China’s Red Line Has Asia Braced for Lose-Lose Trump Battle

  • ‘There would be nothing left to talk about’: Ex-China diplomat
  • China stocks, currency, bonds fall on Monday as concern grows

Trump Ties 'One-China' Policy to Trade

U.S. President-elect Donald Trump’s willingness to test China’s red line on Taiwan has the region braced for a lose-lose scenario where the world’s two economic superpowers take tit-for-tat swipes at each other.

Initial hopes in Beijing that China would strike a grand bargain with the businessman-turned-politician are fading fast. His weekend remarks that the decades-old One-China policy could hinge on trade negotiations touches one of Beijing’s rawest nerves and threatens a “core interest” that China has long said it’ll defend at any cost.

“This is a big deal actually,” George Magnus, senior independent economic adviser at UBS AG and an associate at the China Centre at Oxford University, said in an interview with Francine Lacqua on “Bloomberg Surveillance.” “Effectively he has put U.S.-China relations in play in a way that hasn’t been the case before.”

Read the full story on Trump’s weekend Taiwan comments here

Trump’s comments on the One-China policy contributed to market jitters on Monday. The Shanghai Composite Index sank 2.5 percent, the yuan fell toward an eight-year low and Chinese government bonds tumbled. Taiwan’s benchmark Taiex index slipped 0.5 percent.

‘Serious Danger’

“It’s not obvious what Trump wants,” Magnus said. “If he starts off on the foot of currency manipulation and the threat of tariffs and investigations and so on, then the Chinese will retaliate and there’s a serious danger that these guys are going to have to manage tensions that they haven’t had to before.”

The One-China policy is an acknowledgement that Taiwan and the mainland are part of the same China, and the Communist government in Beijing regards it as a bedrock policy that has underpinned U.S. bilateral relations with the U.S. Indeed, President Xi Jinping warned at his meeting with Taiwan’s opposition leader in November that “the Communist Party would be toppled by its own people” if Taiwan went independent, and his government could use economic leverage to influence cross-strait ties.

“All bilateral business interests and trade negotiations would come to nil were the One-China bottom line overstepped,” said He Weiwen, deputy director of the Beijing-based Center for China and Globalization, and a former business attache in the Chinese consulates of New York and San Francisco. “There would be nothing left to talk about between the two countries. China will not give the U.S. any trade deal to speak of, and Trump will lose badly. Taiwan’s interests would also suffer as a result.”

‘Bottom Line’

The U.S. has maintained a close relationship with Taiwan -- often to China’s anger -- and is legally required to provide military support and protection. Trump cited the conundrum while defending his precedence-breaking phone call earlier this month with Taiwan’s president Tsai Ing-wen -- the closest Taiwan has come to getting formal recognition from Washington since the U.S. established ties with the Communist government in 1979.

“China is highly attentive to the matter,” Foreign Minister Wang Yi, who is currently visiting Switzerland, told reporters on Monday. “I want to make it clear: no matter if it’s Tsai Ing-wen, or whoever else, whatever forces, if they try to destroy the One-China principle and hurt China’s core interests, they’ll only end up shooting themselves in the foot.”

The flip side to Trump’s statement linking support for the One-China policy to trade outcomes is that Taiwan may end up the loser if the president-elect also sees its security as negotiable in a grand deal.

U.S. Credibility

“The One-China policy is a double-edge sword,” Lo Chih-cheng, a lawmaker with Taiwan’s ruling Democratic Progressive Party, said via mobile phone on Monday. “It could cut China, but could cut Taiwan as well.”

Trump’s horse-trading mentality suggests he’s ready to “bargain away mechanisms that help lock in U.S. commitment to Taiwan,” including the Taiwan Relations Act that legally binds Washington to arm Taiwan against potential aggression, according to Ja Ian Chong of the National University of Singapore, who specializes in Asia-Pacific relations.

“Any deal with China that sacrifices Taiwan is likely to lead other long-standing U.S. partners and allies to question the credibility of U.S. commitments to regional security," said Chong. The hint that “Washington is willing to sacrifice their interests in favor of making deals may encourage greater insecurity” in the region, he said.

As for potential economic disruption, China has “a lot of tools to keep their economy growing” in the event of a trade war as its economy is less export dependent than in the past, according to David Dollar, a senior fellow at the Brookings Institution in Washington and former U.S. Treasury attache to Beijing.

“The talk of the U.S. shifting its recognition to Taiwan seems likely to be just talk,” Dollar said. “If the U.S. goes down that road, other countries are definitely not going to follow.”

For a look at past trade tensions between China and the U.S., click here

Even if Trump does press ahead with a plan to link security outcomes with trade and business negotiations, there’s no reason to assume it would deliver better market access, said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles.

Making matters even more complicated is a twice-a-decade leadership transition in the Communist Party late in 2017.

“Playing the nationalist card is irresistible politics in China too,” Loevinger said. “As they jockey for leadership positions next year, Chinese politicians will be tripping over themselves to show they can stand up to foreigners.”

— With assistance by Ting Shi, and Kevin Hamlin

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