Like a bull in a China-shop

The world’s relationship between the US and China is tense. Indeed, it should be – as the world’s largest bilateral economic relationship it affects everything from financial stability to global peace.

China, with its export-driven economy has always been a main target for the Trump administration and has been held responsible for American job losses. Indeed, Chinese exports to the US surged by 15% in 2017, leading to a record trade surplus with the US. President Trump has accused China of being a currency manipulator from the outset of his campaign. Since the beginning of his presidency, however, Trump has deliberately tried to have a diplomatic approach to China, as it was his intention to have a strong partner in dealing with the increasing threat of North Korea´s nuclear ambitions. The continuation of tension with North Korea and the halt of new US-Treasury purchasing programmes, however, has triggered concerns that a new and dangerous era for US-China relations is about to dawn.

Donald Trump´s questioning of Beijing´s “one China” stance – that is, of refusing to recognise Taiwan as a nation – had the potential to escalate tensions with China. Since then, however, China and the United States have navigated their relationship with relatively little friction. Since Donald Trump´s speech on national security, in which he declared China a rival power which is seeking to challenge American influence, tensions between the US and China are rising again.

The recent slowdown of long-dated US-Treasury purchases by the Bank of Japan was not just a sign of a new central-bank era of quantitative tightening, but also a reaffirmation of US debt-vulnerability. China is and has been the largest foreign buyer of US debt for a decade, holding about 19% of all global foreign debt. It is very possible that global monetary tightening in conjunction with a Chinese slowdown of US Treasury purchases, brings down the three-decade bond bull market.

Although Donald Trump is right to question China´s monetary policy, which involves the mass-purchasing of dollar assets with newly printed yuan, he ought to recognise the benefit the US accrues from this. China has kept yields on US-Treasuries consistently low, hence enabling the US to finance itself less expensively, which has in turn kept the deficit lower. The flip side, of course, is that the United States remains the largest market for Chinese goods. Taking into account that the two biggest economies in the world are incredibly dependent on and vulnerable to the vicissitudes of each other´s political decisions, it is in the best interest of both to maintain and foster prudent and peaceful relations. In the upcoming years, China will continue to diversify its economic assets, hence putting ever more pressure on US debt.

Donald Trump´s threat of imposing tariffs would lead to a dangerous war of reciprocal trade barriers and the possible dumping of US debt, which would not merely harm China and the US, but the global economy as a whole. Such a war is without question the biggest threat to the global economy in 2018, as it is almost impossible to predict Donald Trump´s foreign policy. Trump has to understand that China is economically armed and dangerous against the US if need be.

Likewise, it is vital to maintain a close relationship with China in order to increase pressure on North Korea and its ambitious nuclear weapons programme. China is North Korea´s most important trading partner, making up more than 90 percent of North Korea´s trade volume. China´s main priority on the Korean peninsula is stability and it regards North Korea as a buffer to the democratic South, which is home to around 29,000 US troops. In order to ensure peace on the Peninsula, it would be prudent for the president to seek warm US-China relations.