China’s Sphere of Influence?

Donald Trump likes to claim that his administration is the greatest ever and that they have done more in their first 100 days, or first 6 months than any other administration.  In some ways he is correct, the dismantling of the US Federal government and the impact it has caused will have far reaching effects on millions of Americans and it is likely never to be fully rebuilt.  In foreign relations the turning away from traditional allies and formal alliances too marks a definitive break with the past 80 years or so of Pax Americana formed after the second world war.  What took decades to build domestically and internationally has been permanently damaged within months.

Trump’s attraction to strong men leaders and his America First policy has effectively put “might is right” back at the center of international relations.  While never clearly articulated, certainly not by Trump, he seems to hark back to more confrontational relation between countries with the largest and most powerful countries, the US, Russia and China, overseeing spheres of influence, namely the Americas, Europe and Asia, especially South East Asia.

A long running border dispute between Thailand and Cambodia has dramatically escalated in the past days with Thai F16 fighter jets attacking Cambodia, dozens have been killed, and over one hundred thousand residents on both sides of the border have been displaced.  The current tensions started to flare a few months ago but the military escalation has taken many by surprise.

By most measures these two countries would fit neatly into the Chinese sphere of influence.  Both countries have long established ties to China, both are major trade partners (but which country isn’t nowadays) and both countries are Belt and Road Initiative partners.  This would seem to be an excellent opportunity for China to exercise its diplomatic muscle and look to stop the conflict and bring a peaceful resolution to the crisis.  Yet Chinese media has been largely muted in its commentary.  It has reported as per the basic facts, called for restraint, and has even reported on Donald Trump’s efforts to stop the conflict.  Trump has tweeted that both sides are ready for an immediate ceasefire but rebuilding trust and formally ending this long running issue will take time, certainly more time than Trump is willing to dedicate to the matter.

It is worth noting that Trump rolled out his favourite weapon to bully the two countries towards a ceasefire.  Both already faced some of the highest tariff levels and Trump threatened to increase them substantially unless they agreed to a ceasefire.  Trump’s clearly does have an aversion to and horror of war and military action yet this is the President which threatened annexation, i.e. invasion, of Greenland, Canada and Panama.  His ambition is to win the Nobel Peace Prize but unless he can create a lasting peace between Russia and Ukraine he’s highly unlikely to do so.

Xi Jinping certainly isn’t winning any peace prizes.  Twice in the last month he has seen a partner friendly state, Iran, being repeatedly bombed, and now in its backyard two closely affiliated countries have exchanged military fire with casualties on both sides but China has remained on the sidelines.  If the Pax Americana world is going to fracture into spheres of influence it still hasn’t started, or at least China remains highly cautious and apprehensive about stepping outside of its comfort zone.

This partly illustrates why it is too simplistic to think that as America withdraws from its global leadership role then the automatic result is that China can step into the gap.  In the coming world order China will not look to mimic the role of America and it is very likely that China will not be an active negotiator or peacemaker around the world.  Most likely China will limit its actions to a minimum unless it is directly affected by a given situation.  The post Pax Americana world is not one of China as global policeman, but of no policemen.

Another sort of war

Trade wars too remain in focus, how could they not?  Trump’s three-month postponement of his liberation day tariffs was extended to 1 Aug and perhaps not surprisingly there now come a spate of trade deals.  Japan has agreed terms, the EU and the US agreed terms while Trump golfed at his golf courses in Scotland and more will come in the coming days.  To Trump this is all success, deals, deals and more deals.  That is what he promised and now he is delivering.  The terms and general tariff levels are well below the original liberation day tariffs and so the immediate headlines look very positive, but it cannot be forgotten that the new tariffs levels are all significantly higher than where they were before Donald Trump returned to the White House.

For China related trade the two sides are scheduled to meet again in Sweden next month and all signs indicate that they will continue their pause on the unworkably high tariffs.  For China, tariff rates remain around 50% and while there is a postponement there can be no doubt on the Chinese side that they remain the primary target of Trump’s anger.  If Trump does have a foreign policy, it is to disengage from America’s historical commitments to focus on the threat of China.

