Donald Trump talked a lot about China on the campaign trail, making relations between the two likely to be a big issue as the President-elect’s foreign policy takes shape. Trade will be top of that agenda.
Donald Trump has not been a friend to China on the campaign trail. He has called climate change a Chinese hoax and puts blame for America’s slump in manufacturing on Chinese competition.
In January the American government will change significantly, becoming not just led by the right, but dominated by it, as the GOP takes a majority in both the Senate and Congress for the first time since 1929. Accordingly, many are wary about what a Trump victory will look like for China, will his words translate to action?
On the economy
There are three key areas to consider. First, the policies of the U.S. Federal Reserve may change, which would influence the value of the dollar and probably make it more volatile. Second, the U.S. Government is expected to implement fiscal stimulus policies to promote global demand. Finally, Trump is likely to make good on one of his loudest campaign promises and adjust the trade and customs tariff policy towards China.
In addition, UBS Global states it is likely that interest rates will increase, even if the primary impact to the market quickly fades. Despite an initial plunge the dollar has rallied, showing investors are optimistic of Trump’s spending when in office. Although his policies are still far from clear, his enthusiasm for fiscal stimulus seems to already be having an effect.
In the dimensions of trade and tariffs, Trump said during his campaign that he would brand China as a currency manipulator on his first day of taking office. If this is the case then he would be able to restrict government purchases of Chinese commodities. Moreover, he signalled he wanted to increase duties on some Chinese exports by 45% in support of manufacturing at home. However, if he does so China would accuse the US of “violating their trade agreement” and take retaliatory measures towards US exports to China in return.
There is also the important question for Trump’s people to consider of whether import taxes against one country can tackle a problem that is global in nature. Apple’s phone manufacturer would almost certainly pull out of China in the wake of such increases but would those jobs come home? No, probably not. In fact, ASEAN nations such as Vietnam are most likely to benefit. After all it is even cheaper to produce the stock there than it is in China. He may soon realise that cutting out the competition is nowhere near as effective as simply being competitive.
Starting a trade war?
From the Bejing side, Xi Jinping has urged cordial relations and no change in Chinese-American trade. He even stated, “the facts prove that cooperation is the only correct choice for China and the United States”. As such he believes, both America and China must “promote the two countries’ economic development and global economic growth… [and] push for better development going forward in China-US relations”. Increasing duties is not a good way to start that relationship.
The mouthpiece of the Chinese Communist Party, The Global Times warned that Chinese countermeasures towards Trump’s proposed tariffs would mean “a batch of Boeing orders will be replaced by Airbus, American auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US.”
These comments were published just hours after Xi Jinping had his first official phone call with President-elect Trump. The American’s transitional office stated that “during the call, the leaders established a clear sense of mutual respect for one another, and president-elect Trump stated that he believes the two leaders will have one of the strongest relationships for both countries moving forward.” That remains to be seen in practice.
What next for free trade?
According to reports, the outgoing President Obama has halted all work on negotiation for the Trans-Pacific Partnership (TPP) free trade deal. Trump says the deal stinks. As such, analysts say it is wishful thinking that the package will be passed in its original form. This may prove to be a double-edged sword. While the TPP deal would have ensured not only China, but most ASEAN countries, had access to American markets its demise may open other doors.
For a start, Trump has stated he is looking forward to keeping up with certain bilateral trade deals, “because we have opportunity to cut [a] better deal.” There is also the possibility that countries will instead look to the Chinese-led alternative of the Regional Comprehensive Economic Partnership (RCEP). This includes ASEAN plus China, Japan, Korea, Australia, New Zealand, and India. That accounts for a mighty 27% of global GDP. This means that in the diplomatic stakes China’s stock rises as Trump embraces unilateral trade arrangements.
So as Trump sets out to “make America great again”, will he need to cut Sino-American relations at the knees? To deliver on his campaign promises he will certainly need to remould the relationship between the two, and he may come to regret making it such a key strut of his manifesto. But then again, looking at those promises – and the others on which he was swept to victory – there is still room for manoeuvre. The wall between the U.S. and Mexico has already been toned down to a fence in some places, and the removal of Obama’s healthcare reform has become an adjustment. A reasonable settlement between the two may yet be possible, and if not, the ASEAN region is most likely to benefit.