Is an Economic Cold War Emerging in Asia?

For the past 35 years, as China’s economic development accelerated in the post-Mao period, US policy towards the Asia-Pacific was aimed at fostering an environment that would gradually integrate China into the international order. Such a policy was intended to give Beijing incentives to play by a common set of rules, allow the United States and other countries to invest in and profit from China’s growth, and spur the step-by-step development of the kinds of middle class actors and economic institutions that US policymakers believed would push for liberalization, transparency, the rule of law, an open media, and political democracy. Yet, in the past half-decade a number of signs that this presumed developmental trajectory may not come to pass soon have begun to emerge, leading to an erosion in the optimism many foreign firms and leaders express for trading relations with China. China’s growing strength and increasing assertiveness, together with inherent incompatibilities between Beijing’s political-economic model and those of the rules-based international order have increasingly led to concerns that a second cold war might be emerging in Asia.¹

Despite coming to office with a team of advisors who envisioned working together with China to address pressing challenges such as the financial crisis and global warming,² over the past five years the Obama administration has confronted an intensification of pre-existing Chinese behavioral trends that suggest that a fundamentally conflictual relationship is taking root. While many of these indicators are found in the political, military, and values realms, a substantial number exist in the economic realm, aggravating and, in turn, being aggravated by aspects of strategic competition that are ongoing in the political-diplomatic and military realms. This development has been noted by leading policy analysts and former Obama administration officials alike.³ Indeed, as the review of factors below argues, such concerns are well-placed and absent a significant reform of China’s political and economic systems, a substantial risk exists that the trends that are already being noted will deepen and harden into an economic cold war.

This paper examines the economic aspects of what such a long-term strategic competition would amount to, looking first at the question of how to define an economic cold war, and then turning to an examination of the evidence against and for concluding that such a situation is eventuating. It closes with some thoughts on how limited or sharp such a protracted contest is likely to become.

Defining a New “Cold War” in the Economic Realm

The first thing to note in any discussion of a new cold war, whether in the economic realm or elsewhere, is that such a long-term, protracted struggle for power, influence, and rules-making or normative power between the United States and China, if it comes to pass, will not look like the contest between the United States and the Soviet Union. The relationship between Washington and Beijing is fundamentally different than that between Washington and Moscow between 1947 and 1991, largely as a consequence of China’s leaders’ decision to preserve their political monopoly and strengthen their national power through a form of national socialism that relies much more heavily on market signals, trade, and foreign direct investment than the Soviet Union ever permitted. At the same time, the long-term US strategy of engaging with China designed to build areas of cooperation, while hoping that such cooperation might become transformative rather than merely tactical in nature, served to provide the space and room to grow that China required if its leaders’ decision was to produce results.

If the appropriate historical analogy is not the struggle between global liberal-democratic capitalism and totalitarian communism that defined the competition between the United States and the USSR, then is a cold war between the United States and China impossible? Or could there be many types of “Cold Wars,” treating the concept more as a heuristic device or analytical category than solely as a specific historical phenomenon? If the concept is measured not by the example of the only known instance and instead the core features are abstracted and used to define a particular type of conflict, we may gain greater analytical purchase over the relationship between the United States and China today, as well as how it might develop. Adopting that approach, we take a cold war to be by its nature a long-term struggle between two dramatically divergent political-economic regimes each of which is seeking to shape the norms and structures of international society along its own preferred terms without necessarily resorting directly to violent struggle against each other.

Such a shift in approach to the concept provides opportunities for thinking through the similarities between the US-China relationship today and the rivalry between the United States and the Soviet Union. For example, the defining characteristic of the China-US relationship today is not geo-strategic or diplomatic rivalry, but rather the dense bilateral trade and investment flows and exchanges of tourists, academics, scientific personnel, and cultural links that bring the two countries together in addition to increasingly well-institutionalized political, diplomatic, economic, and military exchanges. Trade, investment, and people-to-people contacts serve as a sort of ballast keeping the bilateral relationship relatively stable and giving pause to strategic thinkers on both sides who perceive geopolitical, diplomatic, or military threats from the actions of the other.

