Escalation of the Sino-American conflict: Trade war, financial war, cyberwar, war?

Escalation of the Sino-American conflict: Trade war, financial war, cyberwar, war?

Trump threatens to escalate the trade war to a financial war. The South China Morning Post reports:

Is Donald Trump bluffing about starting a financial war with China? Chinese officials aren’t so sure

Anthony Rowley  Published 24 Aug, 2020

Is US President Donald Trump practising the “art of the deal” on China by scaring it into making major concessions on trade to avoid being decoupled from the global financial system? There are signs this may be so but, even if Trump is bluffing, many in China are taking the threat seriously. 

A recent report by Reuters quoted officials and economists in China saying that a “broad financial war has already started” between the two countries and that Beijing has to be prepared for Washington’s “nuclear option” of kicking China out of the dollar payment system.

It seems that having failed to secure a decisive victory in his trade war against China, the US leader is preparing for financial war – or at least giving the appearance of doing so. This could be just scare tactics, because it could damage the US as much as China.

Even so, the risk of mutual economic damage or even destruction did not deter Trump from launching trade wars against China and others. So it would be unwise to leave anything to chance, and in that sense Chinese experts are wise to think through the implications of potential financial conflict.

Trump’s attacks on Huawei, TikTok, WeChat and other Chinese companies are directed against easily identifiable targets, but an assault on aspects of China’s financial system operations would be different. That involves threatening to cut off China from the international payments system.

At present, most of China’s cross-border transactions are settled in dollars via the Swift international payment network, one of the largest financial messaging systems in the world. Such a move would hurt China’s international trade and capital transactions.

Shutting China out of international dollar payment systems such as Swift is possible as a sovereign act by the US. But it would be an odd thing to do at a time when the Trump administration is trying to pressure Beijing into making big ticket purchases of US goods, which of course have to be paid for.

As Hung Tran, former chief economist at the Institute of International Finance, told me, the US “will continue to trade with China as it expects China to raise annual imports from the US to US$350 billion and China has to use the Swift system to pay the US for the purchases”.

This suggests that Trump is indeed bluffing – or simply failing to think through the consequences of his own threatened actions – in the hope that Beijing will be sufficiently unnerved as to give him a big trade agreement that would secure his re-election.

Chinese officials seem to be taking Trump’s posturing seriously, however. The threat of Sino-US financial decoupling is “clear and present”, Reuters cited Shuang Ding, head of Greater China economic research at Standard Chartered and a former economist at the People’s Bank of China, as saying.

And Guan Toh, former director of the international payments department of China’s State Administration of Foreign Exchange and now chief global economist at BOC International (China), has reportedly cautioned that the US “could expel China from the dollar settlement system”.

Guan has recently called for increased use of China’s Cross-Border Interbank Payment System in financing global trade. China meanwhile could seek to use the euro to settle trade and other transactions with Europe, and the yen with Japan while using the renminbi for payments elsewhere in Asia.

Another action that the Trump administration has reportedly discussed is to seize certain Chinese assets in the US, including some of China’s huge US Treasury securities holdings (around US$1 trillion).

This would be tantamount to an act of financial war – the “nuclear option” – on Trump’s part. As Tran, now fellow at the Atlantic Council in Washington, says, these are extremely aggressive moves sure to invite retaliation. Such acts “would roil international financial markets and cause world trade to collapse, leading to severe economic dislocations in all trading countries”

Defaulting on sovereign debt would seriously dent the reputation of US Treasuries as the world’s premier safe asset. Investors would have to price in the probability of the US reneging on its debt for political reasons, leading to higher interest rates and difficulty in funding US deficits.

Not everyone is taking Trump at his threatening word on financial system sanctions: “I do not believe the Trump administration would be so stupid to take such actions,” Yuqing Xing, a former economics professor and Asian Development Bank Institute official in Tokyo, told me recently.

Nevertheless, few people believed Trump would be “stupid” enough to risk the damage to the world trade system and to production supply chains that have in fact resulted from his assaults and from belated US actions on tackling the Covid-19 pandemic.“

Meanwhile the discussion about security, resilience and supply chains have started and many expert see the end of the globalised world trade system.In the article What it means for Asia as supply chains make security the top priority by Anthony Rowley, the SCMP comments:

„Many people have predicted that the world will be different post Covid-19, citing as reasons the teleworking revolution and other socio-economic changes taking place. But the whole landscape of business and industry could be altered in key respects.

