made from India's front. China too has other areas of concern such as the United States and domestic issues such as pollution, water shortages and managing an ageing populations.

Hence we are unlikely to see any confrontation between India and China. It's within reason however that if the United States and China face an economic war, we will see India-USA relations grow stronger.

Sources:

- https://www.youtube.com/watch?v=EKoNAwhQDEw&t=300s

- https://www.youtube.com/watch?v=cIjoxJUi0JQ

- https://www.cnbc.com/2017/01/15/just-how-badly-could-trumps-threatened-45-tariff-hurt-china.html

By: Arya Krishnan