US-China trade war threatens a new cold war

February 5, 2019: Chinese and US trade negotiators meet in Washington again next week to try to reach an agreement to avoid a massively escalated tariff war from March 1. Without a deal, US punitive tariffs on US$200 billion of Chinese imports will go up from 10 per cent to 25 per cent, and China is likely to respond in kind. The US is blocking appointments to the World Trade Organisation appeals body, and threatening to leave the 164-member WTO.

The tariff wars have already slowed economic growth in both China and the US, with impacts on other economies. According to the International Monetary Fund in January 2019, the tariff wars have contributed to “risks to global growth tilt[ing] to the downside” and its global economic growth forecast has been downgraded since October 2018.

Sydney Morning Herald International Editor Peter Hartcher argues that there are three positions within the White House, from which President Trump will choose:

  • The "traditionalists", including Treasury Secretary Steve Mnuchin, who will settle for China buying a lot more US products.
  • The "structuralists", including Trade Representative Robert Lighthizer, who also want China to change intellectual property law, market access laws and to end the “privileged treatment” of Chinese state-owned enterprises.
  • The "decouplers", led by Commerce Secretary Wilbur Ross, who believe that the two systems are irreconcilable. Hartcher reports that Ross has been urging US CEOs to take investments out of China. This is combined with threats of a new cold war and escalation of the nuclear arms race.

China has refused to abide by international court rulings on its claim to islands, reefs and shoals in the South China Sea, but still claims to support multilateral trade rules through the WTO.

The US is trying to impose a global shut out of the Chinese communications technology company Huawei, and has initiated the arrest of its Chief Finance Officer in Canada. China has retaliated by arresting Canadians in China.

With the two biggest economies in the world in conflict, everyone will suffer economically, and the possible political and even military fallout could be catastrophic.

The lack of Australian public debate and government political initiative to manage these threats is astonishing. Both the Coalition and Labor formally support a “rules-based international order” but cannot confront the reality that the US has abandoned that approach.

While Australia’s trade discussion is about where to sell more beef, or whether Australian prosecco can still use the name, the entire edifice of post-World War II “free trade” is under threat.

US demands to ‘reform’ the WTO are aimed to reduce the number of countries that are classified as “less developed nations” who might claim differential treatment, and to expand corporate power over their global supply chains and markets. If it continues, the US blocking of appointments to the WTO appeals body will paralyse the WTO at the end of this year.

Australia should reject both US and Chinese unilateralism and a new arms race. Australia should support fairer multilateral trade rules through the WTO, including differential treatment for developing countries, and rules that support rather than undermine human rights, labour rights and environmental sustainability. Such change would allow the vast majority of poorer countries to have a genuine development pathway, and ensure that trade improves fairness and environmental sustainability for all countries.