U.S.-China Great-Power Rivalry: From Trade War to New Cold War

Abstract

This chapter establishes a connection between China’s mishandling of North Korea’s denuclearization and the outbreak of the trade war with the U.S. Despite their interdependent relationship characterized by asymmetrical dependence, China found itself in a de facto submissive position during the trade war. However, China’s perception of American power as being in irreversible decline proved to be a significant misjudgment. This overconfidence, amplified by China’s early success in managing Covid-19, intersected with America’s realist impulse of intolerance toward China as a peer rival. These dynamics fueled the escalation of the trade war into a new Cold War, with high-tech supremacy at its core.

Under Obama’s two-term tenure, U.S.-China decoupling began to take shape with the signing of the Trans-Pacific Partnership (TPP) in February 2016. Obama could have taken a tougher stance on trade disputes with China, if not for the need to seek help from China and the EU to address the 2007–2009 economic crisis at home.¹ The U.S.-China trade war did not take place, largely due to significant concessions made by the “rising” China to the “declining” United States on market access. China committed to further trade, investment, and financial liberalization during the eight-round Strategic and Economic Dialogues (S&ED) from 2009 to 2016.

The “Fu Bo Plan” and the Lost Chance of Sino-U.S. Rapprochement

After Trump took office in January 2017, he immediately ordered America’s withdrawal from the TPP and adopted a tough stance toward China by terminating the S&ED. Nevertheless, he believed in his ability to persuade North Korea to abandon its nuclear program and saw Beijing’s assistance as crucial in bringing the Democratic People’s Republic of Korea (DPRK) to the negotiating table. Consequently, he linked China’s cooperation in denuclearizing North Korea with trade disputes, using both threats and incentives.²

Given the importance of DPRK’s denuclearization in Trump’s foreign policy agenda, it is likely that a trade war, which Trump effectively initiated in March 2018 (though he avoided using the term), could have been avoided if China had collaborated in the manner Trump desired. The urgency for North Korea’s denuclearization stemmed from the regime’s history of conducting five nuclear tests before Trump took office. Furthermore, there were indications that North Korea was rapidly advancing its nuclear weaponization capabilities, including the miniaturization of nuclear warheads in March 2016 to fit on ballistic missiles. This posed an existential threat not only to U.S. allies but also to Guam and even the American mainland in the near future. These developments suggested that Obama’s approach of “strategic patience” had failed.

In the immediate aftermath of the positive summit at Mar-a-Lago in early April 2017, Trump became more specific in linking U.S.-China trade policies with cooperation on North Korea. To secure Xi Jinping’s support for denuclearizing North Korea, Trump was willing to refrain from engaging in a trade war with China and even avoided labeling China as a “currency manipulator.” This approach aimed to ensure China’s economic stability that Xi naturally desired before the opening of the Nineteenth National Party Congress, creating the potential for a grand bargain.³

Prior to the summit, China appeared to be convinced by the likely U.S. remonstration about a nuclearizing North Korea, which could also threaten China’s national security. This might explain why the PLA’s chief of general staff, General Fang Fenghui, was present in Xi’s delegation during the summit. In the past, the PRC had taken a passive approach toward North Korea’s nuclearization, viewing a permanently divided Korean peninsula as serving China’s geopolitical interests. Resentful of its neighboring “celestial empire,” the North Korean regime had frequently managed to outwit China since the Jiang Zemin era, maximizing its economic and strategic interests at China’s expense without even a slight likelihood of being controlled by China. Thus, it becomes evident that China’s influence over a near-impenetrable North Korea has been greatly overexaggerated.

Beyond the options of advocating direct dialogue between the United States and North Korea or relying on the ineffective “Six-Party Talks,” which North Korea had exploited to advance its nuclear program, China found itself without a Plan B to prepare for the possibility of a sudden collapse of the North Korean state. Such a collapse could result from either regime implosion or a DPRK-provoked American-led invasion. In such a scenario, reunification by South Korea with American support and ongoing alliance would be likely, a prospect China would view as a significant geopolitical setback.

Additionally, China shared the concerns voiced by many Western strategists regarding the consequences of a potential influx of tens of thousands of refugees into its northeastern provinces if North Korea were to collapse suddenly. Consequently, unlike the United States, Chinese ruling elites did not possess an alternative strategic vision that involved active intervention for the purpose of denuclearizing North Korea through a bold scenario of armed regime change.

From a counterfactual perspective, akin to the situation in 1994 when Bill Clinton seriously contemplated a military strike on North Korea’s nuclear facilities, which at the time had fewer strategic and ecological consequences, there existed a feasible and desirable option for a Chinese military solution. This could have occurred either with or without endorsement from the United States, and it was viable until the last window of opportunity faded away. This window was open before North Korea conducted its fourth nuclear test in January 2016, which detonated the equivalent of 17,000 tons of TNT, just two months before the miniaturization of nuclear warheads.

It is worth noting that certain extra-system elites had such a strategic vision as early as mid-2013, possibly even dating back to 2006 immediately after North Korea’s first nuclear test. One scholar of international relations, Fu Bo, proposed an innovative plan that combined military and diplomatic solutions. In his proposal, Fu Bo advocated the implementation of more stringent economic sanctions against North Korea, with the aim of compelling the nation to completely renounce its nuclear program. In exchange, China would provide significant support for DPRK to facilitate economic reform and extend military protection, including the provision of a nuclear umbrella to shield against external threats. Non-compliance with these terms would result in the total cessation of Chinese aid and an elevated risk of a regime collapse.

The “Fu Bo Plan” did not anticipate North Korea’s willingness to capitulate. Instead, it accounted for the possibility of North Korea’s sustained recalcitrance, which could potentially result in either regime implosion or the North Korean regime provoking a new Korean War. In both scenarios, the involvement of both the United States and China would be justified. Contrary to conventional wisdom, which suggests that China might intervene to support a recalcitrant and dangerous Stalinist regime, China’s intervention would, in fact, be aimed at facilitating a regime change.

Amid the process of armed denuclearization, a People’s Liberation Army (PLA) intervention into North Korean territory would also serve as a “cordon sanitaire,” preventing the influx of refugees into Chinese territory. In the name of humanitarian intervention, China could provide relief to these refugees, safeguarding Chinese border areas from potential disruptions.

Following China’s active military intervention, Fu Bo suggested a strategy reminiscent of the “Austriaization” of the newly unified Republic of Korea. Under this plan, permanent neutrality would be guaranteed by the great powers involved, akin to the “Austrian State Treaty” concluded in May 1955. Within this grand design, China’s security concerns would find resolution, as the new Republic of Korea would serve as a strategic buffer. This approach would significantly advance China’s strategic interests by weakening the U.S.-led triple alliance, with the new Republic of Korea permanently departing from the alliance.⁴

This proposal gained prominence when it was published in the June 2013 issue of “Leaders” (《领导者》), a high-profile internally circulated policy journal in China, with a status akin to that of Foreign Affairs. Its readership included, among others, senior Party cadres at the vice-minister level. Three months later, a RAND report dated September 19, 2013, authored by Bruce W. Bennett and titled “Preparing for the Possibility of a North Korean Collapse,” expressed concerns about the potential for Chinese military intervention, aligning broadly with Fu Bo’s concept.⁵ The United States had a strong incentive to pursue the denuclearization of North Korea with China’s cooperation rather than opting for the implementation of the “Fu Bo Plan.” The latter outcome would have significantly favored China, granting it a prominent position in Northeast Asia’s geopolitical chessboard while undermining U.S. strategic interests.

On March 11, 2014, a proposal for NPRK’s denuclearization emerged from within China’s political elite. This proposal, known as the “Lantern Plan” (提灯计划), was brought to public attention through Phoenix TV, a media outlet controlled by the CCP based in Hong Kong. It was attributed to Wang Xiang, a strategist within the PLA trusted by Xi Jinping, marking the first instance of a call to prepare for the potential reunification of the Korean Peninsula and China’s strategies to address this prospect.

