The Trade Wars Begin, But Where Do They End?

Tit-for-tat tariffs; optimism in Korea; MMRCA 2.0

The Big One.

The trade wars begin.

Dock, Container, Export, Cargo, Freight, ShippingThe U.S.-China trade war has kicked off in earnest, following last week’s imposition of tariffs by the United States on $34 billion in Chinese goods. China retaliated immediately by also imposing equivalent tariffs. The bigger picture is a slow-boil lurch toward protectionism, spurred primarily by policies undertaken by the Trump administration in the United States. As this newsletter went out, China was subjecting the following U.S. products to tariffs: soybeans, sorghum, pork, seafood, electric cars, whiskey, lobster, salmon, cigars. On the other side, the United States was subjecting Chinese steel, aluminum, plastics, chemicals, machinery, boat parts, flash drives, thermostats, batteries, remote controls to tariffs.

This trade war isn’t going anywhere anytime soon. There’s little sign that the U.S.-China Comprehensive Economic Dialogue process will near a breakthrough acceptable to the Trump administration. This is partly the case because the Trump administration has not yet made clear a list of demands for China; what Trump abhors in his marrow is the very fact that the U.S. runs a trade deficit with China, viewing the word “deficit” itself in a trade context as a failure. (It is anything but.)

The potential for escalation and contagion exists, but, curiously, U.S. and Chinese equity markets have been mostly unfazed by the July 6 tariff implementations. Major U.S. and Chinese stock indices have remained mostly stable, suggesting perhaps that investors have priced in trade war risks through the first half of the year. (Recall that U.S. markets grew especially volatile in January and February as it became clear that the trade war agenda was very real for the Trump administration.)

So far, China’s position on trade has been as clear as it has been for months (at least since 2017): Beijing will retaliate while applying principles of reciprocity and proportionality. That means the onus on escalation through this trade war will remain in Washington—something many proponents of the Trumpian approach see as a strength. The trump card (pardon the pun) for China will be possible asymmetric retaliatory moves. For instance, we may see the People’s Bank of China begin to adopt a less risk-averse approach to managing the renminbi.

Bottom Line: Buckle up for a potentially long trade war. If the global economic pain hasn’t hit just yet, it might not be too long—especially if the U.S. follows through with an expanded tariff implementation on up to $200 billion more of Chinese products.

Northeast Asia.

I’ve returned from a nearly two-week trip to South Korea, where I was able to speak with a range of opinion-shapers, policy-makers, lawmakers, and other elites about the dramatic bout of diplomacy with North Korea that has taken place since the Winter Olympic Games earlier this year. A few core observations:

  1. South Korean policymakers are concerned about the ability to sustain inter-Korean rapprochement without moderate sanctions relief for North Korea. Unlike the aftermath of previous inter-Korean summits, President Moon Jae-in’s hands are tied on economic cooperation by UN Security Council sanctions resolution, which expanded their ambit dramatically last year. Until those sanctions are reversed, South Korea can only really pursue cultural, people-to-people, military confidence-building, and political exchanges with the North.

  2. There is concern in South Korea that a collapse in the U.S.-North Korea diplomatic process could seriously jeopardize the implementation of the April 27 Panmunjom Declaration. Many interlocutors also expressed concern that bumpy diplomacy with North Korea could empower U.S. hawks (like Trump’s national security adviser, John Bolton).

  3. The U.S.-South Korea alliance is in more trouble than external observers might realize and not for the reasons one might think. Trump’s unilateral decision to announce the cancellation of joint exercises after the June 12 summit in Singapore isn’t the problem; rather, it’s a broader and growing skepticism among South Korean progressives about the purpose of the alliance itself. Assuming that peace persists on the Peninsula, many Korean policy-makers are disinterested in revisiting the purpose of alliance to, for instance, serve as an overt tool for balancing China. (Many in Seoul are fundamentally wrangling with South Korea’s fate amid the growing competitive dynamic between China and the United States.)

  4. On ‘denuclearization’, there’s a real debate in South Korea. Unfortunately, members of the Moon administration and many South Korean progressives I spoke to genuinely believed that there was a realizable path to North Korea’s disarmament in the short-to-near-term. I was not provided with a compelling theory of why this felt true to many South Koreans, but I suspect it was more a function of the general optimism about the inter-Korean process. Many other interlocutors, including independent experts and academics, were clearer about their view that North Korea would not be denuclearizing.

Bottom Line: There’s a pervasive belief among partisans of the Moon administration in South Korea—and among a significant portion of the policy elite—that this time, the inter-Korean process with North Korea will be different. Whether or not things pan out, South Korean optimism will be an important sustainer of current peace efforts.

In southwestern Japan, the effects of unusually harsh rainfall have been tragic. More than 150 people have died, the highest death toll from a flood in the country in 30 years, and 2 million people have left their homes. Displacement and economic damage from these devastating rains are likely to be felt for a while.

South Asia.

