The Security Risks of a Trade War With China

Why the U.S. Should Be Wary of Economic Decoupling

ByAli Wyne  August 6, 2018

The Arleigh Burke class guided-missile destroyer USS Fitzgerald is shown on patrol in the U.S. 7th Fleet area of responsibility in support of security and stability in the Pacific Ocean, August 2013.U.S. Navy via REUTERS

Trade tensions between the United States and China continue to rise. In June, U.S. President Donald Trump’s administration announced that it would impose tariffs of 25 percent on $50 billion worth of Chinese exports, with the first wave targeting some 800 goods worth $34 billion. China pushed back with its own set of tariffs targeting the U.S. agricultural sector and industrial heartland. In response, Trump has reportedly ordered his administration to consider a 25 percent tariff on an additional $200 billion worth of Chinese exports. As the showdown escalates, many observers are understandably focused on the potential for a full-fledged trade war that could destabilize the world economy. But they should also consider second-order, longer-term implications—in the security realm. Up until recently, the two nations’ economic ties had served as an effective brake on escalating strategic distrust. A China less constrained by and invested in economic ties with the United States could pose a substantially greater challenge to U.S. foreign policy. For all the Trump administration’s frustrations with managing interdependence, the consequences of decoupling could mean even bigger headaches.

THE ROOTS OF TRADE TENSIONS

The United States buys more exports of Chinese goods than any other country. China, meanwhile, is the United States’ largest trading partner and the fastest-growing market for its exports. Yet neither side considers these deep, multifaceted trade links an unalloyed plus.

Trump often expresses irritation over the size of the U.S. trade deficit with China, but trade tensions between the two countries are rooted less in deficit figures than in high-tech competition. The United States sees China’s technological progress as a growing national security challenge. One of Trump’s top economic advisers, Peter Navarro, warned recently that “China’s investment in strategic technologies may ultimately pose the gravest danger to America’s manufacturing and defense industrial base.” He argued that “tariffs will form a critical line of defense against predatory trade practices China has used to the detriment of American industries.”

China, meanwhile, seeks to become a global leader in advanced manufacturing. Its Made in China 2025 initiative prioritizes ten industries—including information technology, aerospace equipment, and new materials—and aims to raise the domestically produced share of “basic core components and important basic materials” used in China to 40 percent by 2020 and 70 percent by 2025.

As seen with the case of ZTE—until recently China’s second-largest telecommunications equipment maker—Beijing depends heavily on Washington for high-tech inputs. In mid-April, the U.S. Commerce Department issued an order banning companies from selling parts to ZTE for seven years. Although the justification was that ZTE had circumvented U.S. sanctions on Iran and North Korea, the more fundamental concern was that the company could use U.S. technology to engage in espionage or even conduct cyberattacks against Washington. Without chips from Qualcomm and Intel and optical components from Acacia and Lumentum, ZTE could not function, and in early May it announced it had ceased “major operating activities.” A few days later, Trump said he was working with Chinese President Xi Jinping to rescue the company, prompting the Commerce Department to soften its earlier decree, but a bipartisan group in Congress urged the agency to stick with its original order, barring firms from doing any business with ZTE through 2025.

Although the company has just received a lifeline—the U.S. Senate passed a $716 billion defense appropriations bill last week that omitted an amendment introduced by Senator Marco Rubio (R-Fla.) and his Democratic colleague Chris Van Hollen (D-Md.) to reinstate Commerce’s ban on ZTE—Chinese leaders are increasingly convinced that Beijing will not be able to realize its full economic potential unless it becomes more self-reliant. China already saw the currency crisis that rattled the Asia-Pacific in the late 1990s and the global financial crisis that erupted a decade later as evidence that it needed to diversify away from U.S. consumption. Until recently, though, Beijing was primarily looking to shore up its own domestic resilience, and to do so by unwinding its embrace of Washington over time. Now China may seek a more rapid decoupling, less for economic reasons than for strategic ones. The country’s leaders believe that extant U.S. leverage over its economy could thwart the ambitions it has set out in Made in China 2025, which a ranking Communist Party official recently called “the guarantor” of China’s “sovereignty and prosperity.”

