Sep 16, 2017 07:49 PM

Opinion: Trump’s Bellicose Nature Presents Challenge to China

Like the rest of us, Chinese leaders are still struggling to figure out Donald Trump. Specifically, they are still seeking to determine how Chinese policy should be adapted to the uncertainties surrounding the intentions of the U.S. administration.

My assessment is that Chinese policymakers have avoided, for the most part, falling into the traps created by the Trump presidency and have even managed to capitalize on the situation. To start, they have avoided becoming too excited by the U.S. president’s more-provocative statements. They did not threaten Boeing when Trump launched an investigation of Chinese steel exports. They did not threaten U.S. banks when Trump administration officials hinted at sanctions on Chinese financial institutions doing business with North Korea. They understand that the statements from Trump are generally two parts bluster and one part action, and that it is better to wait for the latter, if in fact it ever occurs, rather than overreacting to the former.

Second, Chinese leaders understand that the trade imbalance between the two countries is a hot-button issue for the U.S. president. They have therefore allowed their currency to strengthen against the dollar. The yuan is up by fully 8 per cent against the dollar this year, and it has appreciated by nearly 3 per cent in the first half of this month alone. Since it takes several quarters or longer for currency movements to translate into changes in trade flows, there hasn’t been much of an impact on the bilateral imbalance yet. But it will come. Meanwhile, the fact that the yuan has strengthened will make it harder for the U.S. Treasury Department to label China a currency manipulator when it issues its next semiannual report to Congress in October on exchange rate policies.

Third, Beijing has walked a fine line in seeking to encourage North Korea to come to the bargaining table. It has resisted pressure from the Trump administration for a full-blown embargo on oil and fuel exports while agreeing to tougher United Nations sanctions against the country. Pyongyang will feel pressure from lost export revenues but not perceive an existential threat to its economy, and on both grounds become at least somewhat more inclined toward discussions. Trump administration officials will see that they are getting a degree of cooperation from China. And they will come to understand that a degree of cooperation is better than nothing, since without Chinese cooperation, no solution to the North Korea problem is possible.

Finally, China is capitalizing effectively on the geopolitical vacuum created by the Trump administration’s abdication of international economic and political leadership. It remains committed to the Paris climate accord and has recently announced the intention of phasing out gasoline- and diesel-powered motor vehicles. Already it is far and away the leading manufacturer of solar equipment. The Trump administration, meanwhile, is making it easier to mine coal on federal lands. There’s no question, in other words, about which country is better positioning itself to capitalize on the coming Green Revolution.

And where the Trump administration’s budget proposes draconian cuts in U.S. foreign aid, Beijing is ramping up its foreign investment programs. At the first Belt and Road Forum in May, President Xi Jinping promised foreign investment in infrastructure projects in the hundreds of billions of dollars. Most recently, the “Belt and Road” initiative was extended to Haiti, a country desperately in need of assistance and in America’s own backyard. In August, Chinese and Haitian officials initialed an agreement under which China will invest $30 billion in power plants, railways and housing for the afflicted country. There can be no clearer indication of which major power is making friends and strengthening its geopolitical position.

More late-night China-bashing is bound to emanate from Trump’s Twitter account, such being the president’s temperament. While the economic nationalists in the White House have been weakened by the departure of Steve Bannon, Trump’s now-former chief strategist, others China skeptics like Wilber Ross and Peter Navarro are still there. Bannon’s speech on Sept. 12 in Hong Kong did little to shed light on the Trump’s thinking. Bannon asserted once again that the U.S. is an “economic war” with China, while at the same time acknowledging that there is much to admire about the “Chinese way of running their economic system” and warning, ominously, that “China right now is Germany in 1930.” In other words, whether Trump and his advisers, current and past, see China as friend or foe remains as uncertain as ever.

China’s best strategy is to continue to ignore the provocations and attend to business, which means maintaining a strong economy with a strong currency, pressuring but not threatening North Korea, and further expanding the Belt and Road initiative. If it does so, there will be no question about which country, the U.S. or China, emerges as stronger at the end of Trump’s four years.

Barry Eichengreen is a professor of economics at the University of California, Berkeley, and the University of Cambridge.

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Barry Eichengreen

A professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund