Are We at the Start of a New Cold War Between the US and China?

Joseph V. Micallef is a best-selling military history and world affairs author, and keynote speaker. Follow him on Twitter @JosephVMicallef.

One of the hallmarks of the Trump Administration's foreign policy has been a sharply confrontational attitude toward the People's Republic of China. The result has been a marked deterioration in U.S.-Chinese relations over the last four years -- a deterioration that has often been described as the start of a new cold war between China and the U.S.

The Trump administration has moved aggressively to limit China's access to U.S. technology and to block Chinese high-tech companies, most famously telecommunications equipment giant Huawei, from expanding globally. At the same time, it has insisted that China increase its purchases of U.S. goods, especially agricultural commodities, to offset the perennial deficit that the U.S. had in its China trade.

As part of that strategy, Washington imposed a range of tariffs on Chinese goods entering the U.S. It also moved aggressively to prosecute Chinese companies engaging in the theft of American intellectual property and to limit Chinese access to American capital markets. The White House has even suggested that the U.S. should consider disengaging from China's economy.

Based on what it saw as a direct relationship between China's growing economic clout and its increasing military power and diplomatic influence, the Trump Administration has adopted a strategy that could be described as "Economically Containing China."

The concept harkens back to George Kennan's 1947 memorandum in which he argued, in response to the deterioration of U.S.-Soviet relations, that the U.S. should respond to Stalin's aggressive foreign and military policy by building a series of interlocking alliances around the periphery of the USSR, backed by U.S. military power, to contain Soviet expansionism.

At stake is the same issue: who will determine the fundamental parameters of the world order?

Is the Soviet-era concept of containment relevant to managing U.S.-China relations? Can the U.S. "economically contain" China? Is disengagement the answer?

Are the U.S. and China in a Cold War?

To be fair, the U.S.-China relationship had already begun to deteriorate under the Obama Administration when Beijing, starting in 2013, moved to militarize the South China Sea. It did this by creating a total of seven new islands, which it used to house military facilities, and became increasingly confrontational in its relationship with its neighbors.

As a candidate for the presidency in 2016, Donald Trump had repeatedly claimed that the terms of U.S. -China trade were unfair to the U.S.; that they had resulted in the loss of millions of high paying manufacturing jobs; that both the Chinese government, its state-owned enterprises and private Chinese companies were routinely stealing American technology; and that China had taken advantage of the U.S.

Nonetheless, the Trump Administration, notwithstanding that many of its trade officials were notoriously "China hawks," did show a willingness to continue the Sino-American economic relationship, albeit on radically reset terms.

The term "Cold War" was coined in 1947 by Bernard Baruch, a prominent financier and longtime advisor to the U.S. government, to describe the state of U.S. -Soviet relations and the challenges they posed to the U.S. The term resonated with American media and was quickly adopted to describe what historians called, "a war without fighting or bloodshed, but a battle nonetheless."

The Cold War between Washington and Moscow lasted approximately 40 years. It was fought mostly by proxies and in the shadows of covert intelligence operations. To call it bloodless is a misnomer. Bullets fired by proxies were just as lethal as those fired by the military forces that sponsored them; a lesson driven home to both American and Soviet soldiers in conflicts ranging from Afghanistan to Vietnam.

It's hard to see how the experience of the Soviet-American Cold War is analogous to the current state of Sino-American relations. The U.S. is not engaged in any military conflicts where its opponents are Chinese proxies.

There have been military clashes between the military forces of China and those of its neighbors. Some, like the Philippines, are bound to the U.S. by defense treaties. Others, like Vietnam or India, have no such agreements, much less any explicit U.S. guarantees of their security, but share a common interest with Washington in preventing Chinese encroachment on their sovereignty. While those incidents had casualties, although none were American, they fall far short of the proxy conflicts that characterized the Soviet-American Cold War.

The U.S. and China are involved in a wide-ranging economic competition, one that spills over into American bilateral relations with other countries, and also impacts the "rules" of an international system that has evolved, largely under American leadership, in the postwar period. The U.S. competes economically with other countries, most notably Japan and the European Union, but this rivalry is different from the Sino-American one.

First, while countries like Japan or the members of the EU compete economically with the U.S., and while they may seek to shape the "rules" of world trade and the international economic system to their advantage, they stop short of seeking a wholesale replacement of the U.S. dollar-centric global financial system. Even the creation of the euro as the common currency of the EU, while it had the added advantage of being an alternative reserve currency to the U.S. dollar, was never envisioned to be a replacement for it.

