The United States and China are locked in a trade war, with both sides accusing the other of wrongdoing. The Trump administration has repeatedly threatened to sanction American economic assets that it says are assisting China in its economic war with the United States. Now, China is threatening to do the same thing to American financial assets that it considers to be assisting its economic war against it.
The Wall Street Journal reports that in a meeting with the Russian foreign minister and the Chinese general manager of the World Health Organization in Geneva on Sept. 5, President Xi Jinping told the Russian FM that a trade war between the two countries would be “inevitable.” If the United States cannot get its trading partners to stop trading with China, the Chinese government will take measures to help its own trading partners.
This likely had something to do with the fact that Russia was one of the United States’ top trading partners in the past. But that is something that the two countries need to work out together. If the United States finds ways to assist its allies against China economically, the Chinese government will consider these assistance measures to be “holy war” rather than a form of retaliation.
To see where this could go, we take a look at the threats that China has made against the United States’ economic assets:
The squeeze on American financial assets
In a meeting with the leaders of the G-20 economies in Osaka, Japan, on Sept. 4, Xi said that the United States’ reluctance to allow Chinese financial assets into the country’s financial system “opens the door to greater restrictions and restrictions on your financial assets.” Xi said that if the situation persists, “then the Chinese government will take further actions, includingbut not limited to, the restriction, inhibition, or even prohibition of certain U.S. financial assets.”
The threat of currency wars
In an interview with the Financial Times on Sept. 3, Xi said that the trade war with the United States was not a zero-sum game. “If one side wins, then the other will lose,” he said. “It is not a zero-sum game. If one side wins, then the other will lose.”
The cancellation of trade agreements
The Trump administration has been trying to cancel or renegotiate a number of trade agreements with Pacific Rim countries, most notably the Free Trade Agreement (FTA) between the United States and Japan and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). But in a meeting with Japanese and South Korean leaders in Tokyo on Sept. 5, Secretary of State Mike Pompeo canceled the US-Japan FTA and the CPTPP.
The risk of a financial crisis
While a trade war would be a disruption to global supply chains and could have knock-on effects on the financial system, experts say the chances of a financial crisis in the United States are remote. Because the United States is a great financial and trading power, a trade war would have wider ramifications for the global economy, but it would have very little impact on the financial system.
The effect of new regulations
New regulations and restrictions on American financial institutions could also hurt China’s own financial system, but the potential fallout would be limited. Because the Chinese government regulates the banking system and the financial markets in a way that they are effectively closed to foreign businesses, the potential for a plague of financial detorsions would be limited.
Short-term impact of trade wars
The short-term impact of a trade war would be on US businesses and consumers. Because so many of these transactions are done in dollars, it would have a significant impact on the value of the dollar. At the same time, it’s worth remembering that trade wars are part of a negotiating process, and the United States and China have been roundly beating each other up for a long time.
In the short term, a trade war could have a significant impact on the global economy. A decline in American exports and a rise in US imports could hurt global growth and, in particular, the economies of developing countries that depend on trade with the United States.
What can be done?
Both the United States and China have to learn to co-exist, and the most effective way to do that is to reach an agreement on trade. If the two countries can work out their differences, then they can achieve greater trade and economic cooperation. But if they can’t, then there are a number of steps that both countries can take to avoid a trade war.
First and foremost, both countries should stop the chest-thumping and the threats that they use to try and get other countries to change their policies. The United States has to stop using the term “free trade agreement” to describe its trade deals, and China has to rescind the ambiguity that it has allowed in its economic policies.
A trade war between the United States and China would be a profoundly disruptive event for the world economy. It would have a significant impact on the United States and China’s respective economies, but it would have a much less significant impact on the global economy. In order for a trade war to occur, both countries have to be willing to treat each other as trading partners instead of economic rivals.