The US-China Conflict: Security vs Growth.

The relationship between the US and China has undergone seismic shifts in recent years, moving from working with one another as trade partners to now each side considering the other as a major adversary. In her speech on 20 April 2023 at the John Hopkins School of Advanced International Studies, US Treasury Secretary Janet Yellen stated that the terms of engagement between the two nations has changed, alluding to the fact that the US now considers China a serious threat to its national security. It seems that forty years of bilateralism that took a lot of blood, sweat and tears to establish, is pretty much over, with growing animosity between the two spilling over into every sphere of interaction between them.

The US has tried its best to discredit China and justify its tough stance against it with accusations of unfair trade practices, intellectual property theft, corporate espionage and human rights violations. It has also imposed tariffs on hundreds of billions of dollars of Chinese goods and restricted US investment in certain Chinese sectors such as artificial intelligence and quantum computing, citing security risks. China has retaliated with its own tariffs on US exports and lowered tariffs on imports from other countries, as well as pursuing its own national security interests through its military-civilian fusion, Belt and Road Initiative, and digital sovereignty policies.

Studies by the International Monetary Fund (IMF) and the European Central Bank (ECB) have shown that the trade war has reduced global output, increased inflation and disrupted supply chains. The IMF has estimated that the formation of a US bloc and a China bloc could reduce global output by as much as 2% over the longer term. The ECB found that the trade war could boost inflation by as much as 5% in the short run and around 1% over the longer term. These effects could also have implications for monetary policy and financial stability in both advanced and emerging economies.

Interestingly, the trade war has created trade opportunities for other nations that have increased their exports to the US, China and other nations. A study led by Professor Pablo Fajgelbaum, an Economics Professor at UCLA, found that the trade war has raised global trade by 3%, as bystander countries substituted for the products previously supplied by the US or China. The US benefits from the dollar's role as the world's dominant reserve currency, which allows it to borrow cheaply from abroad, despite increasing talks of global de-dollarization threat.

Both the US and China care about their geopolitical security and are concerned about each other's influence, power and action. They have policies that aim to protect their interests and stop their rival's influence that is leading to a dual bloc fragmentation, where countries are aligning themselves with either the US or China based on their economic and political interests. I have written previously that this is already underway under the guise of the G7 led by the US, and the BRICS led by China.

Having been a member of the World Trade Organization (WTO) panel on defining the future of trade, this precarious situation poses a serious challenge for both countries as well as the rest of the world. The US has to weigh the costs and benefits of compromising its economic interests for its security concerns. China has to balance its development goals with its security ambitions. Other countries have to navigate the changing dynamics of global trade and geopolitics. My fear is that this, alongside increased sabre rattling on both sides, will culminate in military conflict between the two nations, which will result in huge losses and devastation, thus must be avoided at all costs.

Talal Abu-Ghazaleh