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Everyone’s a loser in Trump’s trade strategy, including China

20th November 2016

Call it global trolling or seizing the moral high ground, but it didnt take long for China to out-muscle the US on the question of free trade. Little more than a week after Donald Trump was elected President of the US on a decidedly anti-trade platform, President Xi Jinping addressed the Association of Pacific Exporting Countries meeting in Peru last weekend with a call to establish a Free Trade Area of Asia-Pacific (FTAAP). This is Chinas response to what is almost certainly the sound of the last rites being read for the US-sponsored Trans-Pacific Partnership trade agreement (TPP). 

 Whether or not the FTAAP will succeed without US participation, is a moot point, but its a funny old world, where the US seems to be walking away from free trade and from engagement with Asia, and China seems to looking to fill the vacuum. How are the US and China now likely to define their mutually dependent but increasingly fractious relations now that both countries have authoritarian presidents with populist agendas?

Asias strategic significance

 We should remember how American and Asian leaders and thinkers have coalesced around the view of Asias significance in the global system. In 1944, as the tide in the Pacific War turned in favour of the United States. Nicholas John Spykman, a US geographer and strategist, wrote The Geography of Peace, in which he emphasised the strategic and maritime significance to the US of what he called the rimlanda vital part of which stretches from theMiddle East to the Indian Ocean, across to the South China Sea and up to Japan and the north-west of China. Spykman said that whoever controlled this rimland would rule Eurasia, and the destiny of the world.

 China knows this instinctively. Deng Xiaoping told Indian Prime Minister Rajiv Ghandi in 1988 that the next century would be the century of Asia and the Pacific. Its more recent foreign policy initiatives in Asia, naval build-up in and on contested islands in the South and East China Seas, sponsorship of the Asian Infrastructure Investment Bank and One Belt One Road (OBOR) strategy – a sort of political and commercial renaissance of the old Silk Road – constitute robust evidence of its designs to be a regional hegemon, at the very least.

 The US has understood this too, commercially and militarily. Indeed, President Obamapivot to Asiaand the US militarys view in recent years about future strategic challenges emanating largely out of the Pacific region and the littorals of the Indian Ocean corroborated Spykmans judgement in the face of a rising China. The TPP, which excluded China, was at the heart of the pivot, and even though the US and China nevertheless have a mutually high level of economic, financial and commercial interaction, relations went frosty as a result.

Trump and trade

 The starting point for the US and China is not good. Trump and his advisers see trade as a zero sum game. This is not auspicious for the world economy because America has championed an open and liberal global trading system ever since the end of the second world war. World trade and investment are not in the best of health now anyway, but if the US takes a more hostile view about trade agreements and becomes more protectionist, the world economy in general, and emerging markets especially, will lose out. It is not good news for China, therefore, and it is important to note that the country is an often understated, and major beneficiary of thsystem that the US has nurtured until now.

 During the presidential campaign, Trump threatened to terminate or amend key US trade agreements in a probably self-defeating attempt to repatriate or protect US jobs. His team insisted that trade partners that ‘cheat’ on trade by manipulating their currencies or using illegal export subsidies would face punitive tariffs. China was clearly in the cross-hairs of this warning, and the Trump team talked of imposing a punitive 45 per cent tariff rate, taking into account not only currency factors, but also intellectual property ‘theft’ and the effects of lax worker and environmental regulations – precisely the sort of trade topics that were central to the TPP.

So how might a Trump presidency approach China?

 Trump has said and threatened many things and he will do some things to placate his supporters and demonstrate authority. In 2015, the US ran a trade deficit with China, amounting to a record $366 billion, equivalent to about 69 per cent of the total trade deficit of $530 billion. This is likely to be a weathervane for the new Administrations success regarding dealing with China. 

 It is quite likely that Trumps threat to label China a currency manipulator’ will see the light of day quite early on in his term of office. It wont cost a thing to do so, and wont have any direct effects. By statute, it simply requires the US executive branch to negotiate with China, in this case, and only if this proves fruitless would the US government pursue tariff options. 

 The President certainly has the authority to levy tariffs via the office of the US Trade Representative and the Commerce Department, especially if justified in the context of national security or intellectual property theft.