In late April, Xi stated that in “the next step of tackling technology, we must cast aside illusions and rely on ourselves.” His conclusion parallels that of Trump, who believes that the United States has eroded its competitiveness by buttressing the postwar order and joining multilateral trade agreements. TheNew York Times posits that this alignment of views may presage “a time when the economic engines of China and the United States are not so closely linked, particularly in high-tech industries.” A loosening of those links would have not only economic implications but also security ones.

A MORE REVISIONIST BEIJING?

There are few factors, after all, besides trade interdependence that compel the two countries to exercise mutual restraint and carry on multifaceted cooperation. The United States is a young, racially diverse democracy whose self-conception is molded anew by each wave of immigrants; China is a five-millennia-old, predominantly ethnic Han civilization that clings to a largely immutable identity. The two countries have markedly different, sometimes explicitly antithetical, perspectives on domestic governance and foreign policy—divergences amplified by each one’s insistence upon its own exceptionalism. Absent economic interdependence, U.S.-Chinese ties may well have grown more strained, if not antagonistic, over the past four decades.

There are few factors besides trade interdependence that compel the United States and China to exercise mutual restraint and carry on multifaceted cooperation.

In the long run, a China economically decoupled from the United States could scale back existing bilateral cooperation and take a more overtly revisionist attitude toward the postwar order. The Council on Foreign Relations’ Elizabeth Economy explains in her new book that Xi “is ambitious to lead but embraces globalization insofar as it controls the flow of ideas, as well as human and financial capital.” Beijing could steadily reduce its financial support for leading economic institutions such as the International Monetary Fund; prioritize the development of economic and security arrangements that presently leave out the United States (such as the Regional Comprehensive Economic Partnership and the Shanghai Cooperation Organization) and undertake to construct other exclusionary ones; more proactively attempt to drive wedges between the United States and long-standing allies by casting Washington as an inconsistent and unreliable steward of world order and asserting that Beijing is better suited to adapting that system to contemporary geopolitical realities; and make a more concerted push to challenge Washington on ideological grounds.

Beijing could also further undercut the Trump administration’s “maximum pressure” campaign on North Korea. U.S. Secretary of State Mike Pompeo testified in June that there has been a “modest amount” of backsliding in China’s enforcement of multilateral sanctions on Pyongyang, acknowledging that the Chinese are “not enforcing control over their cross-border areas as vigorously as they were six or 12 months ago.” That admission came shortly before reports of a new U.S. intelligence assessment, based on evidence collected after Trump’s historic Singapore meeting with North Korean leader Kim Jong Un, that Pyongyang not only seeks to “deceive the United States about the number of nuclear warheads” in its arsenal but also may maintain more than one secret site for enriching fissile material.

On Iran, in the wake of the U.S. withdrawal from the Joint Comprehensive Plan of Action, China could decline to join any U.S.-initiated effort to sanction the regime should it resume its pursuit of nuclear weapons. It might even go further, boosting energy ties with and increasing arms sales to Tehran while expanding the scope and depth of its alignment with Russia to frustrate U.S. foreign policy objectives in the Middle East and eastern Europe. It could also accelerate its ongoing militarization of a crucial maritime chokepoint, the South China Sea; more aggressively press its claims in the East China Sea; and increase preparations for an attack on Taiwan, appreciating that a United States that is already militarily overstretched has little desire for an armed confrontation with the country possessing the world’s second-largest economy.

WILL THE DECOUPLING CONTINUE?

Given the breadth, complexity, and interconnectedness of global supply chains, the United States and China would only be able to unwind their current interdependence very slowly. In 2013, when two-way trade totaled $562.2 billion, the Brookings Institution’s Thomas Wright concluded that Washington and Beijing “have no way of significantly reducing trade with each other through protectionism without setting in motion a general unraveling of the global trading system that each relies upon.” That judgment holds even truer today, given that two-way trade was 13 percent higher in 2017 than it was in 2013.

Still, China’s economic strength relative to the United States has increased significantly over the past decade, and it will continue to grow. Xi declared this past October, moreover, that “no one should expect China to swallow anything that undermines its interests.” In other words, expect an increase in both Beijing’s ability and willingness to absorb the pain of economic decoupling with the United States. Trump may well want to accelerate this trend, but the potential security consequences of doing so should give his administration pause.