Pakistan’s march toward general elections later this month continues. Even as the security situation in the country has improved over recent years, the Pakistani Military has announced that it will deploy as many as 371,388 troops to provide security coverage at polling centers around the country. That represents a five-fold increase since 2013 and highlights the creeping militarization of Pakistani democracy.

Meanwhile, Pakistan Tehreek-e-Insaaf’s leader Imran Khan announced a political manifesto ahead of the election, promising a “New Pakistan.” Khan’s candidacy for the prime ministership, once seen as remote, may be less so depending possible coalition formation talks that may be necessary if no one party posts a decisive result. (Khan is also perceived to have the backing of the Army—a powerful backer in a country like Pakistan.) Khan has seized on Pakistan’s blasphemy laws recently, too, to win the support of the country’s growing politically active Islamist hardliners.

Bottom Line: Pakistan’s elections will be messy, consequential, and likely not as free of the military’s long arm as its democrats would like.

Elsewhere in South Asia, too, elections are anticipated later this year. Keep an eye out for Bhutan’s National Assembly elections; Bangladesh’s general elections; and, in the Indian Ocean, presidential elections in Maldives.

Southeast Asia.

Malaysia’s new and old prime minister, Mahathir Mohammad, now 93 years old, continues to make dramatic moves, pursuing a sort of ‘dual track’ approach to managing Chinese capital in Malaysia. Earlier this month, he announced that he would freeze China-backed projects worth $20 billion, even while entering talks with China to plan for an eventual visit to the country. The prime minister is seeking to talk to China while reviewing deals entered into by his predecessor, Najib Razak. (Najib, now charged with corruption-related offenses, has his own problems.) Mahathir is conducting a review of the costs of the 1MDB scandal and there’ll be a lot to uncover and understand. The Diplomat’s Luke Hunt has more.

Bottom Line: Mahathir’s so far keeping up with many of his campaign promises, at least as far as the country’s thinking about Chinese investment goes. Watch this space closely.

The story that briefly and dramatically grabbed the world’s attention came to a happy conclusion: Thai rescuers were able to successfully rescue all 12 boys and their soccer coach who’d been trapped in a network of caves. The Diplomat’s Luke Hunt has more coverage.

Also, in case you missed it, Prashanth Parameswaran and I recently discussed the implications of Vietnam’s anti-Chinese protests on regional geopolitics on the podcast.

Central Asia.

Traveling to Uzbekistan is about to get a lot easier as of July 15. As Katie Putz explored over at our Crossroads Asia channel, Tashkent is poised to introduce e-visas—a remarkable step for what was a terribly repressive and insular country. The move is part of the ongoing reform process being stewarded by President Shavkat Mirziyoyev. As Katie notes, “Easing the barriers to entry is sure to satisfy not just tourists and those involved in the tourism sector, but international investors as well.” Investors no doubt will be pleased to see an important structural change on travel to and from the country. While the e-visas will make it easier for foreigners to travel into Uzbekistan from all over the world, the issue of exit visas for Uzbek citizens will take longer to see reform. That system will be done away with on New Year’s Day 2019.

Bottom Line: Uzbekistan continues to open up to the world.

Asian Defense.

Everything that is old is new again. If you’re an #avgeek or generally interested in defense commercial issues, you’ve probably heard of the ‘MMRCA’—once called the mother of all defense deals. This was India’s competition to find a suitable Medium Multi-Role Combat Aircraft, which formally crashed and burned in 2015. The tender for 126 jets never saw the light of day.

Rafale - RIAT 2009 (3751416421).jpgThe problem is that the Indian Air Force really needs fighters—and fast. The IAF is far below its sanctioned strength. Enter what is effectively MMRCA 2.0: six foreign manufacturers are have submitted Requests For Information (RFI) to the Indian government. We have familiar faces from the original MMRCA process, including Dassault’s Rafale, Saab’s Gripen E, and the Eurofighter Typhoon. The U.S. F-16 Block 70 and F/A-18 Block III are also reportedly under consideration.

And don’t miss what’s New Zealand’s largest-ever defense deal. The Royal New Zealand Air Force will operate four P-8 Poseidons, the most advanced anti-submarine warfare-optimized maritime surveillance aircraft.

Bottom Line: This will be a process to watch, with a potential multi-billion-dollar payoff for the winning firm, but experience suggests that we won’t see a quick and easy process. When it comes to Indian defense procurement, nothing is ever quick or easy.

Extras.

Kim Jong Un has picked up his on-site inspection routine in North Korea after the Singapore summit—and he’s got a new approach. North Korean propaganda images show Kim getting down-and-dirty during inspections in the country’s northwest, along the border with China. A few choice shots:

This one, in particular, draws a sharp juxtaposition with Kim’s June 11 nighttime drive around Singapore in his bulletproof Mercedes S600:

Also, we’re hiring writers at The Diplomat. If you’re a budding Central Asian analyst or a writer interested in Northeast Asian cultural affairs, please do consider applying.

Please do feel free to reach out with comments, tips, and feedback at either ankit@thediplomat.com and follow me on Twitter at @nktpnd and The Diplomat at @Diplomat_APAC.