Prelude:
Trade war may end but the technology war has barely begun.
Risks is substantial for an even more fundamental economic decoupling.
Economic decoupling could expand to affect the internet, telecommunications,
fintech, and the uncharted world of artificial intelligence.

Comprehending the decoupling of the British and European economies pales into insignificance against the complexities from unraveling the financial, technological and global supply chain ties that now bind the United States and China. The challenge is real, language used is important, words do more than describe real world activity, and they also shape, and in some cases determine, what happens as well because language influences behavior.
The idea of a "new Cold War' between China and the US misrepresents the actual reality we now face.
Unless the underlying political objective of those using this language is actually to bring about a Cold War.
A lot of loose talk, both in Beijing and Washington, about a “new Cold War” is not helpful.

The last Cold War, between the United States and the Soviet Union, had four basic characteristics.
1. Moscow and Washington were committed to mutually assure nuclear destruction.
This does not accurately describe US and Chinese nuclear weapons doctrine.
The Chinese arsenal is not even ten per cent the size of the American arsenal.

2. The United States and the Soviet Union were engaged in a global, ideological struggle to the death.
It is hard to find evidence of an ideological struggle between authoritarian and liberal capitalism.

3. The United States and the Soviet Union were engaged in multiple, armed, proxy worldwide conflicts.
China and the United States are not involved in proxy wars, but Global competition for political/economic influence.

4. The Soviet Union and United States had negligible economic engagement. By contrast, US/China,
investment and capital market connections are comprehensive, create mutual dependency and
are of profound importance to both countries’ future economic growth.

5. China, unlike the Soviet Union, is fundamental to the future of the global economic wellbeing.

Containment was first used in George Kennan in his famous 1946 “Long Telegram” from Moscow.
It was to prevent other states falling into the Soviet strategic orbit, which had already occurred in Eastern Europe.
A clear strategic line in the sand was being drawn between those states and Western Europe.
Kennan has believed containing Soviet global economic engagement would eventually implode her economy.

Export markets could be cut off but applying these economic preconditions to China is more difficult.
China has infinitely more market-flexible than anything the Soviet Union ever had. .
Chinese military expenditure is modest by ancient and modern standards.
China’s economic model has a large-scale conversion from external demand to internal demand.

It took more than forty years for the Soviet economy to implode.
In China’s case, 2060 seems a very long way off indeed and
a Containment strategy would deliver enormous damage to American and global economies.
Containment as a strategy ended in 2001 when China joined the WTO.

 

"Decoupling" is a “term du jour” to many in Washington and Beijing.  Its exact meaning is important

It may be seen as a conscious strategy or as the unintended consequence of a series of action, which
set off a chain of events that over time create two competing sets of standards, systems and patterns
of critical economic engagement.

Internet decoupling has already occurred as a direct consequence of different political systems.
However, whether it is internet content, search engines, or the broader regulatory regime,
we are heading toward different digital worlds anchored in America or behind a Chinese firewall.
Belt/Road countries may find themselves in an increasingly uncertain no-man's-land.

We see the same development already unfolding in the worldwide digital payment systems.
China’s Alipay, WeChat Pay and UnionPay systems vs. American credit cards.
At stake is the financial engine-room of digital commerce and the wider global digital economy.

The decoupling of the two countries’ telecommunications systems
is under way for national security grounds.
American telcos have negligible Chinese access.
Huawei is listed entity US Company and dominates 5G technologies.
The battle for third world companies is underway.

What are the consequences for the Chinese/American global supply chains?
China’s new “unfriendly entities list” retaliates against America’s blacklisting Huawei
resulting in a complex minefield for global supply chain operations.
This, rather than technological innovation, could cause the next great global disruption.
A Return to inefficient forms of vertical integration within single firms or two supply
chains could emerge in self-contained geo-political spheres of influence.

Structural economic efficiencies through better resource allocation increased global living standards
and poverty reduction resulting globalization could end.

Both countries are conscious of the dilemma faced in retaining its technological edge.

Decoupling cannot be easily stopped. It is justified on national security grounds and
is facilitated by classical forms of protectionism and economic nationalism.
Is this the unraveling of the economic globalization, where will it take us?

Are we creating the economic conditions for a real rather than imagined second cold war?
What then happens in foreign policy and national security policy?

The United States, China and other members of the international community
need to think through where these new and unsettling trajectories may take us.

Trade War, Economic Decoupling and Future Chinese Strategy Towards America Rudd 6/13/19 speech summary

China’s Changing Geopolitical Grand Strategy

"The common theme in these internal critiques of Xi Jinping has been strategic and political overreach in conscious contravention of the longstanding wisdom of successive generations of Chinese political leaders following Deng Xiaoping’s long-standing doctrine of restraint. Instead, according to Xi Jinping’s internal critics, China has been out there “loud and proud” and, as a consequence, for the first time since 1978, generating significant structural opposition abroad to the realization of China’s long-term political strategy.

China’s soft economic performance in recent years adds to Xi Jinping’s vulnerability. . There have been a number of contributing factors to this. First, there was China’s homegrown financial crisis of 2015 which saw the collapse of Chinese equities markets and a run on various Chinese financial institutions until the state intervened.

Second, after the crisis of 2015, Xi effectively put on hold the new economic blueprint for China adopted by the administration back in 2013. That blueprint sought to move away from China’s old economic model of labour intensive, low-cost manufacturing for export, strong state-owned enterprises turbocharged by high levels of state infrastructure investment to a new model based on domestic consumption, service industries and a dynamic Chinese private sector, with new industries based on technological innovation and a declining state economic sector.  

