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General News    H2'ed 5/6/18

Of War and Peace in East Asia

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Diplomacy is in high gear in East Asia as all actors scramble to prepare for the hastily-called Trump-Kim summit in as little as a month; expectations of a new peace are high. At the same time, threats of a US-China trade war, also instigated by Trump, hang over all like Beijing air.

The clock is ticking as the dates on which US and Chinese tariffs, as threatened, could be actually imposed unless there is resolution of US-China conflict points such as Chinese hacking of US corporations and Chinese extraction of US tech secrets in exchange for market access.

While the natural assumption on the part of most US actors over the past few decades has been that, as China develops, it will open up, get more democratic, import more and operate more "normally" on the business front, in fact, China has become more controlling, invasive and, according to the infamous official report Made in China 2025, more intent on importing less, not more, on the back of an official policy of a modern version of the discredited socialist "import substitution."

China does not appear to be gearing up for kinetic military action, other than in the South China Sea, where aggressive and militaristic gambits appear to be motivated by attempts to grab fishing rights around seized islands, not by global ambitions. However, as China continues to intensify its interference with domestic import markets, clamps down on the movement of information, and solidifies its ships' freedom of movement, both commercial and military, across Asia to South Asia, Africa and Europe via its ambitious Belt and Road Project, conflict may increase rather than abate.

This would have been a perfect time for the US to gather allies in support of serious, detailed, specific, micro-level, multilateral negotiations for the removal of non-tariff barriers to imports to China, but Trump instead greatly muddied the waters by slapping down, unannounced, sudden tariffs. That said, before threatened, significant additional tariffs would take effect, there is time for such important talks. Action in this area would be highly beneficial, if not critical.

China is clearly transgressing international norms of open trade, interfering with business inside China so as to advantage domestic quasi-state business actors and importing far less than it exports, by government design. While the inevitable aging of the Chinese population -- the labor force has already begun to contract -- will eventually (in about 20 years) naturally erase the Chinese trade surplus (as happened to the Japanese), the gains that foreign economic actors should reap from that may be denied, the date that happens delayed and the conditions under which that happens distorted against international actors in an unfair manner if nationalistic business practices by quasi-state and state-backed business in China are not addressed and rectified.

Clearly, business practices cannot continue unchanged in East Asia and the risk that the Chinese government will, as it has declared, actually move to make things even more unfair is high. Sincere and threat-backed negotiations to convince China of the advisability of integrating comfortably and fairly into existing trade systems rather than working aggressively to advantage its own corporate entities, while damaging foreign ones, are highly advisable. Progress that could allow the shelving of threatened tariffs on both sides is imperative for the stability of fragile asset markets worldwide.

If the China-US interface were to deteriorate into more pugilistic moves, to escalate from tariff wars to real wars, the damage to both nations, as well as the international economy and economic structure would be huge. Even a deranged leader like Trump can't accomplish such destruction alone and Xi is surely wise enough to hold his fire against a leader likely to be hamstrung after his party loses control of the lower chamber of the US Congress, at least, in November elections. That said, if the US House comes under Democratic control, the recent closure of the House investigation into Trump's Russian treason, campaign finance and other crimes will be reversed, investigations will into high gear and will continue unabated for the rest of Trump's administration. He is likely to be impeached by the House and his conviction and removal from office by the Senate will depend on a few swing votes, possibly those of a few critical female Republican Senators. These events could send Trump into meltdowns like that witnessed by the nation on the Fox News morning show this week and Trump could resort to almost anything to vent, to distract and to try to shore up his xenophobic base. The risk of escalation cannot be dismissed.

Escalation is more likely to occur if the necessary negotiations and concessions do not happen in time to prevent the threatened tariffs, those in addition to the steel and aluminum, from coming into effect. That could prompt China to actually enact the retaliatory tariffs they have already threatened; that would cause substantial damage to global asset markets; that would probably trigger a global recession; that could cause pressure on both governments to back off or it could draw out an insane response, but it takes 6 months at minimum for a recession to develop from asset price collapses. If China were to boycott US bond markets, the yuan would rise, hurting China and US interest rates would rise, hurting the US and global markets. If that leads to insanity, our leaders could get into a shooting war; if leaders are insane, anything can happen.

In a far shorter time -- a month -- Trump will be meeting KJU.

That meeting happened only because China tightened the screws on NK, at Trump's behest. China could, in retaliation for the tariffs, which could bite in 2 weeks, open their borders and banks to NK and remove KJU's incentive to make concessions. China did not cut its trade with NK in response to the tariffs; the reduction of Chinese trade with NK happened first. In response to China's help with NK, Trump hit them with tariffs. The logic of this is " maybe illogical. If China were to withdraw its recent, new pressure on NK (Trump wants to take credit for the new sanctions, but they are really just newly-stepped-up enforcement of the old sanctions by China) KJU could refuse to disarm in exchange for the removal of sanctions, as those sanctions would already be no longer biting that badly due to the end of China's enforcement. We do need to consider the possibility that NK is getting a lot of help in being belligerent from Russia and China wants to bring NK back under its control, so the motivation for China's stepped-up enforcement recently has little to do with Trump -- so Chinese leaders will continue to muscle KJU regardless of Trump's whacking at them. That could lead to real concessions on KJU's part. But, if this does not happen, Trump would be faced, at his poorly-planned meeting, with the option of accepting a fake or unenforceable, looks-only "denuclearization" to save face, while giving KJU the open trade he needs, or to leave rebuffed, with no deal.

Trump is so easily tricked, he could, without consulting his experts on inspection regimes, accept such an unenforceable "denuclearization," and relax the sanctions. That would give KJU everything he wants. The fact that the deal lacks teeth and that KJU can covertly retain his missiles and bombs while appearing to have given them up would not become evident to outsiders for months or years after he is enjoying the return of open trade with the world.

Or, Trump could refuse such a hollow deal, leave rebuffed and then retaliate to save face " first, by issuing more threats against KJU. Without China's help in enforcement, such threats are also hollow and are likely to be ignored. With Bolton around, he might even try to bomb something north of the 38th. If we are lucky, Trump is restrained and nothing happens, but KJU and the Chinese could go back to happily trading as before. However, China could continue to push KJU to end his flirtation with the Russians, who seem to be supplying what he needs to so quickly gear up his missile capabilities.

It would take a total madman to let a tit-for-tat on trade escalate past the significant damage that such a trade war would cause to economies but this "trade war" is already cued up. A "trade war" would be nothing more than allowing threatened tariffs to become reality, followed by further retaliatory tariffs, withdrawal of bond purchases and such, though the fact that China imports so little from the US does limit China's ability to retaliate with more tariffs. China is already threatening to put tariffs on more than half of its total imports from the US.

In the short term, the Korean War-or-Peace drama continues and continues to suck up most of the oxygen in the diplomatic room, overshadowing economic diplomacy with China, which is of more significance in the long term.

Both Kim Jong Un and Trump are drama queens adroit at media attention grabbing, brinksmanship and posturing. Kim is both in a very strong position due to his recent, supposed acquisition of the ability to bomb American cities with nuclear-tipped missiles and in an acutely weak position due to China choking off 90% or so of critical international trade with the new, harsher Trump sanctions.

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Jan VanDenBerg earned a Master's Degree from the Economics Department of Stanford University in 1987.  She served as head Japan economist for Merrill Lynch Tokyo 1987-1993, and worked for the US Treasury Department Office of (more...)

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