Issue Briefs

Trump needs to shape difficult relationship with China

Trump needs to shape difficult relationship with China

Martin Sieff

December 26, 2016

US President-elect Donald Trump faces a long, difficult road, fraught with pitfalls, in seeking to redefine the symbiotic relationship between the United States and China that has developed over the past 40 years. That process has already begun: But it did not get off to a good start.

Trade imbalance with China

Trump made clear in every speech he gave during his long and arduous election campaign that he is determined to dramatically reduce the tidal wave of manufactured goods that the United States imports every year from China, generating an annual trade deficit between the two countries of half a trillion dollars, the largest such sustained trade imbalance ever recorded in history between two nations.

China also holds around one third of all US treasury bonds in existence. It should be noted that, while the ongoing tsunami of exports into the American market has been the main locomotive pulling the rise of China’s industrial economy for decades, the United States has also benefited from this huge trade flow in getting products that are at far lower cost than they could be if manufactured at home, keeping inflation to negligible proportions for generations.

U.S. factories closed

However, as Trump repeatedly pointed out in his campaign speeches, the long-term effect on US manufacturing and heavy industry of the Chinese imports on the American Heartland has been devastating. At least 70,000 US factories and enterprises have closed since China joined the World Trade Organization, (WTO), on December 11 2001, when Bill Clinton was President.

While not all those factory closures can be attributed directly to Chinese imports, throughout a very long period these imports have made up more than half of the annual flow of manufactured goods into the United States, undercutting long-established traditional American manufacturers.

Keep the campaign promises

Keeping all this into account, Trump will now be faced with the hard task of fulfilling his core campaign trail promise about getting tough on trade. He will have to find a way to substantially reduce the annual trade deficit of half a trillion dollars with China without setting off a potentially ruinous trade war with Beijing.

 Breaking the rules on Taiwan

The US President-elect made that job a lot harder by his phone conversation with Taiwan’s President Tsai Ing-wen on December 2, and his subsequent casual comments on his willingness to follow or not to follow the venerable, 44-year-old US “One China” policy nine days later.

The “One China” policy was set in 1972 when US President Richard Nixon pledged to recognize only Beijing as the legitimate government of China and never to grant comparable status to Taiwan.

On December 11, Trump signaled that he will not be bound by the One China policy regarding relations with Taiwan.

“I don’t know why we have to be bound by the One China policy unless we make a deal with China having to do with other things, including trade,” he said in an interview with FOX News.

Indeed, Trump stated that his administration will follow its own counsel on matters pertaining to the delicate China-Taiwan relationship.

“I don’t want China dictating to me,” he stressed, commenting on a note of protest issued by Beijing after his phone conversation with Taiwanese President Tsai Ing-wen on December 2.

Trump’s almost off the cuff comments on the “One China” policy and the US-Taiwanese relationship have caused deep concerns among Chinese observers.

More conciliatory moves

Yet Trump has tried to send more conciliatory messages to Beijing too.

On December 7, he announced his appointment of veteran Iowa Governor Terry Branstad, a long-time friend of Chinese President Xi Jinping, to be the US Ambassador to China, suggesting that stable relations would continue. And introducing Branstad, who has been on six official US official trade missions to China, Trump emphasized that his selection had been based on the high standing Branstad enjoyed among officials in Beijing.

No more TPP, good news for Beijing

For its part, China has already warmly welcomed Trump’s commitment to pull the United States out of the controversial, 12-nation Trans Pacific Partnership (TPP) as soon as he took office.

The reason for this is clear: the death of the TPP opens the way for China to push ahead with its own Regional Comprehensive Economic Partnership (RCEP) project that it has been working on since 2011 with trade negotiators from 14 other Asian nations, including Japan and India as well as Australia.

RCEP could give China a major advantage in trade relations

If successfully concluded, the RCEP will cover almost 30 percent of global GDP and more than 25 percent of world trade. If implemented, the RCEP may become the base for an even larger, China-led Asia-Pacific free trade area excluding the United States.

US liberal free traders have warned that Trump’s decision to scrap the TPP will cede the venerable US economic and even diplomatic leadership in the Asia –Pacific Region over the past 70 years to Beijing.

However, to Trump and his supporters, this is an acceptable price to pay for maintaining US sovereignty and preventing international corporations from being able to operate within the United States with impunity from US government regulations and laws, by being able to appeal to the jurisdiction of transnational courts that the TPP sought to create.

A bad start?

That said, Trump’s more recent gaffes on One China policy and Taiwan now threaten to overshadow his more positive signals to Beijing.

Trump does not appear to want to start a tariff war with China that would set off a crisis for the global economy. His entire life experience has been as an international businessman and dealmaker with a generally successful record in business negotiations.

Trump therefore can be expected to seek a process of hard dealing with Beijing, starting by presenting maximalist positions, but being ready to fall back from them and cut deals.

However, the problem Trump is likely to face is that China over the decades has become so used to American policymakers who are clueless and naïve on trade and exchange rate issues.

The Chinese are also likely to feel fearful that any significant reduction in the volume of their annual exports to the United States could have a devastating effect on expectations in the long-fragile Shanghai financial community and set off a chain reaction economic crisis at home.

 How to extract a better deal?

Trump also faces the problem that after decades of such lop-sided trade flows, he is inheriting a US economy that is far more dependent on Beijing than the other way round. Around one third of all US Treasury bonds are now held by the State Bank of China, although Beijing has moved to quietly sell significant quantities in recent weeks, so that Japan’s holdings now exceed China’s for the first time in many years.

China clearly has the “nuclear option” of dumping its Treasury bonds and setting off a catastrophic financial crisis in the United States. But this still appears very unlikely to happen as the impact of such a meltdown would be almost as ruinous on China economically, and fatally discredit the current Beijing political leadership.

The South China Sea problem

China’s leaders may also be reluctant to seek to topple or totally discredit Trump, because he is the only US potential leader who may offer the prospect of peaceful de-escalating the face-off between US and Chinese naval and air forces in the South China Sea.

For Barack Obama and Hillary Clinton, hanging tough in the South China Sea was central to their “Pivot to Asia” policy and to their determination to keep the US Number One in the Asia Pacific.

However, Trump has made clear he sees the United States as dangerously strategically overextended around the world, and would like to pull out of the danger of a military confrontation with China. While this alarms such core Asian allies as Japan and South Korea, it is a very welcome prospect to Beijing.

China’s security concerns

For China, the US naval and air buildup in the South China Sea represents an existential threat.

As I documented in my 2010 book “Shifting Superpowers: The New and Emerging Relationship between the United States, China and India” Chinese civilization and society were totally destroyed twice in modern history through invasions and catastrophic military defeats coming from the South China Sea.

The first was by Britain and France in the 1840 First Opium War that led within a decade to the Taiping Rebellion, the bloodiest and most destructive civil war of all time.

And on the second occasion, Japan’s invasion of China and drive up the Yangtze River valley to Nanjing in 1937 cost at least three quarters of a million lives. Estimates of the number of Chinese who perished in the eight year war and occupation that followed range from 16 million to as high as 30 million.

Trump has repeatedly said he wants to avoid conflicts around the world in order to rebuild the exhausted US military forces and to concentrate on his priority strategic goal of destroying the Islamic State (ISIS).

Pragmatic foreign policy?

Trump’s choice of Exxon Mobil Chairman and CEO Rex Tillerson as his secretary of state sends a message that he puts economic interests above ideological ones and suggests that he would therefore like to reduce the level of confrontation with Beijing over the South China Sea.

On to a difficult start with Beijing

However, Trump looks certain to be constrained by political and military as well as economic issues in handling his ongoing relationship with Beijing. Resolving the huge and complicated problems in the Sino-American relationship will take years rather than months and a soft landing for either or both parties is by no means guaranteed: Indeed, it looks depressingly unlikely.

Martin Sieff is a Global Policy Institute Fellow. He is author most recently of Gathering Storm: The Seventh Era of American History and the Coming Crises That Will Lead to It.


The views and opinions expressed in this issue brief are those of the authors and do not necessarily reflect the official policy of GPI.