US-China trade wars: a geoeconomic view

The “Thucydides trap” is a term originating in the Peloponnesian War*. Originally meant to describe the war between Athens and Sparta, formerly allies against the Persians, expanded to mean the inevitable clash between superpowers in their time. France and England. Spain and England. France and Britain. Russia and America are all examples.  

The 20^th century was marked by four major geoeconomic events:

1. The Bretton Woods Conference (1944) pegged the US Dollar to gold, and all other Western currencies to the US Dollar, setting the scene for a post-WWII American economic, political and financial dominance.
2. The Nixon Shock (1971), when the US, laden with debt, broke with the gold standard, ushering in an era of monetarism and free-floating currencies, capitalising on US dominance to repay the country’s building debts. It led to a massive inflation wave in the 70’s and the 80’s, accentuated by various crises in the Middle East.
3. The Plaza Accord (1985) was when Ronald Reagan decided that the system was not working, and pressured allies to allow significant US Dollar devaluation. This eventually crippled Japan’s rise and destabilised the US Dollar, which needed another accord, the Louvre Accord (Feb 1987) to try and repair the Greenback. Still, by the end of the year, instability persisted, leading to Black Monday (19 October 1987), largely considered the worst day in modern financial history.
4. The Fall of the Soviet Union (1991). Whatever failings of a US-led global economic and financial system were covered by the end of the Cold War and the opening of new markets to the East

A US-led system worked ubiquitously in the years after WWII, which had left most of the world comparatively devastated. As other countries found their post-war footing, however, they would be able to compete in this US-based system, even outdoing its creator. Japan, Germany and China were the countries that emerged. Subsequent attempts to change the rules, in a way that would work for the US over the longer term, like the empires of old (the Dutch, Spain, Britain) didn’t quite work. Higher labour costs and deteriorating demographics in the West were the larger trends and eventually led to a fall in productivity and competitiveness. The Chinese entry into the World Trade Organisation in 2000 allowed Americans to take advantage of cheap manufacturing for some items (car parts, clothes, electronics), reducing headline inflation. The internet accelerated trade between the two countries. China would turbo-charge its growth, and Americans would live better thanks to lower prices for many goods. The two countries became very quickly and inextricably linked, even if the geopolitical priorities of their leaderships diverged.

The internet also linked all countries together. As a result, a variety of business-driven commercial globalisation emerged, without, however, the express political strategic planning, or even acceptance, to go with it. The political class grudgingly yielded power to businesses because the system appeared to increase the wealth of their constituents.

What resulted was globalisation, without a governance system to support it. The US, through the US Dollar, the deep market and its global business reach, was the driving engine of this system. But it would sometimes act as a steward, and other times as an active competitor, seeking even to reset the whole system from time to time.

Despite the benefits of the system to America, popular demand for rapid improvements in the standards of living increased, prompting banks to exponentially increase the provision of credit, leading to the 2008-9 Global Financial Crisis. The wake of Lehman Brothers’s collapse saw a world in shock. Years of lower demand and productivity followed as central banks filled the growth void of busted commercial banks and reluctant governments. Their cheap money-focused capital mostly on financial markets, inflating the prices of financial assets. Investors found better returns in the stock and bond markets instead of investing in the real economy and infrastructure. As a result, growth lagged, industries dwindled, factories closed, infrastructure deteriorated, jobs became more procedural and less well-paid and inequalities were accentuated. A precipitous buildup of government debt, to cover bailout costs and replace bank credit, was not enough to provide the growth consumers were looking for. Political furore in Western markets, across both sides of the Atlantic, rose as elected governments, re-empowered, found fault in the system, and mainly China, due to its aggressive competitive practices.

By 2015, China had realised that it could not depend entirely on Western consumers, as winds were shifting. An initial focus on the internal consumer failed. The COVID-19 pandemic caused significantly inflated real estate prices to collapse, an economic situation which can hamstring growth for a long time. Exacerbating the situation were demographics, which crashed even after the “one child” policy ended. Emerging from the pandemic, instead of renewing its focus on domestic consumers, it doubled down on maintaining its role as the world’s cheap manufacturer, eventually bringing it into collision with the larger consumer, and the other superpower, the US.

Thucydides was right again. The superpower clash is inevitable. Regional conflicts in Ukraine and the Middle East, Iran and North Korea, European political function and dysfunction may all be part of the larger picture, shifting some winds, but that picture is dominated, as ever, by the clash of our times’ superpowers.

Six tips for businesses to navigate the current trade war landscape

1. Acknowledge that a US-led global economic and financial system is prone to crises and revisions. Like the empires of old, the US frequently revisits the arrangements when it feels that the system is not necessarily working for it. Far from being one man’s folly, the 2025 Trade Wars are another iteration of the Nixon shock and the Plaza and Louvre Accords. Its impact only emphasises the centrality of the US to the global economy, as it did in 2008.
2. Build resilience. This will not just go away. We described a world where big changes happen roughly every decade. Entropically, those forces only continue to build up. The debt increase in the past decades, now 330% of annual global GDP, prevents further growth by borrowing. The AI revolution and a new global trade system in reverse will only accentuate pressures on corporate leaders.
3. Build local expertise. A company that maintains its wish to compete fully across a multipolar world needs to remember that the commercial globalisation which made such endeavours relatively easy, is now in remission. Besides the internet, there’s no major global force facilitating global expansion. The competitive differentiator will likely be that of deep and rooted local expertise. A corporation can build it, or it can buy it.
4. Maintain agility. Local expertise as a differentiator means trusting local individuals to pursue business goals. Corporations must allow local managers to remain flexible in investments and talent acquisition.  
5. Double down on tech investment. While the tech dream might for many a CFO seem like an unnecessary diversion, in fact, it may be technology that will ultimately help corporations break through a world that experiences such tectonic shifts.
6. Find “bubbles” of stability. Regions like Europe and the UK, previously unloved due to red tape and stricter regulation, may provide stability and predictability at an age where the winds may shift any which way.

Businesses want predictability and forecastability. Accepting that both of these propositions are difficult, as political and economic entropy accelerate, will allow business leaders to take the necessary steps to build the necessary resilience our age requires.    

*Thucydides (460-400 BCE) was an Athenian hstorian and general, often dubbed the father of “scientific history”. He proposed that “incentives drive behaviour”.