 The likelihood at the moment, though, of the US imposing a 45 per cent tariff on Chinese goods does not look that high. Instead, the threat – or even the outcome – may be limited to specific tariffs or duties of, say, 5-10 per cent on high profile and sensitive Chinese exports, for example, metals including steel, automobile parts, higher valued added products and a range of below the radar’ products that US consumers are unlikely to notice at Walmart and so on. The US might also seek to expand the remit of the Committee on Foreign Investment in the US to block or be more selective regarding the purchases of US companies and assets by Chinese companies. 

China cant fail to react

 In any event, China will be unhappy if it attracts the currency manipulation charge, angry if the US threatens or imposes tariffs and duties, and inclined to retaliate. Global Times, a daily Chinese government newspaper, was quick to point out that US tariffs could result in China spurning Boeing, US automobile, and iPhone purchases, and in imposing trade restrictions against US soybean and maize imports. 

 China could object to US tariffs at the World Trade Organisation, and if successful, the US would have to pull back, or flout the WTO in what would be a highly significant blow to the world trade governance system. Alternatively, China might choose to retaliate in what might then become a trade war. Some in Trumps administration might even welcome that, but even if this were avoided, it is easy to see how the trade climate between the US and China looks likely to deteriorate, and the danger is that this sours economic, financial and political interactions in other spheres. 

 As it is politically important for Trump to be seen to living up to his election promises, so it is important for Xi Jinping not to be made to look weak. No one really knows what his political position actually is. He has certainly amassed control around himself in ways that havent happened since the Mao era, but Sino-specialists are divided as to whether this speaks to his strength or vulnerability. Either way, he cannot afford to lose face or be seen not to be in charge of US-China relations as he prepares China for the important 19th Party Congress a year from now, where he hopes to push back opponents and get his own people to fill vacancies on the Politburo and the Standing Committee. This suggests that China will respond strongly to what it might see as any US provocation or aggression.

Filling the TPP vacuum, and what if nothing can?

 Tariffs aside, the abandonment of TPP would deliver a trade blow to China and to US allies in south and east Asia, whose security interests would also be threatened. It is true that China is nearing completion of its own Asian free trade agreement called theRegional Comprehensive Economic Partnership (RCEP). This was launched in 2012 and includes the 10 countries belonging to the Association of South East Asian Nations plus China, Australia, India, Japan, South Korea and New Zealand. Yet, the RCEP is a poor cousin to the TPP, with lower goods tariffs and duties, a focus on traditional goods, and some reluctant free trade participants such as India. 

 In any event, the RCEP would promise far fewer benefits for China than TPP, even though China isn’t included in the latter. How so?

 The principal reason is that China benefits strongly from existing, open and dynamic trade arrangements. It did in the 1990s and 2000s before and after joining the WTO in 2001. This proved to be an important catalyst for sustained and complex reforms to state enterprises and in favour of private sector development and competition under  Zhu Rongji and Wen Jibao. Similarly, TPP was designed to provide members with gains from increased trade, inward investment, and operating conditions for local businesses. This could serve as an example for China, and encourage more reform-minded officials to press the case for deeper market reforms. The idea is that TPP would help in ways that RCEP won’t, that is by spurring an opening up of relatively closed and less developed non-financial service industries, which are crucial to a new economic growth model and to economic rebalancing. 

 The FTAAP, which is a much more ambitious trade agenda, would extend the RCEPs membership by adding Canada, Chile, Mexico, Peru, Hong Kong, Papua New Guinea, Russia, Taiwan, and the US. If China could really put this to bed, and demonstrate a capacity not only to define a trade agenda for Asia-Pacific countries but to implement it too, its geopolitical kudos would certainly increase. However, without the US – and why would the US participate in this arrangement – its hard to see the FTAAP getting very far.

 If the US walks away from the TPP, Chinas foreign policy hard-liners and international hawks may feel emboldened in their quest for regional hegemony. President Xis OBOR strategy and now his championing of the FTAAP testify to that desire. 

 But to say that the end of TPP is in Chinas interests is a risky assertion. It conflates two groups with incompatible interests, the hawks – as suggested above – and those who are urging reform on a seemingly reluctant leadership. If the hawks flex their muscles at American disengagement in Asia, the reformers will rue the loss of example and impetus that had at least a chance to help China avoid bad case economic outcomes from following the current economic and financial strategy. 

 All thats left to say is that if the rhetoric in the presidential campaign is all we know and believe, US-China relations are about to go downhill very fast.