The Xchange Blog

Is President Trump a Paper Dragon?

Donald Trump the presidential candidate relied on an aggressive, protectionist sketch of a foreign policy platform to become Donald Trump the President. However, now that he is President Trump, he has likely discovered that foreign policy requires a softer speaking voice and a more nuanced handle on America’s big stick.

That seems apparent in President Trump’s about-face on U.S.-China relations. Candidate Trump routinely promised to label China a currency manipulator the moment he entered office and threatened the country with import tariffs as high as 45% to combat what he viewed as an onerous trade imbalance.

Following his November victory, President-elect Trump also broke with the American government’s decades-long “One-China Policy” by speaking with the President of Taiwan, a country the Chinese government claims as a territory of the People’s Republic of China.

These actions, in tune with the rising strength of the dollar following Trump’s election win, generated a pronounced downturn in the FTSE China 50 Index, which includes 50 high-liquidity Chinese stocks, primarily in the financial sector, near the end of 2016.

Several months later, and following an April meeting with Chinese President Xi Jinping, President Trump has reversed his stances. He admitted that China is not a currency manipulator and has not yet used his executive power to increase tariffs on Chinese goods.

China’s Renminbi has rallied through much of 2017 off of extremely positive trade data. In that same time, the strength of the dollar has waned slightly and U.S. markets have cooled off from the post-election rally, especially once Trump himself said that “the dollar is too strong” after meeting with Xi. All of this has bolstered the China 50 Index by more than 10 percent since January.

However, this newfound amiability between President Trump and China is also due in part to increased military and political posturing in the region between the United States and North Korea, which holds China as its primary trade partner. Donald Trump has adopted Henry Kissinger’s school of thought toward North Korea, leveraging China’s influence over the otherwise internationally isolated country. Trump’s attitude may have changed once President Xi agreed to withhold shipments of coal to its trade partner.

Still, uncertainty in the region has created recent volatility in both Chinese and Pacific markets, as shown by the MSCI Emerging Market Index, which includes a majority of Chinese, South Korean, and Taiwanese stocks.

MSCI Emerging Market Index Performance. Source: Financial Times. One cannot directly invest in an index.

The United States’ increased military action in the area and greater U.S. and international pressure on North Korea has forced China into a delicate position in order to maintain peace in the Pacific. China is now a key mediator between two leaders that are unwilling to bow to pressure.

It will be a matter of waiting to see whether President Trump uses the amplified stakes in U.S. China relations to foster stronger economic ties with the country or if he returns to his previous hard-line stance in the Pacific. Stay Tuned.

 

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