Here's What the Donald Trump Presidency Could Mean for China Lombardi Letter 2017-01-10 10:52:35 TrumpThe Donald Trump PresidencyDonald Trumpdefense spendingtradeChinaU.S. economydefense stocksChinese exports With Donald Trump set to take over the White House come January 20, the Donald Trump presidency could send shock waves through U.S.-China ties. U.S. Economy

Here’s What the Donald Trump Presidency Could Mean for China

U.S. Economy - By |
U.S.-China ties

The Donald Trump Presidency Could Spark a Major Shift in China Relations

Donald Trump’s cut with Barack Obama’s China policy goes further than simply the military buildup. The “positive” effects for U.S. defense stocks should also be seen in this context. Indeed, the Donald Trump presidency will break all aspects of relations with China, whether political, economic, military, or financial.

The Donald Trump presidency’s foreign policy will shift in favor of Russia and against China. Russia will become less of a pariah and more of a partner. The catalyst for the shift will be closer U.S.-Russian cooperation in combating Islamist terrorism.

This marks a major break from Obama’s isolation of Moscow following the crisis in Ukraine and the annexation of Crimea, featuring political and economic sanctions. Many of Washington’s European allies will welcome this change profusely. Russia was a major importer of western European goods.

The Trump presidency, even before getting underway, has sent shock waves through U.S.-China ties. Trump doesn’t have to do much to signal that break. Trump has stirred the pot by speaking to the President of Taiwan. Thus he betrayed the historic international recognition of the People’s Republic as the “one China.”

A Key Post Appointment Signals Shift in Trump Presidency’s Approach to Trade with China

Donald Trump has appointed Peter Navarro to lead the White House National Trade Council. Navarro is an economist. At the academic level, he has focused on the relationship between Asia and the United States. He wrote the bestseller Death by China and also directed a related short documentary—narrated no less than by liberal actor Martin Sheen. Evidently, Navarro’s book and research do not please Beijing.

He will give academic legitimacy to the Donald Trump presidency. Trump claims that the United States has signed too many trade agreements. These have transformed free trade into a killer for U.S. industry and employment. Navarro argues that trade with China might have favored some American companies.

However, it has not favored America itself. Trade with China, contends Navarro, is a Trojan horse, which will destroy America if something isn’t done to restore balance before it’s too late. Trump’s promise to focus much of his military spending on the U.S. Navy has already produced foreign policy sparks.

The Trump Presidency Is Planning Biggest Increase in Military Spending Since Reagan

Just after being elected, Trump announced the largest American naval rearmament since Ronald Reagan was in office. In December, China seized a U.S. Navy submarine probe in international waters. Donald Trump tweeted that China could “keep it.” China was clearly responding to Trump’s provocation. (Source: “Donald Trump says China should keep the seized US Navy drone,” The Independent, December 18, 2016.)

Beijing wanted to give him proof of its military capabilities, perhaps undervalued. However, these suggest value for defense stocks, especially General Dynamics Corporation (NYSE:GD), which is one of the Navy’s top contractors. Beijing has achieved, in peacetime, the same exponential industrial and financial growth profile that characterized America during World War II.

Washington took advantage of the war’s destruction of Europe’s industrial capability to export all kinds of products. That was temporary. But China has benefited from the huge wage gap and social and environmental protection measures. It’s now reaching the end of that cycle. The price of Chinese products with high added value is now comparable with those of the best international competition. Labor costs have become an ever more important factor in determining competitiveness.

In China, the debt/GDP ratio rose from 150% in 2008 to 260% in 2016—and rising. The debt burden has been shifted by businesses and local institutions to the State and families, leaving unchanged the overall pace of debt growth. This creates the basis for an even more serious economic collapse. It also favors the rise of militarism.

China’s yuan is dropping like a brick against the dollar, buoyed by higher interest rates. If China allows the currency to drop too much, blaming capital flight, Trump and his supporters would have more opportunities to accuse Beijing of manipulating the economy to favor Chinese exports.

Trump already believes China is the greatest danger to the United States. He is not waiting to act.

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