Why to worry about more than just a U.S.-China trade war

We see geopolitical risk remaining a material market factor in 2019, contributing to an environment of slowing growth and elevated uncertainty.

At the center of the geopolitical scene: U.S.-China competition. U.S.-China relations transitioned in 2018 from a broadly cooperative state to a more competitive phase. But it’s not all about trade. Increasing rivalry between the U.S. and China is broadening out to include economic, ideological and military dimensions. The current dispute is sharply focused on technology.

We believe these tensions are structural and long-lasting and may be underappreciated by markets. In our view, markets are focused too narrowly on the U.S.-China tariffs dispute—where progress is indeed likely. We believe markets are failing to appreciate the complexities of the intense race between the two countries for global technological leadership—where concerns range from national security and economic competitiveness to global systems dominance. Markets may also be under-appreciating other looming trade issues beyond the U.S.-China conflict.

Market attention to our U.S.-China competition risk is relatively low, while market attention to our Global trade tensions risk has nudged down. This means these risks have relatively greater potential market impact.

We take a deep dive into the U.S.-China rivalry, and highlight other potential trade conflicts on the horizon, in the latest update to our BlackRock geopolitical risk dashboard. Here’s a quick take.

Background of the U.S.-China rivalry

The competition between the U.S. and China for global technological leadership is coming to a head in the debate over fifth-generation (5G) cellular networks. First adopters of 5G—the high-speed mobile technology that will enable enhanced communications and advanced technology solutions—are expected to sustain a significant long-term competitive advantage.

Both the U.S. and China are ramping up efforts to be the first to deploy the technology and set the standards for 5G globally. In China, technology development has the full weight of the national government behind it. The government has laid out a comprehensive plan—Made in China 2025—to create globally competitive firms and reduce China’s dependence on foreign technology.  In the U.S., by contrast, the development of new technologies is led by the private sector, with limited regulation, coordination or direction from the national government. This enables more diffuse outcomes. Some are concerned that the U.S. federal government is not doing enough to support research and development.

Three key issues

Chinese President Xi Jinping has called for China to surpass the U.S. technologically by 2030, sparking a strong reaction in the U.S. Washington increasingly views advanced technologies as a zero-sum game; any progress made by China is seen as coming at the U.S.’s expense. The current challenge between the U.S. and China centers on three key issues: national security, economic competitiveness and global systems dominance.

Many U.S. government officials fear that technological advances made by China will threaten U.S. national security. The U.S. is taking measures to protect its technology and intellectual property (IP) from transfers, acquisitions and other perceived threats to its national security. China, too, cites national security justifications in its push for technology development. China wants to reduce its dependence on foreign suppliers of digital and communications equipment and, instead, scale up its own capabilities and cyber defenses.

From an economic competitiveness standpoint, each country is taking a very different approach toward achieving global technology leadership, and this is spilling over into the trade dispute. China’s Made in China 2025 strategy is reliant on government subsidies, technology transfer, and the promotion and protection of national champions. This is a point of contention for the U.S., which sees Chinese government support as threatening the ability of U.S. companies to compete globally. The U.S. administration has leveraged Section 301 of the Trade Act of 1974 in response, imposing tariffs on $250 billion worth of Chinese imports. Resolving the existing tariffs in place, as well as the underlying structural issues, is the focus of ongoing negotiations.

Finally, for nearly half a century, the U.S. has guided the growth and development of the Internet in a model that is characterized by limited regulation, privacy and free speech. Now China is presenting an alternative global systems model, anchored by an Internet that guides public opinion and fosters economic growth—and is tightly controlled to ensure regime stability. The competition between the U.S. and China raises the prospect of technological spheres of influence.

In the case of 5G, the U.S. administration has made clear that countries and companies may soon be forced to choose sides. We see this leading to tensions between the U.S. and traditional allies, with early signs the UK, Germany and other countries are ready to challenge the U.S. stance.

Other looming trade tensions

Beyond the U.S. and China conflict, we fear a resurgence of trade hostilities between the U.S. and the European Union, if the U.S. decides to implement tariffs on imported autos and parts from Europe. We find markets are not pricing in this scenario. We worry too about the new U.S. trade deal with Canada and Mexico, where ratification is becoming more uncertain.

Overall, we see trade remaining at the center of U.S. foreign policy in 2019, and are keeping the likelihood of our Global trade tensions  risk at a high level.

Isabelle Mateos y Lago is BlackRock’s Chief Multi-Asset Strategist. She is a regular contributor to The Blog.

Catherine Kress, Advisor to the Chairman of the BlackRock Investment Institute (BII) and a contributor to the BII’s geopolitical views, contributed to this post.

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