Can Trump salvage the situation with China?

This text was written in response to the article “Trump’s Gift to China” published on April 4, 2017 in the New York Times (NYT). These comments were published on April 5 in the Comments section of the article. The NYT article is reproduced at the end.

Trump-XiSource: WatchingAmerica.com

“A deal in the making!

Can the US trade a favor for another favor from China? Limited options as the chips available are probably too important: South China Sea, trade and Taiwan. The US might stop interfering in the internal affairs of China. But this is of limited interest to China. If Trump is really serious about his “America First” approach, he might offer to disengage from Asia, in exchange for an agreement on trade. That is a possibility, however scary it might be for the “free-world”.

Can the US apply pressure on China? Commercially, any action taken by the US would be matched by China. This would hurt American companies that are involved in China through their supply chain or sales (i.e. Apple). Diplomatically, the US has weakened itself by withdrawing from the TPP, and has unsettled its allies with its blustering approach. Militarily, the US has a substantial advantage, but that would probably worsen the situation.

Alternatively, Trump might try the approach of being chummy with Xi. Unfortunately, golf diplomacy is too foreign to work with China. Maybe if Trump learnt to play ping-pong it might be the start of a rapprochement. The “art of the deal” does not work in China without a human rapport between the parties. And, currently there is no admiration for Trump in the “Middle Kingdom”. A jester will not get much respect from the polished leaders of China.

The Chinese are masters at the game of Go. Trump should read its guidebook before the USA is encircled.

Pierre”

___________________________________________________________________________________________

Trump’s Gifts to China

New York Times, Roger Cohen, April 4, 2017

SINGAPORE — The United States meets China this week in a position of weakness. Since taking office, Donald Trump has handed China a strategic gift by abandoning a trade pact designed to offset Chinese power in the region, been obliged to grovel after offending China over Taiwan, and turned President Xi Jinping of China into an unlikely poster boy for climate change concern and an open global trading system.

So much for the art of the deal; to Asian nations like Singapore worried about China’s aggressive territorial expansion in the South China Sea, American policy under Trump has looked more like a blink-first exercise.

Now Trump — having given the Japanese prime minister, Shinzo Abe, the full Mar-a-Lago – is obliged to give Xi the same at his Florida resort. (Angela Merkel, merely the German chancellor, need not apply.)

Top of the Florida menu is North Korea and how far China will help Trump in rolling back Kim Jong-un’s nuclear and missile program. The thousands of acres of new land built by China in the form of artificial islands or expanded reefs in the Spratly Islands off the coast of the Philippines — an extraordinary act of lawless territorial expansionism — will also be part of the discussions. Then of course there’s bilateral trade and Trump’s unhappiness with the $347 billion U.S. deficit last year — although with North Korea’s belligerent Kim now in a position to hit Japan, that feels like a manageable irritant in the symbiotic U.S.-Chinese economic entanglement.

China will not satisfy the United States on North Korea. Secretary of State Rex Tillerson has said “strategic patience” is over. But what does that mean? A pre-emptive American strike is nearly unthinkable given Kim’s ability to blow up Seoul. It sounds like what the Trump administration has specialized in: bluster. The Trump foreign policy doctrine: Shout loud and carry a little stick. When Trump tells The Financial Times that he can “totally” solve North Korea without China’s help, everyone shrugs at his saber-rattling.

China has leverage over Kim, but its “strategic patience” with him is infinite. Its priority is the survival of the totalitarian regime as a buffer. The dictator is China’s insurance against a nuclear-armed united Korea at its doorstep. Millions of North Koreans flooding over its border in the event of a regime collapse is the last thing China wants.

To Trump’s demands to deliver Kim, China is likely to shrug. Especially if the president (unlikely scenario) does what he should and tells Xi that China’s artificial-island push for regional dominance in the South China Sea is unacceptable.

In the long run any effective North Korea policy will probably have to begin with acceptance that denuclearization is no longer possible and stringent curtailment of Kim is the best bet. Diplomacy is a word that Trump might usefully add to his vocabulary.

