04 May 2020 3 min read

US/China relations: no thaw in the new cold war

By Emiel van den Heiligenberg

Not so long ago, the trade war between the US and China was the greatest geopolitical risk facing the market. COVID-19 has taken its place at the front of investors’ minds, but it hasn’t eased the underlying tensions – and may have exacerbated them.



As recently as December, markets were still jumping up and down on the latest headlines about tariffs. That seems a long time ago now.

Another far more serious global crisis has understandably made the trade war between the US and China seem less important, but that does not mean the underlying issues have been resolved.

The rise of China, and how the US reacts to the perceived threat to its own hegemony, has interested me for many years now. In 2017, I wrote about the US falling into the ‘Thucydides trap’. Little since then has persuaded me that there will be a sustainable détente between the two rivals.

At the start of 2020, many were optimistic about the ‘Phase One’ trade deal between the US and China, but we were sceptical. That agreement covered only a relatively small proportion of US imports (0.1% of GDP) and we knew that President Donald Trump could be unpredictable – as could events, as sadly we all soon discovered.

We could not see COVID-19 coming, but we knew there was an unstable fault line between the US and China. Any number of issues could have provoked renewed hostilities, but the gravity of the coronavirus risks making the already strained relationship even worse.

Regrettably, some in the US have insisted upon referring to COVID-19 the ‘China virus’ and in recent days the administration has again spoken out on this. Even some moderate voices have accused China of being insufficiently forthcoming with information about the outbreak. Equally, some in China have tried to blame the origins of the pandemic on the US military.

The electoral campaign in the US this year is only likely to inflame matters further. Trump believes he can attack Democratic candidate Joe Biden for having been friendly to China as vice president, which means Trump could take an even tougher stance on China in the run up to the election to emphasise this point. Similarly, Trump’s rhetoric could force Biden to become more protectionist to fend off that line of criticism.

If Trump’s ratings drop or the economy remains weak, the president could double down on this strategy and impose even tougher tariffs on China. The US could also become more bellicose if China, in the process of stimulating its own economy after the shutdown, allows the renminbi to depreciate.

Taipei personalities

Just like in the cold war – and, indeed, the Peloponnesian War – there is also the potential for proxy conflicts to open up new fronts between the US and China.

One may be developing now, ensnaring Taiwan and the World Health Organization (WHO). Taiwan has long attempted to gain representation in the WHO, but has been blocked by Beijing’s assertion of the One China principle. Taiwan now finds itself caught in an escalating tussle with the WHO’s leadership that involves both Washington and Beijing.

Taipei warned the WHO as early as December that COVID-19 could be transmitted by humans and that the pandemic risk was high. Both China and the WHO are therefore now under pressure from the Trump administration for failing to share information and sound the alarm to prepare other countries.

This increases the risk that Trump starts to help Taiwan to punish China and the WHO indirectly; he has already halted US funding of the latter after accusing it of “severely mismanaging” the pandemic.

And this is just one satellite issue in the trade war. We could also mention that the dispute over Huawei is far from resolved, for example, and is pushing governments from Europe to Africa to pick a side.

Moreover, we don’t think these tensions will ease significantly after the US election. Mainstream opinion in both the US and China has hardened, and the standoff has both eroded institutional trust and left long-term scars on global trade and supply lines.

This could easily lead to a new cold war between the two superpowers, creating an increasingly bipolar world and a race to get ahead in the technology and defence industries.

As investors, this is another reason to remain cautious even amid short-term exuberance, to remain diversified and focused on risk management, and to remain true to our approach of ‘prepare, don’t predict’ through scenario modelling.

We know an epidemic played a major role in the Peloponnesian War; a future Thucydides may pinpoint the coronavirus outbreak as such a pivotal moment, when a trade war between the US and China started to become another cold war.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg