The US-China trade war is already having a negative impact on the global economy. If Donald Trump and Xi Jinping cannot agree to new terms at the G20 Summit, it will affect everyone.
As world leaders gather in Osaka this week for the G20 summit, expectations are high that Washington and Beijing can finally agree to trade arrangements between two countries.
However, most analysts claim that this is unlikely. Such an agreement requires concessions neither Chinese President Xi Jinping nor US President Donald Trump seems willing to make. To the contrary, we may witness the beginning of a much wider conflict between the two powers.
The escalating trade war between the US and China is the primary source of concern for global markets for some time now. President Trump blames Beijing for reaping the benefits of the global economic system but failing to comply with the rules of the game. It is a fact that China runs a massive trade surplus with the US, which the US administration blames on the Chinese government's heavy hand in the country's business affairs.
According to Washington, Beijing provides substantial subsidies to domestic producers and devalue the Chinese yuan (renminbi) giving Chinese companies an unfair advantage in global competition, while failing to fight intellectual property theft and forcing foreign companies investing in China to make technology transfers.
Determined to punish China and eliminate the enormous trade deficit of the US economy, President Trump first imposed substantial tariffs on $250 billion worth of Chinese imports and is now considering extending the scope even further until and unless China fully opens its market to US companies by reducing tariff and non-tariff barriers, and maintains a stable currency.
Beijing, on the other hand, claims that US bullishness is curtailing Chinese development. China has been able to take hundreds of millions of its citizens out of poverty and became the second biggest economy in the world within a considerably short period, thanks to the very economic policies which the US wants China to drop.
According to Beijing, it is the US that tilts the playing field and uses its global hegemonic position to derail Chinese development.
More recently, sanctions on Huawei, the world's largest telecoms network gear maker, took the confrontation to a different level. The US administration accused Huawei of presenting an espionage threat and banned sales of key components to the Chinese tech giant, most of which are supplied by US firms such as Skyworks and Qorvo, based on alleged national security concerns.
According to many policy analysts, however, sanctions against Huawei aim to maintain US companies’ comparative advantage in strategic sectors, especially artificial intelligence and 5G technologies and restrict the transfer of know-how in these critical sectors to Chinese companies.
Although Huawei says they are ready and capable of dealing with the blow, experts say that China’s ambitious plans to be the first in 5G technologies will indeed be hampered. Furthermore, after US government’s warnings about potential security threats coming from China, small-scale US firms started to break ties with Huawei, which led to a 40% decrease in the global smartphone sales of the company.
China isn’t the only country President Trump has directly confronted. His time in office has been characterised by an aggressive foreign policy and hasn't hesitated using strong measures to coerce US adversaries and even allies to align their policies with American interests.
Extraordinary economic sanctions against Iran, partial dissolution of NAFTA, growing tensions with NATO allies over military budgets, and increased tariffs on certain imports from EU countries are examples of this new aggressive US foreign policy paradigm.
Trump and his hawkish advisers seem to believe that the US is disadvantaged under current trade arrangements due to naive political positioning by previous administrations in the White House. According to them, by leveraging American financial and political power to its fullest extent, they can extend American economic and political hegemony beyond the 20th century.
The US wants to set the terms all over again while the US still has the upper hand and while doing so disregard previous institutional arrangements such as the WTO and NATO or trade agreements such as NAFTA or the TPP. The idea is to reform and restructure institutions of global order in a way where the US gets a ‘fair' share.
However, while it is not sure if it will create the desired results for the US economy, the aggressive attitude risks global chaos on both political and economic grounds. The trade war has slowed the global economy and could lead to another global recession, similar to the 2008 financial crisis.
Furthermore, a full-scale confrontation between two giants can lead to a cold war, except this time, the division is likely to be on economic and technological grounds rather than political. Soon, we may be living in a world where movements of technology, data, capital, and trade are all restricted within two mutually exclusive regions, one led by China and the other by the US.
Washington is already pressuring its allies to break economic ties with China and join the American policy of isolating Chinese companies, while China is creating its own digital world with its versions of Google, WhatsApp and other social media. Now, the Chinese government will also do its best to make sure that its companies are not cut-off from essential inputs, looking for trade allies that are not influenced by US pressure. In the end, all countries will be forced to pick a side.
The planned meeting between Xi Jinping and Donald Trump in the upcoming G20 summit could be a historical turning point. A failure to reach an agreement between two leaders may be the beginning of a new era which can last for years.
China and the US will either come to terms with each other and create a new international economic order between themselves, which potentially gives more influence to rising China without curtailing the American hegemony, or choose to turn their competition into a full-scale economic war with severe implications for everyone.
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