Trump just raised turned up the political temperature with China

13th December 2016

In an interview with Fox News over the weekend, the President-elect said he didn’t know why the US should be bound by the One China policy unless China was willing to do a deal with the US over trade and other issues that span tensions over the South China Sea and relations with North Korea. This policy, which hasn’t prevented US commercial and military relations with Taiwan but which doesn’t recognise its sovereign status, has been the bedrock of US foreign policy towards China for 40 years and is among the most sensitive of red lines for Beijing. Why is Trump treading on eggshells?

The now typical answers to this – as to many other questions – are that he doesn’t care for political correctness, doesn’t mind being called volatile and unpredictable, and wants to establish a new basis for US-China relations, ostensibly to give American workers a better deal. But a more fractious relationship with China has also been in the Trump narrative from the beginning of his presidential election campaign. The rhetoric during the year and since his November victory has included the threat to label China a currency manipulator, to levy across-the-board tariffs on Chinese goods, and to build up American military presence in the South and East China Seas. more recently, he had already broken protocol by arranging to receive a congratulatory phone call from Taiwan’s President Tsai Ing-wen.

It is sometimes argued that Trump’s unpredictability means no one should take too much at face value. He has, after all, nominated Terry Branstad, Governor of Iowa and a man who has known President Xi Jinping and calls him a friend, to be America’s ambassador to China. But for the moment at least, even though we don’t know if Trump’s bark is bigger than his bite will be, he is making big and not very comforting noises. This latest foray, to put the One China policy in play, is a serious escalation in US-China tension, and he must have known China would not be happy.

And it wasn’t. Foreign Ministry spokesperson Geng Shuang told journalists in Bejing on Monday that if the One China policy was compromised or undermined, then the US-China cooperation would be out of the question. The daily Global Times, affiliated to the Communist Party, said that Trump’s statement testified to his inexperience, and insisted that the One China policy was not something to be traded, sold or bargained over.

It is tempting to put all this down to posturing before the new President takes office, but it’s also probably a mistake to do so. Leaving aside the straight geopolitics of maritime disputes and rights, trade is already a hot issue for both America and China.

For Trump, American jobs are the central issue, and he has alleged the connection with the US trade deficit with China, which amounted to a record $366 billion last year, equivalent to about 69% of the total US trade deficit of $530 billion. Trump’s team has charged that China cheats in trade by manipulating its currency, and by using subsidies and other measures to boost exports, and restrict imports.

For China, the issue is status and respect in the world’s trading and economic system. It seeks recognition not only for its weight in the world as the largest export nation, but also a bigger say in global institutions and a bigger role for the Renminbi. It doesn’t want to be treated as a supplicant, or a country that is on trial for good behaviour.

In this respect, for example, Chinese officials were disappointed not to have been awarded ‘market economy’ status (MES) last weekend on the 15th anniversary of their joining the World Trade Organisation, which they thought had been assured. MES requires global trade regulators in trade disputes to consider export prices, for example, on a domestic basis, and not with reference to prices in third countries. MES, therefore, would favour China, especially in contentious areas such as steel, where it is accused by the US and EU of dumping steel at unfairly low prices. But it’s not only steel. Last week, the US imposed anti-dumping tariffs on Chinese-made washing machines, joining other products according to the US International Trade Commission’s website. China has vowed to take action against any WTO member that refuses to to recognise MES in anti-dumping disputes. In a rather pointed way, the official Xinhua news agency said that the refusal to award MES was ‘nothing short of protectionism’, and ‘poisons the recovery of the global economy’.

The background to Trump’s One China policy statement, therefore, is one of festering tension over trade. After Trump is inaugurated, the likelihood is that his Administration will label China a currency manipulator, which is relatively meaningless but it would trigger investigations. If these found China to be manipulating its currency, the Executive could recommend and implement partial or sector-specific tariffs tariffs, probably much lower than the 45 per cent widely cited, on high profile and sensitive Chinese exports, such as steel and automobile parts.

China would almost certainly retaliate. Global Times pointed out recently that US tariffs could prompt China to spurn Boeing aircraft, US automobiles and iPhones, and impose retaliatory trade restrictions against soybean and maize imports from the US, which certainly wouldn’t please the voters of Iowa.

US-China relations, therefore, look set to enter a new phase in which 2 strongmen, Trump and Xi Jinping, are determined not to lose face, and more to the point, be seen to lose face. Trump has vowed to make America great again, and stand up for American workers in the face of foreign countries and governments, and even US companies that have contrived to offer them a bad deal. China, by contrast, is on a mission to overcome and overturn the humiliation, which it claims foreigners and history have imposed on the country; and President Xi Jinping, facing a crucial 19th Party Congress at the end of 2017, is determined not to be seen to be weak, or be seen not to be in control of China’s most important external relationship.

The US and China will have to manage an increasingly difficult and sensitive relationship next year and after, and with Trump’s One China statement, the temperature of that relationship just went up several degrees.

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