Double-edged swords in the US-China Cold War

The US and China are in a cold war, not a trade war. And they are fighting with double-edged swords that end up harming both sides.

The US and China are in a cold war, not a trade war. This is something much bigger than tariffs and trade deficits. It is much bigger than Taiwan or semiconductors. And it began long before Trump or Xi. The US and China are locked in a global contest of power that is playing out along every dimension: economic, technological, military, cyber, soft power, global prestige. Both sides are searching for any tool, any weapon, any piece of leverage they can use against the other—short of direct military action.

There is no such thing as escalation dominance. Trump thinks the US will win in a trade war because China sells more to the US than the other way around. A tit-for-tat escalation on tariffs means the US will always be able to tariff more Chinese goods than vice versa. Adam Posen has recently argued it’s actually China that has “escalation dominance” (a RAND concept in nuclear deterrence) because China has other ways of escalating beyond tariffs, including potentially denying Americans access to Chinese-made goods from smartphones to medicines. However, the reality is neither side has escalation dominance because both sides have already gone far beyond trade measures. If you’re looking at the full range of actions beyond trade tools, there’s virtually no limit to how far each side can go.

The US and China both believe they have escalation dominance, which makes the problem worse. US Treasury Secretary Scott Bessent said on CNBC that China had made a “big mistake” in retaliating against Trump’s tariffs because China was “playing with a pair of twos.” China’s Ministry of Commerce has said that China would “fight to the end” (中方必将奉陪到底). While there are already signs that Trump is backing down, the confidence that each side feels—or at least tries to project—only fuels a downward spiral of recklessness and emotion-driven bravado.

Source: Reuters

Double-edged swords

Every weapon in the US-China Cold War is a double-edged sword. Because the US and China are so deeply integrated—both in terms of bilateral ties and as parts of a highly integrated global economic system—any action that one country takes will end up hurting both sides to some degree. The question then becomes: what is the balance of pain? Are you able to inflict more pain on your opponent than you would on yourself? It’s useful to map out the different tools and weapons in terms of the relative costs to each side, as I’ve tried to do in the diagram at the top. Which tools fall into which quadrants?

Both sides are searching for asymmetric weapons where the damage caused to the other side far outweighs the harm to oneself. China believes critical minerals are one such asymmetric weapon (top-left quadrant). The US believes semiconductor export controls are one of its asymmetric weapons (bottom-right quadrant).

There are weapons that would blow up both sides (top-right quadrant). For example, if China cracks down too hard on US companies operating in China, this would have a severe chilling effect on all foreign companies in China. Or, as Trump is now learning, imposing extremely high tariffs on all Chinese goods can have huge costs for US consumers and producers. An act meant to pressure China has backfired spectacularly. CEOs of major US retailers recently warned Trump of possible goods shortages. The US basically placed an embargo on itself.

Source: Atlantic Council

Types of tools and weapons

It’s useful to think about the tools and weapons that China and the US are using in terms of categories of goals:

• Trade tools: Conventional policy tools aimed at shaping trade flows, including tariffs, import licenses, quotas, local content requirements, and other non-tariff trade barriers.

• Competition tools: Policy tools designed to insulate domestic firms from competition and slow down the other side. For example, US-led export controls on semiconductors and semiconductor manufacturing equipment to China are designed to slow down China’s AI progress, among other goals.

• Human rights sanctions: Punitive measures meant to punish the target country for human rights violations. For example, various US bans on solar and textile products due to concerns over the use of forced labor in Xinjiang.

• Defensive national security tools: Defensive measures that are meant to prevent or mitigate potential national security risks, such as the US ban on Huawei telecom equipment or China’s “delete A” (i.e., delete America) campaign to remove US hardware and software from major state-owned enterprises.

• Offensive military degradation tools: Measures aimed at constraining the military capabilities of the other country. For example, China’s export controls on heavy rare earths, which are key inputs for US weapons systems. Or US controls on advanced chips and computing hardware to limit China’s ability to improve its missile systems.

• Pain tools: Tools aimed at causing outright economic or material pain among the population. For example, China reducing purchases of US agricultural goods to cause economic pain for American farmers. Or the US imposing an extra round of retaliatory tariffs meant to increase the economic pain for Chinese producers.

