July 4, 2017 / 6:43 AM / 3 months ago

Beijing-Trump relations enter dangerous phase

U.S. President Donald Trump (L) and China's President Xi Jinping walk along the front patio of the Mar-a-Lago estate after a bilateral meeting in Palm Beach, Florida, U.S., April 7, 2017. REUTERS/Carlos Barria

HONG KONG (Reuters) - Sino-U.S. relations are entering a dangerous phase. The honeymoon between presidents Xi Jinping and Donald Trump ended abruptly, and the latter feels sore. China hasn’t delivered change in North Korea, and trade is still imbalanced. Now the U.S. administration is lashing out. The likelihood of miscalculation is rising, as is the risk of economic fallout.

Graphic: China's trade surplus with the United States has risen since February: reut.rs/2sGKCuT

    The fundamental problem lies in the false cognate Trump presents to Chinese officials. He looks so familiar: an autocratic real-estate developer who unabashedly mixes business and political interests, and surrounds himself with trusted family members.

    Seeing a man who disdained the advice of experts from his own bureaucracy, China invested heavily in relationships with Trump’s family, in particular his son-in-law Jared Kushner and daughter Ivanka Trump, who have been invited to visit China later this year. The president reciprocated by saying nice things about Xi, and by abandoning his brief flirtation with Taiwan.

    But that analysis underestimates three things: Trump’s unpredictability, pushback from the Washington bureaucracy, and electoral support for China-bashing. Trump’s support base rallied behind his tough talk about 35 percent sanctions on Chinese imports.

    Meanwhile, Trump’s team also misread China’s openness to compromise. Beijing has tossed out a few token concessions on market opening, including allowing American beef imports, and opened a few more doors for Wall Street. But it has pushed ahead with a cyber security law that appears designed in part to squeeze out foreign software companies. After briefly falling to a multi-year low in February, China’s trade surplus with the United States has been rising, to hit $22 billion in May. 

    China implemented further sanctions on North Korea but to no effect: Pyongyang tested another ballistic missile on Tuesday, on the day America celebrates its independence.

    Trump appears to be losing patience. He is selling $1.4 billion of weapons to Taiwan. He is sanctioning Chinese individuals and banks doing business with Pyongyang, and talking steel sanctions. The U.S. navy is confronting Chinese ships and aircraft in the South China Sea.

    The first risk is that the U.S. president swings from one extreme to the opposite. The second is that China over-reacts, and the status quo that has placated investors so far takes a turn for the worse.

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