Financial

Most observers of the U.S.-China trade war believe that the root cause was that China’s unfair trade practices ran into conflict with protectionism advocated by U.S. President Donald Trump. However, such interpretation misses a key development trend. Namely, America’s engagement strategy toward China over the past decades has come to an end.

As the largest trade war in post-WWII economic history has officially launched, and President Trump is determined to escalate it, some American economists have now subscribed to the old myth pushed by Gordon Chang of an imminent Chinese economic meltdown.

China and the U.S. have fallen into a more “competitive stage”. Economically, China and the U.S. enjoy close economic relations, so a large-scale trade war seriously hurts each other's economy. And trade war can directly or indirectly affect the global value chain and global trade flows. Imposing tariffs on each other not only increases the bilateral trade costs in the short-term, but may also affect multinational enterprises' future production decisions and arrangements in the long-term, thus causing the restructuring of the global value chain.

Most commentators have not noticed the core obstacle to a new U.S.-China trade agreement: Xi insists on a solution that reinforces international law, while, ironically, Trump rejects the law-based multilateral world order that the U.S. had championed for more than a century in favor of a results-based, transactional view of agreements. This is a return to the “power politics” of might makes right.