For countries from Vietnam to Singapore, its absence has been alarming. Trump’s decision to rip up the Trans-Pacific Partnership, an ambitious free-trade arrangement including many countries in the region but not China, was reckless. China’s pressure on Singapore to choose between the United States and Beijing — something Singapore rightly refuses to do — is typical of the increasingly heavy-handed Chinese regional approach. With the T.P.P. dead, China is emboldened.

Already last year it had impounded some Singaporean military vehicles to signal impatience with Singapore’s close relations with Taiwan. It has also been critical of Prime Minister Lee Hsien Loong of Singapore when he raises concerns over China’s South China Sea aggrandizement. For the Chinese, “silence is golden” when it comes to all that new land for runways, radars and the like in waters far from its shore. But for Singapore, the sea is its lifeline. It cannot stay quiet; and it needs offsetting American power in Asia to keep those sea-lanes open.

Here we get to the nub of what should be on the Trump-Xi agenda. As Razeen Sally, an associate professor at the Lee Kuan Yew School of Public Policy, told me: “In the end it’s about free people and open societies. Are we going to have more or less of that in this part of the world? That is why more Chinese domination in Asia would be so ominous.”

But of course the Trump foreign policy is an experiment in a valueless, transactional approach to the world from which the American idea has been stripped.

Anthony Miller, an American businessman in Japan, wrote to me recently about a meeting with a senior Japanese university official who had asked him why Japan should align itself with America if there is no longer “a mutual belief in democracy, free trade and liberal values.” Miller concluded of Trump: “The damage he is doing to the underpinnings of liberal democracy is tremendous.”

When Lee, the Singapore prime minister, called Trump in early December he mentioned the free trade agreement between the United States and Singapore. The then president-elect, I was told, had no idea of its existence. Nor did Trump know that the United States has a trade surplus with Singapore.

Unpreparedness is bad. It’s worse when combined with bluster and recklessness. That’s why China is winning.

_____________________________________________________________________________________________

Economically, is China no. 1 or no. 2?

Is China the leading nation with its newly acquired economic might, or is the USA still the economic leader? The economic forces that we will briefly analyse are the size of the economy, the level of international trading, foreign investments, and the financing provided to other countries.

Over the last 30 years, the economic growth of China has been phenomenal. The most talked about measurement to assess the economic might of a nation is the GDP (i.e. creation of economic wealth). The challenge in comparing countries is that the value of the GDP needs to be converted from the currency of the country into a common currency, generally the US dollar. Often the number that is used is the GDP at CER (Current Exchange Rate, also called Nominal), compared to the GDP at PPP (Purchasing Power Parity).

GDP at CER is the GDP in local currency converted into US currency using the currency exchange rate at the time the two countries are compared. The challenge for this method is that the currency exchange rate is at times established artificially and is often subject to rapid fluctuation due to external factors.

For 2016, China’s GDP was 74.4 trillion RMB. For 2016, the value of the Chinese currency was on average 6.6 RMB to the US$, while in early March 2017 it was 7.0 RMB to the US$. Let us convert the Chinese GDP from RMB into US$, for these two values.

  Value in trillion
  In RMB In US$
 

Rate of

Rate of

 

6.6

7.0

Chinese GDP

74.4

11.1

10.6

Comparison of China’s GDP at two different exchange rates.

We note that the value of the Chinese GDP has shrunk by US$0.5 trillion (11.1 – 10.6), while in fact, the actual GDP value has remained the same.

The comparison of the GDP at PPP uses the actual wealth generated in goods and services, and the resulting power of consumption that is compared between two nations. It is for that purpose that for an end result that better reflects the reality, the GDP at PPP is used. In the CIA Factbook, one of the most comprehensive accessible database that covers all countries, comments on the GDP for China read: “Note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China.”

The following table presents the GDP converted in US$ at PPP for the G20 nations.

gdp-at-ppp              GDP of the G20 countries in US$ at PPP. Source: CIA Factbook

We see that the GDP of China at US$21.3 trillion is the largest in the world, even exceeding the combined current economic might of the 28 states in the European Union. It also exceeds the GDP of the USA by almost 15%. In fact, China’s GDP surpassed the US GDP in 2015. No other country approaches the economic might of these two nations.

A country can also impact or influence another country through trade. By using data from the CIA Factbook for exports and imports, we see that China’s Total Trade value marginally exceeds the numbers from the USA. For this analysis, we have added to China a portion of the numbers for Hong Kong.

