Bloomberg Briefs

Q: How do you see the U.S.-China relationship evolving?

A: I am expecting a rise in U.S.-China tensions and volatility later this year. The Trump administration appears to be deeply divided about how to approach China, with both hawks and moderates voicing strong views. Trump has articulated fairly antagonistic views about China. The moderates have taken the lead right now, as seen in the reversal on the “One China policy,” invitation to Xi to Mar-a-Lago and not naming China a currency manipulator on Trump’s first day. I don’t think this approach is sustainable. The hawks on trade and security issues will assert themselves in part because the Chinese won’t give Trump what he wants on trade and investment liberalization, on North Korea, and on the South China Sea. The Trump administration will grow impatient with the difficulty of extracting meaningful cooperation from China.

Q: What would happen if Trump imposed high trade tariffs on China?

A: It is very unlikely Trump will impose a 45 percent across-the-board tariff on China. That threat was pure campaign rhetoric and many in Congress already oppose similar measures such as a border-adjustment tax. Rather, there is a high probability that Trump will adopt aggressive trade and investment restrictions on China in the form of antidumping and anti-subsidy actions.

Q: Has Trump’s about-face on the “One China policy” removed this issue as a potential source of tension?

A: Trump and his advisers are not yet done with the Taiwan issue. Trump did a U-turn on the “One China policy”
because he thinks Xi will give him something for it. If the Chinese don’t reciprocate on North Korea, Trump’s
team may revisit U.S.-Taiwan relations.

Q: Is there any merit in suggestions that China is a currency manipulator?

A: No, in the sense of manipulating for deliberate economic advantage. The Chinese have since mid-2014 been
selling foreign exchange reserves to prop up the RMB, not to keep it artificially low to generate an export benefit.

Q: Where do you see Japan’s relations with the U.S. going?

A: The U.S.-Japan relationship is a clear bright spot in Trump’s Asia policy. Trump and Abe have a strong personal
connection, which provides ballast and direction. This burgeoning “geopolitical bromance” will be a pillar of Trump’s Asia policy. However, the real bilateral challenge is trade. Abe wants the U.S. to rejoin the Trans-Pacific Partnership and thinks he can persuade Trump to do so over the next year. Trump wants a bilateral free trade agreement.

Q: What Asia issue worries you most?

A: North Korea, full stop. It is the single biggest threat to regional stability and financial markets. The security threat to the United States and its Asian allies is growing and the window for Trump to deal with this is rapidly closing. At a minimum, we should expect major U.S.-China tensions over North Korea; and if the North takes very provocative actions like conducting an ICBM test, we could see broader instability. Trump will try enhanced sanctions for the next year but if they don’t work, I expect more coercive measures.

Q: Do you see the election of Carrie Lam as Hong Kong’s chief executive as a potential flashpoint?

A: I see it as a potential turning point, if Carrie Lam directly addresses the mounting economic and social
frustrations. The key challenge is how she will address the enduring frustrations — high property costs, few employment opportunities — at the heart of much of the social discontent.

Q: How do you see the South China Sea dispute playing out?

A: The South China Sea situation has largely stabilized due to Philippine President Rodrigo Duterte’s efforts to
seek a diplomatic solution with Beijing. Also, China recognized that after the July 2016 international arbitration ruling against it, it was better off stabilizing the situation than pushing for more.

Q: Which Asian markets are most attractive for investors and why?

A: The most attractive are what I like to call the V-I-P: Vietnam, Indonesia and the Philippines. For structural reasons, all three economies will continue to grow even amid a soft global growth outlook.

Interviewed by Colin Simpson on March 27, 2017 (Bloomberg Briefs).