Tariffs Could Set Up a U.S.-China 'Cold War'

Summary

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WSJ Your Money Briefing

Episode: Tariffs Could Set Up a U.S.-China 'Cold War'
Date: September 27, 2018
Host: J.R. Whalen
Guest: Greg Ip, Wall Street Journal Chief Economics Commentator

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Episode Overview

This episode explores the deepening trade conflict between the United States and China, focusing on whether escalating tariffs signal a shift toward a lasting economic “Cold War” between the two superpowers. J.R. Whalen is joined by WSJ’s Greg Ip to discuss the long-term implications of U.S. tariff policy, China’s potential responses, and how businesses are beginning to adapt. The episode provides listeners with expert analysis of what might be a fundamental transformation in global trade and economic relations.

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Key Discussion Points & Insights

1. US Tariffs on Chinese Goods: The Current State

[02:53]

• The US has announced and implemented a series of tariffs on Chinese imports, most recently a 10% tariff on $200 billion worth of goods.
• China has canceled scheduled trade talks in response, signaling a hardening stance rather than a willingness to negotiate.

2. US Demands and China’s Economic Model

[02:53 – 03:36]

• The US demands are “fairly aggressive and fairly sweeping,” targeting China’s fundamental economic practices:
  • Less subsidization for domestic enterprises
  • Fewer restrictions for foreign companies
  • An end to forced technology transfers
  • “It amounts to wholesale demand that China change its economic model.” (Greg Ip, 02:53)
• Greg Ip questions whether these demands are intended for negotiation or simply to force a split between the two economies:
  • “Whether this is really intended to reach a negotiated settlement or simply to lay out demands that China cannot meet and set the stage for the two countries to basically disentangle the relationship that has built up between them over the last 15 years.” (Greg Ip, 03:13)

3. Historical Context and Lack of Precedent

[03:36 – 04:53]

• Unlike the Cold War with the Soviet Union, the US and China are deeply economically intertwined.
• The US/Japan trade conflicts of the 1980s are also an imperfect comparison; Japan was a military ally, whereas China is increasingly viewed as a strategic rival.
• In China, “there is no real distinction between the state and the private sector... when you are dealing with a Chinese company, you’re dealing with the state and vice versa.” (Greg Ip, 04:27)
• Thus, every trade conflict carries geostrategic overtones.

4. China’s Resilience and Alternative Spheres

[04:53 – 06:07]

• China is unlikely to “cave” to US pressure and may have no choice but to shift focus.
• Reports indicate multinationals are considering moving some production out of China, to countries like Vietnam, Cambodia, Taiwan, and Thailand.
• “Over the next 10 or 15 years, notwithstanding the big loss to China of not being able to sell to the United States as much, they could begin to develop almost their own sphere of influence. They trade heavily with their neighbors, they trade heavily with the European Union...” (Greg Ip, 05:28)
• China possesses its own domestic capabilities and “the second largest internal market in the world after the United States.”

5. Challenges of Disentangling Supply Chains

[06:07 – 07:08]

• Moving production out of China is not easy due to infrastructure and entrenched industrial networks.
• “You don't just...say goodbye to all that and you do not find all the assets that you have in China that easily in other countries.” (Greg Ip, 06:25)
• Multinationals might develop two distinct supply chains: one for China, and one for the US, to navigate the emerging divide.
• Example: Companies like Apple may assemble some products in the US to bypass tariffs.
• American tech firms are increasingly required to store data within China—a sign of “segregated operations” becoming the norm.

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Notable Quotes & Memorable Moments

• On the scale of US demands:
  “It amounts to wholesale demand that China change its economic model.”
  —Greg Ip, [02:57]

• On the intent behind US policy:
  “Whether this is really intended to reach a negotiated settlement or simply to lay out demands that China cannot meet and set the stage for the two countries to basically disentangle…”
  —Greg Ip, [03:13]

• On US-China dynamics:
  “In China, you don’t really have the difference between the state and the private sector that you do in other countries. And so there’s this sense that...you are dealing with a single entity and, and that entity is not friendly to US interests.”
  —Greg Ip, [04:27]

• On China’s potential to adapt:
  “They have a lot of domestic endogenous capability. They didn’t just get where they are by stealing other people’s ideas. They have a lot of talent and engineering and scientific resources of their own...”
  —Greg Ip, [05:41]

• On the challenge facing multinationals:
  “You don't just...say goodbye to all that and you do not find all the assets that you have in China that easily in other countries.”
  —Greg Ip, [06:25]

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Important Segment Timestamps

• US tariffs and China’s reaction: [02:53]
• Scope of US demands: [02:53 – 03:36]
• Historical precedents and unique current risk: [03:36 – 04:53]
• China’s economic alternatives and capacity: [04:53 – 06:07]
• The unwinding challenge for global business: [06:07 – 07:08]

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Summary

The episode discusses whether recent US tariffs on China mark the start of a new, prolonged era of economic rivalry—akin to a “Cold War”—with global repercussions. Greg Ip highlights that the US demands are not just tactical, but strategic, seeking to fundamentally alter China’s economic system. There is no clear historical precedent, as prior strategic rivalries lacked economic interdependency, and past trade disputes involved allied nations. China is likely to respond by strengthening regional and internal economic ties. Multinational corporations may be forced to operate dual supply chains and segregated operations to navigate political and economic divisions. “You don't just...say goodbye to all that,” says Greg Ip, illustrating the deep and difficult adjustments ahead. The landscape of global commerce is on the verge of a significant transformation.

