SINGAPORE (May 27): The tussle between the US and China has taken a turn for the worse. US President Donald Trump has abruptly returned to confrontation with China, re-imposing tariffs and attacking Chinese technology firms with potentially fatal restrictions. Southeast Asia will be hurt; it is already enduring weaker global demand, rising risks of a Middle East conflict that could cause oil prices to spike and uncertainties such as Brexit. This trade-technology war is the last thing the region needs.

Still, one should not exaggerate the downsides. Yes, it is true that the trade war is a subset of a wider strategic battle for global influence between the US and China — which means that the frictions between the two could last a long time. But that does not preclude the two powers from making tactical deals when it suits their interests. Remember that during the Cold War, when the US and Soviet Union were engaged in an even more bitter contest for power, they found areas of agreement such as treaties to limit nuclear proliferation and mechanisms to improve security in Europe. Today’s Cold War involves two countries that are inextricably linked together in interdependencies of trade, investment and technology; that means they have an even greater incentive to avoid a downward spiral into conflict.

And that is why our baseline scenario is that the US and China will cut a trade deal within the next few months, one that prevents an outright trade war and allows businesses around the world to breathe a sigh of relief.

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