Yet, the mere presence of deep trade ties alone does not perforce render impossible the prospect of an economic cold war. For decades, analysts from the realist school of international relations theory have pointed out that the crucial question for major powers that trade with each other is the problem of how the relative economic gains from trade are divided up, since these economic spoils provide the basic taxable foundation from which state revenues to fund military hard power are derived Indeed, in a ground-breaking recent work on the question of how China and Taiwan—two long-time political-military rivals—had been able to expand and deepen their trading relations, Kastner found that the important factor was the extent to which political leaders in a given country were reliant on international trade interests to accomplish their goals.⁴ To the extent that this argument is true, if China deepens its emphasis on building “national champion” state-owned enterprises and seeks to gradually marginalize the role of foreign firms in the PRC economy, the prospects of conflict would be expected to rise. The phenomenon, widely noted in the post-2008 period, of guojin mintui, or growing emphasis of the state in the economy at the expense of the private sector, especially when paired with Beijing’s emphasis on “indigenous innovation” (zizhu chuangxin) to extend preferential treatment to domestic firms, carries worrisome implications. Although recent comments by Premier Li Keqiang suggest that Chinese leaders are looking to resume at least some elements of market-oriented economic reforms that would off-set the concerns noted above, it remains to be seen how far these will go in the face of entrenched interests that will seek to preserve their prerogatives under the current system.⁵

That states engaged in a long-term political-military struggle can nonetheless engage in substantial trade and economic cooperation calls attention to the fact that the question of whether or not a cold war exists cannot be decided with reference merely to whether or not they trade extensively with each other. Instead, the economic relationship between the two states—as well as with the broader world in which they interact—must be explored. Do the two articulate competing political-economic models? Do they seek to establish competing visions of international economic order and architecture? Do they strive to contain or prevent each other from investing in each other’s markets or strategic industries? And do their broader economic policies suggest that they are attempting to use trade and investment policy for geo-strategic purposes to weaken each other?

On the basis of the list above, it becomes possible to begin exploring whether or not the US-China economic relationship approximates a cold war rather than the Cold War. But first a note of caution is appropriate: Is “cold war” really the right analytic frame? The term needs to be dissected. The word “cold” suggests that the relationship between the two parties—here taken to be China and the United States—is characterized by cold, frozen, or non-dynamic interactions. Obviously this is not the case, given the magnitude of the two sides’ interactions across political, economic, diplomatic, and increasingly military realms. At the same time, the word “war” is too alarmist and inflates the competition and struggle for power and influence beyond what appears likely. But before the term “cold war” is cast off too quickly, the content and intended thrust of the concept should also be evaluated, in addition to merely the terms. If it is treated as shorthand for a wide-ranging and intense competition for influence and power that carries implications for the ordering principles of international society, then the term holds more value. Human beings reason by analogy when confronted with new phenomena, seeking to fit the circumstances they confront into familiar analytical categories that can provide guidance to action. However, this can cause more confusion than the value it adds if the accuracy of an analytic, short-hand construct is outweighed by the differences in the cases considered. In the case of the United States and China, “cold war” is not as accurate a concept as dispassionate analysis might demand, but if used carefully it can, arguably, shed some valuable insights.

US analysts have been reluctant to describe the US-China relationship as a new cold war, and US observers have generally argued that the two sides are working diligently to avoid such an outcome.⁶ By contrast, Chinese analysts and state officials routinely deride US government agencies’ studies of China’s military power, arms sales to Taiwan, “rebalancing” to Asia, and treatment of Chinese investment in sensitive sectors of the US economy such as telecommunications as reflective of “cold war thinking” or a “new cold war mentality.”⁷ The difference in the two sides’ willingness to embrace this language stems in part from the US desire to avoid such an eventuality while seeking Chinese cooperation on a host of issues. By contrast, the Chinese side believes that the US ideological threat is substantial but at the same time amenable to being manipulated through skillful use of propaganda to shape the willingness of US analysts to conceive of the relationship as being as conflicted as the Chinese side actually sees it to be, thereby advantaging China by lulling its opponents into a more passive state.

