Taiwan Play: Trump Knows China Needs Us More than We Need Them

Although China, with its huge Treasury bond holdings, was seen during the Obama administration as having a strong hand in trade negotiations, President-elect Trump is aggressively communicating that the need for access to U.S. consumers is China’s weakness.

George Friedman of Geopolitical Futures in a new report concludes that:

China is more economically dependent on the U.S. than the U.S. is on China. This is because the U.S. is not wholly reliant on China for any strategically important commodities or products, the U.S. has significant extra capacity in many of its manufacturing sectors, and the U.S. is resilient to Chinese retaliatory moves.

Despite the U.S. depending on imports of cheap Chinese products and certain commodities, such as rare earth elements, America could quickly find alternatives if necessary. In a trade war between China and the U.S., both would suffer short-term consequences, but China would feel the impact of U.S. protectionist measures much more and for far longer than the U.S. would feel any economic retaliation.

George Friedman believes that President-elect Donald Trump’s December 2 tweet that he had spoken to Taiwan’s president, breaking a four-decade policy of “One China,” was screaming message to Beijing’s leaders that Trump “intends to change the nature of the relationship between the U.S. and China; it is also clear that he considers China to be the weaker and more vulnerable partner in the bilateral relationship.”

The U.S. “One China” policy began after the Chinese fought a major battle in 1969 with the USSR on the Ussuri River, along the Siberian-Chinese border. China wanted U.S. support to offset Soviet threats, while the U.S. wanted listening posts along the USSR border. To address both nations’ political needs, the U.S. acknowledged “One China,” i.e. that Taiwan is theoretically part of the mainland, and China promised not to invade Taiwan. The U.S. continued to be a strong military ally of Taiwan, but public statements were minimized until Trump’s tweet.

The Democrat and Republican establishment fears that Trump’s renegotiation of the economic relationship with China could be dangerous, but the U.S. has been the top destination for Chinese exports for over 15 years. During that period, China’s GDP increased by 1,000 percent, from $1.3 trillion 2001 to $10.9 trillion in 2015. China has accomplished this feat by leveraging its 1 billion peasants into the cheapest manufacturing work force on the planet.

China’s exports-to-GDP ratio peaked in 2006 at over 35 percent. and has decreased to 22.3 percent in 2015, reflecting reduced demand for Chinese products. But about $1 out of every $5 of China’s exports still went to the United States last year. That is 3 times the percentage of exports that went to Japan, China’s second-largest export market.

Geopolitical Futures sees the Chinese as masking the lack of demand by pumping stimulus money into their economy. The result is massive overcapacity of 30 percent or more for iron and steel, cement, aluminum, solar panels and power generation.

Due to China’s inability to offload the overcapacity, non-performing bank loans (NPLs) have steadily increased since 2012. Although Chinese regulators claim the NPL percentage is just 2.15 percent, the real rate is closer to 20 percent.

The negative impact of increased imports from China cost American workers at least 2.4 million jobs from 1991 to 2011, according to researchers at the Massachusetts Institute of Technology and the University of California, San Diego.

Donald Trump is riding into the Oval Office on a promise of trade confrontation with China to address what is now perceived as 25 years of traitorous economic policies by establishment politicians. Trump promised to punish China by increasing protectionist measures against its exports — and the Taiwan tweet is just the first indication of “game on.”

Geopolitical Futures comments: “Threatening to impose harsh tariffs or import cut-offs is more effective as a threat than anything else, and these tactics are the diplomatic maneuvers of an economic conflict.” But with Trump knowing the U.S. is less vulnerable to Chinese actions; China’s existential need to access to U.S. consumer markets “will shape the U.S.-China economic relationship going forward.”


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