Trump’s trade policy leaves China wide open on its path to dominance

Donald Trump’s trade policy may ultimately result in lower trade deficits and better protection of American technology, but it is also myopic.

China’s global influence will rise as a result of Trump’s “America First” foreign policy, together with China’s rapid advance in technology and its One Belt One Road Initiative (OBOR).  

OBOR is a trillion-dollar infrastructure project across more than 60 countries in Asia, the Middle East and Africa. At an OBOR summit attended by 130 countries, China’s President Xi Jinping declared that the project will fill the vacuum left by Trump’s withdrawal from the Trans Pacific Partnership and other isolationist actions taken under America First.

Not only could China eclipse the United States in global trade, but OBOR will give China military presence and political alliances that could supplant America’s already-waning influence around the world.

{mosads}OBOR spans countries that hold 62 percent of the world population and produce 30 percent of global GDP. It covers trade routes from China through Central Asia and Russia to the Baltic Sea in Europe, and other land routes to the Persian Gulf, Mediterranean Sea, Southeast Asia and the Indian Ocean. There are also sea routes to Europe through the South China Sea and Indian Ocean and a planned railroad linking China to the Netherlands.

China is building highways, railways, and ports that it will ultimately control. It has invested or participated in nearly 1,700 projects over the past three years, including high-speed railways like the 750-km line from Addis Ababa to Djibouti, a 480-km railway from Mombasa to Nairobi and another from China to Laos and Thailand.

Chinese companies are building more than 60 energy projects in more than 20 countries, including oil and gas pipelines from Russia, Kazakhstan and Myanmar to China. It has helped countries build 56 industrial parks where it can locate companies for manufacturing and trade. More than 1,000 companies have already moved in to do business.

As of a year ago, 70 countries signed agreements  to participate in OBOR. In its first three years, more than 1000 Chinese companies invested in 56 projects in more than 20 countries, generating $1.6 billion in local tax revenue and 180,000 jobs.

To be sure, there is pushback. Ghana rejected a $3 billion oil infrastructure loan, due to onerous terms and a requirement that Chinese contractors build the project. Some countries are insisting on more details on environmental impact and project financing. Sri Lanka stopped the Hambantota port project because it threatened its sovereignty.

In other setbacks, Pakistan and Nepal pulled out of deals to build dams due to disagreements over terms. Nepal exited a $2.5 billion hydroelectric deal because of lack of competitive bidding. There’s also competition from India and Japan pursuing infrastructure projects in OBOR countries.

But none of this has stopped OBOR’s progress. Council on Foreign Relations senior fellow Ely Ratner warns that amid OBOR and “America First,” the U.S. is losing its geopolitical battle with China. If China dominates Asia, he argues, “many foreign policy achievements over the last 75 years will be lost, and it will take generations (at least) to revive central elements of today’s liberal international order.”

Trump’s efforts to stop forced technology transfer from U.S. companies to China have merit.  But China is rapidly growing its own technology and catching up to the U.S..  

In 2000, China’s R&D investment in technology was 5.7 percent of America’s. Today it’s more than 81 percent. China will eclipse the U.S. this year or next if the rates of R&D spending continue. Its patent acquisitions surpassed those of U.K. in 2003, France in 2005, Germany in 2009 and Japan in 2013.

The nation’s “Made in China 2025” plan, funded by billions of government dollars, is intended to upgrade its technology so it controls what it needs domestically and better diversifies its exports. One CFR researcher called Made in China 2025 “the central villain,the real existential threat to U.S. technological leadership.”

China’s technological advance will increase its influence around the world.  Countries that own essential technologies grow their exports, have healthier trade balances and enjoy leverage in negotiating trade and other agreements.

“America First” has been a gift to China. Trump chose to retreat from the world stage when he abandoned the TPP, cut the State Department’s staff, cut its ambassadors by 30 percent, cut aid to Latin America and reversed a friendly Cuba policy. All of this left a massive vacuum rapidly being filled by China.

Why did Trump make these choices? In sharp contrast to President Xi, Trump appears to choose policies based on what gets him adoration from his base instead of on what’s best for America.

His too-late attempt to rejoin TPP is a case in point. He abandoned it because his anti-trade rhetoric generated massive applause at his rallies. Subsequently, countries in the region, which account for nearly one third of Global GDP, signed pacts that included China and excluded the U.S. The U.S. lost a trade deal that eliminated import taxes on every type of American-manufactured and most agricultural products. Trump’s actions have also weakened U.S.  commitment to Southeast Asia and allowed China to freely bully nations in the region.

Republicans in the U.S. Congress won’t help change this policy direction, because they need Trump’s base to win elections. Trump’s approval ratings are 41 percent nationally and 86 percent among Republicans, versus 23 percent and 40 percent, respectively, for Congressional Republicans.

Sadly, America First is leaving America last.

Neil Baron advised various governments, including the U.S. Congress and Securities Exchange Commission, on management of distressed loan portfolios, capital requirements for banks and insurance companies with exposure to structured financing securities, developing secondary mortgage markets and rating agency reform. He represented Standard & Poor’s from 1968 to 1989, was Vice Chairman and General Counsel of Fitch Ratings from 1989 to 1998, and was on Assured Guaranty LTD’s board for a decade.