As trade deal headlines continue to appear one thing cannot be forgotten.  Trump’s overhauling of global trade has been to increase costs of global trade.  The newly agreed tariffs while not at the trade stopping liberation day rates still remain at historic highs.  To Trump this new high tariff era will herald an American golden age although few respected economists would agree with him.  And while no one, economist or not, can predict the future, it is certain that the conditions under which global trade develops in the coming decades will be profoundly different from the past few decades.  Those long-term trends are hard to model and understand but will certainly have a significant impact on the global economy, and especially America.  As all investment products warn “past returns are no guide to future returns” the same is now true for global trade and economic engagement and growth.  Therefore, just striking a trade deal with Trump isn’t enough, countries need to change or alter their way of doing things and engaging with America going forward.  But that need not mean that deepening engagement with China makes the most sense either.

The continuing threat

Since Trump sees tariffs as the most effective tool for getting his own way and bullying other countries recent announcements of bilateral deals are only a part of the broader engagement between the two countries.  As the conflict between Thailand and Cambodia showed Trump’s go to tool was increased tariffs if they kept fighting.  It would be wonderful to think that such a simple and blunt tool could solve the world’s conflicts but sadly it won’t.

Independent of the trade deal tariffs Trump still plans sector specific tariffs on pharmaceuticals and steel products.  So, no one should think that the spate of trade deals ends the trade friction and costs.  The trade war will just move onto another phase.  Is it inconceivable to imagine that Trump might threaten tariffs to try and force other countries to change their domestic policies to his suit his prejudices?  While in Scotland he complained that the view from his golf course was ruined by wind turbines.  Would he threaten the UK with higher tariffs if the UK government continued to build more wind farms?  It sounds ludicrous yet Trump, especially in this second term, has effectively taken over the Presidency to promote his own personal and business goals.  Unlike previous presidents who respected the office and divested of their own assets and shunned conflicts of interest Trump embraces them and sees no shame in using the Presidential office and authority to promote his own and his family’s business interests.  With that in mind why would any foreign government rest easily when dealing with Trump?

But does China provide an alternative and more stable partner in the coming years?  This is a question that the EU is having to ask itself.  The EU has long struggled to find a balance relationship with China.  Germany under Chancellor Merkel went all in on economic investment and engagement, with the corporate elite effectively driving foreign policy in Berlin.  That model has literally hit a wall as Germany carmakers have seen local Chinese competitors race ahead of them in the EV space.  Merkel had also allowed Germany industry to be powered by Russian hydrocarbons and the Ukraine war exposed all too well the folly of relying on authoritarian states.

The past week saw European Commission President Ursula von der Leyen and European Council President Antonio Costa meet with Xi Jinping in Beijing as part of an EU China summit celebrating 50 years of relations.  Von der Leyen has very much become aware of the challenges, and direct threats, that China poses to both the region and the EU and the summit was pared down in size and scale from the original plans.  But how far should the EU partner with China?

Xi Jinping called the EU and China ”two big guys” and wants to play on the EU fears around Trump and an underlying European anti-Americanism sentiment, to draw the two sides closer together.  While von der Leyen, and many others like Kaja Kallas, understand the China risks, some in Europe remain so shocked by the Americans literally dumping their European allies that they are looking to China to try and counteract the impact of the break with America.

Few tangible benefits came out of the summit although a new mechanism to ensure supplies of rare earths and magnets was agreed but as this column has stated before, ensuring supply from China is not a long-term solution when China is happy to use economic embargos and restrictions to enforce its political will.  Developing alternative supply chains and reducing dependency on China is the only long-term solution.

But while Xi may have tried to sweet talk the EU the week ended badly for him with the EU agreeing to a trade deal with Trump.  In addition to settling the tariff levels the EU agreed to buy more US energy and weapons making their defense ever as dependent on the US.  Trump rightly demanded the NATO allies increase their defence spending and that Europe take on responsibility for Europe’s defence and the Ukraine war but the ties and dependencies to the US remain in place.  The details of the EU deal may well also detail restrictions which target China by limiting what the EU can agree to in the future.

In summary, while China may like to promote itself as a dependable and stable partner in stark contrast to the wholly unstable Trump, they are not directing the action.  Trump’s global economic upheaval will bring long term costs and unintended consequences but for the moment it is driving countries to recalibrate their engagement with America very much on America’s terms, and that doesn’t bode well for China.

In such a complex and needless chaotic geopolitical arena, it is too simplistic to talk of winners and losers yet while it would be wrong to say that Trump is winning is it very clear that China isn’t.