The U.S. and China—Hot Rivalry or Cold War?

August 14, 2020

AMID RISING TARIFFS AND AN INCREASINGLY FURIOUS RACE for technological supremacy, “economic frictions between the U.S. and China have reached a boiling point,” says Ehiwario Efeyini, Director and Senior Market Strategy Analyst, Chief Investment Office (CIO), Merrill and Bank of America Private Bank.

The coronavirus has only aggravated trade tensions that have been building for years, according to a new report from the CIO, “The Great Rivalry: A New U.S.-China Cold War?”, co-authored by Efeyini and investment strategist Rodrigo Serrano, Chief Investment Office, Merrill and Bank of America Private Bank. As a recent example, U.S. officials on August 6 announced restrictions on two Chinese-owned social media platforms that they believe could potentially be used to gather information on American citizens.¹

Where the rivalry stands right now

The U.S. remains the world’s largest economy and still holds the advantage in several key areas, such as semiconductor chip design, controlling 45% of the global market, compared with China’s 5%.² But China, which a decade ago passed the United States as the world’s top manufacturing country, holds the lead in categories ranging from electric vehicles to the number of biotechnology research papers produced each year.

China’s astonishing rise has lifted more than 800 million people out of poverty and made the country a major player on the world’s economic stage, with investments in development across Eurasia, Africa and the Middle East, according to “The Great Rivalry” report. Yet U.S. officials charge that Chinese companies have benefited unfairly from government subsidies and low-cost loans from state-controlled banks, and that the country has flouted international trade rules and failed to make necessary political changes. “Ideological differences persist on a range of questions from data security to online censorship, domestic surveillance and the status of Hong Kong,” Efeyini says.

Yet, in contrast to the U.S.-Soviet cold war that dominated global geopolitics in the late 20th century, “China and the U.S. today have high levels of interdependence on trade, investments and financial markets,” Efeyini adds. Thus, while the rivalry is likely to intensify over the next decade, with more U.S. companies pulling back from ties with Chinese suppliers in favor of supply chains closer to home, an all-out cold war would involve a complex “decoupling” process that would be costly for both countries.