Secondly, except for China, the other major countries with which the U.S. competes economically are ones that are aligned with the U.S. militarily and, with some exceptions, diplomatically. While economic growth and technological innovation may enhance a U.S. ally's military capabilities, such enhancements do not have bearing on U.S. national security. Indeed, in most cases, they enhance it by expanding alliance wide capabilities or diminishing the U.S. contribution to the common defense.

China is the exception to this rule. The growth of the Chinese economy and its technological sophistication directly impact Beijing's military capabilities while, at the same time, enhancing its diplomatic power. Chinese military and foreign policy has become increasingly, nationalistic, aggressive and combative, a style the Chinese media calls "Wolf Warrior Diplomacy." That means China's economic growth has a direct bearing on America's defense and diplomatic posture in East Asia, specifically and generally in the Indo-Pacific basin.

Not only does that posture increase American defense requirements in the region, it also raises the probability that aggressive Chinese actions, especially ones aimed at countries with which the U.S. has a defense agreement, will lead to a confrontation or even a military clash with the U.S. Currently, Beijing has territorial disputes with every one of its 14 neighbors. In some of these disputes, it is unilaterally changing the "facts on the ground."

Disengagement: Is the Economic Containment of China Feasible?

The U.S.-China economic relationship is exceedingly complex. It's far more complicated than the military and diplomatic rivalry between the U.S. and the Soviet Union. In the latter case, the economic relationship was largely irrelevant.

The U.S. and the Soviet Union never had an extensive trade relationship, even after Moscow became a major customer of American grain. The level of direct investment between the two countries was insignificant. Soviet gas exports to Europe were viewed as a national security concern by Washington, but, for the most part, the Soviet economy was largely self-contained and its function had little bearing on the global economy.

The existing U.S.-China economic relationship, on the other hand, is quite large. In 2019, the U.S. and China transacted $634.8 billion in direct trade, consisting of $163 billion of Chinese imports and $471.8 billion of Chinese exports to the U.S., resulting in a trade deficit of $308.8 billion. The overall numbers are probably understated as some trade, both imports and exports, flow through Hong Kong.

China's overall trade account amounted to $4.6 trillion in bilateral trade. The U.S. is China's largest trade partner, although the EU and the ASEAN region, collectively, are larger. Roughly 40% of China's trade activity is represented by foreign enterprises in China. In turn, China is America's third-largest export market, after Canada and Mexico.

In addition, Chinese firms, some of which are state-owned enterprises, had invested $140.5 billion in the U.S., while U.S. companies had invested $269.6 billion in China. Chinese entities owned approximately $1.1 trillion of U.S. government debt, second only to Japan's $1.3 trillion. Most of that debt is with the Bank of China, the county's central bank.

The Trump administration has urged U.S. companies to repatriate or shift their China-centered supply chains elsewhere, especially for goods that are considered essential like pharmaceuticals or medical equipment. It has also stated that it does not want Chinese electronic components embedded in critical defense systems and hardware. Additionally, there has been support in Congress for subsidies to help U.S. companies to underwrite the costs of repatriating supply chains for critical goods.

Overall value of U.S.-China trade dropped by 11% from 2018 to 2019, and is expected to drop again in 2020. It's not clear to what extent the drop in trade is a result of the Trump administration's imposition of tariffs on a wide range of Chinese goods, the economic impact of the pandemic or the repatriation of supply chains. Some repatriation or shifting of supply chains has undoubtedly occurred, but, for the most part, most of the China-centered supply chains are still in place.

It's not easy to shift supply chains, especially when they are based on joint ventures or American-owned Chinese factories. Such a shift would presuppose a divestiture of those assets. Not an easy thing to do, if as part of the divestiture, the demand the factory was filling would also get moved.

Moreover, the value attributed to the trade that flows across a supply chain can be tricky to estimate. Apple imports billions of dollars' worth of iPhones from China. Most of the value in those phones, however, is represented by components that are imported from South Korea, Taiwan and the U.S. What occurs in China is just the assembly of those components into a working phone. Less than 4% of the retail value of an iPhone is attributable to Chinese inputs.

Secondly, China represents a huge and rapidly growing consumer market in which Western brands are extremely popular. From Nike-branded apparel to Jack Daniels to American sports entertainment and films, China represents a significant and lucrative market for Western goods. Denying access to that market represents a significant loss to American firms, one that many will fight to reverse.

Moreover, Beijing has been masterful at making it clear to American and foreign companies that the price of continued access to China's internal market is support for Beijing's policies, or at the least tacit acceptance of them.

That's why American companies that are quick to denounce the mistreatment of minorities in the U.S. and conspicuously silent about the same phenomenon in China. The Australian government's call for an international investigation into the origins of the COVID-19 virus brought swift retribution from China. Beijing imposed punishing tariffs on many Australian exports.

