The Liaoning Sails The South China Sea

CHINA’S AIRCRAFT CARRIER, the Liaoning, seems to have gone no further than the South China Sea. There it has been carrying out exercises with its contingent of F-15 fighter jets including combat exercises, aerial refuelling and difficult return landings.

“The Liaoning aircraft carrier group in the South China is carrying out scientific research and training, in accordance with plans,” according to foreign ministry spokesman Geng Shuang. “Complex hydrological and meteorological conditions in the South China Sea as well as a cold front in the area have posed some challenges,” according to the military.

That is not the adventurous sail to the ‘second island chain’ that had been predicted. Speculation now is that the carrier will sail up the Taiwan Strait on its way back to its home port of Qingdao, to complete a symbolic circumnavigation of the island.

Meanwhile, the US Navy says the USS Carl Vinson, a Nimitz-class aircraft carrier that was used to bury the body of Osama bin Laden at sea in 2011, will sail from California this week to replace the USS Ronald Reagan which is ending its tour in the Western Pacific.

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Heading For The Deep Blue Yonder

The aircraft carrier Liaoning seen in the East China Sea

THE PLA-NAVY’S aircraft carrier, the Liaoning (above), has sailed for the Western Pacific on what state media say is a routine naval exercise. The trip marks the first time it has ventured into ‘blue water’.

Japan’s defence ministry noted that the carrier and seven other warships had sailed from the East China Sea making passage between Okinawa and Miyako islands on Saturday headed for the Philippines Sea. Taiwan’s counterpart said on Monday that the carrier had entered the South China Sea after passing south of the island, though it counted two fewer vessels than the Japanese (it may not be counting supply ships; a carrier battle group usually comprises eight vessels).

The symbolism of the sailing is that the Liaoning has ‘broken through’ the ‘first island chain’ — the first major archipelagos out from the East Asian littoral, stretching from the Kamchatka peninsula in the north to the Malay peninsula in the south-west and within which China believes the United States wants to keep its force projection penned.

This trip may have been long planned to come just as US President-elect Donald Trump prepared to take over from Barack Obama, but the timing will have added piquancy given Trump’s ratcheting up of tensions in past weeks, including suggestions that his administration might abandon the One China policy.

Last month, Beijing declared the Liaoning ‘combat-ready’ and the warship conducted its first live-fire drills earlier this month in the Bohai Sea. Before heading out to the Pacific, Liaoning was carrying out combat-readiness air drills in the East China Sea including aerial refuelling of its J-15 fighters.

This trip (or the next one) may be intended to get the Liaoning to the ‘second island chain’ (Guam, Mariana Islands and Iwo Jima) to test the carrier group’s long-range mission capabilities, which will be essential to changing the strategic naval balance of power in the Western Pacific (eventually).

The nationalist-minded state newspaper, the Global Times, lays out the long-term course:

The Chinese fleet will cruise to the Eastern Pacific sooner or later. When China’s aircraft carrier fleet appears in offshore areas of the US one day, it will trigger intense thinking about maritime rules.

That is still some day off, but no longer never.

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Industrial Policy’s Global Return

INDUSTRIAL POLICY HAS long been a strong pillar of China’s economic agenda but a pariah in the Anglo-Saxon economies of the West.

It made a return there last August when the UK’s new Prime Minister Theresa May outlined her vision of a post-Brexit state-boosted industrial renaissance some three decades after the UK’s previous female prime minister, Margaret Thatcher, had killed it off.

Now, in the United States, President-elect Donald Trump is picking up the torch with the creation of a White House National Trade Council to facilitate industrial policy. Peter Navarro, a University of California economist who is a sceptic of trade with China, is its proposed head.

This suggests that a more populist approach to trade and manufacturing is in the offing from the Trump administration. US trade policy will more likely be used to promote domestic production and job creation, particularly in infrastructure and defence, two areas where ‘Buy American, Hire American” is easiest to implement.

That would represent a significant change from international trade as a foreign policy tool that it was under the Obama, Bush and Clinton administrations.

It remains to be seen what this means in practice, and more importantly, where the new council fits into a Washington power structure that has to accommodate on economic matters the National Economic Council, the National Security Council, the Treasury, the U.S. trade representative and the commerce department.

Beijing, already sideswiped by Trump’s election win, will take its time to pick that apart.  Trump’s proposed commerce secretary, Wilbur Ross, the soon to be octogenarian investor who made his billions from corporate restructuring of distressed companies, is this Bystander’s pick to emerge as the key figure among that group. But Navarro’s appointment will not offer Beijing much cheer.

Navarro is also an advocate of the theory, controversial among economists, that trade deficits are a drag on growth. The United States ran a $366 billion merchandise trade deficit with China last year.

This Bystander will be watching carefully for signs of the Trump administration seeking to implement a ‘border tax’. This is taxation regime within corporate tax that Navarro and Ross have argued is needed to offset what they say is the hurt other countries’ domestic tax systems impose on US exports, say through the imposition of value-added-taxes that have no equivalent in the United States.