If “cold war” is a somewhat troubled construct to employ, does a better term exist? Over the past several years, the idea of a “cool war” has gained ground as a heuristic device, appealing to some analysts who are looking for a conceptual framework to describe the emerging shadowy struggle for power between the US and China.⁸ Such analysts have noted the “cool” nature of advanced technologies such as cyber-hacking and unmanned robotic systems, as well as the shadowy nature of conflict between great powers maneuvering around the margins rather than confronting each other directly in force-on-force engagements, as defining the nature of future competition and possible warfare.

Irrespective of the specific term, the fundamental question is whether the world is entering a period of long-term geopolitical strategic competition between a current hegemon and a rising challenger seeking to define the international system in substantially different terms than currently govern its operations. The following sections examine the evidence against and for such a conclusion. The final section explores the implications of these findings.

No, There Is No Economic Cold War Under Way in Asia

A wealth of evidence exists that can be interpreted as suggesting that an economic cold war is neither extant nor emerging in Asia. Such evidence can be grouped in several broad categories: the absence of rigid differences in political-economic ideology and actions designed to support these; dense and expanding trade and investment flows; and shared membership in the major international financial and economic institutions. These are discussed in turn below.

First, during the rivalry between the United States and the Soviet Union, the struggle between capitalism and communism that framed the power relations between the two superpowers resulted in hot conflicts in third countries, a global division into two camps, and widespread domestic subversion attempts. By contrast, in the past 35 years the United States and China have never fired a shot at each other in anger;⁹ China does not lead a well-recognized international “camp”; and Beijing publicly abjures both military alliances (although some media reports have suggested that Minister of Defense Liang Guanglie reaffirmed China’s defense treaty with North Korea during his visit to Pyongyang in 2009) and economic aggregations defined by ideology (in contrast to the Soviet-led Council of Mutual Economic Assistance).¹⁰

To be sure, the United States and China do compete for influence, but China is not seeking to convert the United States to communism the way Soviet agents once sought to evade the surveillance of FBI agents while organizing spy networks, influencing left-wing political movements, and infiltrating labor unions across the United States so as to transform the economic basis of US life and lay the groundwork for revolution. By contrast, the United States does hope to see China eventually democratize and transition into an authentically market-driven model as opposed to the state-owned model directed by the Chinese Communist Party’s leading families that currently prevails. Indeed, it has supported dozens of funding efforts over the years to help strengthen civil society, give harbor to political dissidents, and support judicial and media training for Chinese officials. In addition, it regularly criticizes China’s widespread human rights abuses while calling on the regime to follow international law, and has refused to extend market economy status to China in light of state control of the commanding heights of the economy.

Yet, all of the above points relating to ideology, political economy, and normative legitimacy attached to regime type could in some sense be seen as relating to the Cold War as opposed to a cold war. It is important to recognize that in the present US-China relationship, a key difference between the PRC and the Soviet Union is that the former harbors none of the global transformative ambitions of the latter. While the United States does believe in universal values and norms that it hopes to see spread in China (albeit not by force), the Chinese state today does not seek to inspire a global communist transformation leading to a workers’ state followed by the ultimate withering away of the state in a classless society. Instead, the PRC is a developmentalist state dedicated to national socialism, not international communism; put simply, the CCP mission is to protect its ruling status and to empower China as a international actor on the premise that this is the best way to preserve CCP rule. When the United States uncovers instances of Chinese espionage today they never relate to subversion of the US political system, but instead are almost invariably related to efforts to steal commercial and military intellectual property, spy on overseas Chinese communities, or obtain classified military and intelligence information, all of which would protect the CCP and strengthen Chinese military-industrial power. Such efforts do not appeal to national communities beyond China, and do not give succor to any global movement designed to pave the way for an alternative future.

