An economic Cold War was long coming

Among the likely transformative changes due to the Covid-19 pandemic around the world, it is certain that it acted as a catalyst on the economic front. It has accelerated the economic Cold War between the world’s two largest economies. The US and China are almost on an irreversible war path on every economic front.

From tariff to chip wars, high-tech telecommunications to currency wars, and virus to manufacturing of vaccines for the Covid-19, and from capital markets to security-related restrictions, there is no area that remains untouched by Washington and Beijing.

The Donald Trump administration and the US Congress are now acting in tandem to escalate the war against China to secure their domestic political priorities. It is a “lose-lose” situation, says Graham Allison, Harvard University’s political science guru.

“The endgame will probably be lose-lose,” he said in an interview with CNBC on May 26. “I think this will be worsening across the board and I hope they don’t do any permanent damage,” Allison opined.

China has also signalled its intention to square-up with the global hegemon on a measure-for-measure on every front. Beijing’s latest security bill on Hong Kong, that led to large-scale protests, has become an example for US Secretary of State Mike Pompeo, who notified the Congress that Hong Kong can no longer be considered autonomous from China. In effect, the US could deny the possible loss of Hong Kong’s special trade benefits.

US on the offensive

The US has already unveiled a new “Strategic Approach to the People’s Republic of China”, which is based on what Washington calls “principled realism”. It emphasises the threat posed by China to US national security and economic interests.

Allison deserves kudos for prophesying that the US and China will eventually slip into what he had called a ‘Thucydides trap’. The term refers to that ancient Greek historian whose magnum opus on the Peloponnesian War in 5th Century BC provided valuable insight as to what would happen between a rising power like China and a ruling but declining power like the US.

In his book Destined for War, Allison offers an illuminating account of the tensions that will rise inexorably between a ruling power like the US and a rising power like China. Significantly, the US has exerted its hegemony largely on account of trade and economic interests under the banner of “open door” policy since 1898.

But, at home, Washington continued to dismantle the open door policy for immigrants, starting with the China Bill, that closed doors for the entry of Chinese immigrants in the first quarter of 20th century.

And now, Washington continues to threaten nations by constantly imposing sanctions on poor and vulnerable countries. It has abandoned the leadership role at several multilateral institutions, including the World Trade Organisation and now the World Health Organisation.Trump continues to attack these organisations on grounds that they assisted China in climbing up the global ladder while ruining his country.

China’s rise

Nevertheless, it is an undeniable fact that China made dramatic advances since 1978. “China has soared from 10 per cent the size of the US to 60 per cent in 2007, 100 per cent in 2014, and 115 per cent today,” said Allison. “If the current trend continues,” he says, “China’s economy will be full 50 per cent larger than that of the US by 2023… By 2040 it could be nearly three times as large. That would mean a China with triple the America’s resources to use in influencing outcomes in international relations,” he pointed.

China has also resorted to some questionable policies for providing market access to foreign companies. It helped its domestic companies to grow in size, scale, and effectiveness globally. The Chinese government offered the red carpet to foreign investors, particularly from the US. But Beijing has allegedly placed barriers for American exporters, because they can be substituted. “This fracturing will accelerate as Covid-19 has laid bare supply chains’ monolithic dependence on China,” argues Robert Armstrong of the Financial Times.

The UK and the US, global hegemons in the 19th and 20th Centuries, respectively adopted extreme nationalist economic policies and stole technologies from other countries, including China and India. The destructive role played by Britain in India’s cotton textile industry is well documented.

Thus, the economic Cold War between the ruling but declining US and rising China will continue to persist for years to come in one form or the other. As Thucydides rightly said, the Peloponnesian War resulted from “the rise of Athens (China now) and the fear that this instilled in Sparta (the US),” it is also fair to conclude that in an economic Cold War, “the strong do what they can, and the weak suffer what they must”.