 

Export value

Import value Total Trade
  US$ trillion US$ trillion

US$ trillion

China (partial HK)

2.2

1.6

3.8

USA

1.5

2.2

3.7

International Trade for China and the USA. Source: CIA Factbook

Another manner in which a country can economically influence another one is through FDI (Foreign Direct Investment). There are two types of FDI: Outward FDI where companies in one country invest in another country, and Inward FDI where a country receives foreign investments. This table illustrates both types of FDI. The Inward FDI value, for China (including HK) in 2014 (232 US$ billion) matched what the USA received (US$231 billion). For 2013, China trailed the USA by 15%. For the Outward FDI, the USA leads over China with China rapidly catching up.

outward-and-inward-fdiOutward and Inward FDI. Source: UNCTAD

Lastly, countries can influence other countries by lending them money. In this case, the USA has historically been the leader. Recently, China pulled off an amazing feat by launching a competitive institution that rivals the US. Since the Bretton Woods Agreement of 1944, the global framework for the world economy was dominated by the leading powers at the end of WWII. With the rapid growth of China, it came knocking at those doors, which remained closed. So China decided to introduce its own international banking organization. In 2014, China launched the Asian Infrastructure Investment Bank (AIIB) with the implicit goal of rivaling the World Bank, which is indirectly controlled by the USA. The USA encouraged western nations not to join the AIIB, but it failed. By the end of 2016, the AIIB already had 57 member nations, with 6 more aiming to join.

So overall, where does China stand? Let us tabulate the above information.

 

China

USA

GDP at PPP

+15%

 Trailing

Trade

Slight lead

 Decreasing

FDI

Catching up

Slight lead

Foreign Lending

Catching up

Solid lead

Comparative information. Sources: Various

There is no obvious economic leader, but what is clear is that over the last decade, China has nearly caught up with the USA in all aspects of what can impact the economic might of a nation. With a population of 1.38 billion compared to 0.32 billion for the USA (4 times smaller), it is a sure bet that in the near future China’s economic might will exceed the power of the USA, and in fact will easily surpass the USA by the middle of the 21st century.

So the answer to our question is: “It can be said that China has the largest economy. But in terms of economic might, the USA remains number 1, but only marginally. Within a decade or so, China will have taken over that position”.

Pierre

Round 1: China 1 – USA 0

In a previous blog, I discussed the China-USA dynamic in the Trump era. After the first month of the Trump administration, it is most interesting to see what is happening on the world stage in regards to the dynamic between these two hegemons.

walmart-in-china        Source: China Daily

In its rapport with the USA, China has built on its cultural strength based on its long history, and has come on top of this game. Over 2,500 years ago, a Chinese sage put in writing the fine art of power. Sun Tzu wrote The Art of War, which is required reading at military academies around the world.

The Chinese have put in practice this long rehearsed skill. No wonder the Trump administration was bamboozled.

A recent article in BBC News details the strategy and accomplishments of China over the last few months. The totally amateurish Trump administration could not stem the “charm” and “power” of China.

Welcome to the new world order where cunningness trumps strength and brashness.

Pierre

BBC News Link: http://www.bbc.com/news/world-asia-china-39061702

The omnipresence of Western culture

In the West, we discover Chinese culture through our enjoyment of Chinese food and the occasional exposure to philosophers (Confucius), medicine (acupuncture), martial arts (Kung Fu) or films (Crouching Tiger, Hidden Dragon). Otherwise, little is experienced of the culture of the Middle Kingdom.

chinese-movieSource: IMP Awards

On the other hand, when Westerners arrive in China, they are surprised to find Western culture so pervasive. Let us explore the extent of this cultural presence.

Upon arrival at the airport, one will note that the male or female models used on billboards are often from the West. Frequently it is to promote a Western brand, but quite often it is used for Chinese products. The use of a Western model can often be explained by the desire to position the product or service at a high-end level, enticing Chinese consumers to achieve the material wealth and ease available in the West.

As the person journeys further into China, the names on a substantial number of stores will be familiar. Often Western companies have identified the Chinese market of nearly 1.4 billion potential consumers as a market that is worth pursuing, in spite of the many challenges that they will encounter. American and European labels will lease many locations in shopping malls, at times occupying more than 25% of the retail space.

hmSource: Nelson Ching/Bloomberg News

American fast food brands have a strong presence across China as well, with KFC (>5,000 locations), McDonalds (>2,000) and Starbucks (>1,600) leading the way.

kfc-mcdonaldsSource: Wikimedia

As the days go by, one will notice the less obvious manners in which Western culture is present. Western music will often be played in public locations, even in Chinese restaurants. Western artists will tour the largest cities to capitalize on being well-known and liked. Billboards will advertise the latest Hollywood action movies. These movies will generate hundreds of millions of dollars annually in a market that will become within a few years, the second largest market, after the USA.

harry-potter

Source: AFP Photo / Frederick J. Brown

One will also be amazed at the number of people who have a decent notion of English. It is estimated that around 300 million Chinese are learning English. Some in a formal setting like schools (public or private), while others will do it on their own. Their goal will be to capitalize on Western opportunities, might they be work related or personal.

As one stays longer in China, further cultural influence will be experienced starting with the introduction of Western holidays. For Halloween, stores offer masks and outfits. On the evening of October 31, thousands of adolescents disguise themselves and go for a walk in the downtown core of major cities. In late November, it is common to see retail stores or banks posting “Merry Christmas” signs. Stores like Walmart and Carrefour offer Christmas trees and decorations. Commercial streets are lit up, encouraging shoppers to purchase gifts for family and friends.

As one talks to Chinese friends, a key topic of discussion is the education of their child (i.e. 1-child policy). Chinese parents take this topic very seriously, and as a consequence, foreign schools are often a preference, if the parents can afford the substantial annual fees, often equivalent to one-year salary of a well-paid individual. American and British schools and universities have established Chinese locations that use the curriculum and teachers from their home countries.

shanghai-american-school

Source: Shanghai American School

In the field of literature, it is frequent to see a book or a play in its original version or translated in Chinese. Through these, Chinese people are exposed to Western values portrayed by the likes of Shakespeare, Molière, Dickens, Hugo, Hemingway and others.

shakespeareSource: British Council

As one further expands its reach into the Chinese society, Western culture becomes more subtle. The presence of many multinationals operating in China and the actions of multiple NGO’s (Non-governmental agencies) further spreads the cultural influence of the West.

Where is the cultural dynamic between China and the West heading? The first observation is that at this time, the flow of cultural influence is highly unbalanced in favour of the West. This has been the case for as long as China and Western countries have interacted. How will this change in the coming years and decades? At this time, it is reasonable to believe that the material wealth, creativity, openness and social dynamism of the West will probably continue to exert pressure for the continued dominance of the West. For this balance to be more equal, substantial changes would need to occur in China.

Meanwhile, the government is fully aware of the cultural dominance of the West and is taking actions to regulate the inward flow. Strict rules have been placed on the number and the content of films allowed in the country. For foreign corporations, a series of rules clearly delineate their areas of activities, while the Communist Party of China monitors their activity through their presence within each of these corporations. For NGO’s, recently issued regulations constrain their operations.

So the approach is if China cannot match or stem the Western cultural influence, China will contain and constrain it. One must wonder if it will work.

It is to be noted that as the Chinese culture is strong, there is no chance that Western culture will subjugate it. The Western cultural experience will remain a veneer on the Chinese culture. The Chinese will continue to live with the beliefs and the behaviour that have been at their core for centuries.

Pierre Brunet

Mandarin as lingua franca?

With the growing power of China, will Mandarin (Putonghua (i.e. national language)) replace English as the language used across the world?

Whenever people in a nation desire to communicate with people another nation, a language that both parties understand needs to be found. Historically, the language of the nation that had the largest economy or greatest military power was used.

As the means of communication and travel evolved, the process used to select the language changed. Originally, the distance of communication was relatively limited. As the means of transportation increased in speed and reach; from horse, to ship, to plane and finally to electronic, the distance and the number of countries covered increased.

latin-as-lingua-francaLatin was the lingua franca during the Roman Empire and subsequent centuries. Source: Wikipedia

What was a regional requirement became an international need. If we travel back in time, common communication languages were based on regional powers. All this changed in the 17th century with the establishment of colonial empires.