If differences in economic ideology do not hark back to the Cold War, do they at least suggest a cold war? There is some evidence for this, but it is unclear whether it should be interpreted as constituting a struggle to define the future of development and a legitimate political-economic model. For example, China’s claim that it is unique and not subject to universal values is essentially an argument designed to insulate its political leadership from criticism over corruption and human rights abuses while China continues to build its comprehensive national power. Such language of exceptionalism seeks to negate the value of the set of rules that the United States believes it is helping to uphold in international society. Additionally, China continues to pose as a leader of the developing world and articulate a North-South frame for international affairs. It did so most notably at the Copenhagen summit in 2009 when state propaganda claimed afterwards that Beijing had been widely recognized in the international media as having stood up for poorer countries by:

…[bringing] together developing nations to jointly safeguard their common interests and [making] a remarkable contribution to a substantive result of the conference… media in small island states, including Antigua and Barbuda, Fiji and Papua New Guinea, also spoke highly of China’s responsible attitude and forceful measures on tackling climate change, saying China’s effort could match that of any developed countries.¹¹

Second, trade and investment flows between China and the United States and its allies in Asia have been expanding rapidly in recent years, something that suggests an economic cold war is not in the offing.¹² Indeed, in the wake of China’s December 2001 accession to the World Trade Organization, regional trade and investment flows associated with production for export began to shift from across Asia to concentrate ever more in China, accelerating a trend seen earlier. Subsequently, as Southeast Asian nations grew concerned that their competitiveness was slipping, resulting in job loss to China, Beijing signed the 2004 China-ASEAN free trade agreement (which entered into effect in 2010), complete with an “early harvest” component designed to ease import restrictions for numerous categories of Southeast Asian exports, supplementing this in 2006 with a further bilateral FTA with Thailand. Chinese leaders also began to encourage their country’s leading firms to “go out” (zou chuqu) to invest overseas in order both to procure access to raw materials and to reassure neighbors and trading partners that trade with China would also yield investment benefits for their economies.

Additionally, during the 2000s Beijing negotiated a Comprehensive Economic Partnership Agreement with Hong Kong and another with Macau. Beijing has long been negotiating a trade liberalization agreement designed to put a framework around China-Australia trade. In the wake of Ma Ying-jeou’s election in Taiwan, Beijing inked an Economic Cooperation Framework Agreement designed to deepen trade and investment linkages. It has also accelerated efforts to conclude an FTA with Japan and South Korea, though the effort with Japan, at least, has foundered on political disputes over history and territorial claims.¹³

These deepening trade and investment ties have given China and its neighbors an expanded set of points of contact and cross-cutting interests that help to mute some aspects of geopolitical competition. This has been most true of US trade with China, which has seen exports to the PRC explode in the post-WTO accession period, growing from US$19 billion in 2001 to US$104 billion in 2011, while imports from China have grown as well, albeit at a slower pace, expanding from US$102 billion in 2001 to US$399 billion in 2011.¹⁴ In addition to the US$526 billion in two-way trade in 2012; China invested US$6.5 billion into the United States while US firms poured US$3.1 billion into China in the same year.¹⁵ As noted above, trade and investment do not guarantee that no conflict will break out, but they suggest that an economic cold war is in many ways not afoot at present; the barriers to one emerging will be high; and the costs of such a confrontation will be great, giving political leaders inclined to escalate conflict levels pause.

A final feature that helps to tamp down (though not eliminate) the possibility of economic conflict and cold war-style economic confrontation is the existence of a broad array of international financial institutions, including the World Trade Organization, the World Bank, the International Monetary Fund, and the Asian Development Bank. Among these, the most important for this discussion may be the WTO. When China was debating whether or not to meet the terms placed on its membership application bid, one of the critical points in favor of accession was the desirability of using the dispute resolution mechanism to handle differences associated with trade, rather than simply relying on bilateral negotiations.¹⁶ Access to an officially neutral arbitral board and a common set of rules and regulations governing many aspects of the region’s trading relations helps to reduce the prospects of an economic cold war emerging in Asia, since such a confrontation would violate many of the constitutive elements of the international trading order.

