TheMarketForIdeas

In 2016, the global situation was characterized by chaos, changes of the international order through conventional warfare and through a new type of war – the hybrid war – while, for the first time in its history, the EU block’s survival was being openly discussed. Nevertheless, what was most frightening in the EU is the fact that, with far-right, anti-EU politicians in France and the Netherlands riding high in the polls ahead of elections in 2017, there is widespread speculation that Britain’s departure may be the start of a great unraveling of the European Union. There was also the added pressure of a resurgent Russia against former soviet countries and against the EU unity. The process of quantitative change seems to have reached the critical point, proceeding into the stage of qualitative change, and the Trump phenomenon is one of them. 

Shifting Asia stance 

In the past few years, the rivalry of strategic interests between China and the US has been mitigated by shared economic interests. But economic cooperation can quickly end over disagreements on currency and trade – reducing the Sino-American relationship to raw, zero-sum geopolitical competition.

Analysts across the world are speculating on what the US foreign policy will be towards one of the central points on the globe, namely the Asia-Pacific region. The US – China relationship is concluding 2016 on the foggiest note in years because of the American electoral campaign. President Trump repeatedly spoke out against Beijing during his campaign. It seems that the Nixon-Kissinger era regarding China is gone with the wind. We have an upside-down Kissinger concept about what the US – China relation could be. President Trump has questioned the “one China” policy by taking a congratulatory call from Taiwanese President Tsai Ing-Wen. China has responded by adding visible anti-aircraft systems to the artificial islands it has dredged out of the South China Sea and by seizing an underwater American drone from under the nose of a US ship. Now, the Chinese aircraft carrier sails together with other warships (a battlegroup) in the South China Sea for a complex series of military exercises. 

In the history of US presidents coming into office, there were precedents of touching China’s red line on Taiwan issue. We still remember that Ronald Reagan and George W. Bush were seen as quite pro-Taiwan in the first months of their presidency. In both cases, it was the US side that changed its original positions, bringing the bilateral relationship back on track. Today the relationship between China and the US is very different from what it used to be during 1981 and 2001, when Reagan and George W. Bush respectively took office. By necessity, and to the wider benefit of the world, the US and China share a close cooperation (or a necessity for such) on many critical issues, some of which Trump cares little about, like climate change, and others which are essential to his agenda, like the economy and trade. If China and America go into a downward spiral, many countries would be negatively influenced in one way or another. That means a US President, no matter his personal opinion on China, needs to pay close attention to the bilateral relations. Of course, that is also true on the Chinese side. 

Crystalizing uncertainty 

The big question for 2017 is whether the two sides will let the relationship unravel further. Will their cold war become more war and less cold? In the past few years, the rivalry of strategic interests between China and the US has been mitigated by shared economic interests. But economic cooperation can quickly end over disagreements on currency and trade – reducing the Sino-American relationship to raw, zero-sum geopolitical competition. Trump made campaign commitments to change the dynamic with China and President Xi Jinping is under pressure to show that his Chinese dream keeps going. 

Navarro believes that a tariff on Chinese imports would compensate Americans for Beijing’s wrongdoings, from illegal export subsidies and currency manipulation to intellectual property theft and environmental wreckage.

Now, in 2017, Beijing will host the 19th Congress of the Communist Party of China. During the last 20 years, China has been transformed from a second-tier power into the major challenger to the political order of the Pacific region. China became the world’s latest superpower and the fastest-rising rival of the US. The Obama Administrations responded cautiously. What has been remarkable about the US policy toward China over the past two decades was its moderation. For the American establishment’s ideology, China’s economic growth posed no problem for the US, because rising global wealth was not a zero-sum game. China – US trade was mostly seen in classically liberal, free-trade terms: it made everybody better off by offering low-priced goods to American consumers and jobs for the Chinese. From a military point of view, Obama maintained the traditional hub-and-spoke security relationship with various Pacific nations, in effect containing China without using that provocative word. 

Trump sees things very differently. He depicts China’s growth as illegitimate and dangerous, caused by a currency policy helping it export goods at rock-bottom prices in a form of unfair competition which fueled a rapid expansion (quantitatively and qualitatively) of its military capabilities. A priority of Trump's campaign promises has been to impose new tariffs on Chinese goods and to bring trade cases against Beijing at the WTO. Trump nominated professor Peter Navarro (with a PhD in economics from Harvard University) as trade adviser. Navarro believes that a 45 percent tariff (suggested amounts vary) on Chinese imports would compensate Americans for Beijing’s wrongdoings, from illegal export subsidies and currency manipulation to intellectual property theft and environmental wreckage. Navarro argues that curbing Chinese imports would reestablish fair competition, leading, in turn, to the resurgence of manufacturing in the United States. Is that good thinking? From a couple of perspectives, it seems delusional. Overall, industrial output in the United States is at a historical high, while manufacturing employment is at a historical low. In a world of global value chains, where production is sliced and diced across the world, several imports from China, such as auto parts, steel, semiconductors, and plastics, are actually intermediate goods or raw material for U.S. exporters, meaning that they contribute to the value of the final good. Paradoxically, a tariff on imports from China would be the equivalent to a tax on US exports, which would imply higher selling prices, a loss of competitiveness for US firms, and, in turn, fewer jobs. 

Regional ambitions 

The transition between Obama and his predecessor in terms of US – China policy was smooth. However, now it seems we are facing a reversal.

Meanwhile, Trump seems fairly unconcerned about China’s regional geopolitical ambitions. On the campaign trail, he criticized the US treaty obligation to defend Japan and called on Japan to pay more for its security and the US troops stationed there. How China will respond depends very much on Xi Jinping’s perception of his nation’s economic and strategic interests - and his own political objectives. China’s export-driven economy cannot afford a trade war with the US. At the same time, Xi has committed himself, and the Chinese Communist Party, to a nationalist domestic strategy. Given the inevitable decline of economic growth in China from its world-historical heights, only nationalism promises to shore up the party’s legitimacy. The nationalist imperative will matter especially to Xi if he decides to try and stay in power longer than 10 years, thus breaking the norm developed by two decade-long cycles of Chinese politics. Xi will show strength against Trump through symbolic military aggressions - like the anti-aircraft batteries in the Spratly Islands. That plays better with the Chinese domestic audience than economic responses. If that happens, Trump will have to reconsider the question of China’s military stance, for instance by reactivating the Obama approach – putting US F-22 fighter jets in Australia. 

The danger of military escalation is not small. The danger of economic escalation is not negligible either. For all the talk about Vladimir Putin and Russia, Trump’s Presidency may well come to be defined by his relations with China. A consensus had been gradually building up in America on a strategy toward China in the past two decades, so stakeholders had begun to pay less attention to how political changes in the US might influence Sino-US relations. The transition between Obama and his predecessor in terms of US – China policy was smooth. However, now it seems we are facing a reversal, because in many ways Donald Trump is an exception to all the rules. 

Conclusion 

This explosive mix of looming multiple crises existing today could be ignited by miscalculation, mistake or misperception. President Trump has already electrified the Twitter world with his post-election conversations with the president of Taiwan and the Prime Minister of Pakistan, both of which suggest a pivot away from China. The appointment of Sinosceptic Peter Navarro to a key trade position in the White House, along with the refusal of the President to name Russia as a real threat, supports this possible policy shift. As both Secretary of Defense-designate General Jim Mattis and National Security Advisor Lt. Gen. Mike Flynn regard the Islamic State and related Islamist terror groups as the main danger, Russia can be a necessary ally to win this fight, because it is already there. Of course, the anti-Chinese thrusts may be negotiating gambits as Mr. Trump loves the art of the deal.