US critical minerals supply risk matrix. Source: US Department of Energy

Blurred lines

The lines between trade, geopolitical competition, and national security are becoming increasingly blurred. The actions taken by both sides in the US-China trade war have already spilled over into areas far beyond trade. For example, the surprise arrest of Meng Wanzhou, the CFO of Huawei and daughter of the company’s founder, over alleged sanctions violations was treated by Trump during his first administration as a bargaining chip in negotiations with China. China’s export controls on critical minerals are a move that extends far beyond trade, targeting key inputs into America’s defense industry and power infrastructure. And of course, lurking in the background is an ongoing cyber war, including China’s successful cyber infiltration of US critical infrastructure and telecom networks.

Different policy goals are increasingly mixed together. For example, the Biden administration effectively shut out future Chinese EV imports through tariffs and a national security ban. These actions mixed together several different goals: leveling the trade playing field, protecting US automakers from Chinese competition, and addressing security issues around espionage and even remote control for “connected vehicles.” Mixing tools and goals together might seem like a way to kill two birds with one stone, but it ends up diluting their effectiveness. While this was a problem in past administrations, that pales in comparison to the blind hammer-throwing of this one.

Timing and sequencing

One curious pattern has emerged in all this. Both sides seem to be preempting the other side’s actions by implementing some of these same actions in advance.

• Nvidia H20 chips: For a while, the US seemed on the verge of banning Nvidia’s H20 chips from China. But before this happened, China’s NDRC released new energy efficiency rules that would have effectively banned Nvidia H20s. (The US has now gone ahead and effectively banned the H20 chip for China.)

• BYD Mexico plant: BYD’s plans for building a new EV plant in Mexico were put on hold after Trump got re-elected. Then suddenly in March, China’s Ministry of Commerce jumped ahead and withheld approval for BYD’s Mexico plant, arguing that BYD’s technology might get “leaked” to the US (which doesn’t make any sense given the many BYD plants popping up all over the world).

• Critical minerals: A few days after China imposed export controls over heavy rare earth elements, Trump signed an order to look into imposing tariffs on critical minerals.

One explanation for this pattern of actions is a battle over symbolic control. Rather than getting hit by a ban by the other side, it looks like you have more control when you jump ahead and implement the ban first yourself. It’s like the classic line: “You can’t fire me—I quit.” The end result is the same but the sense of agency switches.

Another factor is control over timing and sequencing. As each country tries to find chokepoints to use against the other side, they’re also trying to patch up their own vulnerabilities. Each country would prefer to do so at a pace and manner of their own choosing. For China’s semiconductor industry, this means retaining access to some foreign equipment and components while gradually substituting in domestic firms for pieces of the supply chain—when they’re ready. For the US, this means gradually reshoring or friendshoring critical parts of its supply chains to reduce dependence on China.

Both countries are trying to avoid powerful shocks that are unexpected and sudden, like the first Trump administration’s export ban on ZTE, which nearly destroyed the company. Even anticipated disruptions can cause near-term pain when they mess up a country’s timing. For rare earths, it’s true that the US can eventually scale up production from domestic and other non-Chinese sources to a certain extent. But this still takes time, and US supply chains could suffer significantly from shortages in the interim, as a set of US agencies have recently warned.

Fear cycle

Lastly, as the US-China cold war escalates and spills over into new domains, each side’s actions increasingly reinforce the other’s fears. China’s rapidly expanding military capabilities, which it often trumpets loudly, and large-scale cyberattacks on US infrastructure feed right into American fears of a growing Chinese geopolitical threat. A Chinese spy balloon floating over the US in 2023 certainly didn’t help matters.

China, in turn, sees a US bent on trying to contain it internationally and suppress its development. US actions that feed into this belief include efforts to get other countries to do trade deals that shut out China, increasingly stringent semiconductor export controls, and even the Biden administration’s AI diffusion framework, which sought to restrict China’s access to US chips by restricting the entire world’s access to US chips.

These mutual fears may have become too deeply entrenched to roll back. But the US should recognize how its actions may in fact bolster the CCP’s legitimacy and validate Xi’s focus on security and national strengthening. And China should recognize how its growing assertiveness is directly fueling a bipartisan backlash in the US.