While the world is fixated on the trade conflict between the US and China, a more significant confrontation is playing out between the two nations over Taiwan and China's "One China" policy.

Last week, Reuters reported that Washington was preparing to sell $2 billion worth of arms to Taiwan.

To China, this is a matter that could cause "serious damage" to US-China relations and disrupt peace in its region.

But the Trump administration has been ratcheting up its challenges to the One China policy for years.

"Taiwan is the thing the Chinese care most about hands down," said Susan Thornton, a former assistant US secretary of state for East Asian and Pacific affairs. "Anything where the US is interfering with Taiwan hits a national third rail."

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The world has its eye on the trade war between the US and China, but a more dangerous confrontation between the two nations is playing out in the background: the worsening disagreement over the "One China" policy.

Last week, Reuters reported that Washington was on its way to approving $2 billion worth of arms sales to Taiwan. The move indicates the Trump administration isn't trying to create an atmosphere conducive to trade negotiations and suggests that disputes between the US and China are more likely headed toward escalation than resolution.

"Taiwan is the thing the Chinese care most about hands down," said Susan Thornton, a former assistant US secretary of state for East Asian and Pacific affairs. "Anything where the US is interfering with Taiwan hits a national third rail."

The One China policy — under which the US acknowledges China's claim that Taiwan is not an independent nation but rather a part of China, without taking a side — was developed during the Nixon administration to improve US-China relations. The idea is central to China's identity as a modern world power, and since President Donald Trump took office the US has challenged that notion repeatedly.

Despite protests from Beijing, Trump signed the Taiwan Travel Act, legislation permitting high-level talks between US and Taiwanese officials, last year. In May, the US national security adviser, John Bolton, met with David Lee, one of Taiwan's top security officials. This meeting came just after Taiwan renamed its unofficial embassy in Washington the Taiwan Council for US Affairs. The old name, the Coordination Council for North American Affairs, neglected to mention Taiwan or the US.

The Trump administration has also sold arms to Taiwan before, as have previous administrations, but this $2 billion arms sale digs at a delicate wound during a delicate time. It's a big sale, even in a world where weapons are becoming more and more expensive. And though it does not include the US's top fighter jets, it is sure to antagonize Beijing before the G20 meeting at the end of the month in Osaka, Japan, where US and Chinese heads of state are expected to meet.

On Thursday, a Chinese Foreign Ministry representative, Geng Shuang, responded to the news of the arms sale with a warning, according to the Chinese state media outlet Xinhua.

"We urge the US side to stop arms sales to Taiwan and sever their military ties, prudently and properly handle Taiwan-related issues, to avoid serious damage to China-US relations as well as to the peace and stability of the Taiwan Strait," Geng said.

It's just imagination

In January 2017, China — most likely aware that the incoming US president was unfamiliar with the complexities of US-China relations — clarified its position on Taiwan in a rare US media interview by the Chinese Foreign Ministry official Lu Kang.

"Because this issue touches upon China's core interest, by no means is this something that could be negotiated or used as a bargaining chip," he told NBC. "One China policy, 100%."

The fight over Taiwan's status started in 1949 after the Nationalist leader Chiang Kai-shek left the mainland for the island when he was defeated by Mao Zedong's Communist forces. To the Chinese, the island's independence is both a product and a reminder of China's century of humiliation, when China was carved up by foreign powers and then thrown into decades of chaos and civil war after the end of the Qing dynasty.

"It's the mythology they've told themselves for years," Thornton said.

In that way the One China policy and China's economic nationalism are tied together in the Chinese political imagination. That may seem foreign to the US, where one set of technocrats handles economics and another handles national security, but the merging of the two interests are a response to the China's lost century.

And both are being tested by the Trump administration.

Chinese President Xi Jinping and US President Donald Trump at the Great Hall of the People in Beijing in November 2017. Damir Sagolj/Reuters

While the US-China trade war producing a "tech Cold War" has grabbed headlines, less attention has been paid to escalation in hostilities surrounding the One China policy.

This despite the fact that the conflict has all the trappings of the Cold War era. China sees US interference in Taiwan as an encroachment on its sphere of influence. And the US sees Chinese involvement in the Caribbean similarly.

Back in February 2018 after a speech in Texas, then-Secretary of State Rex Tillerson warned Latin American nations of China's "imperial" ambitions, invoking the Monroe Doctrine.

"Latin America does not need new imperial powers that seek only to benefit their own people," he said. "China's state-led model of development is reminiscent of the past. It doesn't have to be this hemisphere's future."

All of this matters for Taiwan because the more involved a country is with China, the more pressure China puts on it to wipe Taiwan off the map. Earlier this year the Dominican Republic dropped its recognition of Taiwan at China's behest. El Salvador did it in 2018, and Panama in 2017.

There may be a Cold War-reminiscent motivation behind this arms sale as well. Taiwan's anti-China president, Tsai Ing-wen, faces an uphill battle for reelection next year. In Washington the sale may be seen as a way to bolster her chances of winning.

"One thing US administrations tend to think, which may or may not be true," Thornton said, "is that selling weapons to Taiwan helps political candidates show that they have US support and can stand up to China."

We — the US and China — may be slipping into a world where that theory has to be tested.