An altogether softer tone by Trump bodes well for delicate future relations
The paths of China-US and Japan-US relations might not prove as bumpy as perhaps the markets first envisaged
If politics is the art of the possible, as the 19th century German statesman Otto von Bismarck once said, the financial markets may have to come to terms with the idea that, regardless of campaign rhetoric, US President Donald Trump may actually be able to foster good political and economic relations with both China and Japan.
Markets may have convinced themselves, based on Donald Trump’s fiery campaign trail rhetoric and comments made as President-elect, that there was every possibility that China and the United States would lock horns once Trump was inaugurated as US President on Jan 20.
Trump had even suggested that the one-China policy, which recognises that Taiwan is part of China, might be open to negotiation, a prospect that Beijing could not have countenanced.
Yet, after a telephone call between Trump and China’s President Xi Jinping last week, described by the White House as “extremely cordial” the US Administration’s press release said “President Trump agreed, at the request of President Xi, to honour our ‘One China’ policy”.
It’s worth noting the precise wording of that last quote.
It would be easy to portray Trump as a paper tiger on the one-China policy but that would be an erroneous conclusion. While President Xi undoubtedly gains kudos for being able to force the issue, Trump isn’t making any concession but just reaffirming a US position that had already been in place for decades.
And the Trump Administration has deployed the same stratagem with Japan.
Japanese policymakers were grateful to hear US Defence Secretary James Mattis say of the disputed Diaoyu-Senkaku islands on Feb 4 that “the US will continue to recognise Japanese administration of the islands and as such Article 5 of the US-Japan Security Treaty applies.” But, again, it’s worth noting the precise words.
First off, Mattis’ position is no different from that set out by President Obama in 2014, but it pointedly remains Japan’s administration of the disputed islands that is recognised and that is subtly, but importantly, different to recognition of sovereignty.
Markets understood US campaign rhetoric correctly but in the real world national interests will always trump everything else. And it’s not in the Chinese or the US national interest to have a disharmonious relationship.
In the words of the White House, Trump and Xi “look forward to further talks with very successful outcomes,” a prospect that will only be enhanced by a quiet move by Beijing, tellingly reported by Reuters on Trump’s Inauguration Day, to park an issue that won’t necessarily cost China anything but one that is very dear to the US national interest.
In recent years there has been repeated talk that China was going to unveil a new yuan-denominated crude oil futures contract in Shanghai to compete with the dominant, existing dollar-denominated pricing benchmarks. If oil started, for example, to be priced in yuan, then that could ultimately undermine the dollar’s global currency hegemony.
Those plans have seemingly been shelved or at least postponed.
To understand the issue’s importance, it’s worth remembering that the United States enjoys, in a phrase coined in the 1960s by France’s Valéry Giscard d’Estaing, an “exorbitant privilege” deriving from the dollar’s status as the world’s major reserve currency, a status predicated in great part on the fact that oil is priced in dollars, forcing nations to hold greenbacks to pay for their energy needs.
It might have been pure coincidence that it was January 20 that Reuters ran the story that plans for the yuan-denominated contract had been shelved, but it will have been seen in Washington as a welcome move towards the new US President.
In the case of Japan, which has also been strongly criticised by the Trump team over the weakness of the yen, Prime Minister Shinzo Abe’s Feb 10-11 visit to the United States has already elicited tangible gains for the new US President which could allow Washington and Tokyo to kick the currency can down the road.
Increased Japanese investment into the United States, creating US jobs, will surely happen while Abe and Trump have also announced that US Vice-President Mike Pence and Japan’s Deputy Prime Minister Taro Aso will be heading up a new economic dialogue, including talks on a bilateral trade deal and on fiscal and monetary policy considerations.
Currency, equity and fixed income markets might have to recalibrate expectations of a Trump Presidency that are essentially based on the campaign rhetoric that went before and instead focus on the art of the possible. The path of China-US and Japan-US relations might not prove as bumpy as perhaps markets first envisaged.