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Economy

Hurtling Towards a Hegemonic Showdown

Sep 26 , 2018

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With the imposition of tariffs on more than half of U.S.-China bilateral trade, we have entered a fully-fledged trade war, and neither the United States nor China looks likely to back down. Already U.S. President Trump has threatened tariffs on all Chinese imports to the United States, while Chinese policy-makers have floated the idea of differential tariffs on U.S. imports, targeting those American goods that China can easily replace with imports from other countries with very high tariffs.

As tit-for-tat actions escalate, the stakes are rising exponentially. It all began with Trump’s focus on the large U.S. deficit in bilateral trade with China. Then the administration’s Section 301 trade investigation pinpointed unequal market access and Chinese industrial policy practices that aim to catch-up technologically, especially the Made in China 2025 program.

Now, Trump seems hell-bent on conducting a full-scale trade war with far-reaching repercussions. While no longer part of the Trump administration, Steve Bannon, a former advisor to the president, tends to reflect the administration’s hard-line views on trade. He recently argued that U.S. strategy was to make the trade war “unbearably painful” for China and “unprecedentedly large.” For Bannon, the ultimate goal is to rebuild American manufacturing, the long-term base of any great power, shutting out global supply chains centered on China.

A messy divorce of the fusion between the Chinese and American economies – the end of Chimerica – looms. This raises the specter of the first “hegemonic showdown” between the United States and China.

Students of power transitions are fond of pinpointing a specific historical event, or at least a period, during which a hegemonic changeover is decided. A prominent example is the failure of the Spanish Armada’s campaign of 1588, which changed the course of European history and opened the door for British ascendancy. Similarly, Japan’s win over Russia in the battle of Port Arthur (now Dalian) in 1904/05 pushed back Russian expansion in the Far East and enabled Japan to become the region’s dominant power for 40 years.

Power transitions are not always historically clear cut. Great Britain was exhausted by two world wars and imperial overstretch, but emerged as one of the victorious allies in 1945. Nonetheless, this was the end of British hegemony, as the United States took on the mantle of international leadership.

Finally, in some cases dynamics internal to one of the competitors can alter the course of history. The Soviet Union, although pressured by the arms race initiated by U.S. President Reagan, collapsed mostly under its own weight. The centrally-planned economy could just not compete with the increasingly nimble, entrepreneurial and innovative economies of the capitalist West.

The situation at present is quite different from the above cases. Certainly, China is a rising power. It is the only country with the potential to truly challenge the United States economically, financially, technologically and, ultimately, militarily. But all-out war, with nuclear weapons, would be cataclysmic and suicidal.

Hegemonic competition is thus first emerging in the economic and technological realms. What started as a relatively minor trade skirmish that could have been resolved with negotiations is now becoming an ever expanding contest for economic dominance. While American politicians on both sides of the aisle do not necessarily support Trump’s tariffs, they agree on the strategic objective of containing China’s rise and preserving U.S. global dominance.

Accordingly, the Trump administration is presenting the battle over trade as the opening skirmish in an economic cold war. China has similarly started to see the trade war in a structural light: an attempt by the United States to contain China’s development, especially its efforts to foster indigenous Chinese technologies that could one day rival those of the United States.

This implies rapidly rising stakes in a game of chicken where neither side is willing to back down. While there is still the possibility that all is defused and both sides find a means to keep face and reach a “deal,” there is an even bigger likelihood that the trade war will be seen against the background of a broader power struggle, a hegemonic showdown.

While hegemonic struggles tend to last for decades, the present showdown will be measured in months or even years. Both sides have strengths and weaknesses. Whoever “loses” will be decided by which side blinks first and backs down. Neither side will, of course, admit it, but to the observer it will be clear, since a certain amount of pain will force one side to back down.

If China is forced to back down, it would loose face, but could buy itself time. Depending on the “deal” reached, China’s development might slow somewhat, but the country is unlikely to face a major blow to its momentum.

In large part due to its vibrant private sector, China is highly entrepreneurial and innovative. Major changes to its industrial policy and regulatory regimes are unlikely to stop the trend of technological advancement, and might even help. Moreover, less frosty economic relations with the United States contain distinct benefits.

Most pertinently, this hegemonic showdown is coming too early for China. Ideally, it could have waited another five to 10 years to stand up to the United States. Therefore, the benefit to the Chinese side of suing for peace is considerably higher than for the United States. China could bide its time, continue to develop its economy and wait for a more opportune time.

The calculus for the United States, though, is quite different. While it seems that Trump is winning the trade war, with China suffering considerable financial hurt, the administration’s hands are tied. If the United States is forced to back down due to domestic political pressures triggered by rising inflation, supply chain dislocations, and diminishing corporate profits, it would be seen as a historic loss – the beginning of the end of American economic hegemony.

Of course, this particular showdown will not necessarily decide the outcome of the on-going power transition, which is likely to unfold over many years. Depending on circumstances, the United States could regain momentum. Nonetheless, it would be a symbolic loss that would send a signal to the rest of the world.

This is perhaps why Trump walked away from a possible deal back in May 2018. Recent remarks by Secretary of State Mike Pompeo further reflect how high the stakes now are. Pompeo noted that there is no intent to back off from aggressive trade policies toward China, saying that “we are determined to win it.” Moreover, the administration seems to be trying to coordinate with the European Union and Japan to pile up pressure on China.

Given these very high stakes, the showdown is likely to rapidly escalate. And time is not on Trump’s side. Politically, he could loose leverage if the Democrats win the House in congressional elections in November. Moreover, the fiscal boost from the tax cuts and spending will start to fade in 2019, exactly when the costs of the trade war start to show up.

China faces less political pressure, with President Xi Jinping having cemented his hold on power. The government also has considerable economic tools at its disposal to stimulate the economy and cushion the blow from a full-blown trade war. Naturally, these calculations would change if the United States, Europe, and Japan adopted a united front.

All this creates a highly toxic environment. Fortunately, these dynamics have not, for now, spread into the strategic realm. However, with the United States boxing itself into a corner and China feeling time is on its side, we all better brace ourselves for the first hegemonic showdown between the present superpower and its rising peer competitor.

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