‘Cold War 2.0’ Isn’t Going To End. No Matter Who Is President

“I don’t want to get out in front of the President, but it’s something we’re looking at”, Mike Pompeo said this week, during an interview with Fox.

In this case, “it” is a ban on Chinese social media apps, including TikTok. There are national security concerns, we’re told.

Pompeo’s remarks served as the market’s daily reminder that the administration is prepared to escalate tensions with Beijing at any moment. Plan accordingly. Or don’t.

“Cold War 2.0” doesn’t seem to be a thing that investors care much about these days. It’s ironic that market participants seem to draw a distinction between that concept (“Cold War 2.0”, a narrative that dominated the macro discussion in 2018 and 2019) and the pandemic. To let investors tell it, COVID-19 has “replaced” the trade war as the top tail risk.

But as ominous as “trade war” sounds, it was always just a euphemism for culture clash. Donald Trump is particularly keen on (and adept at) inciting culture clashes for political benefit. He’s doing it on the home front in the lead up to the election. While there are signs the strategy is backfiring as it relates to racial tensions in America, there’s little evidence that voters are inclined to adopt a more sympathetic view towards Xi’s China in the wake of the pandemic.

I doubt seriously that most Americans believe COVID-19 was the product of a bioweapons program or that Beijing deliberately spread it to other countries (two narratives pushed tacitly and explicitly by Peter Navarro), but there’s plenty of public anger about Beijing’s lack of transparency.

China’s crackdown on dissent in Hong Kong and record of human rights abuses in Xinjiang may not be of much interest to the average American, but Xi’s transgressions continue to draw bipartisan ire on Capitol Hill. That means both Trump and Joe Biden will be inclined to adopt a hardline approach to Sino-US relations, despite hopes that a Democratic administration would end the trade war.

I wrote a bit about this Monday in “Maybe Biden Wouldn’t Be So Bad: Markets Begin To Ponder Trump Exit“. It’s worth exploring a bit further because, as alluded to above, market participants seem to be separating the pandemic from the trade war story and the trade war from the “Cold War 2.0″/culture clash narrative, even as lawmakers draw no such distinction.

It’s true the Trump administration has variously insisted that issues of national security and human rights can be kept separate from trade, and the president admits to having held off on sanctions in the interest of preserving his cherished “phase one” deal. But the laundry list of actions taken by the Commerce department over the past year suggest that when push comes to shove, there is no distinction between trade, technology, national security, and executive vanity.

The pandemic will blur those lines even further. Indeed, US lawmakers have already floated legislation aimed at punishing China for the virus.

“Biden’s reluctance to use tariffs as a geopolitical tool could be a tailwind for the economy and markets”, UBS writes, in an election update dated July 6. While the bank concurs with the consensus that “Biden is likely to revert to a globalist approach when dealing with most of America’s trading partners”, they concede that “bilateral trade relations with China may prove an exception”.

“Perhaps a Biden administration would take a different tone or approach in handling relations with China, but we’d expect the policy direction to remain the same — the continued raising of non-tariff barriers around critical technologies and processes, and ongoing, even escalation, of rhetoric”, Morgan Stanley says.

As far as a possible Trump second term is concerned, UBS reiterates a point I’ve been particularly keen to emphasize recently — namely that Sino-US relations are the worst they’ve been since Trump took office. And that is really saying something.

“US-China trade tensions are at a much worse point than at the start of [Trump’s] first term and will have to be addressed shortly after the election”, UBS says, cautioning that “this creates a market headwind that was not present when the initial Trump Trade began, which focused only on the newly-elected president’s pro-growth policies”.

With each passing day, some new point of contention between the world’s two superpowers grabs a headline or two. For example, on Monday, ICE said foreign students will need to take in-person courses going forward if they want to retain their student visas.

Of course, many universities and colleges are likely to switch to online instruction considering the pandemic. Well, there are more than 350,000 Chinese students in the US.

Barring some manner of unforeseen turn for the worse on the public health front, there will be plenty of opportunities for in-person instruction come next semester or, at the least, courses that offer a mix of classroom and online interactions. But some students could be forced to choose between transferring or leaving the country.