Third, following 2015, the Chinese private sector began to lose confidence in China’s overall economic policy settings. They concluded that state-owned enterprises were now being preferred over the private sector in the allocation of credit, and that the Party had begun to exert greater and greater levels of control over what private firms did and on how much they could grow. This resulted in declining levels of private sector confidence, translating in turn into declining levels of private sector investment, growth and employment.

These factors, taken together with the direct impact of the US-China trade war during 2018-19, as well as its more general impact on Chinese domestic economic confidence, began to place Xi Jinping under considerable economic pressure.

These then, are the wider political circumstances in which Xi Jinping has had to respond to the recent politics and economics of the trade war during the critical developments of May 2019. In other words, the trade war is not simply an economic phenomenon for the Chinese leadership. It occurs in a context of Chinese politics as well, where some within the leadership have begun to question the wisdom of the leader’s perceived overreach across multiple policy fronts.

China’s Current Strategic Reappraisal

My observations from my recent time in Beijing is that all the assumptions of the last twenty years are now under formal review.

At this stage, it remains uncertain as to what precisely this review process will conclude, although it seems as if China may now be on course to indeed change its overall strategic guidance to its various agencies of state, given the new complexity and unpredictability of global politics and economics as seen from Zhongnanhai. Indeed, the earliest indications from Beijing are that China sees its external environment as fundamentally changing on a number of critical fronts, and in a generally more hostile direction. Regional armed conflict is no longer seen as a remote possibility, given possible trajectories on the Korean Peninsula if and when Trumpian diplomacy with Pyongyang breaks down. China is also now anticipating a more vigorous US response to its actions in the South China Sea. Renewed US arms sales to Taiwan are seen as potentially fomenting a future crisis across the Taiwan Strait. On the economy, globalization is now seen as being in retreat. And a more nationalist and protectionist West may well turn against China, in which case Europe, Japan and to some extent India become the key. American hostility to China is now seen as structural as a new Thucydidean dynamic takes hold of all sides of Washington politics. Corporate America is no longer seen as a structural ally in supporting the stability of the US-China relationship. And a newly energized human rights constituency is seen in Beijing as having more widespread political support, animated by recent developments in Xinjiang, Taiwan and Hong Kong. Although, of some consolation to Beijing, America’s global brand is seen as becoming increasingly and perhaps irreparably damaged under Trump.

All of which would tend to point to a much more mixed strategic outlook compared with the “period of strategic opportunity” that has governed Chinese strategic thinking for the last twenty years. This in turn would require of China a more self-reliant, less internationally dependent national strategy for the future, to safeguard China’s interests in a much less stable world. Or it might just result in China taking a truly bold step of throwing open the doors of its economy to the rest of the world, excluding the United States. Early Chinese engagement with the TPP would be a signal of this latter approach. The jury, however, is still out on what conclusions will be reached. And it will be for some time. After all, detailed dialectical analysis takes time. 

The importance of all this for the rest of us in the international community is that if in fact China does conclude that its international operating environment has turned in a fundamentally hostile direction, it will then adjust its strategies and policies accordingly. That’s why this period of review is so critical. If, for example, Chinese policy was suddenly to become more aggressively nationalist or more stridently protectionist or more binary in its international political engagement, the rest of the world would soon know it, feel it, and experience it.

In the meantime, however, China is likely to continue its current pattern of international engagement. The review process will take time. The Chinese ship of state rarely turns dramatically. It’s a more gradual and deliberative process. But once conclusions are reached, and a new direction identified, then turn it does. We have seen it before at certain critical junctures of its modern history.

Conclusion

What China does in the future is important for us all. But watching China respond to these dynamics in isolation is a bit like the sound of one hand clapping. The other hand at play in all this is of course the United States. And the open question remains as to which way the United States will now go in the prosecution of its own wider, long-term strategy towards China in this new age of strategic competition.

The core questions in Washington are what happens to the rest of the US-China economic relationship, not to mention the foreign policy, security policy and human rights relationship, if President Trump does manage to secure a trade deal with Xi Jinping. Will economic decoupling continue to unfold, haphazardly or otherwise? If so, will it be limited to key technology sectors, or will it be broader than that? And will we see a much more vigorous response by the United States rolled out in relation to Taiwan, the South China Sea, the BRI, Xinjiang, and other core points of Chinese international political and policy sensitivity?

Second, what will happen in these other policy domains if in fact we do not secure a trade deal?

Third, if President Trump is not re-elected, what will be the points of commonality and difference between his administration’s China policy and that of the next Democratic president, whoever she or he might be?

However, these three sets of questions all turn on a more fundamental uncertainty about what kind of global power President Trump wants America to be in the future. And about what sort of global power the Democrats want America to be in the future. This fundamental question is important given the new social, economic and political forces at work within the wider US domestic body politic which are in the process of reshaping both Republican and Democratic Party politics, including their traditional approaches to foreign and security policy.

Finally, there is also the question of third countries as they seek to anticipate where China ultimately lands on the question of its long-term strategy towards the United States, its allies, the region and the world. And where, for that matter, America lands as well in its own deliberations. For the Europeans, the Japanese, the Indians, the Southeast Asians and the Australians, these profound dynamics at play right now in the future of the US-China relationship also create real uncertainties as they carve out our own contingency plans for the future. Already in parts of Europe, Japan, India and South East Asia, there are early signs of some form of strategic hedging about the future. Indeed, it would be surprising if it were otherwise.

We therefore live in difficult and dangerous times. And for countries like Australia, this will require a razor-sharp lens on Beijing, Washington and other critical global capitals to understand where these deep changes in global.