To date, the highlight of Donald Trump’s tumultuous presidency was 6 April, when he fired 59 Tomahawk missiles at Syria, winning high-fives and back slaps from even his most acerbic critics.
Trump may seek to relive that moment as scandals mount and popularity plunges. And that puts Asia directly in harm’s way.
Should Trump decide to wag the dog, this region has the two most obvious targets.
Tomahawks to Pyongyang is probably too risky even for the most reckless of administrations, leaving target No. 2—a trade war with China—the obvious choice.
And the odds are fast rising as the dynamics of these two targets feed one another in the mind of an untested White House.
Trade warfare became far more likely last week when Trump realized China’s Xi Jinping isn’t his foil. The real estate magnate-turned-president thought relationships mattered more than national interests. That by serving Xi the “most beautiful piece of chocolate cake that you’ve ever seen” at his Florida hideaway, as Trump put it, Xi would magically tighten the screws on Kim Jong-un. Poof, nuclear threat equalized. Beijing doesn’t do rapport. It sticks to its strategic guns.
Disappointed, Trump is already hinting at huge tariffs on steel imports. But Xi won’t budge, even if Trump ramps up the rhetorical-threat arms race.
Xi’s street cred is his persona as the most powerful Chinese leader since at least Deng Xiaoping. Giving concessions to the twitter-troll-in-chief, who’s accused China of “raping” American workers, is no more an option for Xi than for Vladimir Putin. Trump runs hot and cold, while Xi is a cool, poker-faced customer.
Trump’s 45% tariffs aren’t a certainty. They would savage US consumers—how could Walmart survive?—at least as much as China Inc. But logic hasn’t been Trump’s strong suit these last six months. Put that together with a bruised ego as Xi doesn’t bow to Trump’s whims, and you have a perfect storm of sorts bearing down on Asian markets.
It’s time to batten down the hatches. The chilling effect from American mercantilism would slam the most open and trade-reliant economies—Singapore, South Korea and Taiwan. But the real problem may be the shock value, a regional blow that would come in two waves. The first is the recalculation required as the biggest economy reads from the Venezuelan playbook—lower growth projections, altered current-account dynamics, currency volatility. The second is US policies that throw China—the world’s No. 2 economy—even more off-balance.
Investors betting on a mainland debt crisis made little money in the nine years since the last global crash. But that stability comes on borrowed time. By pumping tens of trillions of dollars of fresh credit into the economy, Beijing is just supporting older asset imbalances with newer ones.
Policymakers are juggling three overlapping bubbles in property, debt and credit (some might add Shanghai stocks to the list). Hard enough in the best of times, the feat becomes infinitely more perilous if China’s foundations are under threat from Washington.
Trump has even raised the spectre of defaulting on US debt to show his bankers in Asia who’s boss. This region, of course, is by far the biggest owner of US Treasuries, with Beijing and Tokyo together holding $2.2 trillion worth.
A Trump shock would fuel a bull market in Asian regret. New Delhi will lament not moving faster to reduce bad loans and address the current-account deficit. South Korea will rue the day it went easy on the giant family-run conglomerates damaging competitiveness.
Indonesia will regret not eradicating corruption, Thailand not implementing infrastructure projects soon, Malaysia failing to dismantle innovation-killing affirmative-action schemes and the Philippines shelving reforms. Japan will regret not putting deflation in the rear-view mirror. So will Xi as the export engine he planned to replace with services sputters as Trump tosses a grenade at Asian trade.
If implemented, Trump’s attack could easily knock 5% off China’s gross domestic product, as forecasters at Oxford Economics and elsewhere have estimated.
Then there’re the ways in which Beijing would retaliate—tit-for-tat levies on iPhones, General Motors cars and Starbucks coffee or new subsidies for China’s state-owned enterprises.
What if China dumped its Treasuries to drive up US borrowing costs? India, Indonesia and other current-account deficit nations would get whipsawed as interest rates and currencies gyrate.
China preferred Trump to Hillary Clinton for reasons his presidency so far makes abundantly clear. By scrapping the Trans-Pacific Partnership and Paris climate-change accord, insulting allies and having a testy relationship with the truth, Trump created a void China is gleefully filling. But buyer’s remorse may be just around the corner.
As Xi stands his ground, Trump’s bruised ego could be a clear and present economic danger. Perhaps not 59 Tomahawks, but executive actions by a leader desperate to change the narrative, damn the consequences in the most populous region.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek