US-China relations: When there’s nothing left to talk about,
If anyone doubted that the post-war consensus on free trade and economic integration was under pressure, the inauguration in the US of an avowed foe of both should dispel the notion. The election of Donald Trump marks the first time an economic nationalist has led the Republican Party since 1940, when Wendell Willkie lost decisively to Franklin Roosevelt. Combined with Britain’s vote to exit the EU and a surge in support for populist movements across Europe, this trend will change the tenor of the global economic conversation in 2017. It will also intensify growing pressure on the relationship between the world’s most important economic and political actors: the US and China.
In decades past, free trade and globalisation created a buffer to the often conflicting national interests and prickly pride that separate China and the US. Through many crises overseen by presidents of both US political parties, economic priorities have helped contain crises and rapidly repair ties afterwards. The 1999 bombing of China’s embassy in Serbia, the 2001 Hainan spy plane incident, and multiple disputes over dissidents and cyber espionage along the way: any or all might have upended a more fragile relationship.
A major factor underpinning restraint has been the belief on both sides that, on balance, the bilateral trade and investment relationship is too important to jeopardize. As of January, when Trump takes the oath of office, the feeling is no longer mutual.
Free trade under fire
The extent to which candidate Trump can or intends to do all he promised during the election campaign is unknowable at this juncture. Faced with the realities of office, the ‘campaign’ version of some policies may give way to a more pragmatic version over time. For example, there have already been signs of backtracking from, or at least redefining, his high-profile call to slap a 45% tariff on all Chinese imports. And dramatic withdrawals from trade agreements will not necessarily preclude future reengagement once Trump has shocked interlocutors into giving the US a better deal.
Nonetheless, in affirming in November that he will end US participation in the Trans-Pacific Partnership (TPP) free trade accord, as well as its European variant, the Transatlantic Trade and Investment Partnership (TTIP), Trump has put down a marker: free trade is in the crosshairs. No target looms as large as China.
Trump has strong domestic incentives to aggressively pursue punitive action against China and other low-wage manufacturing nations through the WTO, and to consider a raft of unilateral tariffs targeting Chinese steel, aluminium, auto parts and possibly selected electronics. This would partially fulfil some of the key promises of his presidential campaign (which included similar proposals aimed at Mexico), but would invite retaliation. There is currently little real basis to forecast how far a tougher US approach will go on the spectrum from measured pressure to ‘trade war’, but the uncertainty is concerning for companies exposed through complex global supply chains, markets and investments.
China, with its giant stake in stable global trade, has watched events in the US with concern, and will wait to judge the new president on deeds rather than campaign words. Many in Beijing were already expecting a difficult period if Hillary Clinton had won the presidency, and are yet to be convinced that Trump will bring a very different from some of his predecessors who talked tough on China. George W Bush took office vowing to treat China as a ‘strategic competitor’ not a ‘strategic partner’, but after an early crisis of relations ended up presiding over one of the most stable periods of US-China relations in decades. The US and China traded tariff-slapping and WTO complaints shortly after Barack Obama took office, but the outgoing president apparently found little value in that approach, using it sparingly thereafter.
Chinese leaders are nonetheless sensitive to the relative uncertainty Trump brings. Any confidence they may have had that he will be ‘just another US president’ was dispelled by a single phone call: Trump’s December call with Taiwanese President Tsai Ing-wen brushed aside the diplomatic deference shown to China by every US president since 1979. Both Trump’s style and his strategy mean we should expect more such surprises in 2017. He will deliberately tackle taboo topics in diplomacy (and no interest is more ‘core’ for China than Taiwan), believing that China will be a more flexible negotiating partner once its assumption and sense of security are shaken.
Assuming this is indeed a deliberate approach rather than random recklessness, these tactics may actually yield some results. If nothing else, leaders in Beijing are having to reassess what they have long considered givens on US policy. Regardless, confrontational actions and anxious episodes lie ahead, ushering a riskier, less predictable period. Although restraining their responses so far while trying to figure Trump out, politicians in Beijing face their own domestic pressures. When China refers to ‘red lines’ on issues like Taiwan it reflects real policy positions, not empty rhetoric.
Nor is China likely to make sweeping trade concessions to appease voters in richer economies. The Trump campaign claimed at one stage that Chinese people feel they are benefiting from poor US trade negotiating tactics, but the opposite sentiment has been evident in China lately. December 2016 marked the 15th anniversary of China’s WTO accession, and triggered considerable reflection there on the unprecedented conditions that Beijing accepted to join the club. The way Beijing sees it, China’s openness to trade and investment has long since surpassed that of its developing peers, and higher-cost countries are blaming China for their eroding competitiveness – either for domestic political ends or as part of efforts to ‘contain’ China.
Even in a country where market liberalisation and trade have helped to drive history’s largest ever movement of people out of poverty, the benefits of continued opening are increasingly questioned. Most of its trading partners now see China as an economic superpower and leading competitive threat to their industries, and therefore expect greater reciprocity, including enhanced market access. Yet China is currently pushing ‘state capitalist’ industrial policy solutions harder than painful market-oriented restructuring and liberalisation.
Whatever the US election outcome, it was clear by 2016 that such trends portended growing bilateral friction under either a Clinton or Trump leadership. Spats over steel dumping are one thing, but going forward China will compete with US companies higher and higher up the value chain. Like their European peers, these companies will add to the pool of malcontents over issues including market access, Chinese state support to local competitors, and intellectual property protection. The US business community has long been a strong advocate of close, stable China ties. This is still broadly true but less so than before, even as most US firms in China remain profitable and growing.
Glueless in a crisis
China’s leaders appear aware of the stakes. Hosting the September G20 summit in Hangzhou, Chinese President Xi Jinping delivered an anti-protectionist speech that reflected its concern at what was transpiring in the US campaign. Since the end of World War II, and in an accelerated form since the end of the Cold War, the US has been the chief proselytiser for globalisation and free trade, and an architect of the institutions that underpin it. In 2017 Beijing will be a louder defender of free trade than Washington, even as China seeks greater influence in those institutions.
It is certainly too soon to declare that the US elections and Brexit signal an end to the era of globalisation – a period that has seen an unprecedented movement of capital, goods and people across international borders, and history’s greatest improvements in poverty, infant mortality, life expectancy and per capita income. Globalisation is seriously challenged, but it is still the operating system of the global economy. What is certain is that the ground under the feet of global business in 2017 will feel less firm and familiar.
Similarly, with Trump not yet installed in the White House it is impossible to say what impact he will ultimately have on the crucial US-China relationship. But tests and turbulence are certain in the coming year. The incoming US president has not been tested as a handler of high-stakes geopolitical disputes and crises. Leaders in Beijing are vastly more experienced, but we have little precedent for how they may react if pushed and provoked by the US on issues where China is most sensitive.
There are still enough tangible shared interests and economic interdependence at stake, to make possible a renegotiation of the terms of the relationship. Some such ‘grand bargain’ seems to be what Trump and his advisors envisage, and China is not entirely averse to such a game. But there is an alarming gap between the two sides’ perception of what is ‘fair’ in the economic relationship, and as of January 2017 it is no longer a mutually accepted anchor of ‘win-win’ US-China relations. The risk is that cracks are appearing in the economic glue that has held together this troubled political relationship, just as it is about to be vigorously shaken by President Donald Trump.