Donald Trump’s phone call to Taiwan following the election, and more recent statements regarding a “One China” policy, have both disturbed leaders in Beijing.

Risk of a global trade war, which Trump seems itching to fight, is very real.

Please consider Beijing Hits Back at Donald Trump Over Taiwan Stance.

China has warned Donald Trump that the two countries will have “nothing to discuss” if his incoming administration discards the four-decade-old “One China” policy.

“Adherence to the One China policy is the political bedrock for development of [bilateral] relations,” Geng Shuang, a foreign ministry spokesman, said on Monday. “If compromised, there will be nothing to discuss on co-operation in major fields.”

Mr Geng was responding to comments that the president-elect made on Sunday in which he questioned whether his administration would continue to respect the One China policy and shun official contacts with Taiwan over which Beijing claims sovereignty.

Mr Trump’s remarks dramatically raised the stakes with China just a week after he broke diplomatic precedent by accepting a phone call from Taiwan’s leader, Tsai Ying-wen.

Earlier on Monday, a stinging editorial in the Global Times, an offshoot of the official People’s Daily, urged Mr Trump to “listen clearly, the One China policy cannot be traded”.

“China needs to wage resolute struggle against [Mr Trump],” it added, warning the president-elect that China “cannot be bullied easily”.

On Sunday, Mr Trump said he fully understood the One China policy, but was unconvinced by the logic. “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade,” he told Fox News.

Dennis Wilder, a China expert who served in the CIA and was the top Asia adviser to George W Bush, said that China would be watching to see whether Mr Trump was serious or whether he had been unwittingly pushed into a corner by his pro-Taiwan advisers. He said that Beijing would be hoping that Mr Trump really had not been aware of the call.

“Look, we’re being hurt very badly by China with [currency] devaluation, with taxing us heavy at the borders when we don’t tax them, and building a massive fortress in the middle of the South China Sea,” Mr Trump said. “And frankly, they’re not helping us at all with North Korea.”

Negotiating Tactic or Real?

This very well could be a negotiating tactic, but it’s also unclear how much China is willing to bend, if at all.

Meanwhile, everyone is scrambling to figure out precisely what Trump’s surprise phone call to Taiwan, means.

Playing Things Both Ways

Trump has a pronounced propensity to say and do anything, then back down later. Two prime examples include prosecuting Hillary and “clearing the swamp”.

On December 6, the Financial Times asked Is Trump using Taiwan as a China Bargaining Chip?

Is Trump preparing to shred US policy on Taiwan?

That depends who you ask. Vice-president elect Mike Pence said on Sunday that the conversation was nothing more than a “courtesy call”. Anthony Scaramucci, an aide to Mr Trump, said on Monday that “this is not a deviation in US policy”.

But Stephen Moore, an economic adviser to Mr Trump, insisted that Taiwan deserved greater American support because of its democratic system. “We oughta back our ally, and if China doesn’t like it, screw ‘em,” he told a radio station on Monday.

Mr Trump has tried to have it both ways. Initially playing down the call, on Sunday he linked it to Chinese policies on currency and the military build-up in the South China Sea.

Mr Trump’s inner circle has strong Taiwan connections. Reince Priebus, the incoming White House chief of staff, has visited Taiwan twice in recent years, and Ed Feulner, the former president of Heritage, the conservative think-tank who is on the transition team, visited the island after the election.

Not Just a “Courtesy Call”

It now obvious the Taiwan call was more than a “courtesy call” as described by Mike Pence a week ago.

More recently Trump stated “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.”

If this is a bargaining ploy, we do not know two critical things:

  1. What Trump is bargaining for
  2. What Trump is willing to settle for

It’s possible Trump wants to change US policy, and floated a trial balloon to see how China would react.

Whatever is going on, the risks of a blow-up one way or another leading to a global trade war are very real.

Trump believes the yuan is undervalued, but the IMF doesn’t. I have long held the opinion the Yuan could crash if floated.

Flashback January 16, 2010: Goldman Says “Something Brewing” in China on Currency; What’s Really Brewing Is “Trouble”

The way to let a currency trade against multiple currencies is to let it float. Given China’s rampant speculation, unsound bank lending practices, and enormous property bubble, if China was so bold as to float the Renminbi right now, it might collapse, perhaps after an initial move higher.

At that time everyone was in love with the yuan. Many believed the yuan would replace the US dollar as the world’s reserve currency.

Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

On April 27, 2011, I made this claim Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

In spite of all the hype regarding the Yuan as a reserve currency I have stated many times recently that discussion of the Yuan as a reserve currency is nothing but ridiculous hype.

My reasons are:

  • The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
  • China is a command economy
  • In China, property rights and civil rights are questionable
  • Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble

If reserve currency status was such a gift, why doesn’t China take the steps that would make it possible. Why doesn’t Europe?

The fact is, for all their bitching, nearly every country on the planet does not want to relinquish their “export growth model”. Every week there is some trumped-up report by someone about how China is trading more in the Yuan with Russia and Southeast Asia countries. In the grand scheme of things such trade in Yuan nearly meaningless, not representative of a significant adjustment.

Mathematically, the fact remains, the US runs a huge trade deficit, and countries accumulate US assets, most frequently US Treasuries.

China Not Prepared to Float the Yuan

China still has not floated the yuan, it still does not have large bond markets, it still has an enormous property bubble, and it still has insolvent banks and SOEs.

China also has a new problem, capital flight.

The irony in this mess is that if China floated the yuan, it very well could crash, even though Trump wants the yuan to strengthen.

Reserve currency? Put it on the back burner as I said long ago. Meanwhile, risk of a global trade war escalates on many fronts in the US, EU, and China.

Mike “Mish” Shedlock