Opinion | Donald Trump is wrong. The US economy is not strong enough to win cold war 2.0

While the US prevailed in the cold war with the Soviet Union, its economy is in a much weaker position today. Both the US and China should resolve their own economic imbalances and then work together to preserve the post-war world order

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Published: 1:00am, 4 Apr 2019Updated: 2:14am, 4 Apr 2019

The United States and China are likely to reach a trade deal, but this will hardly be the breakthrough that ends a deep-rooted conflict. Any deal is likely to focus primarily on multi-year narrowing of America’s outsize bilateral merchandise trade deficit with China, which hit an astonishing US$419 billion in 2018, nearly half the total US trade gap.

But there is no bilateral fix for America’s trade deficit with 102 countries last year. The multilateral imbalance stems from a profound shortfall of US domestic saving, which will only worsen in the years ahead due to chronic and widening federal budget deficits.

Instead of popping champagne corks when such a deal is reached, government officials and investors should think ahead to unresolved structural issues that remain – over technology, intellectual property rights, state-sponsored industrial policy and forced technology transfer through joint venture arrangements.

Consistent with the ominous warnings of US Vice-President Mike Pence and former US Treasury secretary Henry Paulson, such an outcome points to the distinct possibility of an economic cold war, with the US and China locked in a protracted clash over the competitive strategies of two very different economic models.

A year ago, the so-called Section 301 complaint of the US Trade Representative made the case for China as an existential threat to America’s economic future. While my analysis suggests that the evidence behind these allegations is weak, the US seems determined to push ahead on these fronts – many key to China’s own longer-term economic strategy.

America does not have a monopoly on existential fears. China has deep-rooted concerns that the US is fixated on a “China containment” strategy. While Trump’s tariffs underscore these concerns, they follow on the heels of the Obama administration’s “Asia pivot” and Trans-Pacific Partnership ambitions – with the latter excluding China from its original 12-nation framework.