“It’s basically saying if all of a sudden your school is going to pivot to all online courses because of another spike in infections, you’d would need to leave the country immediately”, Sarah Spreitzer, director of government and public affairs for the American Council on Education said.

This isn’t going over particularly well with Chinese students.

“By noon on Tuesday, posts on Weibo related to the new guidelines had gained almost 55 million views”, Bloomberg writes. “Many aimed their anger at the US president, including one commenter who said Donald Trump’s biggest contribution was ‘boosting Chinese people’s patriotism and eradicating all the friendliness and hope for America'”.

Count this as just one more perceived affront to the Chinese.

Back in May, reports indicated that the administration intended to cancel thousands of visas for Chinese graduate students if they are found to have connections to universities affiliated with the People’s Liberation Army.

Discussing the possible path to a Trump victory last month, Morgan Stanley said “a sharp economic snapback” would be needed to “energize” Trump’s base. The bank also suggested that in a scenario where “anti-China rhetoric resonates with voters”, Trump would likely “adopt a more aggressive, anti-China stance [and] paint Biden as a weaker alternative as Americans are becoming increasingly wary of China in the context of the pandemic”.

In any case, one should be careful of the tendency to suggest that the virus is a separate issue from the broader Sino-US conflict.

Again, US lawmakers aren’t drawing that distinction, and Donald Trump loves a culture clash. Biden, meanwhile, cannot afford a “soft on China” stance, and even if he could, there’s little in the way of evidence to suggest he’d adopt it.

One more time: Plan accordingly. Or don’t.

Bonus: Snapshot of UBS’s election scenarios and policy outcomes


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3 thoughts on “‘Cold War 2.0’ Isn’t Going To End. No Matter Who Is President

  1. There is a reasonable argument to be made in favor of the inevitability of increasing friction between China the United States.

    Besides the ubiquitous geopolitical narrative of great power rivalry, there are also major cultural fault lines between the two countries. Its not that the two countries lack cultural or political information (i.e. expertise) regarding one another. Rather, cultural and political norms play into idea of a rivalry, whereby the rivalry becomes self-fulfilling. Even absent China’s parlous human rights record or its aggressive stance in the South China Sea, American policymakers were always likely to get nervous about the rapid rise of a global rival at some point. All the more so as China energetically promotes state-control over social, political, and economic policy in direct contrast to Western-style democracies. As much as individuals overwhelmingly prefer the freedoms in the latter system, authoritarians and would-be authoritarians around the world are naturally drawn to a model of top-down control.

    It is interesting to note that in as much as Chinese PR is seen as ham-fisted propaganda to Western observers, it plays quite well domestically as well as in post-colonial parts of the developing world. Given its rise and current claim to power, the CCP is never going to forgo using China’s past, both its greatness as well as its exploitation at the hands of Western powers, to shape and unify domestic public opinion.

  2. Can we get rid of the ‘Tariff’ farce with the American people paying all the tariffs where Trump claimed the Chinese were?? And then get some peace and repair the fences with Europe??

  3. Democrats are as anti-China as Republicans are.

    The difference is that Trump and his advisors are almost as anti-Europe, Japan, etc as they are anti-China, and are instinctively isolationists who think the US has the power to go it alone on every global issue. Biden and his advisors (assuming most of his foreign policy advisors are Obama types) are instinctively globalists who will try to rebuild the US’ standing with its traditional allies (e.g. Europe, Japan) in order to form a united front to take on China.

    Also, Trump has so little understanding of economics that he thinks tariffs are the magic bullet for everything, while Biden likely has a realistic appraisal.

    Finally, Trump’s anti-foreigner, anti-immigrant views tend to poison US economic dealings with other countries, while Biden won’t have that problem.

    This implies that a Biden Administration will greatly tone down trade tensions with Europe, Japan, Canada, Mexico, and use tools other than blunt tariffs when dealing with China. In general that seems positive for most trade-exposed companies.

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