Indian virtue in US-China trade war

Their game of chicken and our path to triumph

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‘The global order, based on rules, is being systematically subverted by China. Its state-led economic model relies on practices that contravene the principles of the World Trade Organization, including extensive industrial subsidies that create global overcapacity, pervasive non-tariff barriers, state-sponsored intellectual property theft, and forced technology transfer. In the security domain, Beijing openly disregards international law, exemplified by its rejection of the 2016 Permanent Court of Arbitration’s ruling on the South China Sea. It undermines regional stability with military coercion against Taiwan and provides a crucial economic lifeline to Russia helping in the invasion of Ukraine. In response, the new United States (US) administration, under Donald Trump, has initiated a policy of imposing high, broadbased tariffs, aiming to force fundamental changes in China's behaviour.

This confrontation is a geopolitical game of chicken. The game theory model is simple: Two drivers accelerate towards each other on a single-lane road. The first to swerve is the “chicken”; if neither swerves, the result is a catastrophic collision. The high-stakes standoff between Washington and Beijing is of this nature. Each side is projecting strength, but a closer look reveals significant internal weaknesses that pressure both to find an off-ramp.

On the Chinese side, the economy is afflicted by severe structural weaknesses. The collapse of the over-leveraged property sector is the epicentre of the crisis. This has triggered a solvency crisis for developers and for local governments that depend on land sales for a significant portion of their revenue. The contagion has, in turn, placed the banking system under severe stress, given its exposure to both property developers and local government financing vehicles. The government has ratcheted up economic nationalism, crushing private-sector confidence and fuelling record-high youth unemployment.