Will the Chinese Trade War Become a Cold War?

By Andrew Willms, President & CEO

Tensions between the U.S. and China escalated sharply this past week. The U.S. indicted two Chinese hackers for allegedly targeting American companies involved in virus research, and then ordered the shutdown of China’s Houston consulate. State Department spokeswoman Morgan Ortagus said Wednesday the Houston closing was needed to protect American intellectual property and Americans’ private information. Shortly thereafter, people at the consulate were videoed hastily burning paper in trash cans, a practice the CIA calls a “burn down”.

On Thursday, Beijing retaliated for what it called the "unprecedented escalation" of the friction between the two superpowers by ordering the United States to close its consulate in the southwestern city of Chengduby. The Ministry of Foreign Affairs in Beijing said the move was a “legitimate and necessary response to the unjustified act by the United States.”

Be that as it may, analysts fear that U.S.-Sino relations are at their worst since the United States formally recognized the People’s Republic of China back in 1979. That represents quite a change from just a few months ago. On January 15th, President Trump signed a partial trade deal with China that aimed to resolve some longstanding American concerns about Chinese trade abuses. Shortly thereafter in mid-March, Trump tweeted praise for Chinese President Xi Jinping, saying he had “Much Respect!” for the Chinese leader.

So, why the sudden change in the state of diplomatic affairs? Some political pundits have postulated that villainizing China is part of Trump’s re-election strategy - an effort to win support from conservatives and blue-collar workers who feel American jobs are threatened by trade with China. Then again, there seems to be little doubt that China long engaged in extensive computer hacking as a tool for intelligence gathering in the United States.

Whatever the cause for the recent deterioration in relations, if the hostilities between the two most powerful countries on the planet escalates to a full-blown cold war it will cause great economic harm for both countries. Tech companies such as Apple, that rely on China for a large share of revenue and manufacturing capacity, may be especially vulnerable.

For the moment, the stock market doesn’t appear particularly concerned. Only time will tell if that changes. Meantime, this much seems clear: ignoring a potentially major geopolitical risk could prove to be a costly mistake down the road.

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