The looming US-China economic clash?

It is no secret that President-elect Donald Trump's election caused some concerns in the corridors of power in Beijing. Just last week, Trump fired the first salvo  challenging one of the cornerstones of the 44 years of US-China policy by making formal contacts with the Taiwanese President, Tsai Ing-wen. The Wall Street Journal under the headline "Trump Spoke With Taiwan President in Break With Decades of U.S. Policy" proclaimed that the conversation between Trump and Tsai runs counter to a long-established US diplomatic canon known as One China Policy. However, it needs to be seen what other policies Trump, once he is in office, will take to reformulate US ties with China. Many US analysts have warned Trump that China could play hardball and withdraw some of its extensive investments in the US causing major tremors in financial markets.

Ironically, US has already gone on the offensive in its war with China even before Trump announced his nomination for Secretary of State. On December 15th, the Obama administration launched a renewed challenge against Beijing at the Word Trade Organisation, accusing it of practices that limit US's ability to export rice, wheat and corn to China. When China joined the WTO, it agreed to allow imports of US grains and corn at lower tariff rate, but reneged on its promise. In frustration, US officials described the Chinese system as "not transparent, predictable or fair." United States Trade Representative Michael Froman said China's policies "limit opportunities for U.S. farmers to export competitively priced, high-quality grains to customers in China."

During the long election campaign in the US, Trump repeatedly accused China of manipulating its currency to make its exports cheaper, stealing jobs from US manufacturers, and trying to weaken the US, economically as well as militarily. Speaking on Fox News in early December, he said he understood the principle of a single China that includes Taiwan, but declared, "we're being hurt very badly by China with devaluation; with taxing us heavy at the borders when we don't tax them; with building a massive fortress in the middle of the South China Sea, which they shouldn't be doing; and frankly, with not helping us at all with North Korea."

In support of his position, he can now draw on a recent report — the annual report of the US-China Economic and Security Review Commission — which in October pointed to a growing threat to U.S. national security from Chinese spying, including infiltration of U.S. organisations, and called on Congress to bar Chinese state enterprises from acquiring control of US firms.

Obviously, the US and China have conflicting interests in Asia and beyond. China and US have clashed over China's move to build a naval base in South China Sea. For many years, China has used its foreign exchange rate as a tool for boosting its economy, particularly its exports. The Alliance for American Manufacturing, once accused China of being a "currency manipulator" which tries to keep its yuan-to-dollar exchange rate low to boost exports and curtail imports. Unfortunately, recent evidence suggests that China is manipulating its exchange rate not to boost it, rather to weaken it, which a currency manipulator would do! If Trump, true to his words, plans to declare China as a currency manipulator within the first 100 days in office as he had promised and start the process of doing something about it, he will be in for a big surprise. His Administration will discover that if China returns to letting yuan trade at its correct free market value and allows it to slide against the dollar, Chinese goods will flood the US market even more, and do nothing to improve US's balance of trade with China.

Not all of Trump's economic or trade policies will enrage China much, though. Take the case of Trans-Pacific Partnership Treaty (TPP). President Obama, during a speech early on in support of TPP had indicated that the treaty would serve as a bulwark against China's efforts to dictate the terms of international trade. TPP was pitched as an effort by US administration to thwart China's plans to write the rules of trade. President Obama even saw TPP as "Writing the Rules for 21st Century Trade". 

So, how did China react after Trump's election victory? Immediately following Trump's declaration that TPP was dead, China's leaders fanned out across the globe to espouse its own version of global trade scenario. China had earlier floated its own regional trade arrangement, Regional Comprehensive Economic Partnership (RCEP), as an alternative to TPP which excludes China and India. China's President Xi Jinping went to Lima, Peru for the APEC Summit and promised to speed up negotiations for the conclusions of RCEP. He pledged at the APEC summit to open China's economy, and advocated for RCEP as "the only path to the broader Free Trade Area of the Asia-Pacific (FTAAP)."

But it would be premature for China to open the champagne cork.USA and Chinese relations will go through some rough economic patches. Donald Trump had also railed against many other issues related to the pattern of US-China trade relations, and spoke out against China for "dumping" cheaper products on the US consumer through various policy actions. US steel industry had brought numerous cases before WTO, and is "seeking punitive duties from the Commerce Department to combat below-cost dumping and unfair subsidies that slashed prices of various steel products to historic lows last year, causing layoffs at U.S. steel mills." 

Should the Trump trade team decide to take China the courts and pursue aggressively its case with US International Trade Commission, accusing China of providing subsidies on exports and raising barriers on imports, it has already built a team with seasoned warriors on its side. One of Trump's advisors, lawyer Robert Lighthizer, is a veteran of past trade wars, and worked during the Reagan administration and successfully persuaded Japan to agree to voluntary export restraints. Trade experts familiar with their views and history of confrontation with China say they will not be afraid to push the limits of what is legal under World Trade Organisation rules in defence of US's trade interests.

Let it be known that Donald Trump is also showing some willingness to deal by nominating Terry Branstad, Governor of Iowa, who has had extensive dealings with China, as the new US Ambassador to Beijing. Donald Trump has repeatedly cited US trade deficits, currently running at approximately USD 800 billion, as evidence that US is being taken advantage of. China accounts for half of US's trade deficits, which exists because US exports to China are only USD 116.2 billion while imports from China hit a new record of USD 481.9 billion. He has threatened to impose damaging tariffs on Chinese imports. However, here Trump will soon have a rude awakening. His threat of imposing a 45 percent tariff across the board on Chinese imports will surely be knocked down by WTO. Unilateral tariffs will also face the wrath of its trading partners and run against the rules and spirit of international trade. 

And China has a few cards up its sleeves, too, to hit back. China has been a major market for the Silicon Valley high tech companies. A senior Chinese state planning official has warned that Beijing could impose a penalty on a US automaker for monopolistic behaviour, soon after Trump's challenge to the One China policy. All this might bring back some sense to the Trump team. 

The writer is an economist and writes on public policy issues.