The improbable has happened. Donald Trump will be the next President of the United States of America. So, what are the possible implications for China? Let us look at what might happen from the most probable to the most challenging.
A Chinese newspaper with the headline ‘Outsider strikes back’ above a picture of Donald Trump. Photo: AFP
The first topic regards the Trans-Pacific Partnership (TPP) free-trade agreement, which Trump has repeatedly stated that he would not sign because of his position that free-trade accords ship jobs outside the USA. The non-implementation of this accord goes against the desire of all countries in Asia to expand free-trade. The framework of the TPP was pro-market and was designed to set the stage for Western-based market economy rules. With this agreement not proceeding forward, the context for free-trade agreements in Asia moves in favour of China with its desire to see a strong presence of the state in the market.
Another approach favoured by Trump is to focus on America and take its distance from the rest of the world, as long as it is not about terrorists that can attack the USA. A Trump presidency would probably scale down the Pivot to Asia that the Obama presidency has taken. This implies that smaller countries in South East Asia will see their position weakened in regards to the territorial disputes in the South China Sea, where China has claimed vast areas within the “nine-dash” line. This will embolden China to continue and even expand its land reclamation efforts and force smaller nations to negotiate an agreement with China.
The other aspect that was clear in the Trump campaign is the desire to see foreign countries that benefit from the military protection of the USA, carry a greater percentage of the cost of their defense. The benchmark of this cost is 2% of GDP, as clearly spelled out within NATO (North Atlantic Treaty Organization). In Asia, two key countries might be affected by this policy: South Korea and Japan. The most worrying is Japan, which is facing China in a contest of will in regards to projecting its influence across Asia and maintaining control of small islands that China asserts belongs to them. Currently Japan has been increasing its military buildup and freeing itself from parts of the constraints of their constitution imposed by the USA in 1945. At this moment, military spending by Japan is constrained to 1% of GDP, while for China it is almost 2% based on an economy 3 times larger. It is possible that the tension between China and Japan will continue to rise, allowing the Chinese government to continue its assertive policy towards Japan.
The biggest question in regards to the dynamic between the USA and China relates to trade. Over the last 2 decades, millions of jobs have been lost in the USA and moved to China because of a much lower cost of operation (labour and material). This cost advantage might have been compounded by the weak value of the Chinese currency (RMB) relative to the US dollar, and possibly by market manipulation where State Owned Enterprises dominate (dumping of goods in sectors that are in overcapacity, particularly the steel sector). Not much can be done by the USA to influence the cost of labour or raw material in China, but substantial action can be taken by the USA on currency and dumping.
On currency, the key expression to watch for is “currency manipulator”, where China would be deemed to have weakened its currency relative to the USA currency in a manner that would reduce the costs of goods produced in China. If President Trump officially states that China has manipulated (i.e. weakened) its currency, a series of actions are automatically initiated. This could lead to substantial duties imposed on all or parts of Chinese imports into the USA, with possible counter duties imposed by China on US goods imported into China. Then a trade war between the two countries is a prospect.
What makes the situation even more challenging is that these events need to happen within the framework of the World Trade Organization (WTO), which would take years to rule on these actions. Would President Trump be willing to work through a third-party international body? Not sure, as he has stated many times that third-party bodies have impeded the development of the USA. This is where all bets are off, particularly if President Trump takes action on his frequent comments: “China is sucking us dry. They’re taking our money. They’re taking our jobs. They’re doing so much. We have rebuilt China with what they’ve taken out.”
The overarching point on the economic front that is confronting the USA is the fundamental realignment that I made in a previous posting (Time over for the West to dominate – Oct. 22). China wants, in fact needs, to continue growing economically at a rate that is 2 to 3 times higher than the US growth rate. So, relatively speaking the Americans will feel that they are not dominating the world anymore, and therefore that America is not great. Will the USA accept that China is overtaking them? That is the fundamental conundrum of this election.
The relative importance of the USA shrinks to the benefit of Asia. Source: The Economist
Unfortunately, history indicates that any switch of country that “dominates” has not happened peacefully. It is to be hoped that a modern society, where people understand the mistakes of our forefathers, will find a solution to this transition. I remain hopeful, but the upcoming Trump presidency will keep us on the edge of our seats for the upcoming 4 years.