The Taiwan Banker

Before the coronavirus pandemic, China's ruling Communist Party may well have preferred that Donald Trump win re-election this year. Yes, Trump's tariffs hurt the Chinese economy, while the U.S. sanctions on Huawei could cripple China's most successful global company. But Beijing has also been pleased with Trump's lack of interest in human rights and tendency to alienate U.S. allies. By the time the U.S. and China inked the phase-one trade deal in mid-January, Beijing had learned to live with the mercurial U.S. president. The pandemic and ensuing fallout upended Beijing's calculations. The U.S. has the most covid-19 cases and deaths in the world. Its economy will contract this year. Trump blames China for jeopardizing his re-election chances, which looked fairly good before the worst pandemic in a century. He may believe getting tougher on China will salvage his ailing campaign. For their part, China hawks in his administration see an unprecedented opportunity to turn the screws on the Chinese Communist Party, which they view as an implacable foe of the U.S. and its democratic allies.With the hawks in charge, the U.S. has closed the Chinese consulate in Houston, arrested alleged Chinese spies, sanctioned China's top chipmaker SMIC, banned CCP members from immigrating to America, challenged China's claims in the South China Sea and drawn much closer to Taiwan. The U.S. overtures to Taipei especially flummox Beijing.To a certain extent, there is no telling what Trump will do to China next. Some observers fear that Washington will cut off the access of Chinese banks to dollar clearing. That would seriously destabilize China's financial system. "Such things have already happened to many Russian businesses and financial institutions. We have to make preparations early – real preparations, not just psychological preparations," Fang Xinghai, a vice-chairman at the China Securities Regulatory Commission, said at a forum in June. Fan Yifei, deputy governor of the People's Bank of China, warned in an October commentary for China Finance that the deteriorating U.S.-China relationship posed major risks to the security of China's financial network and information system. Under the Hong Kong Autonomy Act (HKAA) the U.S. Congress passed in response to China's imposition of a draconian national security law on the former British colony, the Trump administration must submit to Congress by mid-December a list of foreign financial institutions knowingly complicit in significant transactions by parties undermining Hong Kong’s autonomy. "Severe punitive secondary sanctions are on the menu, such as denial of US dollar clearance via U.S. financial institutions, although an incremental approach remains our expectation," said Fitch Ratings in a September research note. At this point, Trump's unpredictability has become a liability for Beijing. It is not that China wants Trump to lose. Rather, Chinese leader Xi Jinping and his colleagues no longer see as large an upside in a Trump victory. To be sure, Beijing would expect U.S. power and prestige to further wane in a second Trump term. The U.S. president has been toxic for America's global image. Just 15% of respondents to the Pew Research Center's new 13-nation survey say that the U.S. has handled the pandemic well. China fares better with 37% approving of its covid response. The U.S.'s key allies in Asia Pacific take a dim view of Trump, according to Pew. Just 25% of the Japanese public has confidence in the U.S. president to do the right thing in world affairs. In Australia, that figure is 23% and in South Korea it falls to 17%. Yet in a second term Trump could continue to harm China's interests, squeezing Beijing on multiple fronts. His administration would continue its assault on China's tech champions. A reprieve for Huawei would be unlikely. Tariffs would remain in place, or even be increased in a targeted manner. After all, Trump is a protectionist at heart. That is one of his few consistent traits.Biden's China trade policyIf Joe Biden wins the election, he will take a more nuanced approach to China than Trump. Biden lacks Trump's appetite for confrontation. Nor would a Biden Cabinet include China hawks like Secretary of State Mike Pompeo, National Security Adviser Robert O'Brien and Deputy National Security Adviser Matthew Pottinger. In a July speech, Pompeo described Xi Jinping as "a true believer in a bankrupt totalitarian ideology." In an October interview with Nikkei Asia, Pompeo defended the Trump administration's hardline approach to China. He said that "we've only come to recognize that appeasement's not the answer. If one bends the knee each time the Chinese Communist Party takes action around the world, one will find themselves having to bend the knee with great frequency."Biden's own views on China are unclear. At a May 2019 campaign event in Iowa, he expressed indignation at the idea that China's economy could surpass America's. "China is going to eat our lunch? Come on, man...They’re not competition for us,” the former vice president said. Since then, Biden has noticeably toughened his rhetoric on China. In a February Democratic debate, he called Xi Jinping "a thug... a guy who doesn’t have a democratic — with a small d — bone in his body." If he wins the election, Biden will need to decide what do about Trump's tariffs and trade deal. Biden has said he would use tariffs as needed and not rule out new levies on Beijing, but that he would have "a strategy-a plan-to use those tariffs to win, not just to fake toughness." Biden may hesitate to remove tariffs lest that revenue stream be cut off, particularly now that the levies have been in place several years. He could provide relief to hard-hit industries by easing select tariffs, while leaving the majority in place as leverage in trade negotiations with China. As for the phase-one trade deal, Biden has not said whether he would retain or jettison the agreement in which Beijing promised to buy an additional US$200 billion of U.S. goods and services over two years. If he got rid of it, he would undoubtedly upset the U.S. constituencies that stand to benefit from China's purchase commitments, such as the agriculture and energy sectors. Thus far, China has bought just half of what is required to meet the annual target, according to Bloomberg Economics. At the same time, Biden would almost certainly eschew Trump's unilateral approach to trade. Biden's advisers say his administration would communicate with allies before taking action on trade, especially when China is involved. Tony Blinken, a former Deputy Secretary of State in the Obama administration and a senior Biden policy adviser, believes a multilateral approach would increase Washington's leverage with Beijing. He reckons the U.S. and countries aligned with it for account for 50-60% of global GDP, compared to just 20-25% for the U.S. alone. "Bringing the combined weight of allies and partners together" is "a lot harder for the government in Beijing to ignore," he told Politico in September. Biden would also take a different approach to Taiwan than Trump. Without Trump's coterie of pro-Taiwan deputies, Biden would likely pursue a lower profile relationship with the island nation. It is hard to see Biden dispatching senior U.S. officials to Taiwan as Trump has done this year. A Biden administration would probably not prioritize signing a bilateral trade agreement (BTA) with Taiwan either. As it stands, U.S. Trade Representative Robert Lighthizer, a free-trade skeptic, has showed no interest in a BTA with Taiwan. He is focused on preserving the phase-one trade deal with China, which took him almost two years to negotiate.Meanwhile, bipartisan support is strong in Congress for a U.S.-Taiwan trade pact, leaving the door open for a Biden administration to move forward on the initiative. 50 Senators sent a letter to Lighthizer on October 1 urging him to get the ball rolling. "We are confident that a U.S.-Taiwan trade agreement would promote security and economic growth for the United States, Taiwan and the Indo-Pacific as a whole,” they said in the letter.