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Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. The series of tariffs the US has placed on Chinese goods could do a lot more permanent damage to relations between the two countries. We'll dive into the details on that in a moment. First, these money and market stories you should know. On Wednesday, the Federal Reserve announced plans to raise interest rates, the eighth such increase since 2015, but consumers have yet to feel real impacts. And while US Consumer borrowing costs have drifted higher in recent months ahead of the Fed's decision, those increases have generally been modest. Freddie Mac says the rate on a 30 year fixed rate mortgage averaged 4.65% last week. That's up from 4.54% on June 7th. And it's now at the highest level since 2011. And average rates on credit cards, auto loans and home equity lines of credit and have all risen since June 13, when the Central bank announced a quarter percentage point increase in its benchmark rate and at the time penciled in two more such moves this year. And sales of new homes in the US Rebounded in August following two months of declines. Purchases of newly built single family homes, that's a relatively narrow slice of all U.S. home sales rose 3.5% to a seasonally adjusted annual rate of 629,000 in August. The south was the only region in the US to see new home sales decline in August. In the longer term, sales grew 12.7% in August from the prior year. Still, the pace of new home sales remains well below the elevated level seen before the 2007-2009 financial crisis and recession. China canceled trade talks planned for this week as the Trump administration imposed new 10% tariff on $200 billion of Chinese exports. And while many keep an eye on Wall Street's response to trade tensions with China, Wall Street Journal chief economics commentator Greg Ips says the brewing trade conflict could inflict long term damage between the two countries, and he joins us from our Washington bureau to discuss. So Greg, the US has imposed a series of tariffs on Chinese goods, but as you point out in your column, China so far indicates it has no plans to cave to US Demands.

[Greg Ip]

Well, that's right. I think that the US Actions are fairly aggressive and its demands are also fairly sweeping. They want big changes to the way China runs its economy, less subsidization of domestic enterprises, fewer restrictions on what foreign companies can do, no pressure to transfer technology, et cetera, et cetera, et cetera. It amounts to wholesale demand that China change its economic model. And it's worth asking, and I think many are asking this, whether this is really intended to reach a negotiated settlement or simply to lay out demands that China cannot meet in and set the stage for the two countries to basically disentangle the relationship that has built up between them over the last 15 years.

[J.R. Whalen]

And there really is no blueprint to refer to that would indicate how this might play out.

[Greg Ip]

Well, that's right. I mean, look to the two most relevant precedents. The Cold War with the Soviet Union was strictly a strategic rivalry. There wasn't really much in the way of economic ties between the United States and the Soviet Union. So you didn't have this strategic stuff spilling over to the trade sphere and vice versa. Back in the 80s when there were all these conflicts between the US and Japan over trade that never really had any security implications because the US And Japan were military allies. Today you have, in addition to the well known complaints about Chinese technology transfer and intellectual property theft hurting the US Economically, there is above that a level of concern that these practices are making China a more formidable adversary in military and geostrategic matters. And in China, you don't really have the difference between the state and the private sector that you do in other countries. And so there's this sense that when you are dealing with a Chinese company, you're dealing with the state and vice versa. Therefore, when the US has these conflicts with Chinese companies and the Chinese state, it's really with a single entity and, and that entity is not friendly to US Interests.

[J.R. Whalen]

And China does quite a bit of business already with regions like the European Union and the rest of Asia in addition to the U.S. is it realistic that they could actually shake off a significant reduction of trade with the U.S.

[Greg Ip]

well, I think they may not have much choice. And I think that's what China and many companies and countries in the region are beginning to look at. You have anecdotal reports of multinationals looking at moving some production and some assembly out of China into neighboring countries, places like Vietnam and Cambodia, for example. You have Taiwan and Thailand sort of like laying out the welcome mat for companies that want to set up there instead of in China. But it is entirely possible that over the next 10 or 15 years, notwithstanding the big loss to China of not being able to sell to the United States as much, they could begin to develop almost their own sphere of influence. They trade heavily with their neighbors, they trade heavily with the European Union. They, they have a lot of domestic endogenous capability. They didn't just get where they are by stealing other people's ideas. They have a lot of talent and engineering and scientific resources of their own. And plus they have the second largest internal market in the world after the United States. Companies and countries that want to sell to that market will have to have a relationship with China.

[J.R. Whalen]

And for companies that do business with China, it might seem like a no brainer to take their business elsewhere. And you mentioned some of the countries that could be on the short list if tariff tariffs are driving up prices. But it's really not that easy to unwind all that. And plus China has a very good infrastructure that makes production of goods pretty efficient.

[Greg Ip]

Exactly. You don't just sort of like say goodbye to all that and you do not find all the assets that you have in China that easily in other countries. So I think one thing that might happen is that multinationals may end up basically having two supply chains, one to serve the US Market, one to serve the China market. You might see for example, some companies like Apple deciding they have to assemble some phones in the United States to escape American tariffs. We already have have companies transferring some technology, some in cloud computing, for example. A lot of American companies are now required to store their data in China to adhere to Chinese laws. Increasingly you might actually have companies establishing these segregated operations to serve those two spheres of interest.

[J.R. Whalen]

All right, that is Wall Street Journal chief economics commentator Greg IP joining us from our Washington bureau. Greg, thanks for your comments.

[Greg Ip]

Always a pleasure.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York at the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Consumer Advocate]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.