U.S.–China Week: Trade-North Korea linkage, Pence in region, currency turnabout, Scarborough calm (2017.04.17)

Welcome to Issue 96 of U.S.–China Week. Vice President Mike Pence is currently on a trip to South Korea, Japan, Indonesia, and Australia. The White House provided some material on a press call, and his remarks with South Korean Acting President Hwang Kyo-ahn included a renewed commitment to complete deployment of the THAAD missile defense system. Pence also explicitly linked U.S. strikes in Syria and Afghanistan to North Korea: “Just in the past two weeks, the world witnessed the strength and resolve of our new President in actions taken in Syria and Afghanistan. North Korea would do well not to test his resolve—or the strength of the Armed Forces of the United States in this region.” Chinese Ministry of Foreign Affairs spokesperson Lu Kang spent his Monday briefing largely on Pence-related questions, but revealed little new. Secretary of State Rex Tillerson and State Councilor Yang Jiechi meanwhile spoke by telephone during Pence’s trip (MFA readout, Xinhua English). Plenty more on North Korea in the first item below.

Continuing my occasional series of recommendations for other U.S.–China relations resources out there, I’d like to highlight the new think tank Intellisia‘s 中美问题周报 (China–U.S. Issues Weekly), which has been around for just a couple of months but provides a consistent feed of coverage, analysis, and commentary. The newsletter isn’t available on the web just yet, but you you can e-mail [email protected] to subscribe.

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LINKAGE
Trump says he offered Xi a better economic deal for help on North Korea; Missile launch ends quickly in explosion

In a WSJ interview, President Donald Trump said he told President Xi Jinping: “‘You want to make a great deal? Solve the problem in North Korea.’ That’s worth having deficits. And that’s worth having not as good a trade deal as I would normally be able to make.” On Twitter, Trump underlined his offer to give China better terms “if they solve the North Korean problem” and suggested the deal was on as he justified reversal on a promise to name China as a currency manipulator: “Why would I call China a currency manipulator when they are working with us on the North Korean problem?” After Xi had returned home, Xinhua reported that Xi told Trump in a phone call that China “is ready to maintain communication and coordination” with the United States on North Korea. (Xinhua also reported that Trump said he looked forward to a state visit to China “this year,” following less certainty on the dates in U.S. statements last week.)

The context for all this U.S.–China rhetoric was the much-anticipated annual holiday in North Korea celebrating the birth of Kim Jong Un’s grandfather Kim Il Sung. After the United States sent an aircraft carrier group to the region in a show of force, the holiday passed with a military parade (Ankit Panda’s analysis here) and, a day later, a missile launch that U.S. and South Korean authorities said was a failure. An NBC News story had reported that “multiple senior U.S. intelligence officials” said the United States was “prepared to launch a preemptive strike with conventional weapons against North Korea should officials become convinced that North Korea is about to follow through with a nuclear weapons test.” While the U.S. military is no doubt prepared for contingencies including a preemptive strike, neither a North Korean nuclear test nor any apparent U.S. military response to the missile launch was reported. A much clearer preemption question would arise if U.S. intelligence indicates North Korea has prepared a missile with a nuclear warhead on it.

ANALYSIS: In a remarkable TV clip, Trump told Fox Business his version of events at the Mar-a-Lago dinner table when Trump told Xi the U.S. missile strike on Syria had already been launched. Not only did he tell Xi over chocolate cake, he said, but he seemed to indicate he made the final go-ahead order there. There was plenty of debate over whether the timing of the launch was intended as a message to Xi about North Korea. Pence’s statement above in this edition suggests it was. Given that message, and given the very public redirection of a carrier group to the region, Trump had entered a game of chicken with North Korea that had downside risks including the destruction of Seoul and nuclear war. This type of bluster was, to my mind, fabulously dangerous. It put the United States in a position to start a kinetic war or, when it did not respond to a missile launch or nuclear test, to reveal its show of force was for show indeed. A strategic thinker might spin a yarn that would make such brinksmanship an acceptable risk, but the U.S. administration has shown no signs of a forward-looking plan.

The era of strategic patience is over, we are repeatedly told, but the alternative offered seems to be more continuous than not: a continued ratcheting of sanctions-based pressure, and continued efforts to coax China into doing the White House’s bidding without a strong theory of change on the North Korean side. The discontinuity seems to be in very visibly threatening military action, as opposed to the reported Obama-era efforts to quietly disrupt North Korea’s missile program by interfering with computer systems. At best, this is strategic impatience. Former Secretary of Defense William Perry writes that the Trump administration’s moves mean “the credibility of American military action today is roughly comparable to what it was in 1994,” when Kim Il Sung requested negotiations. At worst, the under-staffed and deeply divided Trump team is incapable of acting according to a consistent strategy.

CURRENCY
Trump backs off promise to name China ‘currency manipulator’

Reuters reported: “Trump said on Wednesday that his administration will not label China a currency manipulator, backing away from a campaign promise, even as he said the U.S. dollar was ‘getting too strong’ and would eventually hurt the economy.” In this week’s WSJ interview, he said flatly: “They’re not currency manipulators.” Later in the week, the Treasury Department released its report on exchange rate policies and indeed did not name China as a currency manipulator, but instead put China on a “monitoring list” for economies that “merit close attention to their currency practices.”

ANALYSIS: The WSJ interview was full of examples of Trump backing away from things he’d said before. This doesn’t immediately help his credibility, but it may be a sign that impractical or damaging promises from the campaign are especially not credible. Take, for example, his language in reversing his position against the Ex-Im Bank: “I will tell you what, I was very much opposed to Ex-Im Bank, because I said what do we need that for IBM and for General Electric and all these — it turns out that, first of all lots of small companies will really be helped.” I find myself reading the phrase “it turns out that” together with his statement on North Korea that “after listening [to Xi] for 10 minutes I realized that not — it’s not so easy” and other wording seeming to justify changed views. It is not encouraging that the U.S. president is only now thinking through important policy issues, nor that he’s getting schooled by a foreign head of state. It might be encouraging, however, that his narrative seems to clear a path toward a less radical policy approach. We’ll see.

