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Will China Retaliate Over Trump’s Taiwan Moves?

American businesses seem concerned they could be subject to Chinese retaliation for the recent pro-Taiwan moves of President-elect Donald Trump.

And there is reason for apprehension. On December 2, Trump took a call from Taiwan’s leader, Tsai Ing-wen. The Trump staff summary of the conversation reports the president-elect called Tsai “President of Taiwan,” suggesting he considered the island a sovereign state, a position anathema to Beijing.

Moreover, on Sunday in comments to Chris Wallace of Fox News, Trump questioned whether he was bound by America’s One-China policy, thought to be the foundation upon which relations have developed since 1979 when Washington broke off formal relations with Taipei.

Chinese state media has threatened stern measures in retaliation for any Trump deviation from the One-China policy, and American business is echoing that line “The Chinese are deeply concerned, and we hear now from reliable sources in Beijing who suggest the Chinese government, the Communist Party, are developing lists of US interests against which they could retaliate, commercial interests, and obviously one merely has to look at top US exports to China to get a quick sense of whose heads may be on the chopping block,” said “one China trade policy expert who interacts closely with US business” to Reuters. “People feel off-balance right now,” said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai, to Bloomberg. “When there is a sour relationship between the US and China, everyone is affected.”  

Of course, exporters and those with manufacturing operations in China are subject to Beijing’s wrath, but in 2010 China threatened to sanction American companies selling weapons to Taiwan yet did not carry through.

Regardless of the heated mood in Beijing, there are two principal reasons why Chinese leaders might not act this time either. 

First, China runs large goods and services surpluses against the US, a whopping $334.1 billion last year. So China needs America more than America needs it. Chinese exporters, already ailing because of an artificially inflated renminbi and other reasons, cannot replace the American market, but America can replace them by buying shoes, toys, and clothes elsewhere.

Trade-surplus countries generally do not do well in trade wars because trade-deficit countries do not have much to lose. As He Weiwen of the China Association of International Trade told the New York Times last month, “We don’t have many things in the toolbox for retaliation, because we export more than we import.”

Trump himself knows he’s in the driver’s seat. “We have trade power over China,”  he told the Washington Post in March. The Chinese, therefore, will have a difficult time bluffing him in a prolonged contest of will.

Second, China’s manufacturing sector, already in distress, is critically dependent on its reputation as a reliable member of global supply chains.

If Beijing were to elevate its geopolitical objectives over its economic ones and disrupt those chains to enforce its aggressive claim to Taiwan, it would put its entire manufacturing sector at risk, not just the portion servicing the American market. As Zhiwei Zhang of Deutsche Bank points out, a trade war “would be a war against all participants of the global supply chain,” American and otherwise.

Yet despite everything, American business is still subject to geopolitical risk in China. It is not clear, however, that Trump, when president, should consider their interests above those of others. These businesses had to know, when entering the China market, they were making themselves vulnerable to an aggrieved one-party state that maintained objectives fundamentally inconsistent with the country from which they came and the liberal international system that protected them.

US businesses, wherever they operate, deserve Washington’s help of course, but perhaps not at the expense of broader, and greater, American interests.

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