USA-China policy reset: Security concerns override economics | The Daily Star
12:00 AM, May 13, 2017 / LAST MODIFIED: 01:12 PM, September 11, 2017

USA-China policy reset: Security concerns override economics

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During the last US presidential elections, candidate Donald Trump always had rather harsh words including warnings for China, particularly its economic policies. While China is one of America's largest trading partners, Trump called China a currency manipulator and blasted it for stealing US jobs. However, the tone has changed recently after the visit by China's President Xi Jinping to the USA. Many China watchers are keeping an eye on President Trump's next move with bated breath and wondering whether this reversal of policy is temporary, lasting only a few months before the tirades start again. Or, is it possible that US-China relations are progressing on a totally different path now that President Trump has got a little taste of power and become more knowledgeable about global politico-economic realities?

USA and China have grappled with many issues in recent years. The most economic important ones are the big trade deficit that has existed for many years between these two countries, restrictions placed on China's imports from the USA, and China's exchange rate policy. In 2016, US's trade deficit with China was USD 347 billion which is the largest with any of its trading partners. And candidate Trump had singled out China, fairly or unfairly, for all its economic problems including lack of jobs when he said, “China's de facto tariff on imported goods has cost the U.S. billions of dollars and millions of jobs.” Donald Trump has been promising to declare China as a currency manipulator on day one of taking the oath of office, but during the recent talks between Presidents Trump and Xi Jinping, “currency manipulation” never came up. What accounts for this about-face?

First of all, Donald Trump received two quick lessons after he moved in to the White House in January: one in economics and the other in geopolitics. The trade surplus that China rings up year after year is financed by Chinese loans to the US government. It buys US Treasury notes and is the second-largest lender to the U.S. government after Japan. As of February 2017, the U.S. debt to China was USD 1.059 trillion. And, like many in the government and US financial industry, Trump learned that China could call its loans i.e., sell the bonds, and cause turmoil in Wall Street.

More recently, the North Korean nuclear crisis flared up and President Trump found his back against the wall. He was advised that the biggest influence on the North Korean leadership was China with its various economic and military ties to the Kim regime. The current crisis, which was undoubtedly triggered by the US-South Korea joint exercise and exacerbated by North Korea's threat to strike the US mainland, has forced President Trump to come to terms with the harshest lesson of all: US needs China to head off any confrontation with North Korea and bring North Korean leader Kim Jung Un's regime back to the negotiating table.

Thus, in an ironic twist of realpolitik, US officials are now courting China and gone are the days of Donald Trump's tweets on China's errant economic policies and ambitions in the South China Sea. USA has all but declared that any Executive Order on branding China as a “currency manipulator” is off the table. How about the ever growing trade deficit with China? Well, two things have happened in recent months. On the one hand, Donald Trump's government is working on a number of fronts to bring back jobs: tax incentives, “arm twisting” US companies, and threat of “border taxes” on imports. On the other hand, various US companies are voluntarily moving some of their operations back to the homeland as cost of operations in China have also ticked up in recent years.

USA and China are nowadays more interested in forging a collaborative relationship, a “bromance” if you will, rather than calling names or threatening each other. US Commerce Secretary Wilbur Ross said the Chinese had expressed an interest in reducing China's trade surplus as a way of controlling its own inflation. “That's the first time I've heard them say that in a bilateral context,” he said. Ross declined to comment on whether the United States was ready to designate China a currency manipulator and referred instead to an upcoming report in which that issue would be addressed.

I would be remiss if I leave out some other saner voices, both pro- and anti-China within and outside Trump's circle that are working behind the scenes. On April 10, Professor Jeffrey D. Sachs wrote in The New York Times that “Eurasia will win the trade game. Each accusation by Trump that is directed at the European Union or China has pushed these two giants towards each other in a warmer embrace”. Others are cautioning Trump against letting up the pressure on China. Anthony Ruggiero, a senior fellow at the Washington-based Foundation for Defence of Democracies has cautioned Trump not to go too soft on China. He cautioned, “Chinese bank accounts are used to conduct business with North Korea and the US should force Chinese banks, many of which have multinational operations, to choose between aiding North Korea and accessing the US banking system.” And finally, one of Trumps military commanders, Admiral Harry Harris, Commander of the U.S. Pacific Command (USPACOM), while welcoming China's role in influencing North Korea, also cautioned against cozying up too much with China. “While recent actions by Beijing are encouraging and welcome, the fact remains that China is as responsible for where North Korea is today as North Korea itself.”

 

The writer is an economist and writes on public policy issues. His new book, “Economics and Policy in the Public Arena” will be published later this year.

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