Thursday, January 26, 2017

Causing chaos in China may be precisely what the Trump administration intends to achieve with its confrontational strategy

Causing chaos in China may be precisely what the Trump administration intends to achieve with its confrontational strategy

The arrival of the Trump administration comes as a significant shock to China’s leader Xi Jinping, who had grown used to the ineffectual policies of former president Barack Obama.

 Beijing illegally expanded into the South China Sea and met only the most perfunctory pushback from the United States. Obama warned Xi to desist or there would be consequences, yet no tangible action ever arrived. Like most foreign leaders, Xi viewed the likely victory of Hillary Clinton with relatively equanimity. The win by Trump, however, has left Beijing anxious about the prospect of a role reversal with Washington, DC.

In simple terms, Washington, DC has taken the role of insurgent—one that will test Beijing for signs of weakness. This was traditionally China’s role. It would probe the United States for areas of weakness on trade or strategic issues, advance in a provocative manner and then retreat slightly to avoid a direct confrontation. Now, it is the United States that is testing China and, in the process, setting up the circumstances for a confrontation.

The formal end of the Trans-Pacific Partnership shows that President Trump “is serious about shifting U.S. trade policy and jettisoning decades of mostly steady trade liberalization in favor of more confrontation with China and other trading partners, with the potential for big tariffs if those countries don't come to the table ready to make concessions,” according to Wall Street Journal reporter William Mauldin.


December, Trump announced the creation of the White House National Trade Council and said it would be headed by Peter Navarro, an outspoken China critic and author of Death by China. Navarro has reportedly created his own staff in the White House to deal with trade issues—and particularly with China—while excluding the State Department and National Security channels. Relations with China will be handed by the U.S. Trade Representative and the U.S. Department of Commerce, notes one Washington insider. That could potentially set the stage for a serious confrontation with China.

“Bottom line: Trump means what he says, but China cannot give what Trump wants,” according to veteran China watcher James Rickards, author of The Road to Ruin. “So the outlook is for conflict, trade wars, currency wars, maybe a hot war,” Rickards wrote.

The Trump administration has put everything on the table—the Chinese currency, trade, the South China Sea and Taiwan—and is demanding Xi to come to the table to negotiate a comprehensive deal. This is precisely what China cannot do, however, because Xi is in the midst of a preparing for the Chinese Communist Party congress and what appears to be a further consolidation of power.

Most observers of Chinese politics believe that while Xi is unlikely to entirely discard collective leadership in China, he may well reduce the politburo to just five members and retain only those loyal to him. As we have noted previously in the National Interest, this suggests that Xi intends to stay in power indefinitely—beyond his ten-year term as CCP general secretary. As a result, any effort to push China on trade or currency will likely result in a strong response by China on security issues or may even invoke a military response.

Trump has branded China a “currency manipulator.” Randall Forsyth of Barron’s disagrees and notes that China has been spending its “foreign-currency reserves, which have slid by roughly $1 trillion from their peak in mid-2014 to just over $3 trillion, as Beijing attempts to brake the decline in the yuan—contrary to assertions that it’s trying to drive its currency lower.” Many of Trump’s supporters view China’s sales of U.S. Treasury bonds—some $1 trillion since 2014—as part of a nefarious plot to drive up interest rates and thereby weaken the United States. But in fact, China remains the largest holder of U.S. Treasury debt, and Chinese citizens have been spending the dollars provided by the Bank of China to purchase real estate and other assets in the United States.

Uncle Xi, as he is sometimes called in China, has recently begun to limit currency outflows—a move that could cause the yuan to weaken further. “Last month, a mere quarter-point rate rise by the Federal Reserve—long-telegraphed—threw the Chinese bond market into spasms,” notes Leland Miller, chief executive officer of China Beige Book International. “While Beijing insists the system is sound and the economy is powering ahead, financial flows say otherwise: money is pouring out of the country and the yuan continues to lose steam against the dollar, despite by far the world’s largest merchandise trade surplus,” Miller said.

Trump has threatened to impose a “border adjustment tax” on goods from China and other nations. If Congress passes such a protectionist measure, then even with a phase-in period we'll see the value of the dollar jump versus the yuan, perhaps substantially, Miller said. “Hard to see how that won't cause chaos in China,” he said.

Causing chaos in China may be precisely what the Trump administration intends to achieve with its confrontational strategy. Navarro and others in the White House inner circle, particularly political counselor Stephen Bannon, are said to view China as an enemy of the United States that must be confronted after years of ineffectual foreign policy leadership under Trump’s predecessor.

Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency.


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