Trump,Taiwan and China

It is not quite clear as to who initiated the phone call – Taiwan or Trump. But, it has set off apocalyptic reactions in media. Unsurprisingly, there is frenzy. No time for reflection and thoughtfulness. Trump has committed a huge blunder, apparently. Offending Beijing, it seems, is worse than offending God. The United States had to ‘reassure‘ Beijing.

Even reasonably intelligent people think that Trump had made a mistake out of inexperience and that he would ‘learn’. What if it was calculated and deliberate? Some may retort that there are better ways for him to deal with China. Really? Something as harmless as taking a congratulatory phone call was not done?

This may lead to unexpected consequences. But, ‘I told you so’ response, in this situation, would be hindsight wisdom. Most policy decisions are entrepreneurial shots. One takes chances. They may backfire or hit the target. But, those decisions have to be taken. What better way to signal the end of ‘business as usual’ than doing something like this?

In the United States, the ‘fear’ of the consequences of offending China is real, even if wholly inexplicable. The relationship is two-way street and, if anything, it can be argued that the United States has more chips than China has. This blogger has said so. See here and here.

See these observations by Francis Fukuyama:

China has a lot of sources of leverage over us, beginning with how much of their currency they’ve been willing to buy, and they’ve been buying airplanes from Boeing and turbines from GE, and there’re all sorts of ways that economic relationship could go south very quickly. [Link]

A similar but not-so-disappointing piece by Yanis Varoufakis appeared in ‘Project Syndicate’ recently:

The US was also saved by the Dragon: the Chinese government cranked up domestic investment to unprecedented levels to pick up the slack created by the contraction in spending in the US and Europe…. China’s leaders knew what they were doing. They were creating a bubble of unsustainable investment to give Europe and the US a chance to get their act together. Alas, both failed to do so….

… if he plays hardball with China, pushing the Chinese to revalue the renminbi and employing threats of tariffs and the like, he may well end up pricking the bubble of China’s private debt – unleashing a deluge of nasty consequences that would overwhelm any domestic stimulus he introduces.

Prof. Varoufakis is usually savvy and sensible. It is hard to treat his observation that China was giving the US and Europe a chance to get their act together as anything more than a hypothesis. Equally, China was desperate and panicky for it feared the collapse of its own export-led growth model and hence, tried to replace it with a massive and desperate stimulus. It was nothing to do with substituting for US and Europe. If anything, US had already undertaken massive monetary and fiscal stimulus.

If Prof. Varoufakis is arguing here that China is too big to fail for the U.S. just as the U.S. was in 2008 for China, that would be acceptable and worthy of consideration, even if there is no final acceptance of the proposition. But, quite what he is recommending to President-elect Trump here is difficult to figure out.

In a paper published in 2009, Dan Drezner argues that China has not had much success in bending America to its will, despite ‘bailing out’ the United States. But, President Obama, while campaigning in 2008, had conceded that it was hard to be tough with one’s bankers! The mindset, it appears, had been set. So, even if China may not have succeeded in influencing American policies, it has succeeded in another way:

While China’s compellence measures against the United States fell short,
Beijing used its capital surplus to deter pressure from others. Financial statecraft
allowed Beijing to reduce its risk and increase its ºexibility in its foreign
exchange portfolio. As the ªnancial crisis deepened, China allowed the renminbi
to depreciate, ignoring U.S. pressure to alter course. Prime Minister Wen
asserted, “No country can pressure us to appreciate or depreciate” the renminbi.
Continuing its quasi-mercantilist policies, the government offered tax
rebates for exporters as a way to boost economic growth and rebuffed efforts
by Coca-Cola to acquire a Chinese juice maker.

China’s financial muscle also tempered U.S. foreign policy. Secretary of State
Hillary Clinton acknowledged in her February 2009 trip to Beijing that pressuring
China on human rights would take a backseat to economic issues for
the foreseeable future. In his June 2009 trip to China, Treasury Secretary
Geithner backed away from earlier U.S. calls for China to allow the renminbi
to appreciate. Geithner explained this shift in policy by noting the absence
of U.S. leverage given China’s financial leverage. Although China could not
compel the United States, it could deter Washington from trying to apply its
own foreign policy pressure.

China also used creditor power to get its way within international institutions.
Beijing effectively vetoed any discussion within the IMF to investigate
whether China’s currency was fundamentally misaligned. China vetoed
loans to Asian Development Bank loans to India because of a territorial dispute with
New Delhi.

Clearly, the Presidential candidate Obama in 2008 had set the tone and the media had obligingly fallen in line with the official policy stance since then. That is perhaps one reason why the much touted ‘pivot to Asia’ was more sound and fury signifying nothing than anything substantive. Perhaps, that was deliberate.

So, Trump’s telephonic conversation was a good signal of a policy shift. What comes out of it is a different story altogether. But, calling it impetuous or irresponsible or inexperienced reveals more about the servile mindsets (including intellectual arrogance) of the commentators than anything else.

On the issue of Trump conversation with Taiwan President, two mild or medium antidotes here and here. This is a great comment in the FT article (second link):

The irony that some liberal western analysts fiercely denounced a call to a democratic US ally, led by a feminist, progressive president, has not been lost on the Taiwanese.

Surprising that these articles appeared in places that they did despite the official and predictable FT View here. But, by the ‘objective’ standards of the newspaper, it was a passable edit.

A bigger and more forceful antidote is here. Even more surprising is that it appeared in Washington Post. John Pomfret’s article has many good parts to it.  It is hard to pick out the paragraphs. It is worth reading in full. The historical background to the evolution of US position on the so-called principle of ‘One China’ is rather interesting.

James Taranto’s piece in Wall Street Journal is another sensible, assertive and forthright pushback. He calls out the lies of journalists who call Trump a liar.

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