Trump Administration Approach to China Not Sustainable: Medeiros

  • N. Korea biggest threat to stability, says ex-adviser to Obama
  • Trump, Abe’s ‘bromance’ will be pillar of U.S.’s Asia policy

Tensions and volatility between the U.S. and China will increase later this year as hawks and doves press their respective agendas, according to Evan Medeiros, a former senior adviser to President Barack Obama.

"The fact that this will unfold during the year of China’s political transition only increases the risk of friction," Medeiros said in an interview on March 27. The upcoming 19th Party Congress will set China’s political hierarchy for the next five years, and President Xi Jinping will wish to look strong in the face of U.S. pressure, he added.

Medeiros, 45, is managing director for Asia at New York-based Eurasia Group, which provides political risk analysis and consulting. He leads coverage of the Asia-Pacific region. He was special assistant to Obama and senior director for Asia at the White House’s National Security Council from 2013 to 2015, and served as the NSC’s director for China from 2009 to 2013.

Here are excerpts of the conversation. Read more in today’s Asia Economics Brief:

Question:

How do you see the U.S.-China relationship evolving?

Answer:

The Donald Trump administration appears to be deeply divided about how to approach China, with both hawks and moderates voicing strong views. Trump has articulated fairly antagonistic views about China. The moderates have taken the lead right now, as seen in the reversal on the “One China policy,” invitation to Xi to Mar-a-Lago and not naming China a currency manipulator on Trump’s first day. I don’t think this approach is sustainable.

The hawks on trade and security issues will assert themselves in part because the Chinese won’t give Trump what he wants on trade and investment liberalization, on North Korea, and on the South China Sea. The Trump administration will grow impatient with the difficulty of extracting meaningful cooperation from China.

Question:

What would happen if Trump imposed high trade tariffs on China?

Answer:

It is very unlikely Trump will impose a 45 percent across-the-board tariff on China. That threat was pure campaign rhetoric and many in Congress already oppose similar measures such as a border-adjustment tax. Rather, there is a high probability that Trump will adopt aggressive trade and investment restrictions on China in the form of anti-dumping and anti-subsidy actions.

Question:

Has Trump’s about-face on the "One China policy" removed this issue as a potential source of tension?

Answer:

Trump and his advisers are not yet done with the Taiwan issue. Trump did a U-turn on the "One China policy" because he thinks Xi will give him something for it. If the Chinese don’t reciprocate on North Korea, Trump’s team may revisit U.S.-Taiwan relations. More mainland pressure on Taiwan would likely precipitate a U.S. response.

Question:

Is there any merit in suggestions that China is a currency manipulator?

Answer:

No, in the sense of manipulating for deliberate economic advantage. The Chinese have since mid-2014 been selling foreign exchange reserves to prop up the RMB, not to keep it artificially low to generate an export benefit.

Question:

Where do you see Japan’s relations with the U.S. going?

Answer:

The U.S.-Japan relationship is a clear bright spot in Trump’s Asia policy. Trump and Shinzo Abe have a strong personal connection, which provides ballast and direction. This burgeoning geopolitical bromance will be a pillar of Trump’s Asia policy. However, the real bilateral challenge is trade. Abe wants the U.S. to rejoin the Trans-Pacific Partnership and thinks he can persuade Trump to do so over the next year. Trump wants a bilateral free-trade agreement. Trump’s frustrations with Japan’s currency policy and auto market restrictions may return.

Question

What Asia issue worries you most?

Answer:

North Korea, full stop. It is the single biggest threat to regional stability and financial markets. The security threat to the United States and its Asian allies is growing and the window for Trump to deal with this is rapidly closing. At a minimum, we should expect major U.S.-China tensions over North Korea, and if the North takes very provocative actions like conducting an ICBM test, we could see broader instability. Trump will try enhanced sanctions for the next year but if they don’t work, I expect more coercive measures.

Question:

Do you see the election of Carrie Lam as Hong Kong’s chief executive as a possible flashpoint?

Answer:

I see it as a potential turning point if Carrie Lam directly addresses the mounting economic and social frustrations. She was elected with strong support from Beijing but weak popular support. That’s a difficult configuration. The key challenge is how she will address the enduring frustrations -- high property costs, few employment opportunities -- at the heart of much of the social discontent.

Question:

How do you see the South China Sea dispute playing out?

Answer:

The South China Sea situation has largely stabilized due to Philippine President Rodrigo Duterte’s efforts to seek a diplomatic solution with Beijing. Also, China recognized that after the July 2016 international arbitration ruling against it, it was better off stabilizing the situation than pushing for more. One factor that could change the situation this year is the U.S. Navy. There is strong support in the U.S. military for increasing freedom-of-navigation patrols around China’s seven artificial islands; if the U.S. does this, China will have to respond, raising tensions.

Question:

Which Asian markets are most attractive for investors and why? And which are least attractive?

Answer:

The most attractive are what I like to call the V-I-P: Vietnam, Indonesia and the Philippines. For structural reasons, all three economies will continue to grow even amid a soft global growth outlook. The least attractive are the ones with numerous structural growth challenges and a constellation of leaders, policymakers and institutions who are not able and/or willing to address these challenges. This basket includes Thailand, Malaysia, Taiwan, and South Korea, albeit for differing reasons.

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