"Team America" 2018

Economic nationalism and a ‘deal’ on North Korea dominate Team “America First” thinking about Asia.

Introduction

My 19 May article reflected on President Donald Trump’s increasingly apparent ambition to effect global regime change with particular reference to the transatlantic alliance. Since then, I have been asked on a number of occasions to comment on the implications for Asia, particularly in the light of the Trump/Kim Jong-un summit and escalating trade tensions with China (more on both of which in due course). This article focuses largely on the political implications for Asia in particular — while also trying to put these in the wider global context — in the light of what might be called the ‘Trump doctrine’.

This doctrine has firmed up considerably since my 18 March article in which I opined that “the unilateralist hawks in Washington appear finally to have won control of US foreign policy”; and, to my mind, it has been illuminated expertly by Jeffrey Goldberg in The Atlantic recently. Looking ahead, the following sentence from Mr Goldberg’s article is particularly pertinent:

“[Mr] Trump’s actions these past weeks, and my conversations with administration officials and friends and associates of [Mr] Trump, suggest that the president will be acting on his beliefs in a more urgent, and focused, way than he did in the first year of his presidency, and that the pace of potentially cataclysmic disruption will quicken in the coming days.”

On a roll…

With so many areas ripe for Trumpian “cataclysmic disruption”, a good place to start any assessment — as is generally the case with Mr Trump — is the President’s approval ratings. The authoritative RCP Average currently has Mr Trump’s ‘approval’ at a respectable 43.3% (with the odd poll even placing him in the upper 40s). This is a marked improvement on where he stood for most of the second half of 2017, ie in the upper 30s, and even a couple of percentage points up on the end of 2018Q1.

…with an eye to the midterms…

In principle at least the improvement in the President’s approval ratings should help the Republicans in the 6 November midterms. And certainly, with the proverbial ‘generic Democrat’ now leading by only 6.4pp in the RCP Average, the Republicans look to be in somewhat better shape than they were even three months ago — perhaps especially with some signs of mounting division within the Democratic Party. Overall, I reckon this is only likely to encourage Mr Trump, an individual who seems completely untroubled by any sense of self-doubt, to go for more of the same.

…but maybe misjudging the proverbial minefield

This could prove to be a mistake in one policy area at least, ie trade, a minefield which could blow up in Mr Trump’s face not only economically but also politically.

​With the (probable) exception of the highly controversial policy of separating the children of illegal immigrants from their parents, trade is the policy area where Mr Trump is most at odds with ‘mainstream’ Republicans, a factor which contributed to the thinking in my 28 May article, as follows:

“…as far as America’s farm product exports to China are concerned, Mr Trump — well aware that come 6 November the Republicans need every vote they can get in the corn belt as well as the rust belt — is likely to remain cautious about escalating trade disputes with China in the next five months or so”.

This, in turn, MAY account in part for why Mr Trump appears to have turned away from the trade ‘hawks' — notably, USTR Robert Lighthizer and Director of the National Trade Council Peter Navarro — over screening Chinese investment into the US, ie in the hope that he can stave off at least some of the retaliation threat from Beijing. This being said, the proposed Congressional strengthening of the Committee on Foreign Investment in the US (CFIUS) will still raise the bar more than somewhat, including on China's 'back door' access to sensitive technologies through de facto mandatory joint ventures for US (and other) companies looking to invest there. Watch this space!

One way or the other, it is not at all clear that the uptick in Mr Trump’s approval ratings is trade related, Indeed, there is evidence to suggest that his 'bounce' owes more to his stance on immigration and, possibly, his summit with Kim Jong-un. I am confident he also stands to see his ratings consolidate now that he has another Supreme Court judge to appoint, further boosting what may well prove to be Mr Trump’s most lasting legacy.

Rather, the problem with Mr Trump’s trade agenda, as I have explained previously, is not that ‘corn belt’ Republicans will turn decisively against him but that retaliation against US tariffs aimed at farm products in particular (which clearly will be the case) could widen the already considerable ‘enthusiasm gap’ between Democrat and Republican voters, costing the GOP otherwise winnable seats in the process. And it remains to be seen whether the President’s delivery of other pre-election promises can counter this to a sufficiently significant extent (although my personal view very much along the lines of a 1 July article by election expert Rachel Bitecofer).

