Trump Reignites China Diplomatic Spat, Says Not Bound By "One China" Policy

While the domestic US audience was focused on what Trump would say about the latest scandal of alleged Russian intervention in the US presidential elections, which as a reminder, he called "ridiculous" and suggested that democrats are behind the report, China was more curious by Trump's foreign policy thoughts, which may have sparked yet another diplomatic spat, because one week after Trump snubbed America's long-running "One China" policy, today the President-elect questioned whether the United States had to be bound by its long-standing position that Taiwan is part of "one China" and brushed aside Beijing's concerns about his decision to accept a phone call from Taiwan's president.

"I fully understand the 'one China' policy, but I don't know why we have to be bound by a 'one China' policy unless we make a deal with China having to do with other things, including trade," Trump said. Trump's decision to accept a congratulatory telephone call from Taiwan President Tsai Ing-wen on Dec. 2 prompted a diplomatic protest from Beijing, which considers Taiwan a renegade province.

Following Trump's decision to nominate Iowa Governor Terry Branstad as the next U.S. ambassador to China, choosing a long-standing friend of Beijing after rattling the world's second largest economy with tough talk on trade and the call with the leader of Taiwan, pundits thought that Trump would moderate his diplomatic outbursts vis-a-vis China. However, in the Fox interview, Trump brought up a litany of complaints about China which he had emphasized during his presidential campaign, and which may provoke an fresh bout of harsh criticism from China.

"We're being hurt very badly by China with devaluation, with taxing us heavy at the borders when we don't tax them, with building a massive fortress in the middle of the South China Sea, which they shouldn't be doing, and frankly with not helping us at all with North Korea," Trump said. "You have North Korea. You have nuclear weapons and China could solve that problem and they're not helping us at all."

Here, contrary to Trump's allegations, over the past two years China has been doing everything in its power to prop up its rapidly devaluing currency, which recently hit record lows against the dollar as a result of ongoing capital flight by domestic depositors who are scrambling to park their savings offshore realizing just how insolvent local financial institutions are.

The President-elect further criticized China over its currency policies, its activities in the South China Sea and its stance toward North Korea and said it was not up to Beijing to decide whether he should take a call from Taiwan's leader.

"I don't want China dictating to me and this was a call put in to me," Trump said. "It was a very nice call. Short. And why should some other nation be able to say I can't take a call?"

"I think it actually would've been very disrespectful, to be honest with you, not taking it," Trump added.

Trump  questioning of long-standing U.S. policy risks antagonizing Beijing further and analysts have said it could provoke military confrontation with China if pressed too far. As of early noon Eastern time - and thus late at night in China's capital - Beijing had no comment on Trump's remarks.

The call with Trump was the first such contact with Taiwan by a U.S. president-elect or president since President Jimmy Carter switched diplomatic recognition from Taiwan to China in 1979, acknowledging Taiwan as part of "one China." Taiwan is one of China's most sensitive policy issues, and China generally lambastes any form of official contact by foreign governments with Taiwan's leaders.

After Trump's phone conversation, the Obama administration said senior White House aides had spoken with Chinese officials to insist that Washington’s “one China” policy remained intact. The administration also warned that progress made in the U.S. relationship with China could be undermined by a “flaring up” of the Taiwan issue. Following Trump's latest comments, a White House aide said the Obama administration had no reaction beyond its previously stated policy positions.

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Meanwhile, as Trump postures in an attempt to jockey the greatest possible diplomatic leverage in his negotiations with China, and drums on about ending free-trade agreements, China is widening its economic footprint in the U.S. backyard: Latin America. 

As Bloomberg notes in its daily Macro piece, the region has long been thought of by the U.S. as under its umbrella of influence. President Teddy Roosevelt famously used the phrase “speak softly, and carry a big stick” emphasize region hegemony in the Americas.

But the world is shifting. With U.S. influence waning, China is carrying a big carrot: trade. President Xi paraded through Latin America in November, boosting trade ties, and a few days ago the state-owned oil behemoth CNOOC purchased a deep-water oil block in Mexico. As the Middle Kingdom’s economy shifts to a larger middle class and more consumption, demand for agriculture produce is expected to increase on top of an already strong desire for metals and oil, which have been the staple exports from South America over the last decade.

The benefits will spread unevenly across the region with countries such as Brazil, Chile and Peru will likely continue to profit more from China trade (Sorry Mexico, China probably won’t bail you out from Trump shocks). Brazil and Chile already run sizable trade surpluses with China. Their top exports are, unsurprisingly, raw materials and agricultural products.

In 2009, China overtook the U.S. to become Brazil’s biggest trade partner. Now, Brazil runs a $24 billion trade surplus with China, bigger than its total surplus last year.

Half of Chile’s exports are copper and related products, mostly bought by China. During Xi’s fall visit, the two countries agreed to begin talks to upgrade their free-trade agreement signed a decade ago.

While others benefit, Mexico will likely be left mostly on the sidelines, given its limited agriculture exports and falling oil output, at a time when it faces possible trade restrictions from the U.S., which buys more than three- fourths of its exports. Mexico has pumped out less and less crude oil during the last few years amid turmoil at state-owned Pemex. Scant Chinese interest in Mexican exports and a strong appetite for “Made in China” goods have contributed to a $22 billion trade deficit.

Although it opened up its energy sector to foreign investors last year, Mexico needs more funding and better technology to boost output and exports over time. Also, its industrial prowess and access to the U.S. may attract Chinese exporters looking to cut costs, but only when the fate of NAFTA becomes more certain.

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There was a time when China felt hedged in by the economic might of the U.S., but with America’s influence in Asia also starting to slip, the tables could be set to turn.

Trump should be careful how far he pushes Beijing, even if it is only with rhetoric.