US President Donald Trump is arguably the most unpredictable world leader today, zigzagging between cooperation and competition on trade and security, particularly with respect to China. The world breathed a sigh of relief when the world’s two largest economies reached an agreement to put a trade war on hold (May 23, Toronto Globe and Mail). A few days later, however, Trump imposed tariffs on $50 billion of Chinese imports and restricted Chinese access to technology goods and investments (May 29, CNBC).
The latest news is that Commerce Secretary Wilbur Ross is traveling to China on June 1 to work out the details on US-China trade normalization (June 1, CNBC).
Additionally, the Trump administration revoked China’s invitation to the biennial RimPac naval exercise (May 23, New York Times) and resumed “freedom of navigation and overflight operations” (FNOPS) in the South China Sea (SCS).
Trump’s contradictory policies caused some frenzy in the market, according to US-based news outlets such as Bloomberg, in that stock market values dropped by an average of one point. However, the policy “U-turn” appeared to resonate with the anti-China crowd and supporters.
Trump determined to make China an enemy
There are many theories on why Trump is “hell bent” on making China an American adversary, if not an enemy.
One, Trump is said to be following through on his 2016 presidential campaign promise of getting “tough” on China. It is a midterm congressional election year and his 2020 re-election bid is on the horizon. To gain popular support, Trump might feel the need to be a “man of his word.” What’s more, he won the presidency largely on his China-bashing rhetoric, which resonates with the majority of Americans, particularly older whites and less educated groups who genuinely believe China has stolen their jobs and see Trump as the only hope of regaining them.
Two, some suggest that being unpredictable would throw opponents “off guard,” giving Trump the deal he wants (May 30, The Hill). His threat of cancelling the June 12 summit with North Korea’s Kim Jong-un and then changing his mind less than a week later is viewed as a strategy to give him the “upper hand” in the coming meeting.
Three, Trump cannot seem to make up his mind about which faction of his divided administration he should listen, the “realists” or moderates (Steven Mnuchin, Wilbur Ross) or ideologues or hawks (Robert Lighthizer and Peter Navarro). The hawks appear to have Trump’s “ears,” in that Navarro got away with rebuking Mnuchin’s “trade war truce” remark in a recent National Public Radio interview (May 30, The Hill). Ideologically, Trump is probably closer to the hawks. However, by swinging between confrontation and cooperation regarding China (and other countries), he is not doing America or the world any favors.
As indicated in this author’s past articles, the world’s two largest economies are increasingly intertwined, playing hardball with the US’s largest trade partner and biggest export destination (outside of North America) cannot bring comfort to American consumers and businesses.
For example, discount retailers such as Walmart, Target and others source the majority of their merchandise from China because they are affordable. The majority of Americans – lower middle, working and poor Americans shop in these giant stores, which would pass the tariff on to the customers. Higher prices dampen domestic consumption further and by extension slow economic growth because private domestic demand accounts for 70% of GDP (World Bank). Indeed, Trump’s unpredictable polices in part have caused the IMF to downgrade US economic growth from 2.9% in the 4th quarter of 2017 to 2.2% in the first quarter of 2018 (May 30, Bloomberg).
China would also suffer from a trade war with the US and has admitted as much, explaining why the country continues to advocate dialogue rather than confrontation to resolve differences. However, it does have a “Plan B.”
How China deals with external shocks
The Chinese communist leaders may be authoritarian and imperfect, but they do demonstrate responsible leadership, looking after the people’s and nation’s interests perhaps more so than those of the “democratic” West.
The government’s posture in addressing the economic woes created by the US-originated financial crisis was a case in point. When the economy slowed down to 6.5% from over 10% in 2008, the government quickly mounted a huge stimulus package of over $580 billion or 14% of that year’s GDP, spending the money on job retraining, subsidizing small-business startups and building infrastructure (World Bank and China National Bureau of Statistics).
Government job retraining programs and financial help afforded laid-off workers alternative employment or started businesses in or near their villages, spurring a mini rural economic boom.
In fact, China built a brand-new city in the earthquake-destroyed county of Wenchuan, Sichuan province shortly after the disaster and within three years turned the isolated region into a popular tourist destination (China National Development and Reform Commission).