The first universal language, commonly called lingua franca was French. It was replaced with English in the late 19th or early 20th century because of the substantial colonial empire and the economic might of England, compounded with the economic power of the USA.

Chinese language was the lingua franca within its sphere of influence (Japan, Korea, Vietnam and Mongolia) until the late 19th century. With the weakening of China due to foreign presence, English displaced Chinese.

Now that China is on the ascendance again, with its economy being the second largest, probably overtaking the USA in the coming decade, it is probable that some countries will feel the need to interact with China in Mandarin in order to ingratiate themselves towards China.

In international bodies, English and French are the most common languages used, with Mandarin rarely recognized as an official language.

The key point that changed in the historical dynamic used to determine which language will be used as the international lingua franca is electronic communication. This has forced parties to rely on the power of the word, compared to a face-to-face interaction. In an environment where time is money, compounded by high pressure to rapidly respond to questions or situations, it is important that the language retained be clear. This implies that the language has a low level of contextual relationship to be understood clearly (i.e. that the words can be taken at face value); in addition to being relatively easy to learn. And this is where the Chinese language stumbles, as the words (or characters in this case) used are not precise in their meaning, particularly if any legal recourse is pursued. In addition, learning Mandarin is time consuming as it is complex.

The following graph illustrates the extent to which English is currently spoken around the world by non-native speakers, compared to Mandarin. This numerical advantage of English is substantial and almost impossible for Mandarin to surpass.

non-native-speakersRelative importance of native speakers to non-native speakers. Source: Transpacific Project

Therefore, it is probable that the English language will remain for the foreseeable future, the lingua franca of the world, as the most commonly used international language when people interface across boundaries.

Pierre

Time-over for the West to dominate

A few years ago, I saw in The Economist a diagram that illustrated how the relative economic power, and therefore, political power of regions in the world had evolved over the last 1,000 years.

It was clear that Asia had led the world in the share of economic might, up to the 1820’s. This was based on the greater number of people in Asia compared to the rest of the world, as all countries had approximately the same capabilities to generate economic wealth per capita.

gdp-realignment

Source: The Economist

Then, something happened in Europe. First came the Age of Enlightenment, then the Industrial Revolution. By the late 18th century, the European societies had changed the ways in which their wealth was generated. New technologies were introduced that allowed the more advanced societies in Europe to generate wealth at a faster rate with fewer resources.

This new wealth based on innovative ways on how societies work, allowed England, then France to establish a strong industrial base, political system and finally military power to project their new found capabilities.

The development of powerful navies would allow European countries, particularly England after the defeat of Napoleon in 1815 to embark on dominating the world. In parallel, the USA had begun developing their own economy in the early 1820’s, but would remain self-centered until the later part of the 19th century.

british-fleetBritish fleet offshore. Source: National Maritime Museum, Greenwich, London

England, with its view of a world free of political constraints, would force free trade on countries that were not willing to cooperate. At times, England simply took over the control of a country to get its ways. This was the high period of imperialism, which lasted till after World War II.

The graph from The Economist clearly illustrates the increased relative power of the West at the expense of Asia. At its peak in the 1950’s, the West generated more than 50% of the world economic wealth, from a population base of approximately 25% of the world. Asia, with a population base of 50%, was generating less than 20% of the world wealth, down from 60% before the Industrial Revolution. Therefore, a person in Asia was 5 times poorer than a Westerner.

By the 1950’s, when the shackles of colonialism had been removed in Asia, the realignment began. Asia began importing technologies (i.e. finally benefiting from the fruits of the Industrial Revolution) and changing the ways their societies were operating. China took the lead with this realignment, particularly since the 1980’s.

Over the coming decades, we will see the relative economic might of Asia continue to grow. It will probably not reach the 60 to 70% it had historically been before the 1820’s, but might very well reach the 50% mark. This will create a greater wealth per person in Asia, and a standard of living progressively approaching the one experienced in the West.

One question remains: how will each country in Asia organize their society, as it is the structure of their institutions and the characteristics of their culture that determine the level at which an economy will plateau.

Ref.: “The balance of economic power – East or famine”, The Economist, Feb. 25, 2010.

Pierre