A new cold war between the US and China may already be here but it is set to be different from the first cold war between the western world and the Soviet Bloc.
We expect a further decoupling between the US and China in terms of technology, investments and human-to-human exchanges. However, we are unlikely to see two separate blocs like during the first cold war, as many countries in Europe and Asia will keep a leg in both camps, leaning towards the US when it comes to security and advocacy of democracy and liberty, while at the same time cooperating with China on the economic front, climate and other global issues.
We believe the US and China will each strive for increasing independence of each other in fields of technology, finance and commodity resources. Fears that the cold war could tip into a hot war eventually have been on the rise and the South China Sea and Taiwan are primary concerns for a possible military confrontation.
A new cold is set to lead to two technological systems developing side by side (bifurcation) and many companies may have to develop two sets of products – one for the Chinese market and one for the rest.
The new technology race as well as more government support for technology and R&D in the West could lead to more innovation and higher productivity. On the other hand, a need to develop two different technological systems will come at a cost and reduce productivity gains. The net result is not obvious.
For financial markets, the new cold war may not have a big impact unless we see serious disruptions in terms of trade wars or material escalation in the conflicts around the South China Sea and Taiwan. The survival of the phase one trade deal will be the most important factor in the short term. We see a 50-50 chance that Trump sticks to the deal.
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