Why China must take Donald Trump seriously

Arjun Sekri believes his threat of renegotiating trade deals with China, should he become the next US president, is no bluff

PUBLISHED : Tuesday, 07 June, 2016, 5:34pm
UPDATED : Monday, 19 September, 2016, 3:08pm

Now that Donald Trump has become the Republican nominee for the US presidential race, China will have to sit up and take notice of the rhetoric being bandied about by the brash billionaire in his campaign speeches. China is Trump’s favourite whipping boy (even more than Mexico). In recent months, he has amped up his tirade against China, from “China is ripping us off” to “China is raping us”. So far, the reaction from Beijing has been sanguine, with the belief that his trade threats against China are bluster, and, just like his predecessors, the trade policies of a potential Trump administration will not reflect the campaign rhetoric.

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Trump has trained his guns on the bullseye of the record US$366 billion surplus earned by China during 2015 in bilateral trade with the US, and has accused China of manipulating its currency to subsidise exports and of using unlawful tariff and non-tariff barriers to keep American companies out of China.

While the argument of Chinese currency devaluation holds less water today than it did in the past (given the renminbi’s 19 per cent appreciation against the US dollar over the past 10 years), most observers would agree that the Chinese market is less open to foreign products compared to the US market.

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Trump has stated that, on day 1, he would declare China a “currency manipulator” and threaten to impose 45 per cent countervailing duties on Chinese goods, to force China to start trade renegotiations. Trump would also ask China to uphold intellectual property laws and stop the “unfair and unlawful” practice of forcing US companies to share proprietary technology with Chinese competitors as a condition of entry to China’s market. Additionally, Trump wants to end China’s “illegal” subsidies for its manufacturers and exporters, which he says are in contravention of World Trade Organisation rules. Finally, Trump claims that China’s “woeful” and “lax” labour and environmental standards are another form of unacceptable export subsidy, and he will coerce China to increase these to international standards.

Trump believes that the existing trade agreements with China have been incompetently negotiated by administrations “beholden to special interests” and that his team will renegotiate a more balanced trade agreement that will establish a level playing field for American companies to compete. The Trump negotiating team is also expected to be different from that of past administrations, with many of the staid career diplomats and Commerce Department bureaucrats replaced by sharp-elbowed lawyers and financiers from Wall Street, and the negotiations would most certainly be led by a very high-powered figure from Wall Street or the business world. Trump has often dropped the names of legendary Wall Street billionaire financiers Carl Icahn and Henry Kravis as people who he would like to lead trade negotiations with China and Japan.

While many people like to dismiss Trump’s posturing and tough trade talk as moronic bluster from a nationalistic candidate, here’s why he has to be taken seriously: first, reducing the trade imbalance with China is a centrepiece of his election platform, and for him to sweep this issue under the rug after his election would represent a major capitulation of his campaign promises and his core beliefs. His entire raison d’être in running for president is that he is “really smart” and a “great negotiator” and will employ the sharpest business minds in the US to renegotiate unfair trade deals, which he believes have cost millions of American jobs.

Second, Trump is an astute and aggressive businessman who has rebuilt his US$4.5 billion net worth (according to Forbes) by judiciously using the complex Chapter 11 corporate bankruptcy reorganisation laws in the US to his advantage.

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Third, his negotiating acumen and litigious “take no prisoners” approach to negotiations has been well documented in his best-selling business books, including The Art of the Deal.

Fourth, Trump is acknowledged as a branding and marketing genius, and the way he has leveraged the “Trump” name into a global residential luxury and lifestyle licensing brand as well as his hit reality show The Apprentice point to that. His media-savvy and branding tact was evident during his presidential campaign, where he got the US media to effectively “pay” for his campaign with extensive free coverage, and with his creative use of highly viral tag lines to negatively brand his opponents.

It’s fair to say that a potential Trump presidency would give China a major case of heartburn

So it’s fair to say that a potential Trump presidency would give China a major case of heartburn at the prospect of a challenging trade renegotiation. Trump would probably begin negotiations with his signature strategy of taking extreme, almost absurd, positions and “walking from the table” many times, and he has already publicly stated that his starting position would be to eliminate the US$19 trillion in US government debt over eight years, in part by correcting the trade imbalances with China.

Given that a trade war with China would upend the world trading system and probably result in a global recession, it’s realistic to assume that Trump’s threats of punitive tariffs on Chinese goods are more of an initial bargaining position, from where he will work his way to more pragmatic solutions. However, to avoid a trade war, China would also need to make meaningful concessions and start buying more American products and strengthen its intellectual property laws and environmental standards.

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Ultimately, it’s a matter of who blinks first, and if Trump does not, China has probably more to lose, given that it is the beneficiary of a huge trade surplus, and its manufacturing industries would be devastated, resulting in massive unemployment and social unrest from a huge restive population which has middle-class aspirations. A quid pro quo for gaining trade concessions from Beijing could well see America using their ideological differences on human rights and political and religious freedom, issues raised by previous US administrations, as a bargaining chip to cut a more favourable deal on trade.

What is undeniable is that with a Trump presidency, China would have to face a “new sheriff in town”, who appears to be much more aggressive and determined than his predecessors to rectify the trade imbalance with China, and has an unconventional approach to achieving his goals.

Arjun Sekri is a Hong Kong-based entrepreneur and a freelance financial and lifestyle writer