Just how different it will be is only becoming apparent as detailed analyses of the longer-term impact of Covid-19 and accompanying geopolitical shifts begin to appear. The economic significance for China and other Asian nations in particular will be considerable.

It is not just the aftershocks of the pandemic that will alter the economic landscape. A combination of Trump’s trade wars rising tensions between the United States and China and the consequent polarisation of economic activity, plus rising security concerns will also be determining factors.

The structure of global production and supply chains could change fundamentally, causing shifts in infrastructure links and human interchange. It will be not so much a brave new world as a more defensive one, with localised production matching more protectionist attitudes.

In 2011, then president of the Asian Development Bank Haruhiko Kuroda was

one of the first to signal concerns about supply chains after the Fukushima earthquake showed how vulnerable they are to disruption. But the threats facing these links now – political, security and logistical – are much greater.

As World Economic Forum noted, the “coronavirus crisis has revealed the fragility of the modern supply chain”, and an “urgent need to design smarter, stronger and more diverse supply chains has been one of the main lessons of this crisis”.

The World Bank devoted its World Development Report for 2020 to the anatomy of supply chains and the International Monetary Fund has analysed them. A recent report by Moody’s Investors Services is among the most comprehensive. It suggests that the pandemic will “accelerate fundamental shifts in trade relationships globally and particularly in Asia”.

The concept of globalised manufacturing (the “borderless world of business”, as management consultant Kenichi Ohmae termed it) is breaking down under the impact of Covid-19 and moving towards protectionism, such as with reshoring (bringing jobs home) and the end of the

‘just in time’global production model. The full implications of this for companies and shareholders has maybe not sunk in fully yet but it is clearly going to make doing business more difficult. As Moody’s said, the security of the supply of industrial goods will “become an overarching objective of governments and companies, overtaking cost and efficiency concerns”.

Supply chains (by means of which myriad firms, small and large, in multiple different locations and countries contribute inputs to a final product) will become more regionally focused, “leading to a more fragmented global trade system with a greater range of suppliers of similar products”.

The focus, Moody’s suggests, will be on building “robust” supply chains – meaning the ability to maintain operations during a crisis by increasing inventories and increasing supplier diversification.

Another key objective will be to avoid concentration of risk and a major source of risk is “reliance on producers in China, which accounted for 20-30 per cent of advanced economies’ total imports in 2019, especially in the case of the US, the European Union, Japan and South Korea”.

Security concerns are likely to loom large from now on in deciding where to locate supply sources – with “security” becoming an all-embracing term covering anything from public health goods, food supplies, information technology, and certain types of manufacturing to energy. China, for its part, also has a heavy reliance on certain resources and technology goods imported from advanced economies. For example, its

chip imports exceed oil imports by value and rank as the country’s largest import item.

China’s dominance as a supplier in many industry sectors exposes it to the risk of companies

diversifying away from it, but Moody’s suggested that there are limits to which this strategy can be pursued in the near term.

“It will be time-consuming and costly to relocate the productive capacity that has been set up in China over the past 20 years to other emerging economies. Infrastructure, human capital and the sheer scale of the capital stock in China will be difficult to replicate in other countries.”

Meanwhile, “China’s domestic market, already one of the largest in the world, continues to grow. Companies that have established productive capacity in China to service the domestic market will be the least likely to seek to relocate supply chains”.

Economies with sound operating environments, strong manufacturing production capacity, high export similarity with China, deep labour pools and few geopolitical risks will benefit from diversification out of China, Moody’s adds. “Thailand, Vietnam, Taiwan and Malaysia stand to benefit the most.”

China on its part wants to use the Asian Infrastructure Investment Bank (AIIB) as new motor and engine for the integration of Asia. However facing the rising nationalism in all parts of Asia, this won´t be like the European integration:

Will Asian economic integration finally take root under China’s infrastructure bank AIIB?

Calls for regional economic integration in Asia are not new but Xi Jinping’s latest push for AIIB to take the lead may be falling on more fertile ground, given US withdrawals from global institutions and a fading dollar“

China is also readjusting ist 14th 5 year plan and wants to make the Chinese economy an econmy designed for an protracted war with the USA. Wang Xiangwei reports in the SCMP on August 13 2020:

„Under US pressure, China is planning an economy that can survive a protracted war

  • The prospect of all-round confrontation with America has invoked a Mao-era fighting spirit that is the driving force behind China’s 14th five-year plan
  • Beijing’s vision of a ‘dual circulation’ economy is likely to emphasise technological self-reliance and growth targets based on quality, not quantity (…)

With officials drawing up the 14th five-year plan, which will run from 2021 to 2025, it has taken on a special importance.The United States may not be mentioned but the prospects of rising all-round confrontation between the two countries have become a powerful driving force behind the formulation of the new plan.Because of this, there have been rising concerns and confusion over whether the Chinese government will strengthen state controls over the economy at the expense of reforms and opening up in the next five years as President Xi Jinping has now urged the country to prepare for “a protracted war” in anticipation of a more hostile international environment in the post-pandemic world.“

Meanwhile the USA is alarmed by the rise of Chinese artifical inteligence in military affairs:

Rise of Chinese AI and quantum computing threatens American military tech, says report for US Congress

  • The days of the PLA lagging well behind the US in military technology are long gone, says analyst
  • However, China’s strength decreases the further the conflict arena is from the mainland: defence expert

Kristin Huang

Published: 10:00pm, 23 Aug, 2020

China’s technological advances in quantum computing and AI are making it a strong competitor to the military technology of the United States. Photo: Shutterstock

China is the United States’ strongest competitor in cutting edge military technologies such as

artificial intelligence and quantum computing, according to a US report.

But security experts said the location of a conflict remained a major constraint for China to exercise its power as the nation’s advantages diminished the further from China’s shores that its military operated.

The report – “Emerging Military Technologies: Background and Issues for Congress” by the US Congressional Research Service – said the US was the leader in developing many of the advanced technologies. However, China and Russia were making steady progress in this area.

“China is widely viewed as the United States’ closest competitor in the international AI market … Recent Chinese achievements in the field demonstrate China’s potential to realise its goals for AI development … Such technologies could be used to counter espionage and aid military targeting,” said the report, which was released in early August.While the US was not known to be developing lethal autonomous weapons, some Chinese manufacturers had advertised their weapons as being able to select and engage targets autonomously, the report said.

And in the hypersonic weapons field, the US is unlikely to field an operational hypersonic weapon before 2023, but China has already developed the

DF-41 intercontinental ballistic missile capable of carrying a nuclear hypersonic glide vehicle, according to the report.

“China has increasingly prioritised quantum technology research within its development plans … China is already a world leader in quantum technology,” the report said.“

China on its part is preparing for an US cyberattack on its critical infrastructure, military assets and even its nuclear deterrence:

Nuclear deterrence needed to prevent cyberattacks from paralyzing China’s nuclear response

By Qin An Source: Global Times Published: 2020/8/24

The US‘ maximum pressure campaign against China now has extended to cyberspace. After the Trump administration’s ban of TikTok and the Clean Network program that aims at Chinese companies, news on Sunday said that TikTok plans to sue the Trump administration over its executive order banning the app. As the game goes viral, there are concerns about whether the US will launch a cyberattack against China. Will China and the US actually cut off the network connection between them?

Such concerns do not come from nowhere. In 2019 alone, there were three major cyberattacks related to the US. In March 2019, Venezuela’s national power grid collapsed. The country’s president denounced the attack as a well planned cyberattack by the US. This indicates that cyberwarfare has become a new mode of undeclared warfare – an invisible invasion of sorts. 

In June 2019, Trump announced retaliation against Iran with a cyberattack too. This showed that cyberwarfare has moved from the backstage to the front lines, from covert warfare to a declaration of war, and from auxiliary fighting to mainstream combat.

On November 4, 2019, the US invited a number of countries to hold the first ever joint cyberattack and defense exercise with the island of Taiwan. It undertook cyberattack scenarios as a new approach to go beyond beach landings and targeting financial systems. It focused on persistent and chaotic destructive attacks on key infrastructure and economic systems. This indicates that the US has crossed the bottom line of the one-China principle in cyberspace.

From late June to mid-July this year, some „mysterious explosions“ occurred in Iran’s strategic facilities causing more than 100 casualties at power plants, nuclear facilities, chemical plants and ammunition depots. Cyber sabotage from Israel and the US were believed to be involved. 

This series of actions and events show that the US has not only the ability to paralyze a society through cyberattacks but also the proven will to do so. Will the US use this ability against China? It’s completely possible. But the two countries might not disconnect their network.

Although US Secretary of State Mike Pompeo has listed the „clean networks,“ the US‘ are the ones who are the most unclean. At present, the Chinese enterprises subject to unilateral sanctions by the US are innocent, and their technologies and products are safe as well. The US is fully aware of this. Besides for the US, disconnecting the network with China will actually cut off the easy path to attack China.

However, China must consider how to deal with „disconnection“ and take primary precautions mainly in three aspects.

First, it must strengthen the awareness of network crisis. With the advent of the internet age, the international structure is experiencing subversive changes. Sovereign states have entered into an era of „stabilizing and governing with big data.“ The network’s characteristics have increasingly made this concept more prominent: The internet can be used to kill people and overthrow a country.

Second, we must optimize the power structure. Cyberspace has become the fifth dimensional battlefield besides land, sea, sky and space. Although ordinary users form the frontline of defense in cyberspace, cyberwarfare cannot mainly rely on „militia.“ The sustainable development of a „regular cyber army“ has become an important option for the construction of a country powerful in cyberspace.

Third, cyber deterrence needs to be showcased. China not only needs to be capable of launching counterattacks in cyberspace, but also must consider special situations in which other countries‘ cyberattacks might affect our ability of a nuclear counterattack. We must keep nuclear deterrence to the cyberattacks that aim to paralyze our network. 

Russia’s latest updated nuclear deterrence strategy lists four conditions that would trigger its implementation of nuclear strikes. In one situation, if the attack undermines its nuclear force response actions, Russia would contemplate using nuclear weapons. Cyberattacks may lead to such situation, therefore Russia’s nuclear deterrence takes cyberattacks into consideration.

The author is head of the Beijing-based Institute of China Cyberspace Strategy.

While US Secretary of Defense Mark Espers visited China in order to prevent a Sino-American war due to misperceptions and poor military- to military communication, the Gloal Times warns that the constellation around Taiwan and the South Chinese Sea is getting tense. China is not speaking of the „peaceful unification“ with Taiwan anymore, but only about the coming unification. It also issued a clear warning to the Taiwanese DDP not to cross red lines as this could mean war:

„DPP authorities must act to reduce risks of war: Global Times editorial

Source: Global Times Published: 2020/8/23

The situation in the Taiwan Straits and the South China Sea is getting increasingly tense. According to data from overseas media outlets, US military planes have flied to the South China Sea 67 times in a month. The Chinese People’s Liberation Army (PLA) started military exercises in the Yellow Sea on Saturday, following its just-concluded military drills in the Taiwan Straits. The PLA will also conduct military exercises in the South China Sea and the Bohai Sea on Monday. There have been increasing discussions on the risk of military conflicts.

The situation in the Taiwan Straits is the most delicate. In the South China Sea, the US is conducting unilateral military provocation, but China and other regional claimants have a clear attitude about the need to prevent military frictions. But in the Taiwan Straits, Democratic Progressive Party (DPP) authorities are making radical and active moves. Political and military issues are intertwined in the Straits, stimulating each other.

Territorial disputes in the South China Sea have been controlled properly. But Taiwan secessionism is still uncertain and could get out of control. The US strategy of containing China is the main cause of tension in the Western Pacific. The strategy has garnered limited coordination around the South China Sea, but it has won full support of DPP authorities. This makes the situation in the Taiwan Straits potentially more explosive.

There have been two extreme unstable factors in the cross-Straits situation in recent years. First, DPP authorities refuse to recognize the 1992 Consensus and have proactively promoted so-called de-sinicization. Second, the US‘ strategy has been to interfere in and suppress China by creating tensions in China’s periphery. The two factors are more and more intertwined, seriously threatening China’s national security and peace of the entire region.

Tensions in the Western Pacific region, especially in the Taiwan Straits, are in a downward spiral. There is no mutual trust between the Chinese mainland and the US or the island of Taiwan. Vigilance and hostility dominate their relations and the situation is becoming increasingly hard to control.

There is certain distance before there is a real possibility of an outbreak of war, but the risks are approaching. Relevant parties are getting prepared for the possible combat, friction points are increasing.

History shows that wars often break out not because someone wants to fight, but because parties are unable to resolve their hostilities and therefore prepared for the worst. And the worst-case scenario arrives abruptly at a certain point due to mutual misjudgments.

The Chinese mainland, the US and the island of Taiwan should all make efforts to ease tensions across the Straits. Since no one wants war, they should show their goodwill to promote peace.

The current round of change in the status quo in the Taiwan Straits stems from Taiwan regional leader Tsai Ing-wen and the DPP authorities‘ assuming power and their fundamental changes to Taiwan’s cross-Straits policies. They shoulder the special responsibility for the ongoing tensions in the Straits.

During the era of former Taiwan leader Chen Shui-bian, the China-US relationship was much better than today. Beijing and Washington kept relatively strong communications capabilities, and Washington to some extent played a role which cooled the tensions in the Straits. Now it is the opposite. Washington has become the instigator of the radical moves of the Taiwan authorities. The US is trying to contain China by leveraging the Taiwan Straits. It is finding fault with China by hyping the Taiwan question, which reflects its overall suppression of China.

The Tsai-led authorities should call a halt right now, both tactically and strategically. If the situation around the Taiwan Straits does not cool down, military tensions will inevitably intensify, and the risk of a war may not be decided by anybody. The utilitarianism adopted by DPP authorities has almost overwhelmed everything, making them turn a blind eye to the risk of a war.

The Chinese mainland does not hope a war breaks out in the Taiwan Straits at this juncture. The bottom line of the mainland is clear and has never changed.

The current danger is that DPP authorities and the US keep ratcheting up their actions and eroding the mainland’s bottom line with „salami slicing“ tactics. The Taiwan authorities continually step on the bottom line under the banner of democracy, and the US constantly violates the „one-China“ principle it has acknowledged in a bid to pressurize China. The two are dancing to the same tune to challenge the Chinese mainland.

Should a hot war break out, the DPP authorities will be bound to step down or even collapse. If the war turns into a comprehensive one, the DPP leaders who have committed heinous crimes will either be wiped out in the war or sent to the mainland and brought to justice. Taiwan’s „defense authorities“ boast their abilities and resolution in a war, which is self-deceiving. If Taiwan authorities indulge in such fantasies and push the situation into a military showdown, they will only confront these self-made tragedies in the future.“

Alex Lo, a SCMP commentator thinks that the Sinoamerican conflict is not about democracy, but that China is becoming a statecapitalist world power in competition with the USA.He even thinks that this can end in a war:

„Why China and the US can’t be friends any more

  • China’s real offence is not its lack of democracy or in-name-only communism, but its embrace of global capitalism that has co-opted foreign technologies and spread supply chains across the world economy

“ China must industrialise. This can be done … only by free enterprise and with the aid of foreign capital. Chinese and American interests are correlated and similar. They fit together, economically and politically … The United States would find us more cooperative than the Kuomintang. We will not be afraid of democratic American influence – we will welcome it.”

Something from Deng Xiaoping? Actually, it was a message secretly passed on to Washington in 1944, from Mao Zedong, via John Service, a deputy to the US ambassador to China.

After long and intimate discussions with Mao and other communist leaders in Yanan, Service wrote to his superiors that besides the Kuomintang, Chinese Communists were “friendly to the United States and look to it for the salvation of the country, now and after the war”.

Mao never received a reply. He would also approach Truman and Eisenhower, and again, no response.

Ironically, it was that great red baiter Richard Nixon who took up with Mao. China didn’t change; it never wanted to antagonise mighty America. By then, it was the US that had changed, because it faced new challenges with the Soviet Union and especially the Vietnam war.

Today, the US is reverting to its old hostile posture. Again, it is because circumstances and challenges, both domestic and foreign, have changed for America. China’s real threat? Its all-too-successful capitalism, not communism.

China’s posture to the US has remained the same. Xi Jinping is no more inclined to take on the US than Mao. When Foreign Minister Wang Yi said this month that China had “no intention of becoming another United States,” he meant exactly that.

But the anger and resentment of American leaders stem from the potential threat of China beating them at their own game – in hi-tech, in social media, in capitalist enterprises. That’s why the US is bent on killing Huawei and taking over Tik Tok, a social app mostly for American teenagers.

What Washington wants from China – what the West had wanted since the 18th century – is an open and unrestricted market for foreign interests to plunder, not for the Chinese to exploit a liberal global economic order to co-opt Western technologies and extend supply chains worldwide like tentacles.

That is what the US will not tolerate, even if it means war.“

It looks like Trump has now scared the Chinese with his threat to start a financial war and to exclude them from the dollar and decouple them, at the risk of a collapse of the world financial and world trade system, to the extent that they are now signaling willingness to talk during the trade negotiations, which in turn let the stock exchanges soar and even give him a political gift of success to prevent the worst. Maybe China still hopes that Biden is elected, but a trade deal with China wold be supportive for an election victory of Trump. Still, my prognosis: If Trump is re-elected, he will be encouraged to escalate the Sino-American conflict further in order to bring China to its knee. in his then remaining 4 years. And also not to forget Iran. Trump has learned from North Korea: If such an economic dwarf can blackmail the entire world with 5 nuclear weapons, how then can the greatest economic and military power blackmail the entire. Forget about soft power.

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