At some point, historians will write about the dismal failure of generations of world leaders to heal the festering wounds, and to effectively deal with the WWII legacy of a profoundly divided global community.

After eight decades of muddling through the widening East-West divide, mismanaging the Bretton Woods system of world economy, and squandering the opportunities to create a more sustainable world order at the end of the Cold War, we now have a total collapse of European security and an intractable call to arms in East Asia.    

The world is currently experiencing an open-ended process of bellicose political instability, where the multilateral trading system is giving way to political, economic and financial partnerships along the lines of rapidly developing new security alliances.

Predictably, those alliances are revolving around the United States and China, the world’s two largest economies and, respectively, leaders of the West and of the Global South (Africa, Latin America and most of Asia).

That is an ominous polarization spearheaded by two countries inexorably positioned on a permanent collision course.

U.S. trade decoupling with China is under way

In that new world, “decoupling” and “de-risking” of trade and investment transactions are just more radical forms of trade tariffs, hostile export and investment screenings, thousands of sweeping sanctions and millions of dollars in enforcement penalties.

The U.S. policy is pointing in that direction. American trade officials are talking about systemic problems in dealing with China. They “cannot wait for China to change,” and they intend to favor trade and investments with free-market economies.

That’s the changing trade pattern we are seeing now. After a weakening trend of the U.S. trade with China in the second half of last year, the two countries’ merchandise transactions in the first six months of 2023 declined 20% -- with American purchases of Chinese goods falling 25% from the year earlier, and the U.S. trade deficit cut in half.

Washington’s latest limits to U.S.-China trade and investments in several high-tech sectors will amplify the decoupling process already under way.

Will all that damage the U.S. economy?

Trade with China is about one-tenth of America’s total foreign trade transactions, and exports to China account for only 7.1% of total U.S. goods sales abroad. That is a far cry from the U.S. Treasury’s statement that a trade decoupling with China would be “catastrophic.”

It’s true though that America’s mindless offshoring of its manufacturing sector could create temporary (import) substitution problems. But adjustments to changing trade patterns are permanent events taken in stride by free, flexible and open economies.

China, for its part, has greatly benefitted from U.S. trade. Over more than four decades, Beijing’s access to U.S. markets has been a key vector for transfers of technology, managerial know-how and hundreds of billions of dollars in trade surpluses. All that was part of Washington’s expectations that trade would bring about China’s systemic changes toward a western style liberal democracy.

Beijing can handle trade limitations with U.S.

The danger now is that such a huge U.S. policy error could be compounded by an aggressive move to contain China’s economic development and its global power projections. That could lead to a catastrophic military confrontation.

Barring such a tragic event, China can handle the U.S. trade limitations. Beijing’s trade with the U.S. is about 11% of its foreign trade transactions. By contrast, China’s trade with friends and allies in Global South accounts for 45% of China’s sales abroad.

In the first half of this year, China’s exports to the U.S. collapsed, but they rose 9% to Global South. Exports to ASEAN (Association of ten Southeast Asian nations), Beijing’s largest trade partner, also rose 9%. Exports to India and Latin America increased 6%, and the largest sales gains were recorded with Russia and Africa -- 51% and 24% respectively.

China’s bilateral trade with Russia during that period soared 92%, with more than 80% of all the transactions settled in rubles and yuan.

That’s an interesting prelude to widely rumored BRICS (Brazil, Russia, India, China and South Africa) decisions about the use of national currencies to execute intra group’s trade deals.

Coupled with an expected increase in BRICS membership and various partnership agreements, China’s captive trade and investment markets will substantially make up for sales losses in the U.S.

Beijing’s trade problems could also be limited if – as seems likely -- Washington’s drive to contain and isolate China hits the wall with the E.U. German automobile and chemical industries, the backbone of the country’s economy, have staked their future on China. Mercedes Benz Group, for example, has made China a key market for its forthcoming EV campaign.

Germany’s heft can be clearly seen in E.U.’s last week diplomatic overtures to Beijing. Europeans are telling the Chinese that they want closer and productive relations because, according to E.U.’s foreign affairs and security commissioner, the European Global Gateway and China’s Belt and Road Initiative are complementary projects.

That’s music to China’s ears and bad news to Washington.