The “Lantern Plan,” as outlined by Wang Xiang, laid out six preconditions for China’s support of reunification⁶:

• 1. Signing a permanent peace agreement between China and the reunified Korean state.

• 2. Resolution of all land and sea territorial disputes.

• 3. Denuclearization of the Korean Peninsula.

• 4. Withdrawal of foreign troops.

• 5. Assurance of China’s economic interests in the reconstruction of the peninsula.

• 6. Conclusion of a China-U.S. agreement and a China-U.S.-Korea tripartite agreement.

However, this approach remains fundamentally passive, contingent on an unexpected U.S.-ROK co-led process for the sudden reunification of the Korean Peninsula—a scenario that China cannot entirely control. It also hinges on the optimistic assumption that China’s economic and strategic interests on the Peninsula would be willingly respected by South Korea and the United States. Furthermore, the “Lantern Plan” falls short in addressing critical aspects such as how to manage the refugee crisis that could arise and how to define the new statehood of the reunified Republic of Korea.

On September 3, 2017, approximately five months after the U.S.-China summit, North Korea conducted its sixth nuclear test, detonating a hydrogen bomb with a force equivalent to 250,000 tons of TNT, surpassing the destructive power of the bomb dropped on Hiroshima during World War II by 16 times. During his 11-day Asia tour in early November, President Trump expressed urgency at his fourth stop in Beijing, stating: “Time is quickly running out. We must act fast, and hopefully China will act faster and more effectively on this problem than anyone.”⁷ However, Xi’s response appeared tepid, as he continued to advocate resolving the issue through diplomatic talks.

Additionally, Premier Li Keqiang’s statements about China’s growing industrial and technological strength, which seemed to downplay the role of the United States, and China’s suggestion of the United States serving as a supplier of “raw materials, agricultural products, and energy” for China’s industrial production, enraged Trump and his team,⁸ contributing significantly to the deterioration of the bilateral relationship thereafter.

China may have misread the U.S. plea for cooperation and the abnormal “Chimerica,” a phenomenon called “dependency-reversed” (where China, albeit a semi-peripheral state, used foreign currency reserves accumulated from trade surpluses with the United States to be lent back to the United States, facilitating its continuous imports from China) as signs of U.S. weakness, which China could exploit to advance its geopolitical interests. Meanwhile, Kim Jong Un, rationally fearful of a U.S.-China collusion that might sacrifice North Korea, shrewdly discerned a schism between the two great powers. He was eager to exploit this division to mitigate the imminent crisis of a possible U.S. military attack. As a result, secret diplomacy set in, leading to the thawing of relations between the two Communist states in late March 2018, following Kim’s surprise visit to Beijing. Kim’s intensive visits to China in March (25–28), May (7–8), and June (19–20) ostensibly increased North Korea’s bargaining position, leading to the failure of U.S.-DPRK summits on June 12 and the following year, concerning DPRK’s denuclearization.

Prior to his meeting with Kim in late May, Trump had sensed the delicate change in North Korea’s attitude on denuclearization and condemned what he perceived as China’s destructive role. He even called Xi Jinping a “world-class poker player” for prompting Kim’s about-face after his second China visit. Surprisingly, it was Kim who managed to keep his nuclear program intact by driving a wedge between the two great powers, intensifying their mutual distrust and pushing the fragile U.S.-China trade relations to devolve into a trade war. In fact, this trade war had been brewing since March 2018, but was by no means a linear progression and could have been averted through U.S.-China cooperation over North Korea’s denuclearization. However, the intervening changes in trilateral relations between the U.S., China, and North Korea resulted in North Korea emerging as the real “world-class poker player,” positioning the country as the sole victor in this geopolitical game and pushing the U.S. trade war into an inevitability.

Trump’s Trade War: Reverse the “Dependency-Reversed”

Before ascending to the presidency during his 2016 election campaign, Donald Trump, a populist and radical economic nationalist, attributed U.S. trade disputes with China to the latter’s unfair practices, including currency manipulation, intellectual property theft, and limited access for U.S. companies to the Chinese market. He vowed to reduce the U.S. trade deficit by imposing broad punitive tariffs. However, many U.S. economists questioned the effectiveness of a trade war without addressing the fundamental structural issue of “U.S. overspending and China over-saving.” Beyond the trade deficit, the rapid rise of China as the second-largest economy, on track to overtake the United States, and its strides in technological advances became primary concerns for the Republican leader. These concerns fueled his natural realist impulse, as demonstrated in the National Security Strategy (NSS) of 2017, where he aimed to change the course of U.S. policy toward China from engagement to competition.⁹

To gain deeper insights into trade war, a comprehensive timeline should be examined, covering actions and counteractions taken by both sides.

Since March 2018, the Sino-U.S. trade conflict has intensified. On March 6, the United States announced plans to impose additional tariffs on steel and aluminum products from China and other countries. Subsequently, on April 3, the U.S. released a list of 25% tariffs on 1,333 Chinese goods valued at $50 billion, citing findings from the Section 301 investigation. Notably, the list covered numerous high-tech fields that were part of China’s “Made in China 2025” initiative. China swiftly responded by announcing a list of retaliatory measures. They imposed 25% tariffs on 106 product categories originating from the United States, including soybeans, automobiles, and chemicals. In an immediate countermove, the United States announced plans on April 6 for additional tariffs on $100 billion worth of Chinese goods.

Amidst the escalating tensions, U.S. Treasury Secretary Steven Mnuchin showed apparent disregard for rumors that China might retaliate by dumping U.S. Treasury bonds, expressing absolute indifference.¹⁰ In response, China clarified that it had no intention of reducing its holdings of U.S. treasury bonds.¹¹ Despite the threat from PRC’s Ministry of Commerce (MOFCOM) on the same day (April 6) that “China will fight to the end and will not hesitate to pay any price,” the country refrained from making further responses to the United States’ additional tariffs.¹²

Not entirely surprising to the outside world, Xi Jinping delivered a speech at the Boao Forum on April 10, proposing to “significantly relax market access, especially in the finance and auto industry, create a more attractive investment environment, strengthen protection of intellectual property, and actively expand imports.” Xi emphasized that these major market access measures would be implemented as soon as possible, prioritizing a faster rather than slower approach.¹³ The next day, China’s National Development and Reform Commission (NDRC) published an article titled “Promoting Opening up and Expanding Win–Win Cooperation in the New Era,” underlining the need to continue introducing foreign investment and expanding imports.¹⁴ On April 17, NDRC announced that the automobile industry would be fully liberalized within five years, and the shipbuilding and aircraft manufacturing industries would completely remove shareholding restrictions on foreign capital within the year.¹⁵

The official explanation for this near-complete opening of China’s economy is that it has transitioned from “prudent and gradual opening” to “voluntary and proactive opening.” This shift is aimed at allowing all countries in the world to benefit from China’s economic development expressively. This reflects China’s strong determination to promote “reform and opening.”¹⁶ The Chinese government intends to emphasize that its wider market access decisions are a natural result of China’s successful economic development and not a capitulation to pressure from the United States.

In response to Xi’s Boao speech, Trump immediately expressed his appreciation on his personal Twitter.¹⁷ Yet U.S. pressure on China continued unabated. On April 11, the United States warned China not to use the depreciation of the renminbi as a means of retaliation, stating that any such action would be met with a strong response.¹⁸ On April 16, the U.S. Department of Commerce announced severe penalties on ZTE, prohibiting all U.S. companies from selling parts and components to ZTE within the next seven years.¹⁹ Three days later (April 19), the U.S.-China Economic and Security Review Commission (USCC), a body that significantly influences the administration’s China policy, accused ZTE, Huawei, and Lenovo of engaging in industrial espionage in the United States.²⁰ On the same day, U.S. officials confirmed that the administration would soon launch the International Economic Emergency Powers Act (IEEPA) as an extension of the Section 301 investigation. This act would comprehensively restrict China’s investment activities in sensitive fields, such as semiconductors and robotics.²¹ With these developments, the motivation of the United States to launch a trade war with China has become increasingly clear.

Robert Manning maintained that: “This U.S.-China tussle is fundamentally about who dominates the industries of the future. We are on the cusp of a technology revolution more transformational than the rise of the internet in the 1990s, what has been dubbed the 4th industrial revolution. It is the melding of the digital and real economy as AI, robotics, Big Data, 3D printing, new materials, and biotech begin to disrupt the economic and social status quo and become key new drivers of economic growth.”²² Independent analyses suggested that the real objective of the U.S.-waged trade war was to prevent China from achieving global technological leadership. The U.S. Trade Representative’s (USTR) office had explicitly stated that the administration’s strategic aim was to thwart China’s ambition to dominate “key strategic technologies,” as exemplified by its “Made in China 2025” initiative.²³

In confidential discussions between Chinese and U.S. officials, the United States forthrightly requested that China discontinue the “Made in China 2025” Initiative.²⁴ The United States expressed significant concerns regarding China’s state-driven technological advances, perceiving them not only as a potential challenge to its economic security but also as a threat to the global expansion efforts of American companies. Brad Setser, a senior fellow at the Council on Foreign Relations (CFR), emphasized that the success of the “Made in China 2025” plan could lead China to achieve technological independence in cutting-edge fields such as microchips, large aircraft, electric vehicles, and artificial intelligence. This potential scenario raised concerns that the United States might be left exporting bulk commodities and energy, like soybeans, oil, and natural gas, to China.²⁵ White House trade adviser Peter Navarro even went so far as to suggest in his published article that China’s emergence in the high-tech industry might eventually lead to a military conflict between the two great powers.²⁶

In fact, shortly after Trump assumed office, the United States heightened its concern for economic security, elevating it to the status of national security. In December 2017, with the publication of the NSS report, Trump explicitly equated “economic security” with “national security” for the first time.²⁷ This differed from the view of some Chinese officials, such as Long Yongtu, who firmly believed that “the more open the economy is, the more secure the country is.”²⁸ In contrast, a senior counterintelligence official from the Office of the Director of National Intelligence (ODNI) reaffirmed on April 18, 2018: “Our economic security is our national security, and there is no boundary between the two.” From this vantage point, preserving the technological advantages of American companies became a top priority to ensure they would not be “eroded” by their adversaries.²⁹

Under such national consensus, on May 7, the Armed Services Committee of the U.S. House of Representatives announced the draft of the new National Defense Authorization Act (NDAA), which prohibits government agencies from using “dangerous” technology products produced by Huawei or ZTE.³⁰ Earlier, on May 4, Secretary of Defense James N. Mattis sent a letter to members of Congress, urging them to expand the power of the Committee on Foreign Investment (CFIUS) in the bill to strengthen the supervision of foreign investment and prevent China from accessing U.S. sensitive technology. On May 22, the House and Senate overwhelmingly passed an amendment giving CFIUS greater oversight authority to ensure that potential foreign investment does not threaten U.S. national security. The additional provisions of the amendment also specifically limit the relaxation of President Trump’s sanctions on ZTE.³¹

The sudden arrival of the trade war far exceeded China’s expectations, leaving them entirely unprepared for its intensity. Among Chinese elites, there was a pervasive sense of blind optimism that “China-U.S. relations will be neither too good, nor too bad.” They appeared to believe that the United States, despite its bluffing, would not engage in a large-scale or long-lasting trade war. This belief was based on the concept of “Chimerica,” a relationship where dependency was reverse, keeping America at bay. As such, from February to early March 2018, the Chinese government sent special envoys to the United States twice within a month, but they returned empty-handed. On March 27, former Finance Minister Lou Jiwei was still talking about the relationship between China and the United States, resembling that of “destined couples” at a domestic forum, believing that China and the United States were destined to be both rivals and partners.

Indications of China’s readiness to make grave concessions were discernible toward the end of April 2018, when domestic media received dictate from the CCP’s Propaganda Department, banning the discussion of the U.S.-China trade war.³² Meanwhile, caught off guard by the unprecedented assertiveness of the Trump administration, China had no other option but to play the great-power card. Since April, China launched an intensive diplomatic offensive, attempting to prompt the EU and Japan into taking “joint action” against the “bad example” of protectionism that the United States “does not abide by world trade rules” in order to “maintain the global free trade system centered on the WTO and build an open world economy.”³³

However, both EU and Japan, being America’s strategic allies of the United States, firmly stood on the side of the United States. On April 17, the ambassadors of 27 EU countries to China issued a joint letter, strongly criticizing China’s “Belt and Road Initiative.”³⁴

On May 31, trade representatives from the United States, Japan, and the EU met in Paris to address problems caused by “non-market-oriented policies and practices.” Targeting China, although in an unspecified way, the “Joint Statement” issued after the meeting stated that they

concurred on the need to deepen and accelerate discussions regarding possible new rules on industrial subsidies and SOEs … No country should require or pressure technology transfer from foreign companies to domestic companies, including, for example, through the use of joint venture requirements, foreign equity limitations, administrative review and licensing processes, or other means …The Ministers further agreed to deepen cooperation and exchange of information, including with other like-minded partners, to find effective means to address trade-distorting policies of third countries, including harmful forced technology transfer policies and practices, and where appropriate, to pursue dispute settlement proceedings at the WTO.³⁵

On the following day (June 1), the EU filed a complaint against China for the infringement of the intellectual property rights (“unfair technology transfer”) of European companies with the WTO.³⁶

As always, when facing pressures from the United States, China attempted to counteract them by leveraging its relationship with Europe, relying on an overrated EU-U.S. divide. Despite the “Joint Statement” issued by the Triad (the United States, EU, and Japan) on May 31, China seemed unaware and continued with its strategy. In early July, during bilateral talks, China offered to open certain industries specifically to European investors, aiming to gain their support in joint action against the United States within the WTO. However, this proposal was categorically rejected by the EU. The EU firmly stated its objections to aligning with Beijing against Washington and openly told Chinese negotiators that it endorsed “almost all the complaints” the United States had made, despite having some reservations about the way in which the United States was handling these complaints.³⁷

On July 15, European Council President Donald Tusk said in Beijing that it was necessary for the WTO to establish new rules on “compulsory technology transfers and industrial subsidies.”³⁸ Two days later (on July 17), the leaders of the EU and Japan signed the “Economic Partnership Agreement” (EPA) in Tokyo, creating the world’s largest open trade zone. This agreement covers nearly a third of global GDP, almost 40% of world trade, and more than 600 million people.³⁹ On July 25, European Commission President Jean-Claude Juncker, during his visit to the United States, issued a joint statement with Trump, declaring their commitment to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” Juncker also assured Trump that he intended to help him address “the China problem.”⁴⁰

While trying to divide the United States and its European and Japanese allies, China also attempted to directly appease the United States. On May 19, Chinese and U.S. negotiators reached a consensus after “constructive consultations” in the second round of talks: China promised to purchase a large number of American products and services to significantly reduce the U.S. trade deficit with China. The Chinese government explained this move in its domestic propaganda as its intention to “meet the growing consumption demand of the Chinese people and the requirements of high-quality economic development.”

Despite the trade war seemingly calming down, serious differences over a series of structural issues remained.⁴¹ On May 30, the Chinese government announced that starting from July 1, the import duties on daily consumer goods would be drastically lowered to “meet the people’s needs for a better life and enhance the people’s sense of gain and happiness.”⁴² Subsequently, during the third round of bilateral negotiations held on June 2–3, China proposed to purchase nearly $70 billion of U.S. agricultural products, manufactured products, and energy products, on the condition that the United States renounce imposing tariffs on $50 billion worth of Chinese products.⁴³ However, the United States remained unmoved.