TRADE + INVESTMENT

  • Jennifer Harris of CFR argues at Lawfare that the U.S.–China investment relationship calls for modest reforms to CFIUS (while maintaining its national security focus) but that broader changes are needed to achieve greater reciprocity in investment.
  • FT reported that former Trump campaign chairman Paul Manafort is advising a Chinese billionaire on how to profit from Trump’s promise of infrastructure development. Manafort reportedly met Yan Jiehe in Shanghai this month.
  • A China Daily op-ed paints an appealing picture for Chinese investment in U.S. infrastructure, but it also raises important questions: How will projects be structured to provide investors with a sustained revenue stream? Will U.S. local governments develop public-private partnerships (PPPs) that make appealing investment vehicles for Chinese capital? These are not new questions, and it’s unclear so far how Trump’s potential initiative would address them.
  • U.S. hospital chains are entering the Chinese market through partnerships with Chinese companies, Caixin reported.
  • Reuters reported: “China’s Anbang Insurance Group will let its agreement to acquire U.S. annuities and life insurer Fidelity & Guaranty Life for $1.6 billion lapse, after failing to secure all the necessary regulatory approvals, people familiar with the matter said.”
  • Japan’s government rejected U.S. overtures for trade talks as part of a bilateral economic dialogue set to begin April 18, Asahi reported.
  • White House spokesman Sean Spicer said Trump got a “big prize” during the meeting with Xi related to U.S. beef exports to China, Bloomberg reported. There was no news in specific, but Spicer said “the plan was to put together a plan.”

SOUTH CHINA SEA
Chinese authorities control access but allow Philippine fishing inside Scarborough; Duterte cancels flag-planting trip

At The Diplomat, Steven Stashwick proposed that Philippine fishing crews near and inside Scarborough Shoal in the Spratly Islands “can act as ‘canaries in the coal mine,’ warning of impending Chinese designs on the Shoal. If China suddenly revokes their access to the Shoal, it sends a clear strategic warning and indication to the United States to marshal diplomatic and military responses well before any construction would be able to take place.” This idea follows Reuters reporting from Scarborough that Chinese authorities still on the scene are not generally stopping Philippine fishing boats from entering the lagoon inside the shoal, possibly indicating at least partial adherence to the UNCLOS Tribunal ruling. Philippine President Rodrigo Duterte, meanwhile, reportedly cancelled a plan to visit the largest Philippine-occupied island in the Spratlys after having told reporters earlier this month “I have ordered the armed forces to occupy all—these so many islands, I think nine or 10—put up structures and the Philippine flag.” In cancelling, Duterte said he was following Chinese wishes: “Because of our friendship with China and because we value your friendship I will not go there to raise the Philippine flag,” he said. “They said, do not go there in the meantime… I will correct myself because we value our friendship with China.”

ANALYSIS: If fishing crews act as “canaries in a coal mine,” they will do so only on further expansion of Chinese control, not on the apparently quite solidified presence China already has in the Spratlys. Since the U.S. Navy hasn’t been making gestures such as publicized “freedom of navigation” operations, it would appear this quiet moment is an opportunity to consider what end-state a U.S. policy should seek in the South China Sea. My guess is there will be little appetite for acceding to Chinese sensitivities in the way Duterte reportedly has done, but a serious rollback of Chinese presence in the area seems increasingly unlikely. The prominence of the Korean Peninsula in recent months leaves the South China Sea to simmer, but without active thinking on the U.S. part, I anticipate interests within the U.S. government eventually pushing for assertive measures. Will Trump’s team push back or go along?

#USChinaWeek1967
‘A Soviet-Chinese Accord on Aid to Hanoi Reported: U.S. Officials Believe an Agreement to Speed Transit of War Supplies Was Reached in Last 6 Weeks

“WASHINGTON, April 11[, 1967]—United States officials said today that the Soviet Union and Communist China had apparently worked out an understanding to speed the flow of Soviet military supplies to North Vietnam across China. These officials, citing reports from countries with good diplomatic contacts in Communist capitals, believe that an arrangement was made by North Vietnam with the two feuding Communist countries in the last six weeks. … Moscow has persistently charged that Peking is interfering with the passage of Soviet missiles, jet planes, anti aircraft guns and other military equipment moving on the Chinese railways to North Vietnam. At one point, Moscow bitterly accused the Chinese of stealing equipment, removing parts from complicated missile systems, and even substituting used fighter planes for new ones. American officials, assuming that the Russians were attempting to discredit the Chinese in the eyes of other Communist nations, have always considered the Soviet charges exaggerated.”

(Source: The New York TimesThis entry is part of an ongoing feature of U.S.–China Week that follows U.S.–China relations as they developed in another era of change and uncertainty, 50 years ago.)

ABOUT U.S.–CHINA WEEK

U.S.–China Week is a weekly news and analysis brief that covers important developments in U.S.–China relations and features especially insightful or influential new policy analysis.

Graham Webster is a senior research scholar, lecturer, and senior fellow of the Paul Tsai China Center at Yale Law School, where he specializes in U.S.–China diplomatic, security, and economic relations through research and Track II dialogues. He is also a fellow for China and East Asia with the EastWest Institute. His website is gwbstr.com.

Disclaimer: Opinions expressed here are my own (and I reserve the right to change my mind).

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Contact: Follow me on Twitter at @gwbstr. Send e-mail to [email protected].