Daily Outlook

The U.S.-China ‘cold war’ is here

From a trade fight to a war of words over the origin of the coronavirus, to greater scrutiny of Chinese firms on Wall Street — relations between the U.S. and China havenosedived in recent years.

A new “cold war” is here and things could get uglier as other countries get dragged into the conflict, analysts warn.

“Things will get worse — perhaps much worse — before they get better. Decoupling is underway,” said Dan Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, referring to an economic split between the world’s two largest economies.

Beijing could also start targeting America’s allies, as it embarks on what analysts call the “wolf warrior diplomacy.” It is named after a series of hugely-popular movies where Chinese fighters defeat adversaries globally.

Most recently, the situation escalated after China proposed a new security law for Hong Kong, a semi-autonomous Chinese territory that has a special trading relationship with the U.S.

President Donald Trump swiftly announced that the U.S. will revoke the city’s preferential status. “Hong Kong is no longer sufficiently autonomous to warrant the special treatment that we have afforded the territory” since the former British colony was returned to China in 1997, he said.

Elsewhere, the United Kingdom could also find itself on the receiving end of China’s wrath after Britain offered visa options to the Hong Kong people following concerns that China was tightening its grip on the city, Granville added.

No full-blown confrontation for now
It’s in neither party’s interest to bring their so-called cold war too far at this point, however, say analysts.

Beijing will probably limit itself to “a combination of more neutral tit-for-tat and veiled warnings,” said TS Lombard.

“While it will react rhetorically, China does not want to get into a full-scale confrontation with the US at the present time. It wants to concentrate on containing the virus, reviving the economy and pushing through the security law in Hong Kong,” Jonathan Fenby of TS Lombard told CNBC in an email. “Relations with the US have some influence on these issues but are not the main concern right now.”

On the part of the U.S., while Trump would likely seek to maximize anti-China sentiment during his presidential campaign, he too may restrain himself ultimately.

Undoubtedly, the resulting political gains from “China-bashing” will come at a lower economic cost, at a time when the stock market is strong, said Granville of TS Lombard.

Still, “Trump will remain vigilant about containing that economic cost since the practical effects of unbridled escalation on China – from reduced farm incomes to tanking markets – would outweigh the favourable ‘tough guy’ impression on his voter base,” he wrote.

However, the Trump administration is not likely going to be the only one targeting China.

The U.S.-China ‘cold war’ is here — and Beijing may start targeting Washington’s allies, analysts say, CNBC, Jun 9

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