China and Trump

08.04.18 Publication:

We are about to witness a historic test of the wills and self-confidence of two superpowers, China and America, and of two leaders who see themselves as supreme, Xi Jinping and Donald Trump. Their battle is over trade, most obviously, but is also about the strategic leadership of East Asia, and possibly eventually of the world. It is a battle in which China holds a stronger position than many people realise. The question is whether President Xi will want to prove it, or else does not yet feel confident or brazen enough to do so.

This test has been set up by America, over trade, and by North Korea, over strategic leadership. It is not China’s choice. But it can be no surprise. The economic nationalism promoted by Trump made some sort of trade confrontation with the world’s second largest economy inevitable. Since announcing that tariffs are to be placed on imports from China, he has declared confidently that “trade wars are easy to win”.

In the case of North Korea, it was that country’s tests of nuclear-capable ballistic missiles and then its sudden offer of bilateral talks with America, made via South Korean officials, that have created the test. This was not something Trump had sought, and he had long rubbished the idea that talking with North Korea’s leader Kim Jong-Un could possibly be worthwhile. But Trump’s response to the proposal of a summit was as brave and confident as his earlier attitude to threats of war: bring it on.

This combination is historic in nature because the results promise to reveal the true strengths and attitudes of both the world’s rising power and its incumbent, but weakened, leader. The results could shape the world for decades to come, for good or ill.

Trade is the simpler topic to analyse. China has a large bilateral trade surplus with the United States. That means that it has potentially more to lose from a trade war, because it has more exports to be penalised than the imports from America that it can retaliate against. For that reason, it is often said that surplus countries are always likely to be the biggest loser in any war of tariffs and other barriers.

However, this misses out both politics and international diplomacy. In both of these, China starts with big advantages. Moreover, it is more economically resilient in the face of a trade war than many people realise, since the share of trade in its economic activity has halved in the past decade, with exports plus imports having been equivalent to more than 60% of GDP in 2007 and only just over 30% now.

Being a dictatorship, China can in principle ignore protests from workers and companies that are suffering from American tariffs for longer than a democracy could. In the American system, with mid-term Congressional elections due in November, the voices of producers suffering from penalties on their exports to China and of companies suffering from higher costs of using Chinese imports will come through loud and clear.

President Trump himself may well choose to ignore protests about the trade war, for he believes that by taking on China he is fulfilling a promise to his core voters, perhaps one he even thinks is necessary to win him re-election in 2020. But the Republican Party in Congress may well feel differently.

Moreover, in international diplomacy, Trump’s trade war will enable China to position itself as a defender of the rules-based international order, including the World Trade Organisation, the very order that America set up.

Not all countries will be convinced by this, since China is not recognised in the WTO as a market economy, given its high level of state involvement in industry, and is widely accused of theft of intellectual property. But it will have a chance to build a case that it is the victim and that America is undermining the international system in a way that damages everybody. The longer the trade war goes on, the more credible this case will become and the more allies China stands to assemble on its side.

China choose not to fight this trade war: it may try to see whether some symbolic concessions on big imports like liquefied natural gas or on intellectual property guarantees might be sufficient to persuade America to stand down. But if it decides to display its strength, resilience and global-rule-backing credentials, it could well end up having more of both than today’s America does.

The issues in Korea are different. But there, too, both China and its troublesome North Korean neighbour have an advantage: this is that the main moves to create a sustainable peace will have to come from the American side. And in the unlikely event that America makes those moves, China’s strategic position would benefit enormously.

On paper, the issue is whether North Korea is willing to give up its nuclear weapons programme. But the reality is well known, especially to China: having built its weapons and missiles capability over 30 years, North Korea is never going to give them up in the absence of a major change in the military balance in and around the Korean peninsula.

China has been pressuring Kim Jong-Un to negotiate, by taking part in co-ordinated economic sanctions against him and reportedly by putting short-term, symbolic caps on vital exports to the North of oil and other essentials. So having done that, China has played its part in bringing Kim to the negotiating table. It looks a good global citizen.

Kim will likely offer to denuclearise solely on condition that America withdraws its forces from South Korea, and perhaps from Japan too. For only if that happens would North Korea feel credibly secure enough that it can do without the nuclear deterrence it has worked so hard to create.

This is surely impossible for President Trump to agree to. The best that could be expected would be agreement on a process through which such extraordinary moves could be discussed.

Either way, China benefits. In the event of stalemate, it will have got Kim to the table and put America in the position of being the refusenik. In the event of any military concession by America, its strategic position will be strengthened.

The question that stands before President Xi Jinping is this: do you want China now to look like the region’s, and perhaps in future the world’s, top dog? Or would you rather wait?