A Trade War Of Unintended Consequences

The growing animosity between the U.S. and China is resulting in a world that will benefit neither.

- Peter Coy

It’s tempting to laugh off the U.S.-China trade dispute as a soap opera featuring men with big hair and bigger egos. Presidents Donald Trump of the U.S. and Xi Jinping of China once professed close friendship; now both feel jilted. The two countries are said to be “consciously uncoupling,” like Gwyneth Paltrow and Chris Martin. Xi’s just not that into Donald, you know?

Except the consequences of this uncoupling—or decoupling or disengagement or whatever it’s called—are deadly serious. The world’s two largest economies, still heavily interdependent, are systematically chopping away at the ties that bind them. There is less trade, less investment, fewer students crossing borders to study, and fewer contacts between militaries.

The only question now is how much more contentious the relationship is likely to get. In a worst-case scenario, the U.S. and China split the world economy in two, each tugging a group of trading partners into its own orbit. That would be reminiscent of the 1494 Treaty of Tordesillas, in which Spain and Portugal agreed to split the New World, or like the Iron Curtain that divided Europe between the West and the Soviet bloc after World War II.

A deepening division between the U.S. and China would further disrupt trade, investment, and movement of people, which together are a source of innovation and prosperity. “The result of forcing Europe and the rest of the world to choose between the United States and China cannot yet be discerned, but it will be costly for all involved,” Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, wrote in a policy brief this month.