The global consequences of a Sino-American cold war

What started as a trade war between the US and China is quickly escalating into a death match for global economic, technological, and military dominance, writes Nouriel Roubini.

A few years ago, as part of a Western delegation, I met China’s president, Xi Jinping, in Beijing’s Great Hall of the People. When addressing us, Xi argued that China’s rise would be peaceful, and that other countries — namely, the US — need not worry about the ‘Thucydides Trap,’ so named for the Greek historian who chronicled how Sparta’s fear of a rising Athens made war between the two inevitable.

In his 2017 book, Destined for War: Can America and China Escape Thucydides’s Trap?, Harvard University’s Graham Allison examines 16 earlier rivalries between an emerging and an established power, and finds that 12 of them led to war. No doubt, Xi wanted us to focus on the remaining four.

Despite the mutual awareness of the Thucydides Trap — and the recognition that history is not deterministic — The US and China seem to be falling into it anyway. Though a hot war between the world’s two major powers still seems far-fetched, a cold war is becoming more likely.

The US blames China for the current tensions. Since joining the World Trade Organization, in 2001, China has reaped the benefits of the global trading and investment system, while failing to meet its obligations and while free-riding on its rules.

According to the US, China has gained an unfair advantage through intellectual property theft, forced technology transfers, subsidies for domestic firms, and other instruments of state capitalism. At the same time, its government is becoming increasingly authoritarian, transforming China into an Orwellian surveillance state.

For their part, the Chinese suspect that the US’s real goal is to prevent them from rising any further or from projecting legitimate power and influence abroad. In their view, it is only reasonable that the world’s second-largest economy (by GDP) would seek to expand its presence on the world stage. And leaders would argue that their regime has improved the material welfare of 1.4bn Chinese far more than the West’s gridlocked political systems ever could.

Regardless of which side has the stronger argument, the escalation of economic, trade, technological, and geopolitical tensions might have been inevitable. What started as a trade war now threatens to escalate into permanent mutual animosity. This is reflected in the Donald Trump administration’s National Security Strategy, which deems China a strategic ‘competitor’ that should be contained on all fronts.

Accordingly, the US is sharply restricting Chinese foreign direct investment in sensitive sectors, and pursuing other actions to ensure Western dominance in strategic industries, such as artificial intelligence and 5G. It is pressuring partners and allies not to participate in the Belt and Road Initiative, China’s massive programme to build infrastructure projects across the Eurasian landmass.

And it is increasing US Navy patrols in the East and South China Seas, where China has grown more aggressive in asserting its dubious territorial claims.

The global consequences of a Sino-American cold war would be even more severe than those of the Cold War between the US and the Soviet Union. Whereas the Soviet Union was a declining power with a failing economic model, China will soon become the world’s largest economy, and will continue to grow.

Moreover, the US and the Soviet Union traded very little with each other, whereas China is fully integrated in the global trading and investment system, and deeply intertwined with the US.

A full-scale cold war could trigger a new stage of de-globalisation, or at least a division of the global economy into two incompatible economic blocs. In either scenario, trade in goods, services, capital, labour, technology, and data would be severely restricted, and the digital realm would become a ‘splinternet,’ wherein Western and Chinese nodes would not connect to one another. Now that the US has imposed sanctions on ZTE and Huawei, China will be scrambling to ensure that its tech giants can source essential inputs domestically, or at least from friendly trade partners that are not dependent on the US.

In this balkanised world, China and the US will both expect all other countries to pick a side, while most governments will try to maintain economic ties with both. After all, many US allies now do more business (in terms of trade and investment) with China than they do with America.

Yet in a future economy where China and the US separately control access to crucial technologies, such as AI and 5G, the middle ground will become uninhabitable. Everyone will have to choose, and the world may enter a long process of de-globalisation.

Whatever happens, the Sino-American relationship will be the key geopolitical issue of this century. Some degree of rivalry is inevitable. But, ideally, both sides would manage it constructively, allowing for co-operation on some issues and healthy competition on others. In effect, China and the US would create a new international order, based on the recognition that the (inevitably) rising new power should be granted a role in shaping global rules and institutions.

If the relationship is mismanaged — with the US trying to derail China’s development and contain its rise, and China aggressively projecting its power in Asia and around the world — a full-scale cold war will ensue, and a hot one (or a series of proxy wars) cannot be ruled out. In the 21st century, the Thucydides Trap would swallow not just the US and China, but the entire world.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was senior economist for international affairs in the White House’s Council of Economic Advisers during the Bill Clinton administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

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