While this analysis offers evidence that an economic cold war does not at present exist in East Asia and suggests some reasons why it may not come about, there are a host of current and future challenges that could undermine the institutional order of international society, and eventuate in an economic cold war, foremost among them, shaping China’s rise in a way that is system-reinforcing.¹⁷ Economic competition is a feature of trade, investment, and bi- and multi-lateral economic interactions and is to be expected. However, many aspects of competition noted below fall outside the normative boundaries of acceptable international economic interactions, while others suggest long-term efforts to change the basic rules that govern or undergird the international economic order in ways designed to serve China at the expense of other states.

Yes, We See an Emerging Economic Cold War in Asia

While substantial evidence suggests there is no economic cold war at present in Asia, a disturbing amount of data suggests that such a long-term and fundamental confrontation could soon emerge between China and the United States and its friends and allies. As in the preceding section, such evidence can be grouped into categories relating to competing political-economic models and norms; struggles over actions on how to divide up the relative gains from trade and investment; and disagreements over rival visions of regional economic order.

At base, Washington and Beijing embody different political-economic principles; indeed, they do so to such an extent that they even represent these in respective “consensuses.” The “Washington Consensus” a neo-liberal political economic ideal type, seen as embodying the collective wisdom of Western-led developmental models, encourages rapid deregulation, extensive use of free markets, minimal government intervention in the economy, an independent central bank, a free-floating exchange rate, and the adoption of liberal democracy in the political realm. By contrast, the “Beijing Consensus” (sometimes referred to as the “China model”) emphasizes the importance of incremental market opening, the defense of infant industries, the targeting of state investment towards strategic market sectors and establishment of national champions in the “commanding heights” of the economy, and insulation of political leadership from democratic accountability and oversight based on “national conditions” that supposedly limit the desirability and applicability of otherwise universal rights.¹⁸ While the “Washington Consensus” is loosely related to official US policy and the “Beijing Consensus”/”China model” is only vaguely articulated by the PRC as something other countries should follow, these constructs have taken on sufficient ideational authority to shape international development principles and debates among experts and laypeople alike, and serve to frame and legitimate each country’s respective role in the international economy and order.

Moreover, whereas US observers talk about markets as objective and neutral phenomena, Chinese state policy has tended to highlight exploitation and the unequal power relations at the state level inherent in such exchanges, a reflection of the state’s leading role in the Chinese economy and its lesser role in the US economy. Chinese nationalism’s strong role in Chinese socio-political and economic life over the past two decades has done much to reframe economic interactions from a discussion of unequal power relations tied to class structure and towards an interpretation that sees economics as a struggle between nations for the fundamental aspects of power, with the CCP defined as the representative of the Chinese people in their purported struggle with the outside world.¹⁹ State champions and state-owned enterprises are in many analysts’ view struggling on behalf of China against unfair foreign competition that has advantages in terms of advanced technology, large amounts of capital, and historical first-mover advantages that require the Chinese government to help China’s companies to compete.

This vision of the nature of international society and international economic exchange as essentially inherently conflictual and aimed at the establishment of hegemony by one nation over another drives China to increasingly play by its own set of rules. When paired with the absence of legal or institutional constraints on the power of the CCP or the Chinese state domestically, this vision of the nature of international economic life makes it much easier to understand why the extensive theft of foreign intellectual property from foreign-invested firms in China, as well as via commercial espionage and cyber-hacking overseas hold such appeal. In many ways, the Chinese view is that the Cold War never really ended in 1991; instead, the opposing side gained a major advantage, requiring the Chinese side to accelerate its adoption of tactics designed to improve its own position.

