1

China and the Perils of Improvisation

January 12, 2017 Topic: Security Region: Asia Tags: ChinaDonald TrumpXi JinpingU.S.-China RelationsDefense

China and the Perils of Improvisation

What to do, and not do, when it comes to U.S.-China relations.

Improvisation -- or just ‘improv’ -- normally takes the stage in comedy clubs, but rarely interferes with the scripted interaction of superpowers. Yet despite this, and before even taking office, Donald Trump’s nightly improv, those one-liners and endless tweets, have collided with major foreign relationships, in particular China.

To be sure, some recalibration with Beijing was long overdue. As a December visit to Shanghai institutes made clear, unpredictable Trump had already unnerved the Custodians of the America Relationship. (We visited at an interesting time, with the Mandarins already thrown for a loop by the President-Elect’s telephone call with Taiwan’s President Tsai.)

Trump’s China-skeptic thrusts have hit a sweet spot: American anger over China’s behavior towards us, friends and allies. To be plain, the current Chinese president has been duplicitous, smiling and cheerily offering “win-win” relations while aggressively pursuing irredentist goals with countries on China’s perimeter. Before becoming president, promised ASEAN countries soothing words about managing tensions (he didn’t). He told President Obama that he would not militarize disputed Chinese held islets in the South China while creating facts for a new Sino-sphere (he did).

None of this is new.  We have frequently written about Chinese provocations in The National Interest . In an open letter about the Republican presidential nominee last August, we joined other former Republican Asia policy appointees in saying that “America faces relentless economic and geostrategic competition from China, [whose] assertive chauvinism directly challenges an open, rules-based order.”

But here’s the rub: While Trump’s improv disparaging China is understandable, he has also exacerbated neuralgic “century of humiliation” grievances and targeted the wrong issues.

For starters, though they may not stand the test of time, solemn commitments given to China about Taiwan have been the foundation of the US-China relationship. For some years, the US has been pushing the envelope, incrementally improving ties to Taiwan (e.g., arms sales, levels of meetings) within the current framework, and Trump should continue this pattern, but strategically.  Beijing is already on edge with the new DPP government.  In case you had any doubts, Beijing’s latest ‘gunboat diplomacy’, sending its aircraft carrier into the Taiwan straits (Jan.10) showed its wrath.

That said, let’s at least get our charge sheet right. The currency manipulation of which Trump complains harkens back to old trade disputes with Japan from the 1980s, and to Chinese behavior in the 1990s. Many reasons account for unfavorable forex fluctuations, but deliberate manipulation in recent years hasn’t been one of them. During 2005-15, the RMB rose 37%. More recently, after liberalizing its currency Beijing has been trying to prop up its currency.

Instead of malevolent currency manipulation, China’s primary economic challenge comes in its refusal to abandon neo-mercantilist habits and predatory industrial policies. A newly released White House report details the threat.

Chinese exporters continue to show undiminished readiness to unload their SOE’s gigantic excess capacity while, at the same time, playing the WTO’s labyrinthine complaint process to the hilt. But no one is buying the Chinese explanations. The US, EU, Japan and even Beijing’s BRICS comrades, Brazil and India; all have hit China with countervailing duties in over-capacity sectors such as steel and aluminum.

Even as Xi Jinping imposes more state control over his country’s economy, China uses an aggrieved tone to press for “market economy” status within the WTO. The organization’s rules are ambiguous, but Beijing must demonstrate all salient attributes of a market economy. Good luck with that – the US, EU and Japan aren’t buying.

In place of collectively pushing back, Trump’s ‘improv’ conveys an inflated sense of US leverage, both vis-à-vis China and with other trade transgressors. His world is a 1950s-like era of US economic supremacy. While the US remains No.1 great power/s it no longer stands astride the world like a colossus in a multipolar world. Even without the Chinese trading juggernaut, the field is crowded.

 

Trump seems to see these and other foreign relations like real estate deals in which everything goes on the table. One improv riff suggests the One-China Policy itself could become just another bargaining chip in new trade talks with Beijing. (This gambit has infuriated Beijing but also irritated Taipei - dismayed to see itself reduced to a mere bargaining chip.)

In another improvisational aside, the next Chief Executive has chided Beijing for “building a massive military complex in the South China Sea,” an exaggeration (to put it mildly) of Beijing’s troublesome penchant for putting dredged-up land features in the South China Sea where other claimants dispute Chinese sovereignty. His Secretary of State designate joined the improv show, threatening to deny China access to the reefs and rocks it controls.

The sum of Trump’s improv goes to the core of China’s (and its Communist Party’s) most sensitive issue: Nationalism. Beijing remains ultrasensitive to any challenge to its sovereignty in Xinjiang, Tibet, Hong Kong – and Taiwan. As its economy sputters, without hyper-nationalism, what legitimacy the Party can long retain is increasingly problematic.

Overall, Trump’s improv suggests that he is in something of a time-warp, a 1980s superhero battling has-been demons. But he persists, in threatening a 45% retributive tariff on trade ‘offenders, with China at the top of the list.

One of his trade and China advisers, University of California economist Peter Navarro, has argued with some retrospective justification that inviting China into the WTO was a mistake. Yet the same WTO has also given levers to counter Chinese (and other) trade transgressions over the last fifteen years. The US, EU and Japan have already hit China with anti-dumping tariffs on steel cement and aluminum. Life is complicated.

The new administration needs to focus like a laser beam on three goals:

- First, discredit and undermine China’s predatory “national champion” industrial policies;

- Second, aim at real (and not some hazy, always-over-the-horizon) reciprocity for US firms in trade and investment in China (tighten CFIUS), and

- Third, push back against China’s quest for “market status” in the WTO – a status which will make retaliatory tariffs much more difficult to impose.

For as long as Xi Jinping backtracks on economic reform while doubling down on state-led sectors, the next POTUS should insist on a genuinely transformational deal with China. To win this he will need close cooperation between the EU, the Japanese and the US.

It’s not all going China’s way these days. The officially acknowledged figures show capital flight of as much as $800 billion during 2016. The decision to bring the yuan into the IMF’s basket of reserve currencies now seems dubious, as China now contemplates walking back the RMB internationalization by imposing new capital controls The currency continues to lose value, not as a competitive ploy by tricky Chinese autocrats but because political and business uncertainty is driving capital flight and corporate acquisitions abroad.

Meanwhile, the cost of sustaining the state-owned albatross has helped push its debt to $27 trillion, over 2.5 times the country’s GDP – more than twice the GDP debt percentage of the United States.  In short, we are not bereft of options – and it is time to get serious about the Chinese, in the western Pacific and in the business of business.

On the stage or in international statecraft, improvisation sometimes morphs into solid narrative. But not often. Here’s a strategic narrative: