Markets are underestimating the long-term impact of Trump's fight with China

  • President Trump's foreign policy has shredded the status quo on a range of issues, from global trade and transatlantic relations to Iran and North Korea.
  • But the Trump administration's tough turn on China will have the most lasting global consequence, altering the terms of the epochal contest of our times.
  • Global markets have underestimated the stakes, largely responding to momentary events — Trump tariff tweets and tentative trade truces.
  • They should instead be banking in the generational nature of this drama, and its potential impact on debt, currency, tech and equity markets of all sorts.
Combination of file photos showing U.S. President Donald Trump and Chinese President Xi Jinping.
Mandel Ngan, Nicolas Asfouri | AFP | Getty Images
Combination of file photos showing U.S. President Donald Trump and Chinese President Xi Jinping.

This much is clear as 2018 screeches toward a close:

President Trump's foreign policy has shredded the status quo on a range of issues, from global trade and transatlantic relations to Iran and North Korea.

Yet it is the Trump administration's tough turn on China, captured dramatically by Vice President Mike Pence's landmark speech at the Hudson Institute in October, that will have the most lasting global consequence, altering the terms of the epochal contest of our times.

Global markets have underestimated the stakes, largely responding to momentary events — Trump tariff tweets and tentative trade truces.

They should instead be banking in the generational nature of this drama, and its potential impact on debt, currency, tech and equity markets of all sorts.

And on global peace and prosperity.

It isn't that individual events lack importance. Whether or not President Trump and President Xi can reach a trade deal that will satisfy both sides by their deadline of March 1 will be a signal of whether the two sides can negotiate modi vivendi on tough matters.

However, the recent arrest in Canada of Huawei CFO Meng Wanzhou may be the more important indicator in the accelerating tech arms race.

Meng Wanzhou, chief financial officer of Huawei Technologies Co., leaves her home under the supervision of security in Vancouver, British Columbia, Canada, on Wednesday, Dec. 12, 2018.
Ben Nelms | Bloomberg | Getty Images
Meng Wanzhou, chief financial officer of Huawei Technologies Co., leaves her home under the supervision of security in Vancouver, British Columbia, Canada, on Wednesday, Dec. 12, 2018.

This is a struggle that will play out for years to come, with unpredictable outcomes, across security, trade, investment and cyber domains. The most significant test, however, and one that could determine who takes the global commanding heights, will be over matters such as 5G communication, artificial intelligence and quantum computing.

Think in terms of the first years of the Cold War from 1945, a competition that wasn't determined until four-and-a-half decades later, yet super-charged by the economic and technological capabilities of a far more robust and resourceful rival.

This was already signaled in a memo leaked earlier this year to Axios, written by a National Security Council official that underscored the dangers posed by Huawei's rise to become the world's most significant supplier of next generation mobile communications gear.

"We are losing," the memo read, noting that whoever leads in this race "will have a tremendous advantage toward … commanding the heights of the information domain."

U.S. leaders have come late to the recognition of the stakes and the evolving Chinese ambition to displace Washington as the dominant global player and rule-setter. For all the praise the Trump administration deserves for more clearly calling out and answering China's unfair trade practices, intellectual property theft and underlying intentions, President Trump began his term with an "own goal" for which he's still suffering.

Sacrificing the TPP

By pulling out of the Trans-Pacific Partnership, he sacrificed the best and earliest chance he had galvanize allies around a 12-country trade and investment agreement that could have compelled China to play more by its rules.

Ongoing trade tensions with Europe have been a second blow. If the Cold War taught us anything, it was that such historic moments aren't won without sturdy and purposeful coalitions and alliances.

That is even more true now than it was then.

This new competition with China will be far more challenging than the struggle with the Soviet Union -- and far more meaningful for markets and the global economy – for three reasons.

First, Chinese and the United States economies are far more integrated bilaterally than was ever the case with the Soviet Union, with whom there was only limited economic interaction. U.S.-China trade in goods remains the largest bilateral relationship in the world.

Second, the global economy's crisscrossing trade, financial and investment agreements rest more heavily on these two leading players than any others. So, their disputes and agreements have almost immediate impact on prices and markets elsewhere.

Finally, while the Cold War struggle focused heavily on nuclear weapons, amassed militaries and opposing ideologies, today's emerging confrontation is being played out primarily on economic and technological grounds. It is less likely to be settled militarily, but as with the Cold War the winner can set the terms for the future.

Kevin Michael Rudd, president of the Asia Society Policy Institute and former prime minister of Australia (2007-2010, 2013). 
Valery Sharifulin | TASS | Getty Images
Kevin Michael Rudd, president of the Asia Society Policy Institute and former prime minister of Australia (2007-2010, 2013). 

"We seem to be walking into another war," said former Australian Prime Minster Kevin Rudd in a must-read San Francisco speech on the hundredth anniversary of the end of World War I. "Beginning with a trade war, developing into an investment war, before metastasizing into a new 'technology war' as China and the United States now struggle to secure the commanding heights of the new technologies that will either drive, or destroy, the economies of the 21st Century."

Speaking to a recent, high-level European visitor, President Xi Jinping recounted a history of China falling far behind major countries of the West during three, previous industrial revolutions: water and steam-powered mechanization; electricity-powered mass production; and digital and information powered automated production.

President Xi made clear to this visitor that China wouldn't be left behind again, but instead make it a national purpose to lead a machine-learning, data-driven Fourth Industrial Revolution powered by the fusion and acceleration of all technologies that have come before it, in the visible and virtual space.

China's view of the technological arms race as the central battleground for the future is growing clearer every day, and the Huawei arrest and the storm of controversy around it must be seen in that light. During a recent speech at the National Cybersecurity and Informatization Work Conference, Xi Jinping reiterated the importance of cybersecurity to national security, economic and social stability.

Competition collision course

"Managing the technology dimension of this new strategic competition between China and the United States will be fundamental for the future – not just a single, compelling feature," said Prime Minister Rudd.

For the 40 years of mutual engagement until recently, the U.S. economy was capital rich and China's was labor rich. Their economies were complimentary and both sides could make a lot of money by working together. That economic relationship acted as a ballast for security challenges.

Now two countries are on a course of competition because China needs to go exactly where the United States needs to go for its future economic success and competitiveness. These growing tensions between the world's two most important powers would have grown in any case. However, they have been accelerated by the nature of President Xi and President Trump.

It's easier to imagine a deterioration of Sino-US relations than an improvement as these countries of dramatically different cultural and ideological systems – and increasingly similar ambitions -- compete for the high ground, while lacking the set of negotiated ground rules that came to stabilize the Cold War years.

The Trump administration would do well to strengthen its alliances and economic partnerships for this generational contest.

Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States' most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper's European edition. His latest book – "Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth" – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week's top stories and trends.

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