In short, they argued that a 20% border tax could eliminate the overall US trade deficit (if not all of the one with China). Imports would become 20% more expensive to cover the new corporate tax liability while exports, which would be exempt, would be roughly 12% cheaper because of the tax savings exporters would get.

The net effect of what in effect would be an across the board import tariff of 20% and an export subsidy of 12% would be equivalent to a 15% change in the value of the dollar.

Given that the United States was a $482 billion export market for China last year, that would give a very different hue to the China-US trade relationship. Not surprisingly, talk of a coming China-US trade war is in the air in both countries.

That may be of less import to China than once might have been the case now that it is rebalancing its economy away from cheap-export-led growth and towards domestic consumption, and that trade in services is becoming as important as trade in goods.

Nonetheless, this is probably not a moment to be sanguine about the prospects and the negative impact on China’s growth of a border tax could be material, and felt far wider than in China alone.

However, the new battle lines between Beijing and Washington may be drawn up over national champions as both countries seek to dominate the new industries that will shape the coming global economy. And that will come down to which nation will be better at picking winners — the perennial Achilles Heel of industrial policy.

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Surprise Seizure In South China Sea

THE SEIZING OF a US Navy underwater drone by the PLA-Navy points to the potential for a small incident to take on greater import as Sino-American relations become more uncertain ahead of Donald Trump assuming the US presidency.

The drone was conducting a military oceanographic survey to map underwater channels in what the US claims are open waters some 160 kilometres off the Philippines, but China considers to be its own.

The incident comes hard on the heels of the publication of satellite photographs showing anti-aircraft batteries on seven of China’s artificial islands in the South China Seas and US President-elect Donald Trump’s questioning of Washington’s commitment to the ‘One China’ policy and his taking of a telephone call earlier from Taiwan’s President Tsai Ing-wen.

Having had the unpredictability card played against it, Beijing may be countering in kind.

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Trump Ups The Ante, But What Is The Game?

WHAT HAD SEEMED to be a passing storm in a teacup has blown up into a tempest.

Taking a telephone call from Taiwan’s president, Tsai Ing-wen, was one thing, especially when the US president-elect’s entourage subsequently played down the potential consequences. It did not signal a change of US policy towards China, they insisted.

But then the man himself upped the ante. He suggested that unless Beijing makes concessions on trade, America will consider abandoning the One China policy, the foundation of Sino-American relations since 1979 and which has allowed the world’s sole superpower to develop a working relationship with the world’s aspirant one.

What had been a restrained response on Beijing’s part hitherto, interrupted into anger, albeit channelled through the state-run Global Times, a publication that never misses the opportunity to blow hard about Chinese nationalism.

It has a reason, though, to suspect that there is an organised campaign to restore Taiwan’s a diplomatic status in the United States. Beyond the telephone call from Tsai, John Bolton, likely to be Trump’s assistant Secretary of State, is known as a China hawk, especially over the issue of Taiwan. Our man in New York sends word that Trump and Bolton met shortly before Trump dropped his hint that the One China policy was in jeopardy.

The extent to which Trump understands the ramifications of the United States abandoning the one China policy is unclear. Less so his advisers. They will know that Taiwan is a red line for Beijing. Trump, on the other hand, possibly regards his comments as no more than an opening bid in a trade negotiation.

In this scenario, Taiwan is no more than a bargaining chip. Beijing, however, sees Taiwan as a first domino that must not be allowed to fall.

Its default position is that the Americans are playing a long game, just as it would. If Taiwan goes, then Hong Kong might also be at risk, especially as there would be support from within the former British colony for any advocacy of Hong Kong independence.

More importantly, Tibet might be next; then possibly Xinjiang. America, this theory goes, is trying to pick apart China one province at a time and thus must be resisted from the outset.

What, though, can Beijing do, and especially against a man who isn’t yet president?

Its easiest option would be to stop supporting the yuan, making Chinese imports into the United States cheaper. That would skewer Trump’s accusations that China is a currency manipulator, at least in the eyes of economists, if not, perhaps, in those of the blue-collar Americans who supported him, in large numbers in the rust belt, in the election campaign.

It could also make life a lot harder in China for those American direct investors, particularly high-tech companies, who manufacture there to export back to the United States or to pursue the market share in China itself of which they dream.  China could also go after big-ticket US exporters to China, such as Boeing, by cancelling orders.

The hope that would be on both scores that US companies would apply pressure on Trump at home not to endanger the trade and investment relationship with China by insisting one following the reckless path of abandoning One China policy.

What Beijing has to do first, however, is to figure out Trump’s true intentions. That may be the hardest part of all.

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Donald Trump, Taiwan And Interesting Times

US President-elect Donald Trump. Photo credit: Gage Skidmore. Licenced under Creative Commons

NO ONE CAN accuse the president-elect of United States, Donald Trump (above), of hiding his antagonism towards China when he was on the campaign trail. He bluntly accused Beijing of “stealing” American jobs and manipulating its currency and was critical of it for “militarising” the South China Sea.

