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Escalating US-China tensions are bad news for Asian stability

Trump jitters could push more countries into China's camp for free trade

TOKYO -- The expanding U.S. trade deficit with China is becoming a source of increasing tension between the two superpowers. Talk by U.S. President-elect Donald Trump about reviewing the "One China" policy appears aimed at spurring Beijing to address the trade imbalance. While China has been largely quiet on the matter, it has been busy building a broad new trade framework in the Asia-Pacific region, no doubt taking advantage of Trump's pledge to pull the U.S. out of the Trans-Pacific Partnership free trade pact.

The escalating rivalry between these economic behemoths could trigger a drastic change in the regional balance of power.

"President-elect Donald J. Trump today announced the formation of the White House National Trade Council," said a statement issued by Trump's transition team in late December. The NTC, to be headed by Peter Navarro, a professor at the University of California, Irvine, will oversee U.S. trade policy. Navarro directed the documentary film "Death by China," which warned that cheap Chinese imports were putting Americans out of work.

Navarro, a Trump adviser known for his pro-Taiwan stance, is believed to have helped arrange the phone conversation between Trump and Taiwanese President Tsai Ing-wen in early December. After the call, Trump questioned Beijing's argument that Taiwan is an inalienable part of China. "I don't know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade," he said in an interview on U.S. television.

The appointment of Navarro as director of the NTC is clear signal that Trump will be tough on China on trade issues.

The president-elect is irked by the record trade deficit the U.S. has built up with China. Statistics from the International Trade Centre show that the deficit hit $386.4 billion in 2015, more than quadruple the figure in 2001, when China joined the World Trade Organization. The figure is also far larger than the trade deficits with Germany and Japan. Addressing that imbalance and halting the job drain were among Trump's key campaign pledges.

Let's make a deal

Some analysts speculate that Trump is playing quid pro quo politics, the idea being that he will respect the One China policy in exchange for trade concessions. If the world's second-largest economy further opens its market to American products or expands investment in the U.S., employment there would likely increase and he could take credit for it.

Trump's transition team said in its statement that, "The National Trade Council will work collaboratively and synergistically with the National Security Council, the National Economic Council and the Domestic Policy Council."

Trump may see the One China policy as a bargaining chip, but China views it as a core principle that it is willing to defend at all costs. A Chinese Foreign Ministry spokesperson said that if the U.S. ignores this fact, the healthy development of bilateral ties and cooperation in important areas are out of the question.

Cross-strait relations have grown bumpier. China has effectively suspended high-level exchanges with Taiwan since May, when Tsai, who heads the pro-independence Democratic Progressive Party, became president.

Diplomatic sources have expressed surprise over Beijing's restrained response to Trump's questioning of the One China policy.

"Of course, going forward China-U.S. relations will face new complexities and uncertain factors," Chinese Foreign Minister Wang Yi said in an interview in the People's Daily, the Communist Party mouthpiece, on Dec. 22. One of the priorities for next year is for the two superpowers to "open new cooperative prospects," Wang said.

Behind China's subdued response are delicate political and economic issues.

In March, Chinese Premier Li Keqiang unveiled a real economic growth target of between 6.5% and 7% for 2016 at the National People's Congress, the country's legislature. With the government aiming for sustainable growth, the target for 2017 is expected to be lower.

Three risk factors

Achieving soft landing requires controlling the real state of the economy -- a task made more complicated with the Chinese currency falling against the dollar. The yuan was trading around 6.5 to the dollar in early 2016, but in late December it had weakened to 6.9. China's slowdown and off-the-books debt held by local governments have prompted investors to shift their money from China to dollar-denominated assets in the expectation that the U.S. will raise its key interest rate at a faster-than-anticipated clip.

Excessive depreciation of the yuan would make imported goods more expensive and potentially stoke high inflation. Chinese authorities have been shoring up the yuan through dollar-selling interventions, gobbling up the country's foreign exchange reserves. The reserves stood at $3.05 trillion at the end of November, nearing the psychologically important $3 trillion line. To stem the decline, the authorities are tightening regulations on overseas remittances by companies and individuals. Speculators are increasingly betting on a further decline in the yuan, increasing selling pressure on the currency.

Naoto Saito, chief researcher at the Daiwa Institute of Research, said that although the Chinese economy was solid, it faces three potential risk factors: the simultaneous depletion of foreign reserves and the yuan's fall; interest rate hikes to curb inflation; and uncertain relations with the U.S.

Domestic politics could also be added to that list. The Chinese Communist Party will hold its quinquennial congress in the second half of 2017, during which the lineup of executives to serve under President Xi Jinping in his second term will be decided. Key party members are therefore becoming more cautious in their remarks, as one mistake in dealing with Trump could cost them their political futures.

Junhua Wu, chief senior economist at the Japan Research Institute, said Beijing was surprised that Trump would suggest such a major shift as reviewing the One China policy even before taking office. "If Trump continues to show he is not afraid of breaking taboos, he would be a tough leader for China to deal with," Wu said.

Trump has spoken a lot about China, but his interest in other Asian countries remains unclear. Akihiko Yasui, head of the Europe and the Americas research department at Mizuho Research Institute, said he did not see the Trump administration continuing President Barack Obama's "pivot to Asia" foreign policy.

For secretary of state, Trump nominated Rex Tillerson, CEO of Exxon Mobil, a company that has oil interests in Russia. His choice of secretary of defense was James Mattis, a retired general with considerable experience in the Middle East.

It is clear, however, that the effects of prolonged tensions between the U.S. and China will reverberate throughout Asia. For starters, the two superpowers may try to attract as many countries as possible to their Asia-Pacific trade initiatives now that the TPP is up in the air.

Asian trade officials are speculating about a possible speeding up of negotiations on the Regional Comprehensive Economic Partnership, a free trade agreement that involves the 10 members of the Association of Southeast Asian Nations plus Japan, China, South Korea, India, Australia and New Zealand. As it stands, they aim to conclude the negotiations in or after 2017.

Obama has warned that if the TPP fails to take effect, China would take the lead in setting trade rules in Asia-Pacific region. It is possible the RCEP, in which China has a strong presence, will be the vehicle for making that happen.

Uniting against Trump

The Philippines used to be the most vocal opponent of China's maritime activities in the South China Sea, but since President Rodrigo Duterte took office in June 2016, the country has become more conciliatory. "Bye-bye America and work on the protocols that will eventually move you out of the Philippines," Duterte told a news conference in mid-December. He added: "We do not need the money. China said they will provide so many. ... The politics here in Southeast Asia is changing."

The Philippines will assume the rotating ASEAN presidency in 2017 and will use that role to influence joint statements issued at regional meetings.

Myanmar's de facto leader, Aung San Suu Kyi, told reporters in Tokyo in early November that her country has very friendly ties with China and she hopes to develop them.

Some experts say Southeast Asian leaders are leaning toward China due to concerns about Trump's unpredictability. "If Asian leaders conclude that they should unite in dealing with Trump, whose slogan is 'America First,' there is a possibility the RCEP will be the framework they choose," said Koji Sako, senior economist at Mizuho Research Institute.

Trump has announced that he will pull the U.S. out of the TPP soon after his inauguration on Jan. 20. The U.S. does not like large regional frameworks to which it does not belong, such as the RCEP. Koichi Ishikawa, a professor at Asia University and an expert on trade issues, said, "The U.S. may try to neutralize China's influence by seeking bilateral free trade agreements with each member of the RCEP." Should that happen, U.S.-China friction would only intensify, undermining stability and growth in Asia.

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