Donald Trump has decided to make China give way. But Beijing has plenty of economic weapons in its arsenal.
2016 will remain in memory as the year in which democracies were destabilized by a wave of populism that has not been seen since the 1930s; a year which went from Brexit to the election of Donald Trump, not forgetting the fall of Matteo Renzi. 2017 could be the year of the brutal rise of tension in the Pacific, as a result of the new strategic order which opposes Trump’s USA – inward-looking, nationalist and protectionist – and Xi Jinping’s China which is threatened by imperial excess.
Donald Trump has marked China down as a priority in his foreign policy. His aim is to change the scales of the economic relationship between the two principal powers of the 21st century by threatening to apply a customs duty of 45% on Chinese imports. At the same time, he intends to withdraw from the Transpacific treaty which set China’s economic and commercial operational limits in Asia. The risk is that this would bring about the widespread use of protectionist measures and competitive devaluations, and thereby put an end to globalization.
For the future US president, it’s all about dealing with the consequences of Barack Obama’s failed strategy of pivoting towards Asia, a strategy ruined by the swing of the Philippines and Malaysia towards Beijing and by the one-sided result of China’s admission to the WTO in 2001. For fifteen years, Beijing has been profiting from its involvement in global exchanges in order to speed up its emergence as the leading exporter worldwide, yet without opening its economy, progressing in the application of the rule of law, or democratizing its power system.
The controntation is going to be robust and will be on commercial, diplomatic and strategic fronts. The economist Peter Navarro, who has regularly condemned Beijing as being responsible for the deindustrialization of the USA, has been appointed head of a new National Trade Council with the mission to set up an arsenal of regulations and taxes as a reaction to Chinese commercial and monetary dumping. Furthermore, Trump has stated that he intends to review the so-called One-China strategy, which has underpinned the relationship between the two countries since 1979, and to establish direct ties with Taiwan. Beijing claims sovereignty over the China Sea and has responded by accelerating the militarization of illegally-built artificial islands, notably in the Spratly archipelago, which are now equipped with anti-aircraft defense systems that ensure a capability to deny any action, and by capturing an American oceanographic drone.
China is not lacking in ways to retaliate. Commercially, the proposal for an Asian free trade area has been relaunched following Donald Trump’s scuttling of the TPP. Economically, Beijing can punish Silicon Valley companies, discriminate against American investment or block the activities of Chinese companies in the USA. Monetarily, its weapon is the devaluation of the yuan. Financially, China remains the main holder of American Treasury bonds, after the Fed, and can speed up the rise in interest rates. Diplomatically, Taiwan, whose activities are dependent on the mainland, could be the object of economic sanctions. Strategically, its tacit support for North Korea could be upgraded to an aid program for development. Finally, it could create an axis with those démocratures (a combination of democracy and dictatorship) that are hostile to the USA: Vladimir Putin’s Russia, Recep Erdogan’s Turkey and Iran under the mullahs, which exports a third of its oil to China.
Apart from benefiting from the weakening of the United States, its loss of credibility and doubts about its guarantees of security, China is also profiting from the difficult times that Washington’s main Asian allies are going through. Japan remains plagued by deflation which began in the early 1990s and by financial scandals that are having an adverse effect on conglomerates like Toshiba; also, public opinion is against Shinzo Abe’s desire to transform the self-defense forces into a regular army. South Korea is paralysed by the removal of President Park Geun-hye who has been implicated in a racket involving large businesses, for which her adviser, Choi Soon-sil, is being prosecuted. It is also being badly hit by the problems of its global groups like Samsung. Finally, the Philippines have turned to the populism of Rodrigo Duterte and are rallying to Beijing.
However, the game isn’t over. The USA still has winning cards in its hands – the vitality and creativity of its society and its unequalled ability to attract talent, brains, capital and businesses. Its vulnerability stems from malfunctions in its political system. China may well give in to the temptation to behave arrogantly while it has the wind behind it, but its stability of leadership and ability to carry out long-term strategies has its drawbacks: the imbalance of intensive development (creating inequalities and plundering the environment), the heterogeneous nature of its huge population, and tensions caused by the existence of entrepreneurial capitalism founded on innovation alongside the absence of political freedom.
Basically, the United States and China are interdependent and, in principle, this limits the risk of any direct clash. But the two giants are fighting over the leadership of the world system. They might get carried away during a flare-up of passions and a mere incident could be transformed into open confrontation. As of now, the Pacific is at the heart of 21st century history, but this history has no reason to be pacific.
(Column published in Le Point, 5th January 2017)