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Trump And Taiwan: Economic And Strategic Factors – Analysis

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Weeks before Donald Trump moves to the White House as the next President, a lot of readings are being made on what kind of foreign policies he would be pursuing following his many unconventional statements on certain foreign policy issues. It is uncertain if there is going to be a new model in foreign policy making. In particular, his 10-minute talk on telephone with Taiwan President Tsai Ing-wen has opened up the critical question of the ‘One China’ policy that the US adhered to since 1979 when it adopted the policy and has since been maintaining only unofficial ties with Taiwan. The ‘One China’ policy refers to the recognition by other countries of Chinese sovereignty over self-ruled Taiwan.

The Taiwan issue is too sensitive in the US-China relations. After almost a decade of near-normal relations between China and Taiwan, Beijing had developed doubt about Taiwan’s thinking after Tsai took office. Beijing started to develop the feeling that Tsai is likely to extract favourable conditions from the US in the relationships. The Trump-Tsai phone talk has only precipitated the doubt.

What could be at the core of Trump’s likely new approach to the Taiwan issue? While the political considerations are given, what possibly weighs high in Trump’s mind are the security and economic considerations. Not only Trump has questioned Beijing’s inability or unwillingness to address North Korea’s pursuance of nuclear programs, and militarisation in the South China Sea, what seems to bother the most is the unfavourable balance of trade that the US has with China and China’s currency manipulation. Even during the election campaign, trump consistently excoriated China’s trade policies and pledged to whack a 45 per cent tariffs on imported Chinese goods and to label the country a currency manipulator on his first day in office.

Trump wants to correct the imbalance in trade with China and the Taiwan card seems to have come handy. Because of the sensitivity of the Taiwan issue, Beijing’s reactions could be harsh, even to the extent of breaking ties with the US. The evolving great power rivalry between the US and China could possibly dramatically impact the security scenario in the Asian region if Trump moves to the next step and Beijing reacts in a more belligerent manner. Trump’s assertion has been rebutted by Beijing by a string of stern reactions, the latest being by Chinese ambassador to the US.

Economic factor

As it seems, Trump wants to use the sensitive issue of Taiwan and the ‘One China’ policy as a bargaining chip to address the economic issue. This in itself could shape how great powers conduct relations. If Trump is thinking of using the trick of a business mind to put pressure on an opponent till the point the adversary (China) yields, this trick may not work. China has unequivocally declared in uncertain terms that Taiwan is one of its “core interests” and would not hesitate to integrate with the mainland by the use of force, if needed. If either side do not back off, the new situation could be the recipe for disaster to happen in the Asian theatre.

Days after Trump questioned the efficacy of the ‘One China’ policy, the state media urged the government to invade Taiwan. The nationalist Global Times, affiliated to the Communist Party of China’s mouthpiece People’s Daily, observed in an editorial China’s Taiwan policy should not be dictated by the US or Tsai’s ruling Democratic Progressive Party (DPP). The editorial observed: “The future of Taiwan must not be shaped by the DPP and Washington, but by the Chinese mainland. It is hoped that peace in the Taiwan Straits won’t be disrupted. But the Chinese mainland should display its resolution to recover Taiwan by force. Peace does not belong to cowards.” A majority of countries, including India, officially consider Taiwan – a functioning democracy with a free press – as part of China while maintaining diplomatic, trade and cultural ties by proxy. Now Trump sees no compelling reason why the US should subscribe to the ‘One China’ policy unless the US makes a deal with China.

Since for China the ‘One China’ policy remains as the foundation of US-China relations, any deviation from this stance by Trump by putting China’s “core interest” on the bargaining table is simply a recipe for rocky relations, or perhaps worse than that. For Beijing, Taiwan is a non-negotiable national interest. If this is the case, are there any chances for economic deal-making, which is what Trump has in mind? Given the way the Chinese have reacted to Trump’s direct contact with Tsai and his subsequent criticism of China’s trade issues and monetary policy, there seems to be little scope for reaching fresh understanding.

Yet, there could be two possibilities. One is the new approach would spiral a war with inconceivable consequences; the other is Trump could succeed in putting Beijing on notice by putting US’ core interests on the table as well to get some results in America’s favour. In other words, Trump is asking Beijing to respect the core interests of the US if it expects the US to continue to do the same for China. By calling that equation into question, Trump is unfolding a Pandora box, which complicates the matter. For now, Trump is only President-elect and not the President and that he may be testing the Chinese waters and may actually not pursue the policy that he has been articulating now after he moves to the White House. Does it men than that the Chinese need not overreact? The answer to this could be both ‘Yes’ and ‘No’.

Should China be patient and wait till Trump moves to the White House on 20 January and see what exactly he does? If the ‘core interest’ analogy means mutual respect, which is what Trump probably wants to leverage with Beijing by way of open shipping lanes in the South China Sea, reduced cyber-security risks emanating from China, and less protectionism and unfair competition for American business interest in China, Beijing might like to ponder in the largest interest of preserving the relationship and also for the interest of the world. But given the recent Chinese aggression in asserting its positions on regional and world issues that could be a mere will-o-the-wisp.

There are fears that Trump’s chest-thumping over trade issues with China could trigger a trade war and if that happens, it would send shockwaves across the globe. Though Trump has announced the name of Terry Branstad, the Iowa governor and “an old friend of the Chinese people”, as his ambassador to China, it is unlikely to prevent worries of a looming trade war if Trump sticks to his threat. It is amazing that a simple telephone talk between two people has the power to reshape world politics and affect the uneasy equilibrium, injecting a dimension to how international diplomacy is conducted.

