Xi vs. Trump – Reshuffling Global Economic Relations?

Currently, Donald Trump and Xi Jinping are meeting for the first time at Trump’s favorite Golf resort in Florida. While Trump’s continuous “China bashing” has fueled fears of a looming clash between the two economic heavyweights, things have calmed down a bit after a phone call between Trump and Xi this February. Trump even confirmed the United States’ “One China Policy”, one of the most crucial issues for the Chinese government. After the welcome dinner with president Xi on Thursday night, Trump cordially remarked: “We have developed a friendship”. However, that was before critical issues like trade policy, North Korea or Taiwan were touched upon. Talks on these issues will take place today and results will certainly give a hint on the direction US-China relations will take.

In 2004, the economist Oded Shenkar labeled the 21st century as the “Chinese century”. Today, it is safe to say that he was right. In the last decade, the world saw China rise to become the world’s second economic superpower and it is even bound to reach the pole position within the first half of this century – just as the United States themselves overtook then number one Great Britain at the beginning of the 20^th century.

China and the United States may have little in common but they share one thing: they both are heavyweights in the world economy. Combined, they account for 23 percent of world population, 40 percent of world GDP and 23 percent of world exports. China and the US alone have received 27 percent of the world’s inward FDI stock and they hold about 28 percent to the world’s outward FDI stock.

In a globalized interdependent world, along with such great economic power comes international responsibility. Something China traditionally has shied away from with its foreign policy notion of non-interference, while the United States has embraced this responsibility maybe even too much sometimes. Things seem to be reversing, however, since Donald Trump became the 45^th president of the United States: While America could very well be taking a much more inward-looking and nationalistic course in the future, China actively positions itself as an advocate of international cooperation. While America is putting important free trade deals, such as TPP, TTIP or NAFTA, into question, China pushes more strongly than before for trade agreements, such as RCEP. While America seems to be retreating from the Asia-Pacific region, China will happily step in to fill the gap.

America’s potential retreat is a challenge for its allies in Europe and Asia alike…

For Trump’s “America first”-based policy perspective, his actions may be a natural choice. For US allies worldwide, however, they come as a shock. For the European Union, the US has been the most important partner in international political and economic cooperation. The trade pact TTIP was to be a crowning touch to this relationship. However, under President Trump, the US appears no longer to be a reliable partner for the EU – not only in regard to trade issues, but also in other policy areas.

Trump’s actions have caused turmoil in Asia, too. His withdrawal from TPP, a symbol for President Obama’s “pivot to Asia”, was a shock for Japan and other Asian members of the trade deal, since they had put high hopes in TPP, seeing it as a counterweight to regional rival China, which is not a member. A potential retreat of the US from the Asia-Pacific region comes highly unexpected and as a rather unpleasant surprise to many of China’s neighbors, especially given the strong tensions in the South China Sea, which have been intensifying recently. Asian countries fear that without the US as a strong strategic and military partner, the region will be easy prey to China’s rising hegemonic tendencies. This development may not be in the interest of other western partners, such as the European Union. And the US itself should not take a potential “loss of Asia” lightly either. “America first” is hard to imagine in a China-ruled world. It therefore remains to be seen how the US will actually act in the Asia-Pacific region in the future.

…but also offers opportunities for already existing alliances

Traditionally, the European Union has had a strong focus on transatlantic relations, economically as well as politically. Asia, especially China, has played some role, but so far has not been the top priority on the EU agenda. This is bound to change under current circumstances. Given that Asia is one of the most populous and dynamic world regions with high growth prospects in the next decades, it is more than time for the EU to make relations with Asia a top priority and to strengthen economic and political ties beyond mere lip service. The same is true for Asian countries looking for alternatives or at least an addendum to China.

There already is evidence that the EU and some Asian countries are maneuvering in this direction, even though President Trump has been in office less than a hundred days: When Shinzo Abe visited Brussels in late March, both sides showed strong commitment to complete the bilateral trade deal, which has been under negotiations for more than four years now, maybe even in 2017. The EU is also negotiating FTA’s with individual member states of the Association of Southeast Asian Nations (ASEAN), such as Malaysia, Indonesia, the Philippines and Thailand. Negotiations with Singapore and Vietnam have already been concluded and await ratification. More recently, the issue of an EU-ASEAN FTA, which was put on hold in 2009, came to Brussel’s table again. These developments show that the EU is already positioning itself for reaching out more strongly to Asia, at least in terms of trade deals.

The looming “new normal” in EU-US relations may also have implications for relations between the EU and China. The latter is still reliant on exports and therefore needs reliable economic partners. If the United States under Trump goes hard on China, for example in regard to import duties, China will have no choice but to put a stronger focus on Europe. In this case, the EU might find itself equipped with more leverage in ongoing negotiations with China, e.g. in regard to the bilateral investment treaty, but also when it comes to other issues, such as market economy status or market access for European business in China.

Outlook: US-China relations will remain a decisive factor for the world economy

While US allies in Asia, Europe and worldwide will eventually find a way to reshuffle their relations and might even find beneficial ways to deal with the situation, the question remains how the Trump administration will actually handle relations with China – one of the most important trade partners of the United States. The two heavyweights are so tightly interconnected not only with each other, but also with the world economy, that, should they turn on each other, consequences would be dire. Take, for example, Trump’s plan for US import duties on Chinese products amounting to 45 percent. Trade barriers like this imposed by the world’s largest economy on the world’s second largest economy would cause serious frictions in global trade flows. Further political and military tensions surrounding the South China Sea issue, Taiwan or North Korea, will most probably not contribute to relaxed and prosperous economic relations either. Even though Trump and Xi seemed to have started their meeting at Mar-a-Lago on good terms, there is no reason to feel at ease about this difficult relationship: No one knows what Trump will tweet next.

It is also interesting to note that shortly before the meeting started, The New York Times reported that Trump’s administration was about “to take a harder tack on trade with China” and “roll out its first concrete measures against China on trade”. So the tone in the personal meeting between Trump and Xi might be more conciliatory than expected. Actual policy measures on the US side, however, might not be.

Moreover, we should not forget that the current Director of the National Trade Council at the White House and one of Trump’s closest advisors on economic matters is Peter Navarro: the author of the book and documentary Death by China, which “pointedly confronts the most urgent problem facing America today – its increasingly destructive economic trade relationship with a rapidly rising China.” Given the key position Navarro holds in the Trump administration, further frictions between the two powers are certainly to be expected, while possible impact on the rest of the world remains highly uncertain.