Chinese handcuffs part 2: the risk of military conflict
In a prior post, we illustrated how in-country sales of US subsidiaries operating in China are almost as large as Chinese exports to the US, leaving the US highly vulnerable to retaliation by China if trade wars escalate. These trade tensions are just one part of the broader Chinese-US relationship; some observers expect military conflict between the US and China as well:
* In a 2017 survey by C100, 50% of Chinese citizens, 33% of Chinese business leaders and 35% of Chinese policy experts responded that war with the US was “very likely” or “somewhat likely”. The percentages were only slightly lower amongst US respondents to the same question
* Harvard’s Thucydides’s Trap Project found 16 cases over the last 500 years in which a major nation’s rise disrupted the dominant state. Twelve of these rivalries ended in war and four did not. The project is directed by political scientist and Presidential advisor Graham Allison, whose recent book is entitled “Destined for War: Can America and China Escape Thucydides’s Trap?”
* The Chinese state-owned newspaper Global Times wrote in 2015 that “if the United States’ bottom line is that China has to halt its activities, then a US-China war is inevitable in the South China Sea”
Perhaps, but there’s also enormous economic pressure on China and the US to find common ground. Compared to adversaries of the past 100 years, economic linkages between the US and China are much larger. The chart below is something I’ve been working on for the last few months. The idea is to measure the economic linkages between adversaries of the past and present. To do this, we add the outstanding stock of bilateral foreign direct investment, the amount of bilateral annual trade, and the amount of government bonds owned by the other country’s Central Bank. Compare China/US today to Europe and Asia in the 1930’s, to US/Russia in the 1980’s and to India/Pakistan.
I’m not by nature an optimist, but I believe these economic linkages will eventually push the US and China toward compromise and away from a shooting war or a full-blown trade war.
When I say “full-blown trade war”, I’m referring to across the board tariffs on both sides that move the needle on overall US tariff rates. The next chart illustrates the magnitude of Trump’s trade wars so far.
For the last 75 years, tariffs on dutiable goods imports into the US have been declining. Trump administration tariffs mark the first increase in decades, although so far, the increases are small.
Should Trump follow through with tariffs on an additional $ 100 bn in Chinese imports and on $ 275 bn of US auto and auto parts imports, the change in tariffs would start to have more of a Hoover-esque feel to them, creating more serious risks to the global trading system.