On June 15, just three days after the conclusion of the U.S.-DPRK summit in Singapore, Trump issued a presidential statement, announcing a 25% import tariff on $50 billion worth of Chinese goods, including products related to the “Made in China 2025” initiative. The sudden decision to toughen its stance was evidently influenced by the latest developments in Northeast Asia, particularly Trump’s perception of China as a spoiler in the North Korean nuclear issue.⁴⁴

In response, the Chinese government swiftly announced retaliatory measures, stating that it would impose 25% tariffs on 659 U.S. goods with a total value of $50 billion. On June 18, the White House issued another statement, threatening additional 10% tariffs on $400 billion worth of Chinese goods if China retaliates further.⁴⁵ On the same day, the U.S. Senate passed the National Defense Authorization Act for the Fiscal Year 2019, which initially upheld the Department of Commerce’s decision to sanction ZTE. Later, after internal consultations, both houses of Congress accepted the administration’s alternative handling of the “ZTE incident.”⁴⁶

In light of the escalating situation, China made a strategic decision not to announce further countermeasures. Instead, on June 28, both NDRC and MOFCOM released the “Special Management Measures for Foreign Investment Access (Negative List) (2018 Edition)” on their respective websites. These measures represented a radical shift toward liberalization, aiming to “significantly relax market access.” Consequently, items on the Negative List were reduced from 63 to 48,⁴⁷ and 22 areas (Table 6.1) saw the introduction of opening-up measures, including several key sectors.⁴⁸ Notably, these measures allowed foreign investors unprecedented access to China’s manufacturing sector, nearly fully opening it up to them.⁴⁹

Table 6.1 China’s Negative List (2018)

Despite the conciliatory measures taken by China, the United States remained resolute in its decision to initiate a trade war. As planned, at 00:00 on July 6, 2018, the United States imposed tariff sanctions on China, formally marking the commencement of the Sino-U.S. trade war. During the period from July to August, two U.S. economists, including the former chairman of the White House Council of Economic Advisers, Kevin Hassett, openly advocated China’s expulsion from the WTO, without necessitating the United States to withdraw from the organization altogether. Their rationale behind this call was that China was not operating as a market economy and was exploiting loopholes in the WTO, which they deemed to be the fundamental issue.⁵⁰

The United States entering into the trade war not only demystified the so-called “dependency-reversed,” a phenomenon many people in the West and even in China had taken for granted, but also shattered the semblance of China being an economic superpower capable of inflicting symmetrical damage to the United States. China’s substantial weakness in retaliatory capacity highlighted the much greater gap vis-à-vis the United States in hard power, particularly in innovation capabilities. This rendered China’s high-tech sectors powerless to withstand U.S. export controls on key high-tech inputs, the denial of which could stymie China’s technological development, as already demonstrated in the case of ZTE, which almost went bankrupt under U.S. sanctions. Despite the “paper tiger” exposé by the U.S.-waged trade war, among many good-sensed Chinese citizens, continued underestimation of the U.S. resolve and capacity to force China into submission through the trade war led the Chinese regime to cling to the belief that “China has the conditions, ability, and confidence to win this battle of defending free trade.”⁵¹

Disregarding the Trump administration’s unwavering determination not to back down in the trade war, Beijing would soon feel the intense repercussions. President Trump, along with his White House chief strategist Steve Bannon, vowed to cripple Beijing’s delaying tactics and unleash an “unprecedentedly large” and “unbearably painful” trade war on China. Trump’s ultimate goal was not merely to address China’s “unfair trade practices” but also to “reindustrialize America” by frustrating China’s “Made in China 2025” initiative, which aimed to build up the nation’s own supply chain.⁵² This strategic move was a crucial part of the Trump administration’s four-pronged approach to the trade war with China. Firstly, the sheer magnitude of the proposed $500 billion trade war caught Beijing completely off guard. Secondly, the U.S. would employ Section 301 to force Beijing into revising its economic system, which currently required U.S. companies to transfer technology. Thirdly, the United States sought to retain the ability to sever the supply chain with China. And finally, the United States vigilantly monitored China’s capital outflows, especially those of high-ranking corrupt officials. These officials, by transferring their assets to Western democracies and circumventing China’s strict control over private capital flight, revealed their lack of confidence in China’s economy, despite their verbal claims about the nation’s economic success.⁵³

This strategy appeared to be yielding results as the United States engaged in a series of alternating pauses and resumptions of punitive taxation on China. On May 1, 2019, negotiators from both countries concluded the tenth-round trade talks and reached an agreement in which, as Michael Pillsbury recalled later, China agreed to “almost everything.”⁵⁴ The extensive near-150-page document with seven chapters included “binding legal language” that required China to make changes to its domestic laws to ensure verifiable compliance with its commitments. This approach was taken to prevent China from making empty promises, a lesson learned from previous dealings with the country, as stated by U.S. trade representative Robert Lighthizer.⁵⁵

However, two days later, the draft agreement was unexpectedly reversed, reportedly by Chinese President Xi Jinping. A revised text was sent back to Washington, and the United States discovered that China had rescinded its commitments to amend the laws addressing the core issues that had triggered the initiation of the trade war by the United States. These issues included the theft of U.S. intellectual property and trade secrets, forced technology transfer, competition policy, access to financial services, and currency manipulation.⁵⁶ In response to this setback, Trump announced on May 6 through his Twitter account that the tariffs on $200 billion worth of Chinese goods would be increased from 10 to 25%, and the new tariff rate would take effect on May 11.⁵⁷ This escalation further intensified the trade tensions between the two nations.

On May 13, China’s chief negotiator, Vice-Premier Liu He, outlined three core concerns that China believed must be addressed for a successful trade deal. Firstly, China insisted on the complete removal of all additional tariffs. These tariffs were the initial trigger of the ongoing trade dispute between the two countries and would need to be fully revoked for any agreement to be reached. Secondly, China emphasized that the volume of purchases agreed upon during previous negotiations should be realistic and not subject to random changes. Both sides had reached a consensus on purchase volumes during talks in Argentina, and China wanted to maintain that agreement. The third concern raised by China was the need for improved balance in the wording of the text in the trade agreement. China emphasized that each country has its dignity, and the text must be balanced and fair. China sought more discussions on critical issues to achieve this balance.⁵⁸

These points, particularly emphasizing the “balance of text,” indicated China’s willingness to yield to America’s demands but in a face-saving manner. On May 17, the People’s Daily issued a commentary article vehemently denying the U.S. charges of China’s “forced technology transfer” as an “ungrounded accusation.” The rebuttal asserted that technological cooperation between U.S. and Chinese corporations was voluntary and autonomous. U.S. firms willingly came to China, driven by the pursuit of maximizing their interests, and there was no evidence of forced technology transfer.⁵⁹

Surprisingly, the commentary made no mention of the fact that forced technology transfer was recognized as legitimate policy space under the WTO’s TRIMs agreement. China’s silence on this matter can be attributed partly to ignorance of WTO rules and, more importantly, to their commitment to abandon this aspect of economic sovereignty in the bilateral agreement with the United States during China’s WTO accession in November 1999. Revisiting this fact might damage the image of the Party as a defender of China’s national interests. Instead, the commentary chose to underscore China’s recent legislation on foreign investment two months earlier, in March, which explicitly prohibits “forced technology transfer by administrative means.”

On May 29, the People’s Daily published an editorial titled “The U.S. Should Not Underestimate China’s Countermeasures,” employing the diplomatic term “Don’t say you haven’t been forewarned.” In this piece, China issued a warning to the United States, indicating its intention to use rare earths as a weapon to retaliate against what it perceived as unwarranted suppression from the United States. The editorial emphatically stated that the United States had miscalculated its ability to manipulate the global supply chain and cautioned against underestimating China’s resolve to safeguard its developmental interests.⁶⁰ However, this editorial failed to adequately elucidate the elements that constitute China’s “developmental interests” and the precise methods for their “safeguarding.” China’s voluntary and significant market concessions, as exemplified by the Negative List (2018), appeared to signal a renunciation of these interests rather than a genuine effort to safeguard them.