Those tactics or actions constitute a second broad category of evidence supporting the notion that an economic cold war is ongoing or emerging. China’s maintenance of a non-tradable and undervalued currency intended to make its exports more competitive vis-a-vis its trading partners; its willingness to restrict rare earth exports, ban certain categories of imports, and manipulate sanitary and phyto-sanitary import inspections in order to punish its neighbors when they transgress Chinese policy preferences;²⁰ its restrictions on investments in broad swathes of the Chinese economy deemed “strategic”—such as the energy and telecom sectors—while seeking access to these fields in other countries;²¹ and its wide-ranging theft of intellectual property, blocks on foreign media, and hacking attacks on foreign companies all suggest an effort to play by a set of rules that are defined principally by Beijing’s economic might, not with reference to any international norms.

The United States and its friends and allies do restrict investment in certain areas of their economy that are deemed to carry implications for national security. Recent notable cases of such national security limitations on Chinese foreign direct investment have included the 2005 CNOOC bid to purchase Unocal, the 2012 Congressional investigations of Chinese telecom firms Huawei and ZTE, and the decision to block Sany subsidiary Ralls Corp.’s bid to build wind farms near a US naval installation in Oregon. Yet, Chinese firm Shuanghui appears likely to successfully acquire US pork producer Smithfield, and Chinese FDI in the United States continues to rise.

Finally, the two countries currently articulate divergent and, in some ways, competing visions of international economic order. While the United States argues for an open architecture tied to a high-level twenty-first century trading regime that standardizes regulatory regimes within borders through the Trans-Pacific Partnership, large numbers of Chinese observers have argued that such a system is intended to exclude the PRC on the basis of its economic system. While the Ministry of Commerce has stated that it is analyzing the evolution of the TPP talks, Chinese analysts favor the deepening of East Asian regional integration centered on China’s economy and view TPP as a threat to China’s vision of the region’s future. Thus, the two sides clearly articulate divergent visions of the future and, at least, potentially competing models of economic order, something that one would expect if an economic cold war were in the offing.

Conclusion

The United States and China are among each other’s largest individual trading partners today, providing each with tremendous incentives to find ways to continue to cooperate and to avoid, or at least tamp down, conflict. Although they share significant common interests, the two sides still harbor substantial divergent interests and contrasting visions of the future economic order they hope to see in the Asia-Pacific. While they trade extensively, one does so while hoping to encourage domestic transformation in the other’s regime type, while the other does so hoping to build up sufficient power and influence to transform the region in ways it sees as useful for reestablishing its centrality and dominance. FDI in each is viewed somewhat warily, with the Chinese seeking eventually to reduce as much as possible the role of foreign economic actors in their economy, even as the United States seeks to balance the desire to welcome foreign investment against the fact that Chinese firms are often attempting to invest in sectors of the American economy that the PRC would not permit foreigners to invest in within China. Looming over all of these interactions are China’s communist regime type, its use of cyber capabilities and intellectual property theft to support its state-owned enterprises, and a deep-seated suspicion of markets and a desire to keep control over strategic sectors of the economy in state hands.

Are these tensions and incompatibilities sufficient to warrant a description that the Asia-Pacific region has entered, or is poised to embark upon, a period of economic cold war? While there are clear tensions and areas of strong disagreement over norms governing international economic behavior among the region’s major powers, the international system seems likely to be sustainable over at least the next five-to-ten years. The critical factor is likely to be how China’s current crop of leaders handles policy towards the economy and international competition. If they pursue substantial economic reforms that emphasize markets while dramatically reducing the theft of intellectual property from foreign firms, then an economic cold war is unlikely. If, however, they fail to reform the economy, or move further in the direction of a state-dominant economic model in which national technical means are used to undercut fair competition by stealing proprietary information from foreign firms, then an economic cold war will be much more likely to emerge. Finally, if China chooses to view the Trans-Pacific Partnership as a direct threat to its economic predominance in Asia and responds by working to conclude either the China-Japan-Korea Free Trade Agreement or the Regional Comprehensive Economic Partnership as a way to shape the region’s developing trade architecture in a direction away from the United States, then it is possible that a competing set of economic relationships—centered alternatively on the United States or on China—may emerge, setting the stage for a much chillier economic future for the Asia-Pacific.