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President-elect Donald Trump recently has sent mixed signals to China, and there may be a strategy behind them, according to Jacques deLisle, a University of Pennsylvania law and political science professor, and director of the University’s Center for East Asian Studies. Trump created controversy in China last week by accepting a phone call from Taiwan’s president, but soon after named a friend of Chinese President Xi Jinping as the next U.S. ambassador to China. While China-bashing was a prominent theme in Trump’s election campaign, he may emerge as business-friendly with that country, predicted Ann Lee, an adjunct professor of economics and finance at New York University and an expert on China’s economic relations.
The two discussed Trump’s recent moves regarding China and their implications on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Here are five takeaways from their discussion:
Trump Keeps China Guessing: “There is a sense that this is a guy who throws out the diplomatic protocol, throws out the playbook, and is provocative and unpredictable,” said deLisle. Trump during his election campaign accused China of taking away American jobs and currency manipulation. When he accepted a phone call from Taiwan’s president, Tsai Ing-wen, last Friday, it was a major departure from the U.S. policy of maintaining unofficial relations with Taiwan since 1979, when the U.S. established diplomatic relations with China.
“There is a sense that [Trump] is a guy who throws out the diplomatic protocol, throws out the playbook and is provocative and unpredictable.” –Jacques deLisle
While China described Trump’s phone conversation as just “a small trick by Taiwan” and lodged a formal complaint with the U.S., Trump surprised observers again five days later by naming Iowa governor Terry Branstad as the next U.S. ambassador to China. Branstad counts Chinese president Xi Jinping as a personal friend. “The Chinese are wondering how much to discount the rhetoric, the way we discount rhetoric from American presidential candidates, especially when [such statements] are from the out-of-power party,” said deLisle, adding that candidates tend to take a softer middle-ground once they are in power.
“Trump is much smarter than he lets on,” said Lee. On the one hand, he relies for advice on the Heritage Foundation, a conservative research think tank and other advisors who are “definitely pro-Taiwan,” she noted. Yet, he sends a “positive signal” with Branstad’s appointment, she added. “Trump is trying to send Beijing a signal that there is a new sheriff in town. He is keeping the Chinese on their toes and not sure of what his next move would be.”
Trump’s Three Gripes against China: DeLisle attempted to understand Trump’s disposition towards China. One element is Trump’s accusation that China indulged in currency manipulation. He described that as “a silly charge,” and said that while China did do that in earlier years, “those days are behind us.”
Second, Trump has complained about trade and investment barriers. Here, deLisle said that while China does impose higher tariffs on average for U.S. goods than the U.S. does for Chinese goods, “that is lawful under the WTO [World Trade Organization] rules.” There is merit in the argument that China erects barriers to investment, he added. “We hear a lot of that from the American business community.”
A third issue relates to the tensions over China’s military buildup in the South China Sea. “China controls these tiny islands that are capable of being significant military assets,” deLisle said. “That is the major security flashpoint in the region other than North Korea.”
Weaker U.S. Voice on the South China Sea: According to Lee, the U.S. doesn’t have much leverage in pressuring China over the latter’s military buildup on the South China Sea islands. The U.S. is mostly strong in the security aspect, but China is strong on economic matters in that region, she explained. China has more trade plying through the South China Sea than the U.S., which is why it has been so “stubborn” about protecting its interests there, she noted.
If the U.S. under Trump chooses to be tough on China and favor other countries over it because of the tensions over the South China Sea, that strategy could misfire, according to Lee. She predicted that China would not to react to the U.S., but instead take it out strongly on those other countries economically. “That would put these countries into a bind,” she said.
Lee noted that China has economic leverage over some of those countries. “Beijing doesn’t like these countries sidling up to the U.S. and would retaliate against them,” she said. Added deLisle: “China has … subtle ways to put pressure on trading partners through regulatory actions without looking transparently like the bad guy.”
In the end, those countries would take China’s side because they would realize that their true interests lie in economic issues and that China doesn’t pose a true military threat to them, according to Lee.
“Trump is trying to send Beijing a signal that there is a new sheriff in town.” –Ann Lee
Trump May Shape His Own Trade Deal: While Trump is opposed to the Trans-Pacific Partnership (TPP) trade deal that the Obama Administration championed, he may fashion another such alliance with his stamp on it, said Lee. He may frame that in a way where the other countries in the partnership commit to invest more in the U.S., she added.
“We could call it the Trump Pacific Partnership to keep the acronym,” said deLisle jokingly. On a more serious note, he added that other countries in the region might be wary of supporting the U.S. on such a partnership. That is because they “took a hit politically” in their own countries when they backed the TPP, which is practically dead in the water now. Meanwhile, China is aggressively pushing the RCEP (Regional Comprehensive Economic Partnership), a trade alliance between 16 Asian countries, he noted.
Trump’s Tax Plan Could Backfire: Trump’s tax plan — where he wants to penalize U.S. companies that choose tax-friendly overseas jurisdictions — could affect U.S. investments in China in the short term, Lee said. However, “China … has enough other engines going so it won’t be a game-changer for them in the medium or long term,” she added.
In fact, that strategy could backfire, Lee warned. “If he does things to discourage U.S. corporations from doing business with China, American corporations are going to be hurt more than the Chinese,” she said. She noted that U.S. companies have deep ties with China in three areas: feeding their supply chains, manufacturing in that country, and selling into the Chinese domestic market. Any disruption of the kind Trump threatens “would make U.S. products uncompetitive and more expensive,” she added.