The Chinese communist leaders may be authoritarian and imperfect, but they do demonstrate responsible leadership, looking after the people’s and nation’s interests perhaps more so than those of the “democratic” West
In contrast, the damage inflicted by Hurricane Katrina on New Orleans in 2005 has yet to be fully repaired.
It is worth noting that since the 2008 financial crisis, the Chinese government has restructured the economy, shifting from low-end assembly and manufacturing to value-added and innovative production. It has poured huge sums of money into research and development, culminating in the “Made in China 2025” industrial policy unveiled by Premier Li Keqiang in 2015 to make China a global innovation hub (China News Service, 2015).
China also re-balanced its economy in the 12th Five Year Plan (2012 to 2016), switching from export to domestic consumption as the engine of growth (International Business Blog, 2015). It was first articulated and pushed through by the then Premier Wen Jiabo at the aftermath of the financial crisis in 2011 (Al Jazeera, 2011). He opined that the export/investment-led economy was “increasingly unstable, unbalanced, uncoordinated, and ultimately unsustainable.”
The latest US stances of restricting sales of technology products to China has heightened its determination in becoming a world technology power. Immediately after the US banned the sales of chips and semiconductors to ZTE, President Xi Jinping announced that China will be self-sufficient in these two technologies (The Diplomat, Apr 26, 2018). Indeed, his government is finalizing a $47 billion fund to establish a semiconductor industry (Wall Street Journal, May 7).
US policies on China have opposite effects
History shows that no US pressure to “contain” China’s technological, economic and military rise will succeed. Barring China from participating in the International Space Station program only resulted in the country building its own. Former US president Barack Obama’s “pivot” to Asia policy culminated in China building islands and installing weapons in the South China Sea.
To that end, it is doubtful that recent anti-China bashing postures would be a “game changer.” For example, shortening Chinese students’ US study visas, banning technology exports, and restricting investments would not curtail but accelerate China’s technological rise.
Worse, the potential huge losses in a US-China trade/military conflict are unnecessary because America’s economic woes are not of China’s making, rather they are largely caused by its own policies.
Trump may have a successful re-election strategy
There is no credible economic or geopolitical reason for Trump’s “tough” China policies because America’s economic woes are not of China’s fault. It is US Inc’s focus on maximizing short-term gains that led to globalization, relocating manufacturing abroad and establishing a global supply chain to exploit each country’s comparative advantage.
However, Trump’s “volatile” China policies could be a successful strategy for his 2020 re-election bid and elicit popular support for a number of reasons.
First, there are no policy differences between the Democrats and Republicans on China; both parties see it as America’s biggest “long-term” threat. For example, the major reason for Obama’s “pivot” to Asia posture and signing the Trans-Pacific Partnership was to “contain” China’s rise. In this regard, Trump’s “tough” policies on China would gain bipartisan support. Indeed, the Senate minority leader, Democrat Senator Chuck Schumer, praised Trump’s China tariff announcement (March 22, The Hill).
Second, the majority of Americans, particularly the less educated white population, bought into the rhetoric that China is the main culprit stealing American jobs, gutting US factories, and doing other nasty deeds. So any policy that could restrict Chinese imports and give the illusion that it will bring back jobs to US shores will be welcomed.
To that end, it would not be a surprise if Trump wins a second term and the Republicans retain their majority in the House and Senate. However, playing the China card could also harm America’s national interests, stifling economic growth and increasing poverty.
Indeed, the International Monetary Fund reported that the US economy slowed from 2.9% in the fourth quarter of 2017 to 2.2% in this year’s first quarter in part due to Trump’s volatile China trade policy. Imposing a 25% tariff on $50 billion of Chinese “imports” and restricting exports to and investment and students in the US would not reverse the downward trend.
Renaming PacCom to IndoPacCom would not entice more countries to join the US in containing China. The opposite may in fact be true, particularly when Trump is blaming the world, including close US allies such as the EU, Canada and Mexico, for America’s problems.
Taking the debate to its logical conclusion, it would not be a surprise if Wilbur Ross “magically” strikes a trade deal with China. But who knows?