There is a significant "China lobby" in the U.S. of companies and individuals who stand to profit from continued access to China's internal market, and who will resist any U.S. attempt to economically isolate China or reduce American participation in China's economy.

Moreover, Chinese financial support of many universities, lucrative licensing deals with American media companies and a general propensity to buy goodwill with cold cash means that Beijing can exert a degree of influence on American decision-makers and elites that is beyond anything that the Soviets could have imagined during the Cold War.

Simply put, it has taken over three decades to join the U.S. and China economically, resulting in a complex web of supply chains and direct investments. Couple that with the enormous influence that China has cultivated in the US. Unraveling those ties will not be easy, and will come with a significant economic cost to those affected. In the short term, it will be almost impossible to change.

In maintaining those ties, the U.S. is also, for all practical purposes, enabling the rise of a near-peer competitor that makes it clear its ultimate purpose is to rewrite the rules of the international system to suit its needs and to ultimately replace the U.S. as the head of that system.

That does not mean that China's ascendency is preordained, or that it will ultimately prove successful in its long-term aims of replacing the U.S. China has plenty of challenges ahead: a rapidly aging population, a bloated and inefficient state business sector and ever-increasing levels of personal, corporate and governmental debt. That's all in addition to growing economic inequality between rich coastal cities and their rapidly growing middle class, and the poorer interior regions. All these factors pose significant challenges that Beijing will have to manage and eventually resolve.

Moreover, viewed against the long sweep of history, China's rise is simply its return to its traditional role in East Asia and the Indo-Pacific basin. Throughout its history, except in those periods of weakness and internal disunity, China has been the reigning power of the region. It was always the largest country, with the largest economy and the largest population.

The most recent exception to that rule was the period from the Opium Wars in the mid-19th century until the Communist revolution in 1949, when China was dominated by foreign powers. That's a period that Chinese historians still describe as "the hundred years of national humiliation." Mao's disastrous economic policies slowed down China's return to its historic role but, ultimately, did not prevent it.

That does not mean that China's current policies are a throwback to its imperial past, although there are certainly parallels. As in the past, Beijing has tried to draw its neighbors into a China-centric world system that reflects its political and economic power.

The difference is that in the 18th century China's world was limited to East and Central Asia and the Indo-Pacific basin. Today, China's worldview is global in scope. Moreover, historically China's economy was largely self-sufficient. That is not true today. China is dependent on foreign markets to drive the export-led economy -- on which its national prosperity, and by extension the legitimacy of the Beijing government, depends. Likewise, China is equally dependent on its trading partners for the raw materials and the technology that it needs to drive its economy forward.

Western governments long assumed that a prosperous, economically developed China that was better integrated into the global economic and world system would ultimately become more democratic and less hostile to Western norms and culture. That has not turned out to be the case. Indeed, an economically advanced and powerful China has been more willing and able to project its norms as an alternative to the present world system.

The Trump administration, among others, has singled out the Chinese Communist Party (CCP) for this seeming aberration and as the cause of China's increasing hostility to the West and its aggressiveness with its neighbors.

On the other hand, China's ambitions to control its peripheral areas, especially the South and East China Seas; its desire to secure the sea lanes on which its trade and ultimately its economic prosperity depend; and to have sufficient military power to defend those sea lanes should a hostile power seek to interdict them, would be expected from any great power in China's position.

The logic of geopolitics knows no ideology. A non-communist China might well pursue the same objectives with equal aggressiveness. Consider that Russia's desire to control its periphery was no less acute under Catherine the Great than it was under Joseph Stalin or Vladimir Putin. The means and the tactics may have differed, but the objective remained the same. Indeed, a non-communist China, freed from the economic inefficiencies that Communist party rule imposes, might well be a more formidable competitor, both economically and militarily, than the present regime.

The U.S.-China economic relationship did not make China a great power, but it did accelerate China's return to his historic status. Dismantling that relationship, assuming that was even possible, and looking to contain China economically will not deprive it of that status, although it will likely slow down its rise.

The U.S. and its allies are right to demand a more level economic playing field with China, including an end to the wholesale theft of intellectual property by China's government and its companies and Beijing's mercantilist policies. They should be equally steadfast in insisting that China adhere to international norms of state behavior.

The U.S.-China relationship is neither a cold war nor a hot war. It is a war, though -- one that will be fought more with advanced semiconductor chip designs and quantum computing protocols than it will be with planes and ships. Regardless of how it is fought, however, the consequences on the international system and who will lead it will be the same.

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