His prospective administration is packed with China hawks who believe that the Asia Pivot policy pursued by President Barack Obama has been a failure and prompted Chinese aggression in the East and South China Seas.

However, few expected the first point of confrontation between the forthcoming Trump administration and China to be over to Taiwan. By agreeing to take a telephone call from Taiwan’s president, Tsai Ing-wen, now seen as the result of a well-connected Taiwanese lobbying campaign in Washington, Trump drove a coach and horses through the basic tenant of Sino-American relations since 1979 when the United States broke diplomatic relations with Taiwan and acknowledged ‘One China’.

In doing so, he unexpectedly put Beijing on the back foot. Many had thought Beijing would test the new president once he took office in January. But Trump has struck preemptively.

Beijing has reacted relatively tamely. This may be a sign that it has been discombobulated by the potential for Trump to be unpredictable. It is likely to be deeply distrustful of the Trump administration as a result.

Unpredictability may become a hallmark of the Trump administration, as it was in his campaign. If so, that may prove as big a challenge to Beijing’s sometimes ponderous policymaking as the substance of Trump’s complaints against it.

We do live in interesting times.

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How Much Candidate Trump Will President Trump Contain?

Donald Trump seen in Washington, November 2011. Photo credit: Gage Skidmore. Licenced under Creative Commons

THE U.S.PRESIDENT-ELECT, Donald Trump (above), had few kind words for China during the presidential election campaign. He accused it of stealing millions of American manufacturing jobs and threatened protectionist tariffs against Chinese exports.

Yet to China he was the preferable candidate. His Democratic rival, Hillary Clinton, was seen, on the basis of having been seen at close quarters as U.S. secretary of state, to be no bosom buddy of Beijing.

The maverick nature of Trump’s campaign and his questioning of the basis of the United States’ traditional security alliances had, however, caused some optimism in Beijing that his election would weaken America’s international standing in the region and that his reservations about free-trade agreements would kill the Trans-Pacific Partnership (TPP), the economic prop of Washington’s ‘Asian pivot’.

However, set against that the uncertainty and volatility in regional affairs that a prospective Trump presidency will bring, in particular on the Korean peninsula. Beijing does not like uncertainty, and there less than anywhere.

Worse, long-cultivated contacts with the Washington China-policy and financial elite have been rendered for nought by the imminent arrival of a US president who at 70 has never held elected office and so has no track record, no known team and no known thought-through China strategy. Beijing also has reason to fear that Trump’s victory will put at risk the forces of globalisation that have propelled China’s economic and thus global ascendency.

It is unrealistic to expect that a Trump administration can repatriate low-wage manufacturing jobs. Those that automation and technology have not rendered redundant are already going to Vietnam and elsewhere in Southeast Asia if they are going anywhere as China ‘rebalances’. Moreover, China is only one aspect of the economic trends that are transforming the US economy in a way that leaves so many Americans, especially older, white ones, feeling left behind, a sentiment Trump so expertly tapped during his election campaign.

That is not to say that Beijing will not try to score points against electoral democracy, though it will not want to examine too closely the insurgence of rank-and-file voters against a ruling political class. Beijing is also unlikely to pass the opportunity to take an early measure of the next US president, probably by being more assertive in the South China Sea.

That, though, is a double-edged sword. It risks prodding Trump in the direction of politicising the issue rather than contesting it on legalistic grounds — such as through asserting freedom of navigation rights and using the UN Convention on the Law of the Sea. That approach, adopted by the Obama administration, has given Beijing scope to build its presence in the South China Sea with a lessened risk of direct US military confrontation.

Beijing’s scope for action now will also be tempered by the reactions of other regional nations to Trump’s election victory. Japan, for one, may see an opportunity to fill a potential vacuum both by building up its military capabilities and by being more active with its development aid and investment in the region. The Asian Development Bank, which falls under its sway, easily outguns the Beijing-created Asian Infrastructure Investment Bank.

South Korea, too, may end up with nuclear weapons from a Trump administration, a development that would be unwelcome in Beijing, not least because it ups the nuclear stakes on the peninsula, elevating the risk of instability that Beijing so abhors.

Further south, the Philippines, Malaysia, Thailand and Indonesia are all calculating where their strategic interests lie between China and the United States.

There has been a quiet (pace the Philippines new president Rodrigo Duterte) shift of emphasis towards developing stronger economic links with China while retaining Washington’s security umbrella. That shift will be being recalibrated in the light of candidate Trump’s criticism that US security partners are ‘free-loading’.

He is not the first US president to have made that complaint, but few have suggested that the US will take its umbrella away if its regional allies do not contribute their fair share to the costs.

Whether President Trump will take the same view as candidate Trump on this and all the other issues that touch on China is probably as much of a guess in Beijing as it is in the rest of the region, and even possibly, at this point, in Washington.

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