Opinion The real question behind the US-China rivalry

In Trump’s second term, the US–China trade war has escalated dramatically. Trump imposed another round of tariffs — threatening an additional 100 per cent on existing ones, effectively halting trade — while China imposed strict export restrictions on rare earths, crippling global production of electronics, automobiles, and other magnet-dependent goods.

Trump’s theatrical style makes his policies seem personal, but the issue runs deeper. As the chronology shows, this has always been about global technological leadership: Who will dominate the next industrial age? America’s strength in technology exports continues to finance its vast commodity trade deficits. Trump’s main innovation has been to use tariffs as a bargaining weapon in this global contest.

Yet, beneath the trade numbers lies a deeper geopolitical competition that goes back to 1950 — the original “Cold War”. After World War II, when most economies lay in ruins, the US emerged as the sole industrial powerhouse. It launched the Marshall Plan to rebuild Europe, a programme that effectively financed American construction companies abroad. The Chinese “Belt and Road” initiative, by comparison, is a faint echo of that model. Around the same time, the US dominated the creation of the General Agreement on Tariffs and Trade (GATT), offering market access as an incentive for countries to join. Special concessions even lured its former enemies — Germany and Japan — into the emerging OECD (Organisation for Economic Co-operation and Development) bloc.

Meanwhile, the communist Soviet Union commanded the COMECON (Council for Mutual Economic Assistance) bloc, comprising Warsaw Pact nations of Eastern Europe Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania. COMECON’s stability, however, rested on Soviet military might rather than economic strength. Thus emerged the Cold War: A global standoff between two ideological and economic systems, democratic capitalism and military communism.

That era of clear ideological division created, paradoxically, a period of relative global stability from 1950 to around 1990. Peripheral nations often benefited from the rivalry. India, for instance, faced both the 1962 Indo-China war and the drought of 1966–67 while its political ties with Washington were strained. Yet, fearing India’s drift toward the communist camp, the US stepped in with aid on both occasions — a “democratic dividend” of the Cold War’s balance of power.

This balance collapsed in the mid-1980s when Mikhail Gorbachev’s “perestroika” reforms triggered the disintegration of the Soviet Union. As Eastern European countries gravitated towards an expanded European Union, the ideological standoff gave way to a world driven by geoeconomics. China, rising as an export-driven powerhouse, emerged as the new counterweight to US dominance, especially after the EU’s relative economic decline post-2008.

But this “new Cold War” is fundamentally different. Unlike the Soviet Union’s military-based influence, China’s power is economic — and largely dependent on access to the markets of the OECD and, in particular, the US. This interdependence makes Beijing reluctant to confront Washington outright; any disruption in trade could threaten its own domestic stability. The recent economic downturn in China, driven by both demographics (declining working age population) and over-investment in infrastructure, is a worrying signal domestically. Clearly, the internal market is not enough to sustain its high growth performance of the past. In addition, non-US economies, threatened by competition from low cost Chinese exports, are no substitute for the US market. In contrast, Soviet leaders never faced internal political risks from poor economic performance as long as their military deterrent held firm.

Since the 1990s, economic growth has come to dominate political thinking across the developing world, India included. In this environment, Trump’s tariff bilateralism and the EU’s retreat leaves India (and other countries) navigating a delicate balance between economic opportunity and political prudence within a democratic framework. India’s own growth, driven largely by an IT sector deeply tied to the US, makes it particularly sensitive to shifts in Washington’s policies. On the other hand, Russia, once a major political player, is now only a marginal economic actor. The recent show of pro-Russia actions by India addresses the politics but not the economics. That is no longer sufficient.

The hope for a renewed global equilibrium — one resembling the old Cold War stability — thus lies, paradoxically, within the United States itself. As I noted in an earlier article (‘A double-edged tariff’, IE, September 8), the US is probably hurting more from Trump’s actions than the rest of the world but the solution is expected to emerge from the internal democratic process. With a clearly diminished EU, an economically weak Russia and a floundering China, we are sadly back to a unipolar world. But 2028 is not too far away if US institutions hold strong.

The writer is visiting professor,  Shiv Nadar University