In April, the US Treasury will release its report and it is to be seen how the report mentions about China’s currency. That time, Trump’s assertion that China has been devaluing its currency in order to stack the deck on exports in its favour will be tested as imposing tariffs on China by bypassing procedure will not be appropriate way to do business. Production of a product is no longer a business of a single country; it involves many companies of other countries as well. Since many US and European companies are involved in assembling products in China, high tariffs would hurt them as well when such products are exported from the assembly lines. That could mean that Trump could target sectors where US companies’ interests are not too much affected. Steel could be one sector that might attract Trump’s tariff wrath as China exports a lot of cheap steel because of overcapacity and which is causing disruption to the US steel industry.

If such would be the scenario, what could be China’s response? It could be in two ways: ignore and concentrate on the larger picture; or retaliate by targeting large American firms (for example, Boeing or Apple whose reliance on China is high). Whichever way the relationship moves, if there is a trade war, loss for both could be immense.

China is America’s largest trading partner. But the US has a trade deficit of $366 billion with Beijing in goods and services in 2015, an increase of 6.6 per cent over the previous year. Trump accuses Beijing of artificially depressing its currency, the renminbi, in order to boost its exports as its value fell by around 15 per cent in the past two-and-half years, which is why Trump accuses China of being a “currency manipulator” and wants the US Treasury to start negotiations with Beijing on allowing the renminbi to rise the day he takes office. During the campaign, Trump was blunt in saying that the US has a massive trade deficit with China and that the US cannot “continue to allow China to rape our country”. He termed the US-China trade as “the greatest theft in the history of the world”. So, if Trump toughens stance, China’s loss would be more in terms of loss in earning from trade but the US might as well find it harder to source the same products elsewhere. So, both sides would be the losers.

China’s position is better than the US if disruptions occur. This is because the largest categories of goods that it sources from the US are soybeans, cars and aircraft for which it has choices to source from other destinations. In contrast, the three categories of goods that the US imports from China are mobile phones, tablets/laptops and network equipment in each of which China is the dominant global supplier, accounting for almost 70 per cent of global output. If trump decides to impose high tariffs on such Chinese products, the US purchasers would be hurt by effectively paying a higher tax on purchases on consumer electronics.

The damage to the US and China’s interests would no longer be confined to the two countries alone but the effects would be felt beyond, across the Asia Pacific region. This is because China imports 35% of the components of its export items from other countries (as of 2015) which are assembled in China before exports, which inevitably means that a trade war would not only hurt both the US and China but would cause collateral damage on imports from Japan, South Korea, Taiwan and others. This would also leave debilitating impact on the real estate sector and result in loss of jobs for millions of workers. According to the World Trade Organisation, China charges an average 15.6 per cent tariff on US agricultural imports and 9 per cent on other goods. In contrast, Chinese farm products pay 4.4 per cent and other goods 3.6 per cent when coming into the US.

So, the rebalancing the economy would prove to be a disaster. However, Trump probably needs to take into consideration that labour-intensive industries that moved to the third world countries are unlikely to return to the US, which is why his policy may be flawed. Trump also need not overlook the fact that China has a stranglehold on the US economy by holding about a trillion dollars in US government debt, which would limit Trump’s leverage to negotiate better terms with China to some extent. Pushing the case too far could only increase the prospect of a trade war.

South China Issue

Dealing with China’s military expansionism is another item in Trump’s agenda, apart from currency manipulation. During his election campaigns, Trump questioned China’s military expansionism in the South China Sea as well as trade issues. Since then China has upped the ante on the South China Sea by making further inroads by building massive military complex in the middle of this body of water. This has not deterred the US to challenge Beijing for its “assertive behaviour in the South China Sea”. Trump has rejected Chinese control of the region and its rapid development of artificial islands capable of hosting military planes.

As is well known, China insists on sovereignty in its entirety over the resource-endowed South China Sea, ignoring claims by some other Asian nations. Taiwan, Vietnam, the Philippines, Malaysia and Brunei also claim territory in the strategic waterway, while the US Navy insists on its right to operate throughout the area, including in waters close to China’s new outposts. Not only Washington not accepted the Chinese claims but also has regularly sent warships into the strategically vital area to assert the right to freedom of navigation. Trump has taken cognizance that China seems to have installed anti-aircraft and anti-missile weapons on all seven of its man-made islands in the South China Sea. China says that these efforts are intended to boost maritime safety in the region.

The coming of Trump into the White House soon has already injected a new element of uncertainty how the future course of US policy towards Asia would be. Trump has also questioned the continuation of US commitment to defend its allies in Asia and has called for a reconsideration of such commitments, suggesting Japan and South Korea even ponder to seek their own nuclear deterrence for their security. This, together with his tough stance on Chinese trade policy towards the US, impacting the future of US-China relations, has injected an element of volatility in the security dynamics in the Asian region, implications of which is difficult to decipher at the moment.

Disclaimer: The views expressed are author’s own and do not represent either of the ICCR or the Government of India.


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Dr. Rajaram Panda

Dr. Rajaram Panda

Dr. Rajaram Panda, former Senior Fellow at IDSA, New Delhi, and until recently ICCR Chair Professor at Reitaku University, Japan, is at present Lok Sabha Research Fellow, Parliament of India. E-mail: [email protected]

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