One month later, on June 30, NDRC and MOFCOM jointly released the Negative List (2019 Edition), further reducing the number of restricted items from 48 to 40. This involved loosening or removing restrictions on foreign investment in seven major sectors within China. Foreign investment outside the Negative List would be managed in accordance with the principle of “equal treatment” between domestic and foreign investment and granted national treatment. All regions and departments were prohibited from independently setting access restrictions on foreign investment in fields not on the Negative List.⁶¹

Furthermore, the Negative List on foreign investment in China’s free trade zones was also updated, reducing restrictive items from 45 in 2018 to 37.⁶² These liberalizing measures were not indicative of China’s adherence to the concept of “neomercantilism,” but rather marked a continued departure from it. The radical Free Trade Zone experiment in Shanghai was exactly what the United States had hoped for, which, in Michael Pillsbury’s words, “behave with an open market the way President Trump wants all of China to do.”⁶³ This stood in sharp contrast to the Trump administration’s overt embrace of economic nationalism, ironically echoing a misunderstood image of China.⁶⁴

China took these actions, anticipating that they would divide the Republican and Democrat parties on trade policies toward China. Additionally, China aimed to incentivize U.S. businesses with stakes in China to lobby on its behalf and end the trade war as early as possible. Ironically, despite being depicted as a neomercantilist state, China’s elites were true believers in free trade. They sought to leverage this belief to outmaneuver their American adversaries and mitigate the impacts of a trade war that their economy could hardly afford.

During the initial negotiation days in Washington, China’s chief negotiator, Deputy Premier Liu He, chose to meet with “free traders” on Capitol Hill instead of the Treasury Department or the White House. Steve Bannon viewed these “free traders” as having a “soft gauzy notion” of Adam Smith’s free trade, lacking an understanding of the CCP’s nature as “a gangster organization running a totalitarian mercantilist state.” As a devout economic nationalist, Bannon ridiculed Liu He for being a “cheerleader of globalization and free trade,” believing that such views would please Wall Street corporatists who might act as lobbyists on China’s behalf.⁶⁵

However, Chinese elites failed to recognize that these tactics were losing effectiveness as a bipartisan consensus emerged, positioning China as America’s most significant long-term strategic challenge, solidified by increasing populism in American politics. China’s anticipation of a “friendly White House” during the 2020 campaign year, as Bannon saw it, would prove to be misplaced.⁶⁶ Trump’s distain for pro-Beijing “global corporatists” also made it difficult for the Chinese regime to influence U.S.-China policy.

U.S. China-hand elites were well aware that “China is not the primary cause of the devastation of the rust belt and rural America, increasing economic inequality, social injustice, the federal deficit, the legitimization of anger as the engine of American politics, or America’s declining competitiveness. That’s on us.”⁶⁷ However, placing the blame on China for all these misfortunes would not only assist Trump in winning the election but also justify his trade war with China, framing it as a pretext for establishing a “Fortress America,” with the belief that doing so would make America great again.

In other words, the raison d’être of “Fortress America” lies in the perceived China’s state capitalism that builds up China’s strength at the expense of the United States. Therefore, a “Fortress China,” as an extension of China’s state capitalism, must be dismantled to ensure U.S. absolute national security.

In the realm of U.S.-China experts, whether they aligned with or opposed the trade war and the concept of decoupling from China, few displayed sympathy for the idea of a “Fortress China.” Even prior to the ascent of President Trump, renowned China expert Henry Paulson offered advice to China, advocating the persistence of efforts to open up domestic markets, further privatize SOEs, and enable foreign companies to operate unhindered within China’s borders. Experts like Henry Paulson, who were well-versed in American economic history, recognized the pivotal role played by the American state in “fostering national industrial development. Paulson argued that nurturing the private sector and attracting foreign investments would foster healthy competition, stimulate demand, and ultimately bolster China’s economy.”⁶⁸

As a former Wall Street investment banker, it was only natural for Paulson to prescribe a neoliberal approach. His vision of dismantling a virtually non-existent “Fortress China” strongly resonated with numerous Chinese intellectual elites. Their aversion to economic nationalism led them to align not with the pseudo-nationalist, but practically economically globalist Chinese regime, but with the economically nationalist Republican administration led by Trump.

Ironically, many of these elites became ardent Trump supporters, believing he would emerge as a formidable adversary to Xi Jinping and employ all means to counter him. They chose to disregard Trump’s various anti-democratic statements and amicable gestures toward autocratic leaders in Russia and China. They stubbornly perceived Trump as the “chief coercer” (zong daobishi, 总倒逼师) of much-needed economic reforms in China, guided by neoliberal principles. Consequently, they turned a blind eye to the concept of “Fortress America,” accepting it as a rationale solely because it was a product of American democracy, particularly associated with Trump. This phenomenon mirrors the 1980s’ trend of “idolizing anything foreign” (chongyangmeiwai), with the only difference being that they now idolize anything Trumpian.

They supported Trump’s trade war with China as a just cause. An influential liberal intellectual, Bao Tong, who once served as the top secretary to the deposed General Secretary Zhao Ziyang, articulated this viewpoint: “It must be done in accordance with what the United States proposes! Domineering? Not overbearing. What the United States proposes is what the United States itself has actually achieved. The United States does not employ tariff barriers, high subsidies, exchange rate manipulation, intellectual property theft, or forced technology transfer … The United States simply seeks reciprocity, which implies fairness and mutual benefit.”⁶⁹

It is worth noting that Bao Tong appeared to be unaware of or chose not to address a question posed by one of his tweet’s followers. This question pointed out that America had, in fact, been the “mother of protectionism,” with its industries thriving under protective barriers for nearly a century. Furthermore, the follower referenced Jack Werner’s Foreign Policy article from three months earlier, which explored true American economic history. This article suggested that in the late 18th and early 19th centuries, America had “enthusiastically engaged in smuggling and theft of cutting-edge production techniques from Great Britain.”⁷⁰ Bao Tong remained silent and did not provide a response.

In the end, the Chinese regime found itself sandwiched by an assertive American hegemonic power and a substantial array of elites within and outside the nomenklatura system, pressing it to further compradorize the economy.

China’s isolation was exacerbated by its unsuccessful diplomatic endeavors to obstruct the “trilateral reform proposal” sponsored by the Triad (the United States, the EU, and Japan). This proposal sought to reshape the rules of the WTO in a manner perceived as more “anti-developmental.” It aimed to curtail the already shrinking “policy space” available to member countries. On May 23, 2019, amid the complexities of the U.S.-China trade war, the Triad openly announced their intention to propose more stringent regulations concerning industrial subsidies and state-owned enterprises to other members of the WTO.⁷¹ Although not explicitly naming China, this move was primarily directed at China, which was viewed as the “most successful state capitalist” model for the Global South. The objective was to undermine China’s “Made in China 2025” initiative, in which state subsidies played a pivotal role.

China’s ultimate submission, or yielding, is just a matter of time, facilitated by an ever-decelerating economy, which began in 2014 when the Chinese leadership euphemized it as the “New Normal.” Similar to the pre-Gorbachev Soviet Union, genuine economic data was a top secret of the party state, accessible only to Politburo Standing Committee members. In 2018, another gloomy year unfolded, with nominal GDP growth not matching the official statistics’ claim of 6.5%, but rather hovering around 1.6% or even negative, as revealed by outspoken economist Professor Xiang Songzuo of the Renmin University of China.⁷²

The ongoing trade war with the United States further pressed down the economy, with the official growth rate at 6.1% in 2019. On July 20, the State Council declared 11 financial liberalization measures. In late July, the Chinese leadership’s eagerness to end the trade war as soon as possible was unveiled by another Renmin University Professor in International Relations, Jin Canrong, who is well-informed and closely connected with within-system elites, yet infamous for his ultra-pro-regime position. Jin spoke confidently, predicting that a trade agreement might be struck in November. He stated that the Party Center was prepared to make significant concessions to the United States at the forthcoming APEC meeting to reach a trade agreement. The decision was based on three major considerations (below). According to Jin, Trump, a typical businessperson pursuing real interests, was expected to reach a deal in which he would obtain 80% of what he wanted, which also marked the limit of what China could concede⁷³:

• 1. Worries that an unending trade war will lead to the withdrawal of all medium-to-high-end industrial chains from China, which would be detrimental to China’s future development.

• 2. The importance of ending the trade war as soon as possible to restore domestic confidence.

• 3. The recognition that a general stabilization of Sino-U.S. relations is crucial to China’s economic development.

Yet tensions flared up once more following the resumption of trade talks in late June. On August 5, the United States officially labeled China as a “currency manipulator.” Subsequently, on August 23, President Trump issued a directive to all U.S. companies, instructing them to explore alternatives to China by relocating their manufacturing operations back to the United States.⁷⁴

By mid-September, there appeared to be a “significant success” as Trump, upon Liu He’s request, announced a two-week delay in implementing increased tariffs on China, postponing them from October 1 to October 15. This gesture was made in recognition of China’s celebration of National Day on October 1 and as an acknowledgment of concessions made by China. Trump wisely refrained from highlighting these concessions and maintained a discreet stance regarding other negotiation discussions. Both sides took measures to ensure that no leaks occurred during the negotiations. Michael Pillsbury, Trump’s most trusted China expert, expressed optimism that a deal could be reached in October, especially since a draft of the 150-page agreement was already in place.⁷⁵

On October 29, MOFCOM reiterated China’s commitment to not impose forced technology transfer and announced the removal of all restrictive measures not included in the “Negative List.” Additionally, China pledged to accelerate the opening up of its financial industry by removing business scope restrictions on foreign-funded banks, securities companies, and fund management companies. These measures aimed to ensure stable foreign investment and create a transparent and predictable investment environment. To further demonstrate their commitment to economic liberalization, China released a draft of a new foreign investment law and issued a new rule to streamline the approval process, both of which will take effect next year.⁷⁶

On November 6, Xi Jinping declared 5-point measures to widen China’s market access, signaling the government’s determination to foster a more open and inclusive business environment. On November 14, the Ministry of Agriculture announced the lifting of poultry import restrictions, further aligning with efforts to promote trade and enhance market access.

By December, “anti-American” propaganda was urgently halted on China’s main mouthpieces. The People’s Daily issued an editorial titled “Rationality is the Basis for Maintaining Sino-US Relations,”⁷⁷ emphasizing common interests and signaling China’s aversion to further confrontation with the United States. These developments strongly suggest an imminent grand deal in the making. On December 12, Trump tweeted confidently: “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”.⁷⁸

The following day (December 13), negotiators from both countries reached an agreement on the proposed text. This news shocked many people in China, who had dismissed the possibility of their country accepting a deal containing so many harsh and humiliating terms, considering it a matter of national dignity. News about the contents of the text swiftly circulated back to China, spreading widely on social media. Wu Qiang, an independent political scientist residing in Beijing, observed that during the week before the agreement was reached, the atmosphere in Beijing indicated that the top leadership had entered a state of “collapse.” They appeared shocked and flustered, facing an atmosphere where “great historical compromises” had to be made. Wu Qiang concluded that Beijing had failed to “win” the trade war as they had boasted, only gaining some temporary relief from economic difficulties. Moreover, they had to prepare for a decoupling with the United States in educational, scientific, and military exchanges, and the regime seemed willing to pay any price to avert a trade and economic decoupling.⁷⁹

Wu Qiang’s observation resonated with that of Arthur Waldron, a famous conservative China expert at the University of Pennsylvania. After being briefed by one of Xi Jinping’s close aides on the failing of the Communist system, Waldron believed that China was in the very stage of disintegration, something that might not be immediately visible.⁸⁰

The Phase One Agreement was eventually signed one month later, on January 15, 2020. In the 91-page agreement, almost unilateral concessions made by China found their expression in 151 places where “China shall…” was stipulated. On the other hand, the United States was stipulated “The United States shall…” in only five places, including two places where both “The United States and China shall…” take specific actions. The Agreement, to be “implemented right down to every detail,”⁸¹ weakens the WTO’s dispute settlement mechanism, as disputes under the Agreement would not be submitted to any third party for arbitration, but rather resolved through three-round bilateral talks. If the United States decided to take action, China could not counteract and nor could it sue the United States in the WTO unless China chose to exit from the Agreement.⁸²

The terms sufficed to compel the Chinese regime to adopt a low-key approach to this event, and for the first time, they had to seriously confront the prospect of decoupling after the “relief period.” This situation was even more precarious than the post-Tiananmen period in 1989. This “unseen change” ran counter to the optimistic assertions made twice by Xi Jinping in the past two years (December 2017 and June 2018) that “China is currently in the best period of development since modern times, and the world is undergoing profound changes unseen in a century.”⁸³ Xi had envisioned the coming of a multipolar world with power transitioning from the West to non-West, specifically from the United States to China, which he believed was becoming an “irreversible megatrend.”

In parallel to the conclusion of the Phase One Agreement, the Triad (the United States, the EU, and Japan) reached a consensus on new rules on the previous day (January 14). These rules stated that “unconditionally prohibited subsidies have to be added to the WTO Agreement on Subsidies and Countervailing Measures,” addressing an outstanding issue that had been “left out of the Phase One Agreement.”⁸⁴ The Triad, seemingly using China as the reference point, also discussed possible core rules to prevent forced technology transfer practices of third countries and emphasized the necessity of “burden-shifting should be reversed.”⁸⁵ These new rule-makings indicated an illusory deglobalization. Instead, a more radical neoliberal hyperglobalization was underway, primarily due to China’s willingness or unwillingness to compromise its critical “developmental interests,” which were repeatedly enunciated by the CCP regime and called for respect from the United States.

It is ironic that, in undermining not only its own developmental interests but also those of the entire developing world, China found itself unable to reverse the “irreversible megatrend” where it was being treated as a “developed country,” no longer eligible for the myriad trade privileges accorded only to developing nations. On February 10, the USTR updated its list of developing and least-developed countries under U.S. Countervailing Duties (CVD) law, removing China from the list.⁸⁶

The Phase One Agreement received criticism from the EU, which deemed it as giving U.S. firms an advantage in forcing China to buy more from the United States. This, in turn, had an impact on the competitiveness and jobs of EU countries. EU Trade Commissioner Phil Hogan went so far as to call the trade pact a “managed-trade outcome,” and he believed that the deal could violate WTO rules, justifying the prospective EU’s legal challenge.⁸⁷ Nevertheless, the discord with the United States prompted the EU, much like what had happened in 2000, to reach a similar accord with China known as the Comprehensive Agreement on Investment (CAI) by the end of 2020.⁸⁸

The Trump administration went ahead with its unilateral approach, ignoring even wider skepticism from global institutions, in which the United States has enduringly wielded immense rule-making power. In September, the WTO issued a panel report indicating that the U.S. unilateral actions to “combat China’s widespread and damaging theft of American technology and intellectual property” were “inconsistent with WTO rules.” The USTR rejected this report, arguing that it failed to stop China’s misbehavior and highlighting the necessity for the organization’s reform.⁸⁹

The Coming of the New Cold War: A Foregone Conclusion?

U.S.-China relations did not improve despite the signing of the trade pact, but instead continued to worsen, especially after the United States removed China from the list of developing countries. The outbreak of the COVID-19 pandemic since late November 2019 and its rapid global spread led to a flurry of accusations exchanged between the United States and China regarding the origin of the deadly virus. China was also accused of intentionally concealing information about the pandemic and providing misinformation about the transmissibility of the virus, which even misled the World Health Organization, resulting in the United States withdrawing from the organization in early July. Furthermore, China’s control over the production of medical goods raised concerns among developed countries about the need to recreate supply chains domestically for national security reasons.

A reconfiguration of the global supply chain unnerved the Chinese regime as COVID-19 was set to plunge the global economy into the worst recession since World War II, accompanied by a sharp contraction of merchandise trade. China’s GDP declined by 6.8% in the first quarter of 2000, the largest drop since 1978, leading to a surge in unemployment. According to a survey by Peking University, the jobless rate in the first half of the year rose to 15% (with an additional 5% being semi-unemployed), implying that around 100 million people in China’s 700-million-strong workforce were jobless.⁹⁰ In response, Premier Li Keqiang called for greater economic opening to “stabilize foreign trade and investment.”⁹¹ On June 23, NDRC and MOFCOM once again simultaneously issued the Negative List (2020 version), in which restricted items were reduced from 40 to 33; the Negative List for Free Trade Zones decreased from 37 to 30, respectively.⁹²

The emergence of an undiplomatic “wolf warrior diplomacy,” despite intermittent friendly gestures,⁹³ offset their endeavors. Since March, aggressive diplomacy was employed as a mobilizing tool to boost people’s sense of national pride and the prestige of the CCP, portraying China as a strong power no longer afraid of foreign bullying. This ultra-nationalist approach involved placing blame on “vicious” Western powers through ungrounded accusations and uncivilized language. It served the purpose of diverting attention from the regime’s dereliction of duty, including that of Xi Jinping himself. Unfortunately, this approach backfired fatally, bringing America and its allies closer together and representing a grave foreign policy blunder that the rapidly rising China should have avoided.