Approaching ‘crunch’ point

This looks to be a critical balance to strike. It is always hard to tell with the mercurial Mr Trump but I am now inclined to believe I may have been wrong thinking that he would be cautious about escalating trade tensions at least until the midterms were done and dusted. We may begin to get a clearer picture as early as this coming Friday, 6 July, when the US is due to start imposing 25% tariffs on US$34bn of imports from China (roughly equivalent in value to one month of Chinese exports to the US); and when Beijing will retaliate by imposing proportionate tariffs on a range of goods imported from the US — notably soybeans, seafood and crude oil. According to Shawn Donnan, writing in today’s Financial Times (subscriber access only), this will take the total value of trade subjected to tariffs through or in retaliation for Mr Trump’s actions above the US$100bn mark.

With Beijing and Washington both already prepared to move to US$50bn, further escalation could follow very swiftly. If Mr Donnan is correct in saying that “Mr Trump is dialling up the pressure to force capitulation” — and I, for one, believe he is — I see this as a high probability…with the likelihood of more to follow consistent with the President’s ordering of a further US$200bn list to be subjected to 10% tariffs and threat of an additional US$200bn beyond that. Again citing Mr Donnan, if things go this far, around 90% of the US$505bn of 2017 imports from China would be hit; and it is reasonable to assume that Beijing would have retaliated against the full range of imports from the US (worth US$130bn last year) and taken extensive ‘unconventional measures’ against US investors in China. Admittedly, this is an extreme scenario; but I do not believe that it can be totally dismissed over the course of the next several months. And especially not if Mr Trump believes that China is about to fold under pressure, as today’s Economist Espresso suggests he may (erroneously) have calculated, as follows:

“China thinks it can outlast America in a trade war, but it certainly looks to be on the back foot. Its equities are in bear-market territory, down more than 20% since late January. The yuan chalked up its worst-ever month against the dollar in June. Economic indicators are weakening. And the tussle is just heating up: China is to impose its first tit-for-tat tariffs on American goods on Friday. But lest President Donald Trump conclude that he has China cornered, the bigger cause of its woes is domestic. The government’s two-year battle to defuse financial risks has dragged down credit growth, which in turn has weighed on investment and asset markets. Some investors had hoped China would relent as the pain mounted. So far, though, it has only eased policy around the margins. Instead, it is trying to set its own house straight, even at a cost, ahead of the looming storm.”

Auto-focus…

Furthermore, I think we have to take Mr Trump at his word when it comes to imposing tariffs on imported autos — which he appeared to prioritise in a 1 July TV interview. This despite strong opposition at home, as well as from America’s trading partners, most notably the Canada, the EU, Japan and Mexico. At the heart of this threat is the US Department of Commerce’s investigation under Section 232 of the 1962 Trade Expansion Act (ie the same provision as was used to justify steel and aluminium tariffs), launched by Mr Trump in May. No matter how questionable imposing tariffs on imported autos and auto parts (worth around US$335bn last year) may seem both economically and on national security grounds, I would be really surprised if the investigation did not result in the imposition of at least some new tariffs — and possibly even before the year-end — despite the high related probability of retaliation.

[Note: The Financial Times reports that the European Commission is considering proposing a plurilateral sectoral deal among major auto manufacturing economies to reduce tariffs when Commission President Jean-Claude Juncker visits Washington later this month. But it is far from clear that this would fly on either side of the Atlantic.]

German auto manufacturers in particular have been concerned for some time about the prospect of US tariffs on auto imports as is underlined by their previous heavy lobbying in Berlin for non-retaliation by the EU on steel and aluminium. This looked to be having an impact on German Chancellor Angela Merkel until Mr Trump made what I consider to be a tactical error at exactly the wrong moment, ie late May, when he announced the Section 232 investigation into auto imports. In so doing he greatly strengthened the case being pressed by French President Emmanuel Macron and the European Commission in particular that the EU must stand firm in the face of US trade "aggression". Or, to put it more fatalistically, that it immediately seemed highly likely given what was already happening over steel and aluminium that Mr Trump would impose tariffs on auto imports on alleged national security grounds in due course anyway.

Given Mr Trump’s track record over many years, it is not, in my view, unreasonable to assume that his frequent singling out of Germany over “unfair” trade practices may be exacerbated by his clear animus towards Mrs Merkel which has been increasingly apparent these past days in his remarkable efforts to urge on her opponents in Germany. Indeed, the fact that she appears to have survived (for now at least —- the clash of personality between her and Interior Minister Horst Seehofer means that we could see another flare-up anytime although one should never underestimate Mrs Merkel’s survival powers) may encourage Mr Trump to take an even tougher line on auto imports that might otherwise have been the case.

Such personal dislike is not, of course, something with which Japanese Prime Minister Shinzo Abe has to deal. But his efforts to work with Mr Trump have been ill-rewarded. We can safely assume that, as is the case with Germany, this is in significant part because of the US President's obsession with bilateral trade deficits, on which count he sees both Japan and Germany as 'guilty as charged'...with autos as a key component in both cases.

