Fallout from US-China trade conflict could be ‘even worse’ than WWI, Kissinger says

BEIJING — The close economic and financial ties between the U.S. and China create potentially greater risks for America’s global clout if the two countries separate further.

“We are still in the foothills of a Cold War,” Henry Kissinger, former U.S. Secretary of State, said Thursday at Bloomberg’s New Economy Forum in Beijing.

Rivalry with China has not escalated to the same level the United States had with the Soviet Union, “but we also don’t have forward negotiations to reduce the political conflict,“ Kissinger said.

Trade tensions between the U.S. and China escalated in the last year, bringing years of growing American concerns against the Chinese Communist government to the forefront of a global debate. U.S. President Donald Trump‘s administration has applied tariffs to billions of dollars’ worth of Chinese goods and put several major Chinese technology companies on blacklists that effectively prevent them from buying from their American suppliers.

Beijing has countered with tariffs of its own, while pushing ahead with campaigns such as the Belt and Road Initiative — a regional infrastructure development program seen by many as Chinese President Xi Jinping‘s effort to increase China’s influence.

“China is a major economic country, and so are we. And so we are bound to step on each other’s toes all over the world, in the sense of being conscious of the purposes of the other,” Kissinger said. “Therefore, if conflict is permitted to develop unconstrained, the outcome could be even worse than it was in Europe,” he said, referring to World War I.

While global stock markets wait apprehensively for the U.S. and China to reach a so-called “phase-one” trade agreement in the next few months, tariffs and overall uncertainty have raised the pressure on businesses to consider how they handle operations between the two largest economies in the world.

Many worry about a “tech cold war” in which innovation and technological systems develop separately in the U.S. and China.

For former U.S. Treasury Secretary Hank Paulson, the greater concern is that such a divide ultimately forces countries to choose to work with China over the U.S.

“I’m not aware of any country that is prepared to abandon a commercial and technology relationship with China,” Paulson said in a separate speech Thursday at the New Economy Forum. “If third countries hop on board with Chinese standards, then China alone will end up with access to these markets, leaving the United States in the cold.”

The same argument holds true for the financial industry, he said, eventually threatening New York’s role as the world’s financial center, while helping other cities like Tokyo — and ultimately Shanghai — fill that gap. “Unless something goes terribly wrong in China, no other nation will wish to decouple from its financial markets,” Paulson said. “So China will be a big part of the global financial picture in decades to come.”

Earlier on Thursday, Chinese Premier Li Keqiang and the leaders of the World Bank, International Monetary Fund (IMF) and World Trade Organization, among other organizations, held a press conference in Beijing after their fourth roundtable meeting.

“For the IMF, it is critical that we can have the financial strength to serve the center of the global financial safety net,” IMF Managing Director Kristalina Georgieva said. “We are very grateful to our shareholders, very grateful to China, for bringing up our financial resources to $1 trillion so we have a cushion — should we need it. And of course, working together, we may not need that cushion.”

Paulson noted other countries still have the choice to work with the U.S. alone over China, potentially shutting Chinese companies out of those markets. “So China needs to think hard about its unwillingness to open up the architecture of its domestic standards,“ he said.

China made historic strides this year in announcing changes to the foreign business environment, and opening the local market further to foreign financial institutions. Despite a slowdown in economic growth and doubts about the accuracy of reported data, it’s taken just a few decades for China to become the world’s second-largest economy.

For Chinese leaders, their view of national development is not necessarily of threatening the U.S., but of making China strong, Kissinger said.

“So I don’t consider China started it,“ he said. “History started it.”