US starting to realize it’s in an economic cold war with China

A generation removed from the first Cold War, a new one has begun. The new cold war has the U.S. engaged with China, not the USSR. The new cold war is primarily an economic one, not a military one. Yet despite fundamental differences from the past, elements of the past have a fundamental impact on the new cold war. 

The first Cold War lasted four decades. It was punctuated by military conflicts — primarily by proxy, but with notable near-misses of direct engagement. Advantageously transitioning to a primarily economic conflict, Reagan would win the Cold War within a decade.  

{mosads}Yet, while economic in substance, Reagan’s final engagement was military in form: The U.S. upped defense spending to a level the USSR could not begin to match.

According to the Office of Management and Budget, U.S. defense spending (measured in constant 2009 dollars) increased from $363 billion in 1980 to $538 billion in 1989 (Reagan’s last budget) — a 48-percent real increase. With Vice President George H.W. Bush winning the presidency in 1988, there was no end in sight. 

Applying economic power to military spending was particularly troubling for the USSR. The Soviet Union’s legitimacy rested on having saved the “Motherland” in World War II. Its citizens knew the regime’s economic shortcomings, but the Communist Party justified — and enforced — its existence by being on par with the U.S. militarily. 

Unable to produce the needed resources internally, or borrow them externally, the Berlin Wall fell in 1989 and the USSR in 1991.  

With a mighty military, but moribund economy, the USSR fell from within, lacking an economic infrastructure capable of supporting its military superstructure. China has seen all of this and knows it cannot succeed without that infrastructure.  

As the USSR was teetering, China was transitioning. Having accepted the U.S.’s famous overtures under Nixon, China, through fits and starts, ultimately oriented away from the USSR’s purely authoritarian economic model to what would become a mixed one.    

Instead of the Soviet central planning model attempted by Mao, Deng Xiaoping prevailed, giving comparatively great latitude at the individual level. However, while allowing some autonomy at individuals’ level of the economy, monopoly remained with the Chinese Communist Party (CCP) at the political level. 

The party adopted a mercantilist approach to development. China’s goal was to earn surplus resources for economic investment through foreign trade. China further bolstered this by inviting foreign investment — an unthinkable break from previous communist developmental models — while still dictating terms with its enormous market strength. 

From China’s perspective, it has been in an economic cold war for some time. The CCP is in a race with the world’s largest population, and with which it has entered an implicit bargain of political rights for economic development. 

The party must stay ahead of the people’s expectations. While the West has complained, China has skillfully played them against themselves — similar to the way Nixon and Kissinger split the two communist colossi in the 1970s. 

The change in this heretofore undeclared economic cold war is that President Trump has declared it, and appears serious about fighting it.  

As in any war, there are casualties. However, because of China’s large trade surplus with the U.S., China is far more exposed. An even greater threat exists should the West seize the opportunity to coalesce and join the Trump administration’s demand that China fundamentally change its economic model of dictated investment restrictions.  

Further, China is much more internally dependent on its economic relationship with the U.S. and even more so on the mercantilist model it embodies. This model supports China’s economy and its political system. Threatening one is to threaten both. 

China is therefore stuck: To acquiesce and reform can be seen as “losing face” and kowtowing to the West, resurrecting the nation’s most painful historical memories. Yet, replacing the lost economic growth with government-administered stimulus is to court the excesses China most needs to correct. 

Already larded with poorly run state enterprises, the last thing needed is to pump more resources into them and invite a day of reckoning akin to the U.S. housing sector collapse of a decade ago. That day of reckoning is coming and the CCP does not need it forestalled and increased in severity.  

Beyond the economic disruption this will cause, there is also a strong political component far beyond America’s substantial one from its financial crisis.

China’s reckoning will reveal corruption, lies, ineptitude and manipulation — all of which will antagonize its people. There will be no hiding for the CCP, which is simultaneously proprietor and regulator of these enterprises. 

For perspective: Imagine the financial crisis’ fallout on a larger scale and its blame of elected officials, regulators, banks and Wall Street all being concentrated on a single entity. 

{mossecondads}Add to this a final Chinese component that has no financial crisis parallel: The Chinese Communist Party took control in 1949 based in part on the people’s disgust at corruption in the previous government. China’s fallout could resonate deeply and negatively in a way Americans cannot understand. 

The economic confrontation that the Trump administration has engaged in with China is indeed a new cold war. It is also an old one — one China has been waging for some time. Yet despite two nations being joined in conflict, it is not an equal one. 

China has far more at stake than the U.S. While the U.S. is fighting on one external front, China is fighting on two: one external, but an even more serious internal one.  

J.T. Young served under President George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987-2000.