President-elect Trump won the 2016 election in part due to his rhetorical position that “America is losing to China.” In forecasting what Trump’s election will mean for Sino-U.S. economic relations, we must ask how this assertion will translate into policy. What will it mean for U.S. businesses operating in, or trading with, China? How should multinationals navigate the uncertainty?
Before sharing my perspectives, I should first offer several caveats: Punditry around Trump has been notoriously flawed. Equally, few have successfully predicted the course of President Xi Jinping over the past four years. What’s more, while we know Trump is deeply influenced by those around him, we don’t yet know who he will appoint. While Wilbur Ross, Steve Bannon, Dan DeMicco, and Peter Navarro have advised candidate Trump, it’s safe to assume that a wider circle of advisors will be available to President Trump.
Also, “stuff happens.” Unanticipated events will shift the context for governing. Much has been written of what Graham Allison’s Thucydides Trap, where seemingly trivial incidents achieve outsized significance when an emerging power (China) confronts an established power (the U.S.). An unforeseen event in the South China Sea, Hong Kong, North Korea, or Central Asia could be disproportionally destabilizing. Additionally, social and environmental mega-trends such as automation, climate change, global pandemics, cyber-attacks will continue to have unpredictable impacts on both nations and are beyond the control of any individual leader.
In looking forward, it’s worth examining the motives of both President Xi and President-elect Trump and their core constituents. Let’s start with Trump. Many have focused on Trump as a business man, negotiator and deal-maker. He and his advisors claim to be guided by “economic nationalism,” “American capitalism,” and “America First.” But he is also a master communicator and showman. According to political consultant Mark McKinnon, Trump’s campaign created a narrative in which he preyed on the fears of the electorate (terrorism; American decline; economic drift), defined clear villains (Islamic-inspired terrorists, illegal Mexican immigrants, and offshore Chinese manufacturers) and prescribed populist solutions (stop Muslims entering the U.S.; build a wall; impose tariffs; scrap trade deals). The campaign then bundled all this into a promise to “Make America Great Again.” To fulfill this promise, the Trump administration has to deliver on at least some of his audacious goals, particularly to create “millions” of new manufacturing jobs, double the GDP growth rate to 4 percent, and rebuild America’s infrastructure. His policy prescriptions include cutting red tape (“cutting two regulations for every new one that is enacted”); overhauling the tax code and reducing corporate income tax to 20 percent; and imposing tariffs of 45 percent on China.
My guess is that President Trump will focus on achieving his headline goals first (jobs; GDP growth; domestic security) rather than acting on every one of his provocative policy ideas. The prospect of widespread import tariffs and a painful trade war with China seems unlikely given moderating influence of (1) a wider team of better-informed advisors, (2) sensitive Republicans in Congress, and (3) the potential negative reaction of the stock market.
The danger, however lies in the seeds of Trump’s campaign narrative. If progress in “Making America Great Again” is slow—which it likely will be—President Trump will be forced to refocus public attention toward one of his external villains—Islam, immigrants, China—with unforeseeable consequences.
President Xi faces his own constraints. Ahead of next fall’s 19th Communist Party Congress, Xi needs to make himself unassailable by maintaining the guise of domestic stability and economic prosperity. This is predicated on continued delivery of modest GDP growth of 6-7 percent, “purifying” the Party of corruption, absorption of unemployment from China’s own sputtering manufacturing sector, doubling GDP between 2010 and 2020, as well as demonstrating China’s international statesmanship.
Hi agenda is being pursued through a number of public initiatives and campaigns (think One Belt One Road, Made in China 2025, Internet Plus, the Chinese Dream among others) and a slew of moves to integrate China into international systems of governance, including the creation of the Asian Infrastructure Investment Bank; adding the Renminbi to the IMF’s basket of “special drawing rights” currencies; adhering international ruling by the likes of the WTO and UN; assuming a leadership role in the Paris Climate Treaty; and being a leading voice on the Regional Comprehensive Economic Partnership (RCEP) trade agreement.
