Asia To Test Trump's Geopolitical Assertiveness

United States | Political Risk | Country Risk | Mon Apr 03, 2017

BMI View: President Donald Trump's geopolitical assertiveness faces an early test in Asia, as he is due to host Chinese President Xi Jinping on April 6-7. Trade and security will dominate the agenda, amid growing protectionism in the US and rising tensions in Korea. Elsewhere, Trump will step up the fight against Islamic State. Meanwhile, relations with Russia will remain static for now, owing to substantial domestic opposition to Trump's desire for a major rapprochement with Russia.

US President Donald Trump's more assertive foreign policy faces an early test this spring, with Trump due to host his Chinese counterpart Xi Jinping in Florida on April 6-7. During the 2016 election campaign, Trump adopted an extremely critical stance towards China, accusing it of unfair trade practices and currency manipulation, and criticising its assertiveness in militarising the South China Sea. In addition, Trump in early December briefly appeared to question the US's four-decade old 'One China' policy (i.e. of recognising the People's Republic of China as the sole Chinese government), when he broke with protocol by accepting a phone call from Taiwanese President Tsai Ing-wen. Given this backdrop, Trump's handling of China will be closely watched to determine whether his administration will be pragmatic internationally or retain a fiercely ideological bent. For his part, Xi will be unlikely to make any significant concessions towards the US. This is because Xi will not wish to be seen to be bowing to a new US president in 2017 in particular ahead of the Communist Party of China (CPC)'s quinquennial congress later this year.

Widening Gulf In Sino-US Relations Cannot Be Bridged Easily

The US is still the world's sole superpower, while China is the only country that could rival it on a global basis. The two countries are locked in a long-term struggle for mastery in the Asia-Pacific region ( see 'Sino-US Geopolitical Competition To Intensify In 2015-2020', March 26, 2015). Although the last three US presidents vowed a tougher China policy while campaigning, only to become much more pragmatic once in office, Trump appears more committed than his predecessors to addressing the trade imbalance. Below, we list the main issues dividing Washington and Beijing:

Trade: Trump has long bemoaned the US's USD347bn goods trade deficit (2016 figures) with China, which he sees as the clearest manifestation of 'unfair' Chinese trade practices. Trump blames this (and US corporations) for the loss of millions of manufacturing jobs overseas over the past generation or so. Trump also regards China as a 'currency manipulator' and has vowed to pressure it to make concessions to the US. Against this backdrop, we see a considerable risk that Trump will impose tariffs on key imports from China. The danger is that China will retaliate accordingly, leading to a step-by-step escalation to a bigger trade war ( see 'Trump Presidency: Three Scenarios For China', January 6, 2017).

Manufactured Goods Drive The Deficit

US Trade Deficit (L) And Surplus (R) With China In 2015 (USDbn). Service Data For 2014.

Meanwhile, Trump's decision to withdraw the US from the Trans-Pacific Partnership (TPP) has left the other participants (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) feeling somewhat adrift, as their governments had placed a great deal of political capital in the trade pact. The collapse of the TPP offers China the opportunity to reshape regional trade via its Regional Comprehensive Economic Partnership (RCEP).

From an economic perspective, we sense an opportunity for an announcement of a bilateral investment plan ( see 'Assessing The Potential For 'Win-Win' Trump Trade Deals', March 2, 2017) and for a timetable on further discussions on trade. A real upside surprise could be the announcement of a bilateral trade and investment treaty roadmap; Barack Obama started down this road and Trump favours bilateral deals.

Asian Defence And The South China Sea: During the election campaign, Trump signalled a reduced military commitment to Japan and South Korea, the US's two closest allies in East Asia. This was quietly welcomed by China, which has a territorial dispute with Japan over the Japanese-administered Senkaku (Diaoyu in Chinese) islands in the East China Sea. However, the Trump administration has since re-affirmed its commitment to Tokyo and Seoul. Trump's foreign policy team has also taken an increasingly critical stance towards China's militarisation of the South China Sea, through which a high proportion of East-West trade passes.

Overall, we believe that Trump will step up co-operation with regional allies to counter-balance China. The key risk is that greater aerial and naval activity on the part of China, the US, and Japan in the disputed regions will increase the risk of a collision or skirmish between rival aircraft or vessels. For example, in April 2001 a Chinese fighter jet collided with a US reconnaissance aircraft near China's Hainan island, forcing the American spyplane to make an emergency landing in Hainan. China detained the crew for almost two weeks, before releasing them after receiving a limited apology from the US. China is now far more powerful than it was in 2001, so a repeat of such incident may prove harder to resolve amicably.

