By Andrew Gilholm

If anyone doubted that the post-war consensus on free trade and economic integration was under pressure, the inauguration of an avowed foe of both should dispel the notion. The election of Donald Trump marks the first time an economic nationalist has led the Republican Party since 1940, when Wendell Willkie lost to Franklin Roosevelt.

Combined with Britain’s vote to exit the EU and a surge in support for populist movements across Europe, economic nationalism changes the tenor of the global conversation in 2017. It will also intensify growing pressure on the relationship between the world’s most important economic and political actors: the United States and China.

In decades past, free trade and globalization created a buffer to the often conflicting national interests and prickly pride that separate China and the United States. Economic priorities have helped contain political crises and rapidly repair ties afterward. The 1999 bombing of China’s embassy in Serbia, the 2001 Hainan spy plane incident, and multiple disputes over dissidents and cyber espionage along the way: any or all might have upended a more fragile relationship.

The major force underpinning restraint has been the belief on both sides that, on balance, the bilateral trade and investment relationship is too important to jeopardize. When Trump takes the oath of office, that feeling may no longer be mutual.

Free trade under fire

The extent to which Trump can or intends to follow through on his election promises is unknown. Faced with the realities of office, the campaign version of some policies may give way to a more pragmatic version. There have already been signs of backtracking from, or at least redefining, his high-profile call for a 45 percent  tariff on all Chinese imports. And dramatic withdrawals from trade agreements will not necessarily preclude future re-engagement once Trump has shocked interlocutors into giving the United States a better deal.

Nonetheless, in affirming that he will end US participation in the Trans-Pacific Partnership (TPP) free trade accord, as well as its European variant, the Transatlantic Trade and Investment Partnership (TTIP), Trump has put down a marker: free trade is in the crosshairs. No target looms as large as China.

Trump has strong domestic incentives to aggressively pursue punitive action against China and other low-wage manufacturing nations through the WTO, and to consider a raft of unilateral tariffs targeting Chinese steel, aluminium, auto parts, and select electronics. This would partially fulfill key promises of his campaign, but also invite retaliation. The uncertainty is concerning for companies exposed through complex global supply chains, markets, and investments.

Many in Beijing, expecting a difficult period if Hillary Clinton had won the presidency, are not yet convinced Trump will bring different tactics than his predecessors who talked tough on China. President George W. Bush took office vowing to treat China as a “strategic competitor” not a “strategic partner,” but after an early crisis of relations presided over one of the most stable periods of US-China relations in decades. The United States and China traded tariff-slapping and WTO complaints shortly after Barack Obama took office, but the outgoing president apparently found little value in that approach, using it sparingly thereafter.

Panda-poking season

Chinese leaders are sensitive to the relative uncertainty Trump brings. Any confidence they may have had was dispelled by a single phone call: Trump’s December call with Taiwanese President Tsai Ing-wen brushed aside the diplomatic deference shown to China by every US president since 1979. Trump’s style and strategy mean we should expect more surprises in 2017. He will deliberately tackle taboo topics in diplomacy (and no interest is more “core” for China than Taiwan), in hopes that China will be a more flexible negotiating partner once its sense of security is shaken.

Assuming this is indeed a deliberate approach rather than recklessness, these tactics may actually yield some results. Leaders in Beijing are reassessing long-considered givens on US policy. Regardless, confrontational acts and anxious episodes lie ahead, ushering a riskier, less predictable period. Although restraining their responses so far, politicians in Beijing face domestic pressures. When China refers to”red lines” on issues like Taiwan, it reflects real policy positions, not empty rhetoric.

Nor is China likely to make sweeping trade concessions to appease voters in richer economies. The Trump campaign claimed that Chinese people believe they are benefiting from poor US trade negotiating tactics, but the sentiment is quite the opposite.

December 11, 2016 marked the 15th anniversary of China’s WTO accession, and triggered a deadline on the unprecedented conditions that Beijing accepted to join the club. The way Beijing sees it, China’s openness to trade and investment has long since surpassed that of its developing peers, and higher-cost countries are blaming China for their eroding competitiveness—either for domestic political ends or as part of efforts to “contain” China.

Even in a country where market liberalization and trade have helped drive the largest movement of people out of poverty, the benefits of continued openings are increasingly questioned. Most of its trading partners see China as an economic superpower and leading competitive threat to their industries, and want greater reciprocity and market access.

Whatever the US election outcome, it was clear by 2016 that such trends portended growing bilateral friction under either a Clinton or Trump administration. Spats over steel dumping are one thing, but going forward, China will compete with US companies up the value chain. Like their European peers, these companies will add to the pool of malcontents over issues including market access, Chinese state support to local competitors, and intellectual property protection. The US business community has long been a strong advocate of close, stable China ties. This is still broadly true, but less so than before, even as most US firms in China remain profitable and growing.

A fragile relationship

China’s leaders appear aware of the stakes. During the September G20 summit in Hangzhou, Chinese President Xi Jinping’s anti-protectionist speech reflected his concern at what was transpiring in the US presidential campaign. Since the end of World War II, and in an accelerated form since the end of the Cold War, the United States has been the chief proselytiser for globalization and free trade, and an architect of the institutions that underpin it. In 2017, Beijing is expected to be a louder defender of free trade than Washington, even as China seeks greater influence in those institutions.

It is certainly too soon to declare that the US elections and Brexit signal an end to the era of globalization—a period that has seen an unprecedented movement of capital, goods, and people across international borders, and history’s greatest improvements in poverty, infant mortality, life expectancy, and per capita income. Globalization is seriously challenged, but is still the operating system of the global economy. What is certain is that the footing of global business in 2017 will feel less firm and familiar.

Similarly, with Trump not yet installed in the White House, it is impossible to say how he will ultimately affect the crucial US-China relationship. But tests and turbulence are certain in the coming year.  The incoming US president has not been tested as a handler of high-stakes geopolitical disputes and crises. Leaders in Beijing are vastly more experienced, but we have little precedent for how they may react if pushed and provoked by the United States on sensitive issues.

There are still enough shared interests and economic interdependence at stake to renegotiate the terms of the relationship. A “grand bargain” seems to be what Trump and his advisors envisage, and China is not entirely averse to such a game. But there is an alarming gap between the two sides’ perception of what is “fair” in the economic relationship. The risk is that cracks are appearing in the economic glue that has held together this troubled political relationship, just as it is about to be vigorously shaken by Trump.

 

About the author:

Andrew Gilholm is Head of Analysis, North Asia for Control Risks, an independent, global specialist risk consultancy. They help some of the most influential organisations in the world to understand and manage the risks and opportunities of operating in complex or hostile environments. For questions or further information, please contact the author: [email protected]

Posted by Andrew Gilholm