So how does this shake out for multinationals doing businesses in China? Here are five predictions:
- Trump needs a public “villain.” With the propaganda-savvy Steve Bannon and Roger Ailes at his side, we should anticipate Trump’s communications will continue the narrative journey of his campaign. He will need to live up to his tough-guy image and demonstrate action against offshoring to places like Mexico and China. We should expect the new administration to find a high-profile “whipping boy” that will be used as an example of being “tough on China.” Trump might inflict punitive tariffs against a sector—such as Chinese steel—or he might take action against an individual company that symbolizes the damage of globalization to American workers (think Carrier and Mexico). Denying Market Economy Status to China, or naming it a currency manipulator might be other relatively painless (and largely irrelevant) ways to “punish” China.
- Both Xi and Trump need a “win.” With multi-lateral trade deals off the table for the U.S., bilateral investment offers a rational place for both leaders to demonstrate a win. With more than $70 billion of Chinese outbound investment to the U.S. in 2016, and billions of dollars of U.S. investment flowing to China, both countries have much to gain from enabling a friendlier investment climate for job creators. Both leaders will be inclined to negotiate a deal, perhaps a Grand Bargain, that can be sold as a win to domestic constituents—particularly blue collar Ohio, Pennsylvania and Michigan, in Trump’s case. This might be a “high quality” Bilateral Investment Treaty (BIT) that opens the U.S. more widely to job-creating Chinese investors (in infrastructure or agriculture, for example), while also forcing China to offer more reciprocal rights in currently restricted sectors such as technology, services and biotechnology.
- TPP is dead. Long live RCEP. Ceding leadership in regional trade to China by rejecting TPP might be a long-term geopolitical miscalculation by the U.S. That said, TPP negotiations already forced governments reveal concessions that could be achieved potentially on a bi-lateral basis with the U.S. TPP’s demise has also added fuel to RCEP, which has the potential to open markets and supply chains for businesses—including American multinationals—across other RCEP countries, including Japan, Korea, India and ASEAN, which in aggregate represent 46 percent of the world’s population and 24 percent of global GDP.
- Ego and “face” have never been so important. Trump’s ego and need for stature offer opportunities for Beijing to curry favor at relatively low cost. American businesses should also look to show their support for the administration. Early state visits between Beijing and Washington would give President Trump the platform, pomp and pageantry he seemingly craves, and give face and reassurance to Xi and his domestic stakeholders.
- American Rebalance; Asia Retreat. In all likelihood, China will be far down the list of Trump’s priorities. While there will likely be some early chest thumping about China, the President needs to use his Republican majorities in Congress to push through quick-win domestic policies that Trumpkins can merchandize for the 2018 midterms. In adopting “economic nationalism” as the guiding doctrine, the Asia Rebalance will be degraded or reimagined as a military-centric “peace through strength” strategy, according to Trump advisors Peter Navarro and Alexander Gray. We might also expect to see re-constituted versions of the Special Economic Dialogue (SED) and the Joint Commission on Commerce and Trade (JCCT), which observers suggest have become ineffectual.
For American businesses in China, our initial advice is to: (1) carefully monitor and map the personalities and regulations of the new administration and align them with risks and opportunities; (2) keep a low public profile, and exercise caution in communicating your China story—particularly in the U.S.; (3) use third party intermediaries—trusted friends, trade associations and think tanks—to gather intelligence and create a context for engagement on tough issues; and (4) build, reinforce and institutionalize relationships with a new a generation of leaders in DC and Beijing.
Before the election, David Dollar of the Brookings Institution observed the relationship between the U.S. and China has become asymmetric and suggested the next U.S. president should engage in “responsible hardball” with China. Temperamentally, however, President Trump will be more inclined to “irresponsible hardball,” which will harm the economies of both nations. Henry Kissinger urged the future U.S. President to engage in “intense study” of China. We know that Trump met Kissinger soon after the election. Let’s hope the President-elect and his advisors heed this advice and come to recognize the interconnectedness of American Greatness and China’s Peaceful Rise.
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