On October 8, the first page of the Morning Edition of the Nihon Keizai Shimbun newspaper ran an article entitled “China Cuts Reserve Requirement Ratio for Third Time This Year: Upholding Economy Amid Intensifying Trade War.” It read:

　On the same day, the Nihon Keizai Shimbun published additional information about this topic on its fourth page, entitled, “China Makes First Move Out of Caution Against Sudden Stock Fall: Depreciation Pressure on Yuan:”

　This article is of a tone expected from the Nihon Keizai Shimbun, a paper with a pro-China stance, but the real situation is even more severe. The October edition of the magazine Sentaku contained an article entitled, “Bubble Burst: China Repeats Japan’s Mistakes as Chinese Economy Heads to ‘Lost 20 Years.’” It described the situation in China more realistically:

　American stock prices fell suddenly on October 10 due to this Sino-American quarrel (which goes beyond trade issues, and is today impacting both of these countries’ structures) and rising long-term interest rates in the U.S. Market crashes spread to Japan, Asia, and across the world, and stock prices have fallen while fluctuating violently afterwards. However, I think the Chinese stock price drop is fundamentally different from Japan and the U.S., and that Japanese and American stock prices will stabilize and rise in the near future.

　The Chinese economy grew so suddenly because the U.S. rapidly became close to China for its honorable withdrawal from the Vietnam War in 1971 (the middle of the Cold War, a time of intense conflict between China and the Soviet Union). They effectively restored diplomatic relations, including a joint declaration, and then officially normalized diplomatic relations in 1979. The U.S. believed that China would eventually become a democratic nation after achieving economic prosperity. It recognized China as a free trading partner based on three conditions: not exporting revolution, not invading Taiwan, and not waging aggressive war. This trend expanded to other Western countries as well, resulting in cheap Chinese products (made with low-wage Chinese labor) spreading across the globe in the blink of an eye, and China becoming the factory of the world. In particular, the U.S. – a major consumer – became China’s most important market. The global economy provides golden opportunities for rich businesspeople to accumulate more wealth, but without fail it also suppresses workers’ wages and leads to unemployment. The American unemployment rate soared as its trade deficit with China grew. In his 2016 presidential campaign, Trump touted an “America First” policy and advocated for banishing the trade deficit to gain support from people who had lost their jobs. To fulfill this promise by reducing the trade deficit, after taking office Trump has denounced China for stealing and using American technologies and expertise, and has sanctioned China with massive tariffs on imported Chinese goods. Issues in past trade friction were the prices and quantities of exported and imported goods, but the theme of the current Sino-American trade war is different and more basic.
　Now that the U.S has a harsh stance against China, Japan should take this ideal opportunity not to be friendly to China, but rather to assert to China that it must leave the Senkaku Islands (which are Japanese territory) alone.

　After World War II, the U.S. gained hegemony because it was the only nation with atomic bombs. The Soviet Union became a major military power when it successfully carried out a nuclear test four years later, and the world was plunged into the Cold War between the east and west with the promise of mutual assured destruction (MAD). But afterwards, American President Ronald Reagan pulled the Soviet Union into an arms race with his “Star Wars” military expansion tactic that increased military spending to a level the Soviet economy couldn’t match. This led the Soviet Union to collapse. Japan profited while staying out of this conflict and even became the number-two economic power. At the height of the asset price bubble, the 23 wards of Tokyo cost more than the entire U.S. The situation changed abruptly in 1990 with regulations on real-estate loan volumes and the full-on application of bank for international settlement (BIS) regulations on financial institutions at the end of March 1993. These regulations require that BIS have a capital ratio of 8% or higher to handle risk assets such as loans, and banks started drastically curbing their financing to meet this standard. This sharply reduced real estate investment. When the land bubble burst, the favorable economic conditions vanished, plunging Japan into the Lost 20 Years. The same thing is about to happen in China.
　The year 2049 will mark 100 years since the founding of China, which is implementing its “Hundred-Year Marathon” strategy to overtake the U.S. as a major power in all realms and grasp global hegemony. Xi, who became president in 2013, is strengthening this policy. To this end China has abolished the presidential term limit, is enhancing his dictatorship and the one-party rule of the CPC, and is working to build a China-centered network under its “One Belt, One Road” initiative. As one facet of this, Chinese funds from exporting surplus goods in its manufacturing industry were being provided in huge sums for railway and other infrastructure building in Asia. However, fear is rapidly growing across Asia that infrastructure investment fully dependent on Chinese funding will lead to insolvency. Infrastructure projects in Pakistan and Malaysia have been reduced or cancelled for this reason. In the September election in the Maldives, the pro-Chinese president was voted out due to concern about China, and the new government is attempting to rethink all projects that China has a hand in. There is not sufficient funding in the Asian Infrastructure Investment Bank (AIIB), founded in 2016 and spearheaded by China, out of lack of confidence in the Bank of China. Trump placed additional tariffs on China (25% on imports from China totaling 50 billion dollars on roughly 1,100 items in July and August) to prevent China from violating American intellectual property rights. The U.S. has started full-scale efforts this year to crush China, and I believe we can say this conflict is a new Sino-American cold war, not just a trade war.

Rapidly falling numbers of pro-Chinese Americans
(Interviewer) Sino-American conflict is intensifying over trade and other topics.
(Luttwak) The U.S. and China are fighting like a war is going on, but rather than using artillery to fight, the weapons are investment, research and development, and in the case of China, theft of high technology. Chinese corporations have grown by stealing American high technology and making it their own. These companies are linked to the Ministry of State Security, which the U.S. views as a problem. Trade friction occurred because Trump decided to stop the outflow of high technology. This isn’t a business issue. It’s a question of whether we will live in a world ruled by China and in an economy led by it, or if we will live in a multipolar world.
Xi believes the U.S. has declined since the 2008 financial crisis, and that China will gain prominence. China Manufacturing 2025, a production policy set forth in 2015, says that China should make the world’s computers and the U.S. should grow its soybeans. This statement is the equivalent of telling the U.S. it has to oppose China.
(I) Vice President Mike Pence gave a speech on October 4 taking a tough line against China.
Pence’s talk was an official declaration on the start of a long-standing confrontation. None of the things he said are unique ideas from him or Trump, but instead represent the agreement in Washington. The number of pro-Chinese Americans has fallen sharply, and this policy will be continued even without Trump or Pence. It was more than a political speech; we should regard it as a national declaration.
Preventing China from stealing intellectual property
(I) How does China see these changes in the U.S.?
(L) China under the Xi administration is growing increasingly inward-facing day by day, and it is losing its ability to understand the world. Under the previous President Hu Jintao, there were at least 12 to 13 famous experts on the U.S. at the Chinese Academy of Social Sciences in Beijing. They researched in the U.S. and advised the supreme leadership (members of the Politburo Standing Committee). Incidentally, only two experts advise Xi today, and they aren’t given sufficient opportunities to do so. The Chinese Ministry of Foreign Affairs is focused on propaganda and is dysfunctional.
One thing that demonstrates Xi’s lack of global understanding is that he lied to Obama in 2015 by telling him face-to-face that China would not militarize the South China Sea. This was a terrible mistake in the international community.
(I) Tensions are rising in the South China Sea. How does this impact security?
(L) Conflict was ended by wars in the era of geopolitics. However, the Sino-American conflict is being fought mainly through geoeconomic tactics. Even when their battleships come close in the South China Sea, the U.S. and China don’t intend to fight. If a Chinese ship did crash into an American warship, the Chinese ship would be destroyed by the American one.
(I) Will the American side be harmed by long-term confrontation?
(L) Economic damage from this confrontation must be minimized. We don’t hope for Chinese tourists to stop visiting or to lose the export market to China. However, we must stop the trend of Chinese corporations being able to buy American or Japanese companies without any checks, and we can’t allow China to steal high technology.
Collaborating with Japan, China, and other countries
(I) When will this antagonism end?
(L) I have no idea how long it will last, but I think at least until the Xi administration is toppled. Of course, it is theoretically possible that a change of leadership will take place in China at some point, and it may return to its route of a “peaceful rise.” In either case, we must protect what we must and just wait. I am entirely confident in an American victory. The U.S. collaborates with countries like India, Japan, Vietnam, and Australia, and it has a bigger population with more technologies, products, and money. Conciliation is what is necessary.