The Economic Implications Of U.S.-China Tensions

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Summary

Despite previous assertions that South China Sea tensions have not disrupted regional trade, U.S.-China strategic considerations are gradually overshadowing the economic relationship.

Several issues were discussed at last week's S&ED, most notably China's overproduction of steel and aluminum.

South China Sea war would create devastating economic blowback.

U.S.-China strategic considerations are gradually overshadowing the economic relationship, which could potentially lead to mutually-assured destruction.

Despite previous assertions that South China Sea tensions have not disrupted regional trade, U.S.-China strategic considerations are gradually overshadowing the economic relationship. This was driven home on the last day of the aptly-named Strategic and Economic Dialogue (S&ED), when a Chinese fighter jet intercepted yet another U.S. reconnaissance plane.

Globalization vs. national security interests

Several issues were discussed at last week's S&ED, most notably China's overproduction of steel and aluminum. This has resulted in an overcapacity in these two metals on the world market, bringing down global prices. However, several points are worth noting.

First, as China is reorienting its economy towards more domestic consumption, this metal glut is more than likely intended for its own purposes. Related to this, with China's "One Belt, One Road" initiative and, more specifically, the AIIB, this overcapacity is most likely being stockpiled for future infrastructure projects in Central, South, and Southeast Asia.

As such, with the world's largest population and its gradual shift back towards the center of the global economy, the Chinese market increasingly is the world market. Correspondingly, China is going to be increasingly concerned with how actions affect its own economy first and foremost, less so everyone else's. China and the world are gradually becoming one market, in that order.

Some in China are already labeling the U.S.'s corresponding anti-dumping duties on Chinese steel as its latest protectionist measure against Beijing. Beijing argues that the measures reflect the U.S.'s own economic nationalism, not belief in true free trade. Even though the duties were in effect before the S&ED, the language is an expression of strategic mistrust, itself a legacy of the previous week's Shangri-La Dialogue.

Globalization's benefit to China is unmistakable, enabling it to lift more people out of poverty than ever before in history. However, this benefit will in no way make China disregard what it perceives as its core national interests. The pattern is the same with Russia, with which China shares a strong realist bent in its foreign policy approach. This perceived security concern is magnified if the country in question also had a previous history with Western imperialism.

It is for all of these reasons that Beijing insists that it does not oppose commercial freedom of navigation in the South China Sea. International trade is what has enabled China to develop very quickly and become the main economic partner for many states in the region. Any restriction on this trade would not be in its self-interest, nor those of its regional trading partners. Conversely, China does oppose unrestricted military freedom of navigation, advocated by the U.S.

South China Sea war would create devastating economic blowback

Conflict in the South China Sea has, in fact, already taken place. A full-blown war in the region, however, would be devastating not just to itself, but to the entire world economy as well. Even though many would consider war in the region to be unlikely due to globalization, its ultimate influence on a nation-state's behavior is restricted at best, as outlined above.

Even though the primary antagonists in the conflict are China and the U.S., any war would not be localized to just those two economies. China is the predominant trading partner of many southeast Asian states, a fact that made them hesitant to issue a harsher anti-China statement at the recent Sunnylands summit.

With the U.S. unofficially siding with Vietnam and the Philippines in their respective disputes with China, a war would be particularly devastating to their economies as well. Vietnam is a TPP member, whereas the Philippines is not. Conversely, the Philippines is a U.S. treaty ally, whereas Vietnam is not. Pertinently, neither TPP membership nor status as a U.S. ally will help insulate either country, either economically or militarily, from an increase in U.S.-China hostilities.

Powers outside of Southeast Asia would be affected as well. Most notably, this would include Japan, India, and Australia, as the U.S. has been targeting them for recruitment in its "Principled Security Network". The only thing worse than a conflict involving the two largest economies in the world would be one involving Japan, the third largest. The U.S. would also be asking itself which of its partners and allies could it really count on.

Lastly, the rest of the world is still recovering from the effects of the Great Recession. Europe is still struggling with the Eurozone and immigration crises, as well as the rise of right-wing political parties. The U.S. is still gradually recovering itself. Therefore, any conflict which threatens to envelope all of Asia, the world's economic nexus, would be tantamount to mutually-assured destruction.