…and common cause

If there is an up-side to this it is that it gives the EU and Japan common cause — and one which is shared by Mexico and Canada.

[Note: This being said, a word of caution on Mexico as it is by no means clear where Andrés Manuel López Abrader (aka AMLO) will come down on trade in general and Nafta in particular after he is sworn in as President on 1 December. Following his victory in the 1 July general election, the Economist Espresso opined (accurately, in my view) as follows.

"Andrés Manuel López Obrador’s victory in Sunday’s presidential election was predictable, but earth-shaking even so. What awaits Mexico now is uncertainty. The 64-year-old Mr López Obrador, a charismatic populist, is a conundrum: he can sound like a fiscally conservative pragmatist one moment and a messianic rabble-rouser the next. His first priority will be tackling corruption—but how is unclear. There is little sign that he has the mindset or the patience to build the institutional framework needed to fight graft effectively, for example by making prosecutors truly independent. On other issues there is even less certainty. The president-elect promises prudent budgeting, but also says he will freeze petrol and electricity prices and subsidise agriculture. His election adds an unpredictable new factor to negotiations over the North American Free-Trade Agreement. Once a critic, Mr López Obrador now says he supports NAFTA. But his economic nationalism resembles Donald Trump’s, which could make it harder to reach a deal."\*]\*

Furthermore, the same (ie a degree of solidarity among other major trading economies) can be said for Mr Trump’s attitude towards the World Trade Organisation (WTO), which he again threatened during a 2 July meeting with Dutch Prime Minister Marc Rutte. Even if Mr Trump does not go as far as to withdraw the US from the WTO at some stage (which I would not rule out), his blocking appointments of replacement judges to the Appellate Body of the dispute settlement mechanism (as a consequence of this, we will be down to just three — out of a nominal seven — judges in just 13 weeks from now, as I understand it, where four is the minimum number required for the body to function) coupled with likely continued breaches of WTO rules, threatens to undermine the Organisation more or less totally.

Japan is therefore unlikely to find itself left out on a limb over trade (or, for that matter, climate change) by its non-US G7 partners. Indeed, it would be fair to say that an informal G6 does appear to be emerging after the recent G7 summit though it remains to be seen quite how far this can go.

The answer to this may depend, to an extent at least, on what happens at Mr Trump’s 16 July summit with Russian President Vladimir Putin. Not least in the wake of the outcome of the North Korea/US summit, even Mr Trump’s own advisors are reportedly concerned that their boss may make unjustified (and, in the eyes of key allies, unjustifiable) concessions to his Russian counterpart. And even before he meets Mr Putin, Mr Trump may further damage the transatlantic alliance if he launches a typical Trumpian outburst or around the 11/12 July Nato summit (perhaps even proposing that Russia should be admitted to Nato!).

China: Pain but also potential gain

There is no question other than that China will suffer significant economic pain in the event of a trade war with the US. Indeed, the economic 'hit' to China stands to be greater than that which the US would suffer; but, by most reckonings, still not disastrous. Where I think the risk of serious economic impact may be greater is in smaller economies across Asia which are tied up in the complex supply chains which feed into China's manufacturing for export ‘machine'. Indeed, this may be helping to bolster what appears in any case to be considerable resolve in Beijing to stand firm in the face of US pressure, believing that the economic ripples from US trade tariffs could help its regional ambitions both economically and politically. It may have been Mr Abe who hosted the 1 July meeting of trade ministers from the ten ASEAN countries plus the six countries with which ASEAN has bilateral trade deals (ie Australia, China, India, Japan, New Zealand and South Korea); but China is sure to welcome quicker progress towards realising the objective of that meeting, ie concluding the negotiation of the Regional and Comprehensive Economic Partnership (RCEP). The longer-term implications of Mr Trump’s stance on trade could therefore turn out to be contrary to his prime objective of bringing manufacturing back to the US as Banyan points out in The Economist (subscriber access only) this week as follows:

“Led by China and Japan, Asian countries are at last opening to one another. They are striking bilateral trade deals among themselves, as well as with the European Union. And that begs a question: if the Trump administration succeeds in smashing existing supply-chains, why assume manufacturing will return to America? Might more links in the chain simply relocate within Asia instead?”

Furthermore, mercantile though its conduct may often be, China too has a strong interest in defending the WTO. It will not necessarily be easy for other economies — either in Asia or more widely — to work with China on trade; but, especially if the US persists down its current track, the various parties will try to do so.

All this also begs the question of whether in punishing China on trade, Mr Trump risks undermining his fervent desire to ‘do a deal’ with North Korean leader Kim Jong-un. My personal view is that, although China/US trade and North Korea/US cannot be seen as completely independent of one another, each now has a sufficient life of its own for 'cross-fertilisation' to be marginal. Indeed, my bet is that, following his meeting with Kim Jong-un, Mr Trump believes that they has such a good relationship that he doesn't need Chinese President Xi Jinping’s help to the same extent anymore. And US National Security Advisor John Bolton and Secretary of State Mike Pompeo are probably prepared to go along with this to an extent at least on the (much more realistic) grounds that China's willingness to continue to squeeze N Korea economically is in heading into reverse gear now anyway.

This reversal makes sense from Beijing's perspective. After all, China's biggest concern must be to keep North Korea firmly within its sphere of influence, the corollary being that Beijing certainly does not want Pyongyang building a strong relationship with Washington — and we can safely assume that, for all his courting of Xi Jinping at present, Kim Jong-un is probably aiming firmly to play off the one against the other if he can.

More widely, Beijing certainly sees Mr Trump's conduct towards Asia in general — ever since his early days in office when he withdrew the US from the Trans-Pacific Partnership — as a big opportunity for China to build more influence across the region as a whole. Notably, pulling strings in the North Korea/South Korea process — which is clearly related to the North Korea/US one but which has an important life of its own — Xi Jinping is trying to ease Seoul gently out of the US 'camp' and more firmly into Beijing's sphere of influence. This is not straightforward; but I suspect it it is one instance where Xi Jinping, otherwise a man in a hurry, may be prepared to be incremental, as China was for years to very good effect in the South China Sea — one long-term objective being to achieve a complete US military withdrawal from the Korean peninsula.

Such a move would be a major strategic ‘win’ for China. But then, as I have frequently said previously, I don't think one could legitimately accuse the Trump Administration of joined up thinking between its trade agenda and its national security agenda (except, possibly, in its unjustified use of Section 232) — even though Defence Secretary James Mattis seems to have been told to tone it down a bit (relative to his presentation in Singapore at the start of June) on South China Sea when he visited Beijing at the end of the month because of the North Korea issue.

On the other hand, let's keep in mind that, for now at least, the US is taking a pretty forward stance (albeit arguably too little too late) in the South China Sea with far more Freedom of Navigation exercises than we saw during the Obama era. This suggests that we are still a long way away from a possible US military withdrawal from the western Pacific.

Then there is the question of Taiwan. Although the US sent a sufficiently low level official to the opening of the new 'cultural centre' last month not to provoke Beijing unduly, if anything Congressional (and possibly Administration) commitment to Taiwan seems stronger than ever. I don't rule out the conspiracy theorists' thinking that Mr Trump might be prepared to 'sell out' Taiwan to get a deal on North Korea; but I am not at all sure that Congress would let him get away with that. And if the US is to continue to be a realistic supporter of Taiwan militarily I don't see how it can easily withdraw militarily from Japan. And especially not if withdrawal from South Korea was on the cards as part of a North Korea deal. Indeed, the Pentagon would almost certainly argue very strongly indeed for full retention, if not reinforcement, of the US military presence in Japan — pushing Mr Trump's own argument that China is a "strategic competitor" in support. Nevertheless, there are more than sufficient grounds for America’s traditional allies in Asia to question its commitment, sowing doubts about Washington which China will undoubtedly continue to seek to exploit.

Conclusions: An old-style consistency

If there is a central theme to all of this it appears to be inconsistency. However, Mr Goldberg, in the article from which I quoted earlier, refers admiringly to an essay by foreign policy expert Thomas Wright and published on 20 January 2016 which claimed consistencies in Mr Trump’s views which were a throwback to 19th century international relations. As Mr Goldberg puts it:

“[Mr] Wright, who published his analysis at a time when most everyone in the foreign-policy establishment considered [Mr] Trump’s candidacy to be a farce, wrote that [Mr] Trump loathes the liberal international order and would work against it as president; he wrote that [Mr] Trump also dislikes America’s military alliances, and would work against them; he argued that [Mr] Trump believes in his bones that the global economy is unfair to the US; and, finally, he wrote that [Mr] Trump has an innate sympathy for ‘authoritarian strongmen’”.

Almost a year-and-a-half into the Trump presidency, I think this has proved to be a remarkably accurate summation.

Alastair Newton

Footnote: The image at the top of this article is taken from the 2004 satirical animated movie Team America: World Police which seems particularly pertinent in many respects.

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