US-China dispute: It’s not just about trade, and it won’t be easy to resolve

Presidents Trump and Xi, after a long period of uncertainty, agreed to meet later this week at the G-20 Summit in Japan. But before financial markets and those hoping for a breakthrough breathe a sigh of relief, it is worth stepping back to assess the formidable challenges — and gaps — both still face. 

Current negotiations between the U.S. and China are considerably different from any other engaged in by the U.S. since World War II. Dusting off strategies of earlier eras in the hope that they will produce significant results this time will not address successfully the profoundly consequential 21st century issues under consideration.

Some view this conflict — at least from an economic perspective — as a new version of the Cold War, and thus believe it should be addressed with policies employed during that period. Back then, Washington pursued a version of “economic containment,” imposing a wide range of restrictions and barriers on commercial and financial interaction with the USSR. Little commerce took place between the two. Most U.S. allies and friends cooperated in implementing this strategy.

Today, in sharp contrast, China and the U.S. are highly independent economies. China has experienced decades of remarkable growth; America’s allies and friends are close trading partners of China, some engaging in more trade with China than with the U.S. Attempting to “contain” China and convince other countries to do likewise would be both unrealistic and counterproductive, as would attempts to “disengage.” These would disrupt the economies of both nations and much of the rest of the world. 

But while avoiding the notion of an economic Cold War redux, we also should avoid seeing this as a conventional 20th century trade dispute. Issues facing the U.S. and China today are not solely, or even primarily, about trade in the traditional sense. Many involve protection of intellectual property and commercial secrets, as well as rules and conditions for competition in advanced technologies with transformational economic and military implications. It is the significant overlap among trade, investment and security issues that makes solutions more complicated.

The confrontation first appeared to be only a tariff war. Now it involves increased mobilization, and escalation, of other policy instruments by one or both nations: investment restrictions, prohibitions on purchases of high technology products made by targeted companies, strict licensing requirements on sales to certain foreign entities and, recently, threats of penalties related to currency rates. Dangers are growing that what began as primarily a tariff war could become a series of investment, import/export restrictions, technology and currency wars.   

Continued escalation would put the U.S. and China on a path toward Mutually Assured Disruption, an economic update of the old Cold War’s much-feared mutual destruction in a nuclear exchange.

U.S. leaders assure Americans that China is suffering more than we are, but this is scant solace to this nation’s farmers, businesses and consumers who are being impacted. If this matter could be resolved quickly and the outcome solved all key outstanding problems in one big bundle, most Americans likely would accept the short-term costs. But the longer the confrontation lasts and the more intense it becomes, the higher the price will be — and the less accepting most Americans are likely to be.  

Moreover, there would be long-term consequences. Once supply relationships are severed, reestablishment of the old links will be difficult. This would be particularly harmful for American farmers. For U.S. technology companies, which account for a large amount of high-value exports and a lot of excellent jobs at home, imposition of export restrictions will be seen as a bad message to other countries; it could induce those countries to seek alternative sources for fear that such restrictions might be applied against them in the event of a future dispute with the U.S. When supplier reliability comes into question, trade relations can be quickly undermined.  

Of course, much of this applies to China, too, and that country will incur similar costs.   

Many other nations are being caught up in the conflict as well. They will be targeted by both the U.S. and China to use their companies’ technologies, particularly in advanced telecommunications, AI and quantum computing. And Beijing and Washington also will likely urge other countries to accept their rules and standards on data privacy, localization of storage, censorship and government access to information. The U.S. will prevail in some instances; China in others. Over time, “zones” or “spheres” of high-technology influence or preeminence are likely to emerge, although there will be overlaps as many countries use certain technologies, rules and standards of both the U.S. and China. But competition and differences could remain intense for years, and earlier visions of a seamless global information system will fade. 

Where do we go from here?  

The longer this confrontation lasts, the more difficult compromise will be. President Trump appears to believe that tariffs benefit the U.S.economy; many in his political base favor these tough measures. Some of his advisers are likely cautioning that, as the election approaches, the confrontation could harm an already weakening economy and the stock market, while others believe that a compromise could render him vulnerable to political criticism. And President Xi faces economic issues at home, too — as well as public and intra-party pressures to ensure that any deal is consistent with China’s core interests and, in the words of his key negotiator, “premised on equality and dignity.”

All issues cannot be resolved in one series of negotiations, nor in one summit. So we should not set our hopes too high about dramatic results in Japan. But it’s imperative to resolve, as soon as possible, at least a few key differences that have been building for several years and that, left unsettled, will only deepen economic conflict and to begin to deescalate — or at least call a truce to — the now escalating confrontation. 

At the same time, both sides will need to reconcile themselves to the probability that these negotiations will not put an end to all disputes. At best they can provide solutions to some and establish an agreed framework for resolving, or at least constructively managing, others. This will be particularly necessary regarding each nation’s support for economically and militarily critical advanced technologies, in which both will be assertively competing for decades.

And these are only a part of a wider set of challenges. Can the world’s two largest economic and military powers manage their future relationships based on agreed, or at least non-conflictual, rules, norms and practices? Can they work together on critical bilateral, regional and global matters where they have common interests, even as they compete on others? This requires long-term strategic understandings. 

Resolving major trade-related issues would be a good start, but a more comprehensive multi-year engagement to address these broader questions must follow on quickly.   

Robert D. Hormats, vice chairman of Kissinger Associates, was undersecretary of State for Economic Growth, Energy and theEnvironment, 2009-13; assistant secretary of State, 1981-82; and a former ambassador and deputy U.S. trade representative, 1979-81. As senior economics adviser to three White House national security advisers from 1969 to 1977, he helped to oversee the U.S. opening to China. He is a former vice chairman of Goldman Sachs (International).