The Greatest 'Game'

Asia - Geopolitical Alignments

Korean Peninsula: The Korean Peninsula is emerging as a key flashpoint for Trump, as the North presses ahead with its nuclear and missile programmes. Pyongyang may well carry out further weapons tests on April 15 or 25 (the 105th anniversary of the birth of its founder and the 85th anniversary of the establishment of its armed forces, respectively). Trump has repeatedly called on China to pressure North Korea into scrapping its nuclear programme, but Beijing has been reluctant to abandon Pyongyang outright, for fear of causing the latter's collapse, which would generate a massive refugee and security crisis affecting north-eastern China. In any case, we believe that China's influence over North Korea is limited.

South Korea's decision in Q1 2017 to receive the US's Terminal High Altitude Area Defense (THAAD) missile system to counter the North has greatly angered China, which fears that THAAD's radar could be used to enhance US surveillance of China. Beijing has responded by imposing punitive measures on South Korean cosmetics, pop culture, and tourism. The situation is further complicated by South Korea's May 9 presidential election, which is likely to be won by the centre-left opposition candidate Moon Jae-in, who favours a more conciliatory stance towards the North. His ascent would put Washington at odds with Seoul at a time when the Trump administration is toughening its stance on Pyongyang and is even reportedly considering a military strike ( see 'Scenario: US Military Strike On North Korea', March 20, 2017). Although this is unlikely any time soon, the risk of US pre-emptive action will increase, as North Korea makes further progress in developing nuclear-tipped missiles capable of reaching the US. A US attack on North Korea could put Washington onto a collision course with Beijing, which is committed to the North's defence.

Taiwan: Another major concern of China is that Trump, backed by Japan, could increase US diplomatic and military support for Taiwan as a means of pressuring or containing China. Since January 2016, Taiwan has been governed by the independence-leaning Democratic Progressive Party (DPP) after eight years of a China-friendly leadership. Trump's acceptance of a congratulatory phone call from President Tsai Ing-wen in early December 2016 was not a spontaneous act of politeness, but apparently the result of months of Taiwanese lobbying. Trump later backtracked from comments suggesting that he would re-assess the US's 'One China' policy, but Beijing will remain wary of any attempt by Trump to use Taiwan or other geopolitically sensitive flashpoints as a means of pressuring it on trade issues.

Fight Against Islamic State To Be Stepped Up

Meanwhile, Trump is also stepping up the US-led air and ground campaign against Islamic State (IS) in the Middle East, as he regards fighting Islamist terrorism to be the number one security issue facing the US. The main US focus at present is supporting Iraqi forces in their offensive against Mosul, which has been controlled by Islamic State. Reports of rising civilian casualties in Iraq in early 2017 have raised speculation that US military commanders are being given greater freedom of action than under the previous Obama administration. The US has also steadily been raising the number of its troops in the conflict area with more than 5,300 now in Iraq and more than 500 in Syria, and there are reports that a few more thousand could follow soon. Moreover, Defense Secretary James Mattis stated in late March that US troops could remain in Iraq even after IS is defeated, presumably to prevent its reconstitution. That said, we do not expect Trump to deploy a tens-of-thousands-strong ground force (as he has previously hinted) against IS in 2017, unless there is a major terrorist attack in the US. Trump will most probably acquiesce to Russia playing a major role in Syria to defeat IS, in support of Syria's Assad regime.

Showdown In Mosul Under Way

Iraq - Control Of Territory

As regards Iran, Trump will take a cooler attitude towards the landmark July 2015 P5+1 nuclear deal, but will probably refrain from withdrawing from it outright, as its other signatories will warn of the risk that this could eventually lead to a military showdown with Tehran. In addition, it would be too risky for Trump to start a new confrontation with Iran at the same time that the US is fighting IS (which Tehran is also fighting against). However, once IS is defeated, Trump may gradually find ways to pressure Iran.

Russia Rapprochement To Be Delayed By Establishment Opposition

Elsewhere, Trump's often-stated desire to pursue a rapprochement with Russian President Vladimir Putin will prove harder to achieve, given that revelations of contacts between Trump campaign associates and the Russian embassy in 2016 have heightened congressional suspicions towards Moscow. We still believe that a Trump-Putin summit is possible over the coming months, but both sides will have tone down their expectations of what can be achieved ( see 'US-Russia Relations: Three Scenarios, 2017-2021', January 20, 2017). Even so, a more cordial atmosphere could pave the way for a modest improvement in US-Russia relations, which have sunk to their lowest point since the early 1980s.

However, we caution that the conflict in Eastern Ukraine remains susceptible to occasional flare-ups. Given this backdrop, it now appears unlikely that the EU will ease sanctions on Russia in July 2017, when it reviews them in June. This suggests that the sanctions will probably remain in place until early 2018 at least. In the meantime, if Putin grows increasingly frustrated with this deadlock, or seeks to drum up nationalist sentiment ahead of the Russian presidential election next March, then he could resort to more brinkmanship in Ukraine, or military posturing in the Baltic states or the Balkans. This would further postpone a rapprochement with the West.