iFund- How will the US-China trade war change the world pattern? (1)

2019-06-19 01:25
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Sino-US relations have shown a significant turning point in 2018, starting from the issue of tariffs. In the future, how will the world pattern evolve? Will China replace the US to be the strongest power in the world? Can the renminbi successfully challenge the dominance of the US dollar?

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Since World War II, when talking about the world pattern, the Cold War, the EU and even the rising of China have come to people’s minds. However, Sino-US relations have shown a significant turning point in 2018, starting from the issue of tariffs. In the future, how will the world pattern evolve? Will China replace the US to be the strongest power in the world? Can the renminbi successfully challenge the dominance of the US dollar?

What is behind the Sino-US conflicts?

First, the United States believes that China is not a market economy which can only benefit state-owned enterprises, for example, many state-owned enterprises are directly or indirectly controlled by the government and use administrative means to monopolize economic resources which restricts the competition of foreign companies. At the same time, China has not actively protected private property and intellectual property rights, resulting in the economic losses for foreign companies. And market access and intellectual property rights do show the conflicts in trade interest distribution between China and the US.

Second, China is promoting Made in China 2025 strategic plan to support the development of high-tech enterprises, and hope to tackle the problem of overcapacity in the traditional industries through industry upgrading. There is no doubt that the domestic companies are at the core of the strategic plan in which foreign companies are not included. If Chinese companies relying on the industrial subsidies from the government recapture the top position of the industrial value chain, the profit margin of foreign companies is bound to decline. Besides, the US is worried about security risks due to losing industrial autonomy.

What is the future of the world pattern?

The world pattern is determined by power which consists of both hard power and soft power. Hard power is dependent on economy and military strength. Soft power, contrasting with hard power, comes from a series of factors such as culture and politics. At present, the US has an obvious advantage in hard power. Traditionally, Europe is the main rival of the US to compete for the strongest power in the world. But with the rising of economy, China also has power to compete for the role.

Besides power, currency is another tool that can affect the world pattern. Historically, the Bretton Woods system established the dollar-centered international monetary system which extinguished the status of the US. Therefore, it would have far-reaching significance if the renminbi can challenge the US dollar and become one of the world currencies. Currency is no longer limited to the field of payments in trade, but has much influence in the capital market, international reserves and other systems.

In a nutshell, the US-China trade war has begun changing the world pattern. The following article in the series will analyse the prospects of hard power and soft power between China and the US. And the third article will explore whether the renminbi can come onto the international currency stage and compete with the US dollar. Investors should learn more about the evolvement of the world pattern which in return can help to allocate assets and balance revenue and geopolitical risks better.

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