The trinity of the U.S.-China trade war

    Monday, 12 August 2019

    The U.S.-China trade war has recently become markedly complicated. Previous U.S.-China trade disputes were focused on tariffs and targeted key companies such as Huawei, whereas the latest situation suggest that the U.S.-China trade disputes are spreading to the financial sector.

    On August 5, China’s yuan breached the critical level of 7 to the U.S. dollar, and this has shocked the Chinese and foreign markets. From the U.S. perspective, this is China’s retaliatory response to the trade war to boost its exports. Therefore, U.S. President Trump quickly responded and asked the U.S. Treasury to immediately designate China as a currency manipulator. According to the current U.S. law, the United States will impose a series of penalties on China’s financial sector in the future. Meanwhile, the chance of the failure in U.S.-China trade talks has increased, adding to the worries of the global capital market about the future risks, and the global capital markets — equity, bond, currency and commodity markets — have all been caught up in the turmoil.

    It can be seen from the recent situation that apart from trade disputes, a currency war or a financial war will be waged between China and the United States. However, ANBOUND’s research team believes that the “war” between the United States and China will not merely be waged in the currency or financial sectors. ANBOUND has previously pointed out that the U.S.-China trade disputes are the complex competition between two major powers. Particularly the originator of the conflict, the United States has a “tariff-enterprise-finance” three steps “assault” against China, corresponding to different competitive modes such as tariff war, scientific and technological war and financial war.

    It should be emphasized that these three steps are not three separated or individual modes; rather they are an integrated “trinity”. However, in different stages and fields, the “trinity” game between China and the United States will have different forms. From the perspective of public policy research and decision-making, the overall understanding of U.S.-China relations is very important, which is conducive to a rational and relatively accurate grasp of the essence and trend of U.S.-China relations.

    Why does the dispute between China and the United States, originated in the field of trade, evolved into a complex game of “trinity”? Why do we say that U.S.-China trade frictions will last for a long time? The answer is exactly what ANBOUND pointed out in the research report of April last year. The U.S.’s long-term strategy toward China has changed as China has been regarded by the United States as a long-term strategic rival. This is the third historical stage that the United States has faced since the end of World War II, following the periods of the Cold War and anti-terrorism, and America’s mission in this historical stage is to deal with long-term strategic rivals, particularly China.

    Under such historical context, it can be seen that the “trinity” games between the United States and China, no matter it is a trade war, enterprise war or financial war, have the goal of dealing with the rise of China. From the perspective of the West, the rise of China is not only about China’s economic growth, but also about the challenges they face in the global status quo. China has also gained more in many areas, such as obtaining the geopolitical and geo-economic interests through its Belt and Road Initiative, controling certain part of the international resources, as well as having certain control over some major maritime routes. The West even believes that China’s cultural exchanges with other countries parts of China’s efforts to build and expand its international influence.

    There has been a history of U.S.’ concerns and responses to the rise of China. Ray Dalio, the founder of the Bridgewater Fund, points out that the tension between China and the U.S. is reminiscent of a time in history when the world powers of the global order were challenged by rising powers. Dalio argues that China’s current trajectory is akin to the rise of the Dutch, the British and, more recently, the United States, and China has begun to play a dominant role in the global economy. “Would you have not wanted to invest with the Dutch in the Dutch empire? Would you have not wanted to invest in the industrial revolution and the British empire? Would you not want to invest in the United States and the United States empire? I think it’s comparable.”

    Against the backdrop of the current trade war, Dalio is sticking to his belief in diversity, that despite the risks of investing in China, there are still places to grow and do the right thing in China. “I believe that China is a competitor of the United States or Chinese businesses will be competitors of American businesses and other businesses around the world,” he said. Dalio believes that the world order is undergoing restructuring, with both China and the U.S. will adjust their positions in it.

    Final analysis conclusion:

    The U.S.-China trade war is actually a trinity game of “tariff, enterprise, and finance”. In essence. It is a backlash against the rise of China by the United States and other western countries, and it a response to China’s geographical expansion represented by “Belt and Road Initiative”.