Trump has put US-China relations in the balance

In an interview with Fox News over the weekend, the President-Elect said he didn’t know why the United States should be bound by the One China policy. This policy, under which the US has commercial and military relations with Taiwan but doesn’t recognise its sovereign status, has been the bedrock of US foreign policy towards China for 40 years and is among the most sensitive of red lines for Beijing. Now, Donald Trump is hinting he could revisit it—unless China was willing to do a deal with the US over trade and other issues that span tensions over the South China Sea and relations with North Korea. Why is he treading on eggshells?

The now typical answers to this—as to many other questions—are that he doesn’t care for political correctness, doesn’t mind being called volatile and unpredictable, and wants to establish a new basis for US-China relations, ostensibly to give American workers a better deal. But a more fractious relationship with China has also been in the Trump narrative from the beginning of his election campaign. The rhetoric during the year and since his November victory has included the threat to label China a currency manipulator, to levy across-the-board tariffs on Chinese goods, and to build up American military presence in the South and East China Seas. More recently, he had already broken protocol by receiving a congratulatory phone call from Taiwan’s President Tsai Ing-wen.

It is sometimes argued that Trump’s unpredictability means no one should take him at face value. He has, after all, nominated Terry Branstad, the governor of Iowa and a man who calls President Xi Jinping a friend, to be America’s ambassador to China. But for the moment at least, he is making big and not very comforting noises. This latest foray, to put the One China policy in play, is a serious escalation in US-China tension, and he must have known Beijing would not be happy.

And it wasn’t. Foreign Ministry spokesperson Geng Shuang said on Monday that if the One China policy was compromised or undermined, then the US-China co-operation would be out of the question. The daily Global Times, affiliated to the Communist Party, said that Trump’s statement testified to his inexperience, and insisted that the One China policy was not something to be traded, sold or bargained over.

It is tempting to put all this down to posturing before the new president takes office, but it would also probably be a mistake to. Leaving aside the straight geopolitics of maritime disputes and rights, trade is already a hot issue for both America and China. For Trump, American jobs are the central issue. The US trade deficit with China was a record $366bn last year, equivalent to about 69 per cent of the total US trade deficit of $530bn. Trump’s team has charged that China cheats in trade by manipulating its currency, and by using subsidies and other measures to boost exports and restrict imports.

For China, the issue is status and respect in the world’s trading and economic system. It seeks recognition for its weight as the largest export nation, and it also wants a bigger say in global institutions and a bigger role for the renminbi. It doesn’t want to be treated as a supplicant, or a country that is on trial for good behaviour.

In mid-December, Chinese officials were disappointed not to have been awarded “market economy” status (MES) on the 15th anniversary of the country joining the World Trade Organisation. They thought it had been assured. Among other things, MES requires global regulators in trade disputes to consider export prices on a domestic basis and not with reference to prices in third countries. MES, therefore, would favour China, especially in contentious areas such as steel, where it is accused by the US and the European Union of dumping the product at unfairly low prices.

And it’s not only about steel. Last week, the US Commerce department imposed anti-dumping tariffs on Chinese-made washing machines. China had vowed to take action against any WTO member that refuses to recognise MES in anti-dumping disputes. In a rather pointed way, the official Xinhua news agency said that the refusal to award MES was “nothing short of protectionism” and “poisons the recovery of the global economy.”

The background to Trump’s One China policy statement, therefore, is one of festering tension over trade. After Trump is inaugurated, the likelihood is that his administration will label China a currency manipulator, which is relatively meaningless but it would trigger investigations. If these found China to be manipulating its currency, the US could implement partial or sector-specific tariffs, probably much lower than the 45 per cent widely cited, on high-profile Chinese exports such as steel and automobile parts.

China would almost certainly retaliate. Global Times pointed out recently that US tariffs could prompt China to spurn Boeing aircraft, American cars and iPhones, and impose retaliatory trade restrictions against soybean and maize imports from the US, which certainly wouldn’t please the voters of Iowa.

US-China relations, therefore, look set to enter a new phase in which two strongmen face off. Trump has vowed to make America great again, and stand up for US workers in the face of foreign countries and governments, and even domestic companies that offer them a bad deal. China, by contrast, is on a mission to overcome and overturn the humiliation which it claims foreigners and history have imposed on the country. President Xi Jinping, facing a crucial 19th Party Congress at the end of 2017, is determined not to be seen to be weak, or not in control of China’s most important external relationship.

The US and China will have to manage an increasingly difficult and sensitive relationship, and with Trump’s One China statement, the temperature just went up several degrees.