Ignore the rhetoric, US-China trade benefits both countries, and businesses have more to lose than gain from conflict

Edward Tse says war between China and the US isn’t inevitable, and the two nations can avoid falling into the Thucydides Trap by focusing on shared goals

US-China trade war

Edward Tse

Published: 1:03am, 11 Jun 2018

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Are the world’s two most powerful nations heading towards a Thucydides Trap? Harvard Professor Graham Allison sees the US and China stumbling into the same dynamic that led to the Peloponnesian wars and that repeated itself between a rising England versus the Dutch Republic in the 1600s, a rising Germany versus Britain in the early 1900s and a rising Japan versus the US in the 1940s.

Warning lights of an inevitable war between China and the US are flashing red. The tit-for-tat tariffs threaten to become a full-blown trade war that could cripple the global economy. Following US President Donald Trump’s ban on the Chinese telecommunications equipment maker ZTE, the trade dispute has become more complex, revealing a broader critical landscape in which the US pushes back against China’s advancement into the global electronics value chain.

Moreover, tensions over the South China Sea point to the strong likelihood of a regional military conflict. US Defence Secretary Jim Mattis warned last week of “much larger consequences” if China continues to militarise disputed islands.

Both the outcome of the Peloponnesian wars and basic economics suggest that any such conflict would result in the worst kind of disruption to the global economy. However, the world is a very different place from ancient Greece and pre-second-world-war era.

Today, all-out war between large powers have become unlikely as the nature of the economy has changed and present-day military technology would make it extremely difficult to replicate the second world war feats. Moreover, in an interconnected world, the damage inflicted by a major war between large powers would go beyond that to the two countries alone.

Averting the Thucydides Trap requires both the US and China to focus on commonalities and find ways to deal with their differences. Regardless of ideological and geopolitical frictions, the two countries need to work together on global governance to tackle common challenges: building a permanent peace mechanism on the Korean peninsula, finding solutions to terrorism and the refugee crisis, helping to maintain balanced global economic growth and creating an international environmental regime.

Watch: Chinese President Xi Jinping’s vision of China’s place in the world

Battle of ideas again defines China-US rivalry

Although the Trump administration seems to disregard some of these common challenges, China’s President Xi Jinping has consistently underscored the country’s efforts towards building “a community of shared future for humanity” and achieving win-win development across countries. A recent report by the RAND Corporation, a US think tank, recommends that the US should establish a comprehensive strategy and leave open the potential for cooperation to manage emerging rivalry with China.

[Chinese entrepreneurs] model their organisational design on US tech companies instead of Chinese state-owned enterprises

On the business level, there are many similarities between China and the US, although China follows its own distinctive development model often questioned by the West. China’s private sector has been thriving and driving the domestic economy for a decade or so. The sector now contributes more than 60 per cent of China’s GDP growth and provides over 80 per cent jobs, according to a Xinhua report last year. The new internet-based economy represented by e-commerce and car-hailing services grew twice as quickly as the overall gross domestic product between 2010 and 2016.

Chinese entrepreneurs, such as the leaders of Alibaba, Tencent, Xiaomi and Didi Chuxing, like their US counterparts, are risk-takers, willing to accept ambiguities and actively looking for financial returns. They model their organisational design on US tech companies instead of Chinese state-owned enterprises.

These entrepreneurs look to the West, especially the US west coast, for inspiration, with Tencent being the second-largest foreign investor in the US tech industry. Meanwhile, many US venture funds such as Sequoia Capital and IDG Capital have seen high returns on their investment in Chinese tech companies.

Watch: What makes Tencent such a tech goliath?

Why China will keep firm grip on US debt even if trade war breaks out

Preventing a trade war also requires a willingness to collaborate. Kishore Mahbubani, Singapore’s former ambassador to the United Nations, urges rational economic argument in place of political polarisation and simplistic ideology to cool the brewing trade war. The cold war rhetoric of blaming China for the US trade deficit dismisses how close integration with China greatly benefits the US economy.

The cold war rhetoric of blaming China for the US trade deficit dismisses how close integration with China greatly benefits the US economy

First, exports to China bring jobs and opportunities for many, including Americans. According to a report prepared for the US-China Business Council, US goods and services to China were worth US$165 billion in 2015, accounting for 7.3 per cent of all US exports and about 1 per cent of US GDP. Because China is deeply integrated into the global supply chain, these figures underestimate the benefit to the US economy since they do not account for re-exported products to China from other countries or the products bought by China’s neighbours under its influence.

Second, US investors also benefit from China’s continued growth at almost 7 per cent per year. The report says 80 per cent of products made in China by US companies were sold in China; if redistributed to shareholders and spent domestically, these profits would support 103,000 jobs and US$11.9 billion to US GDP. Meanwhile, Chinese firms are beginning to invest in the US. The combined effect of China’s direct investment in the US and US affiliates of Chinese firms is estimated to support a total of 104,000 jobs and US$10.8 billion in GDP.

Watch: What a US-China trade war could cost Americans

Third, China’s innovation in business is growing by leaps and bounds but, in general, American businesses have not fully taken advantage of these opportunities. Foreign companies tend to copy and paste their business models without reaching out to their fringes even if those fringes could mean major upside opportunities.

In his book, Return of Marco Polo’s World: War, Strategy and American Interests, the American political adviser Robert Kaplan describes an Asian century in which Eurasia will become the centre of conflict.

Though one cannot ignore the possibility of small-scale military conflict or the escalation of the trade war, it behoves all parties to stay calm and appreciate the importance of stability for mutual benefits. Avoiding the Thucydides Trap requires rationalism and appreciation of dialogue, cooperation and common goals from both sides.

Edward Tse is founder & CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is also author of China’s Disrupters

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