In July 2020, both Japan and the United States accused China of seeking territorial expansion in the East and South China Seas. The United States, for the first time, took a position, dismissing China’s claims over the South China Sea as “completely unlawful.”⁹⁴ The EU had developed a tougher approach toward China in 2019, marking a turning point in EU-China relations. For the first time, it rated China as a “systemic rival” in its “strategic reflection paper” in late March and finalized its investment screening mechanism in April to scrutinize investments from China in the EU’s critical assets. Furthermore, the EU, along with key Member States Germany and France, decided in December 2019 to retool a Europe-wide industrial policy to protect its technological independence.⁹⁵ The EU’s position toward China stiffened even further in 2020. Notably, it was the EU, rather than the United States, which first raised the idea in December 2020 of creating a transatlantic body coordinating U.S.-EU policies on export control and investment screening to forge a technological alliance against China’s rise. This changing geopolitical landscape posed challenges for China as the EU, despite its distaste for Trump’s cowboy diplomacy, viewed reduced cooperation with the United States as detrimental to its “strategic sovereignty agenda,” while relieving the U.S. burden would contribute to the joint defense of the multilateral rules-based international order.⁹⁶

Fearing an all-out decoupling, an approach that some CCP-trusted extra-system advisers suggested could be mitigated by China’s pursuit of unilateral unrestricted market access, even in the event of a Western blockade⁹⁷ (an ultra-anti-nationalist view that was strongly criticized by a famous Chinese liberal intellectual, who called this adviser a “traitor”),⁹⁸ the Chinese leadership, facing mounting international hostility partly due to its “wolf warrior diplomacy,” had to prepare for the worst-case scenario. The catalyst for this preparation may have been an event on June 15 when China lost a “landmark dispute” with the EU regarding the enforcement of the EU’s recognition of China’s market-economy status, which had allowed certain benefits to lapse.⁹⁹

This development followed a CCP decision on May 14, 2020 to adopt a new strategy called “internal circulation.” This strategy aimed to reduce China’s dependence on foreign trade and shift that dependence toward the domestic market. However, amid widespread suspicion about China’s new direction, Xi Jinping clarified two months later, on July 21, that “internal circulation” was not intended to shut the door to the world.¹⁰⁰ This clarification was ostensibly made in recognition that China could ill afford such isolation, especially in technological terms.

Yet the worst moment came when U.S. Secretary of State Mike Pompeo delivered a pivotal speech on July 23, 2020 titled “Communist China and the Free World’s Future” at the Richard Nixon Library.¹⁰¹ Drawing historical parallels, this address can be likened to Winston Churchill’s iconic Iron Curtain speech in 1946. During this momentous event, Pompeo, as succinctly summarized by Fred Kaplan, “calls for ending engagement with China, rolling back its fledgling empire, and rallying the Chinese people to overthrow their regime.”¹⁰²

Despite being perceived as a “cry for war” by many critics,¹⁰³ the ideological impact of this speech, unprecedentedly delivered by a U.S. top official, significantly exacerbated the great-power rivalry between the United States and China, thrusting the world into a new era that was reminiscent of a Cold War. It is worth noting that until Trump’s final months in office, U.S. “new containment” (directed not only against China but also Russia and Iran)¹⁰⁴ had little or nothing to do with whether China made itself more democratic.¹⁰⁵ It was the PRC’s gross and unrestrained mismanagement of foreign policy, notably exemplified by the infamous “wolf warrior diplomacy” under Xi Jinping and the Communist regime’s radical totalitarian turn that justified America’s ideological crusade from July 2020.¹⁰⁶

While debates continue regarding whether it is appropriate to conceptualize the ongoing U.S.-China rivalry as a new Cold War, it is evident that this competition has indeed evolved into a genuine new Cold War, often referred to as Cold War II, particularly concerning the two dimensions of ideology and geopolitics.¹⁰⁷ As Niall Ferguson suggested, this emerging reality “is both inevitable and desirable,” given China’s assertive foreign policy and domestic repression, alongside the “genuine bipartisan consensus” in the United States for a hawkish policy shift toward China.¹⁰⁸ Pompeo’s “distrust and verify” approach toward the increasingly autocratic China, in contrast to Ronald Reagan’s “trust but verify” approach toward the democratizing Soviet Union, further vindicated the irreversibility of the new Cold War.

Trump’s vagaries may raise doubts about the consistency of U.S.-China policy. However, a bipartisan consensus on adopting a tough stance on China, combined with the competition from Democrat candidate Joe Biden, who displayed no less hawkishness, left little room for Trump to deviate from the objectives stated in his “enlightened realism,” as espoused in the NSS of 2017. This strategy demonstrated the administration’s determination to “push back against the revisionist powers of China and Russia.”

Reportedly, Henry Kissinger proposed a “reverse Nixon strategy” both during and after Trump’s election, aiming to engage Putin’s Russia to “contain a rising China.”¹⁰⁹ This idea was echoed by the renowned Cold War historian Odd Arne Westad, who made a similar policy recommendation in Foreign Affairs (September/October 2019). He suggested accommodating Russia over the Ukraine issue to focus on China. Nevertheless, he opposed the concept of decoupling and advocated managing the rivalry with China “within the context of continued economic interdependence,” given his recognition that “Overall, China is more of a match for the United States than the Soviet Union was when Kennan wrote down his thoughts.”¹¹⁰

For many in the West, the rationale for a new Cold War is derived from their realist belief that a risen China has fundamentally challenged the U.S.-dominated hegemonic order. John Mearsheimer viewed past engagement with China as “the worst strategic blunder,” actively fostering the rise of a peer competitor. In line with Westad’s belief that today’s China is likely to be a more powerful competitor than the Soviet Union was in its prime, a Cold War with China has become inevitable, and “it is now too late to do much about it.”¹¹¹

However, some scholars, like Beckley and Brands, who subscribe to the power-transition theory, hold different views on China’s actual strength. They argue that the dynamic for U.S.-China great-power rivalry comes not from power parity between China and the United States, but from a declining Chinese power. Similar to the pre-World War I German Reich, whose relative decline was highlighted by the Triple Entente, China is inevitably dissatisfied with the status quo and is poised to venture into a war with the United States to overcome its strategic disadvantages. As a result, the United States must “prepare for a major war” in advance.¹¹² Like Mearsheimer’s offensive realism, the power-transition theory assumes that an even distribution of power tends to increase the likelihood of war. The best strategy for the established power is to act preemptively before the revisionist power becomes intractable. Thus, the new Cold War dynamic is shaped not necessarily by a true belief on the part of the United States that China has risen, but more likely by the need of U.S. policymakers to inflate such a “belief” to facilitate U.S. pre-emptions.

The value of pre-emption was equally well understood by practitioner elites, whose assessments of Chinese power were highly accurate. Henry Paulson, a former official in the Obama administration, had cautioned against overestimating China’s power and advocated continued engagement before Trump’s inauguration. Although he did not perceive China as “an unstoppable powerhouse,” he emphasized the importance of bolstering U.S. hard power and enhancing deterrence against China.¹¹³ Despite the concern over the “China threat,” Secretary of State Pompeo astutely recognized a significant distinction between China and the former Soviet Union. In his “New Cold War” address, he noted that “unlike the Soviet Union, China is deeply integrated into the global economy. However, Beijing is more dependent on us than we are on them.”

Former White House chief strategist Steve Bannon held a rather negative view on the so-called “China’s rise” thesis. In an interview conducted in August 2018, he contended that China’s seemingly impressive economy was built on shaky foundations that harmed the interests of the people and lacked institutional stability and sustainability. He drew a comparison to the Cold War era, when the West had long believed that the planned economy led by the Soviet Union was on the rise while the free economy in the West was in decline. This misconception led to a series of peaceful co-existence policies promoted by Kissinger, based on peaceful negotiations. However, President Reagan’s intelligence agencies later found that the real economic strength of the Soviet Union was only half of what was shown in the data and that it was economically vulnerable. As a result, Reagan pursued a strategy of a massive arms race, which eventually led to the Soviet Union’s collapse.

Bannon saw parallels between the “rise of China” in 2018 and the Soviet Union’s past situation. He pointed to the nervousness of the Xi Jinping government during the U.S.-China trade war, which he believed reflected serious problems within the Chinese economy. Overcapacity and heavy indebtedness had plagued China’s state-owned enterprises, forcing the country to rely on dumping goods in the Western market, thus negatively impacting Western industries and threatening the global economy. In Bannon’s view, a trade war became a necessity for Trump in the interests of safeguarding American interests, and he believed it was winnable.¹¹⁴

With access to precise intelligence-based information regarding China’s actual economic and military capabilities, it is highly likely that policymakers within the U.S. administrations during and beyond the Trump era have adopted a strategy reminiscent of the Truman administration’s approach when drafting NSC 68. This strategy involved the “conjuring up of an exaggeration of the Soviet threat.”¹¹⁵ History may indeed repeat itself. Present-day America may find every incentive to deliberately overstate the China threat, thereby facilitating preemptive strategies and measures. In fact, discussions regarding preparations for a great power war have been a recurring theme in the U.S. strategic community since 2014.¹¹⁶ The undeterred risk-taking exhibited by Chinese adventurism, for whatever reason, might be playing directly into America’s preferred risk-averse option, thereby enhancing the likelihood of “the Next Great War.”

It is worth noting that winning the new Cold War involves adopting an alternative engagement policy. Unlike the strategy of “fencing-in” the Soviet Union during the Cold War, Pompeo’s call to end engagement with China by no means implies “no engagement.” Instead, it signifies a shift from “strategic engagement” to “competitive engagement,” subjecting China to tougher, legally binding constraints within the rules-based liberal international order, forcing China to choose between continued bandwagoning and full isolation.

Lighthizer envisioned the 150-page draft agreement in May 2019, with a view to achieving a near-unrestricted Chinese market access that is “complete, irreversible, and verifiable”—a denuclearization principle previously applied to Iran and North Korea. Trump’s national security adviser, H. R. McMaster, candidly raised the possibility of expelling China from the WTO¹¹⁷ as part of America’s efforts to rein in China’s revisionist impulse. He believed that only by pursuing such an approach, along with a natural economic “decoupling” involving reduced investment in the Chinese market and the withdrawal of manufacturing and other industries from China, would they foster China’s return to the pre-Xi Jinping era of Deng Xiaoping’s “reform and opening.”¹¹⁸

Chinese elites were stunned by the rapid deterioration of Sino-U.S. relations. In early July, a senior retired official from the CCP’s International Liaison Department called for six aspects of preparation to cope with the full escalation of tensions with the United States. These aspects included the following:

• 1. Preparing for the deterioration of Sino-U.S. relations and the overall escalation of the struggle.

• 2. Being ready to deal with shrinking external demand and disruptions of industrial and supply chains.

• 3. Preparing for the normalization of the COVID-19 pandemic and the long-term co-existence of the virus and humans.

• 4. Getting ready to overcome the hegemony of the U.S. dollar and gradually decoupling the RMB from it.

• 5. Preparing for the potential outbreak of a global food crisis.

• 6. Being prepared for the resurgence of international terrorist forces.

These views were, in actuality, reflections of the top leadership.¹¹⁹

Pompeo’s address served as a reminder to the Chinese elites that the new Cold War had become a fait accompli. In response, China extended an olive branch to the Trump administration. On August 7, 2020, Yang Jiechi, former foreign minister and now a Politburo member in charge of foreign affairs, published an article on Xinhuanet, refraining from criticizing Trump and calling for the “unswerving maintenance and stabilization of Sino-U.S. relations.”¹²⁰ Five days later (August 12), Deputy Foreign Minister Le Yucheng expressed his readiness to open dialogue with American counterparts “at any time” on the most difficult and complex issues, stressing that a “radio quiet” must not be allowed between the two countries’ foreign ministries.¹²¹ On August 13, MOFCOM declared that the Phase One Agreement had thus far been “seriously implemented.”

Shortly after, the Chinese regime changed its tone. On August 17 and 23, the People’s Daily and the Economic Daily issued editorials vehemently condemning America’s decoupling attempts, dismissing them as the “unwise choice” of a small number of American politicians. The CCP is clear that notwithstanding the clamor for a “Great War,” mainly among China’s nationalist elites, the real focus of the new Cold War lies in the unfolding ideologically fueled battle over technological leadership.¹²² To put it another way, the new Cold War is quintessentially a unilateral technological decoupling imposed by the United States on a reluctant China, which cannot afford it, given its semi-peripheral “superpower” status. The regime’s deep fear of decoupling could hardly juxtapose China with Stalin’s USSR that responded with reciprocal counteraction, economically, militarily, and ideologically. To gloss over its weakness and previous appeasement gestures, on August 25, Xinhua news agency issued an extra-long article, a three-full-page, over 30,000-word piece published in the People’s Daily, titled “Pompeo’s China-Related Speech Full of Lies: Truth of Facts,” condemning Pompeo by name for his 26-point “anti-China” remarks.¹²³

Still underestimating the bipartisan consensus on a tough China policy in the United States, Chinese bureaucratic elites simultaneously placed high hopes on the Democrats, anticipating, as explained by former Chinese ambassador to Washington, Zhou Wenzhong, on August 22, that the new U.S. administration would not treat China in the same way as the Soviet Union and would trust China’s intentions of not seeking to replace or challenge U.S. supremacy.¹²⁴ In late November, when the dust finally settled in the U.S. election campaign, Former Deputy Foreign Minister Fu Ying strove to define the new Sino-U.S. relationship as one characterized by “cooperative competition.”¹²⁵ This implied, as interpreted by a renowned American historian: “If we can’t have Chimerica back, can we at least have détente?”.¹²⁶

The U.S.-China trade war might have been averted had China taken a more proactive stance in collaborating with the United States in the critical year of 2018 to denuclearize North Korea. In the absence of this trade war, coupled with a more tactful approach that avoided the pitfalls of “undiplomatic diplomacy” (a euphemism for the infamous “wolf warrior diplomacy”),¹²⁷ the onset of the U.S.-China great-power rivalry, which ultimately led to a new Cold War, could have been postponed, if not entirely prevented. This delay would have offered a rare window of opportunity for China to expedite efforts to rebalance its economy and establish itself as an “unstoppable powerhouse.”

However, Xi’s geopolitical miscalculations strained relations with the Trump administration, resulting in a bipartisan consensus within the U.S. establishment to adopt a more assertive approach toward China. Chinese elites, while recognizing the United States’ realist pursuit of raison d’état in curbing China’s rise, believed that increased economic interdependence and even China’s concessions on its developmental interests might dissuade such efforts. They gravely underestimated and were unprepared for the rapid escalation of the trade war into a full-fledged new Cold War, both outcomes tragically undesired and unanticipated by China.

For the United States, the new Cold War is viewed as an imperative, driven by both economic and strategic motivations. This two-pronged strategy encompasses two distinct levels of connotation: “effective pushback from the United States and like-minded nations” to cope with “China’s strong combination of insecurity and ambition”¹²⁸ in high politics terms; and in low politics terms, engagement where possible, given the symbiotic economic relationship between the two powers, and decoupling where necessary. Both aim to “induce China to change in more creative and assertive ways,”¹²⁹ thereby “balancing the rise of Chinese power.”