The Stakes Aren't as High, But This Cold Trade War Could Be Very Destructive

During the cold war, the US and the Soviet Union had the potential to obliterate each other with their nuclear arsenals. Both sides knew a conflict was unwinnable, and that explained why the missiles remained in their silos. It was known as mutually assured destruction.

The closest the world came to MAD was the missile crisis in 1962, which ended with the Kremlin backing down over its decision to base nuclear weapons 90 miles from the Florida coast.

More than half a century later, memories of the cold war have come flooding back as the US and China lock horns over trade. Financial markets have gyrated as Washington and Beijing display their protectionist hardware. The rhetoric has become increasingly bellicose. Khrushchev and Kennedy were playing for much higher stakes, but the principle is the same: the missile-laden ships are getting ever closer to the shore.

Serious trade trouble between the US and China has been in the offing ever since Donald Trump won the presidential election in 2016. In that year, America ran a trade deficit of about $30bn a month with China, but Trump said it was only that big because Beijing was playing dirty.

Unlike previous presidents who talked tougher than they acted, Trump has kept the promises he made about China while running for president. With strong backing from corporate America, he launched an investigation into China’s alleged theft of US intellectual property.

Last Tuesday, US trade representative Robert Lighthizer announced that, as a result of that probe, the US would release a list of some 1,300 products that could be targeted with a 25% tariff – worth a total of $50bn – unless China changes its ways.

The following day, Beijing announced that it would fight fire with fire. China published a list of US imports, again worth $50bn, on which it would levy a 25% tariff. China’s hit list was smaller but carefully targeted to hurt sensitive US sectors, such as soya bean farming and the aerospace industries.

Larry Kudlow, Trump’s chief economic adviser, tried to calm things down by insisting that the US and China would be able to sort out their problems without a trade war. The conciliatory atmosphere did not last, however, because late on Thursday Trump said he had asked Lighthizer to consider imposing tariffs on another $100bn of Chinese imports. Beijing responded by saying it would fight the US “at any cost”.

For now, this is still a cold trade war. Neither side has yet imposed its threatened tariffs, and there is plenty of time for a negotiated settlement. What ought to happen is simple. China should recognise that there is some merit in Trump’s argument. US firms have essentially been forced to cede intellectual property rights to gain access to the big and growing Chinese market. If Beijing announced an end to that practice, Trump could remove his threat of tariffs and both sides could then disarm.

But the White House needs to create the conditions under which Beijing can do this. China is the world’s second biggest economy and an emerging superpower. It demands to be treated as an equal rather than as a developing country that has no option but to do Washington’s bidding.

In a tit-for-tat tariff war, the Chinese would come off worse – because they export more to the US than they import. But Beijing has other weapons, including its massive holding of US Treasury bills. Any move to dump these government bonds would be mutually assured destruction with a vengeance. But that’s the danger with cold wars: in the wrong hands, they can turn hot.