PRESIDENT Donald Trump never fails to surprise. Since coming to office, he has taken the world on a daily roller-coaster ride. The pendulum of US-China relations has swung from the threat of war, as White House chief strategist Steve Bannon hawkishly declared, to more recent conciliatory gestures. The rest of the world, including Singapore, will continue to watch relations between the two great powers with bated breath.

I have had the privilege of learning about US-China relations first-hand after being named a Public Intellectual Fellow by the National Committee of US-China Relations. During a recent visit to Washington DC, I joined other fellows in dialogue with various experts and government officials.

My first takeaway from the dialogues is that although Mr Trump’s personality brings tremendous uncertainty to foreign policy, there are moderating and stabilising forces within the US bureaucracy. In particular, experts on defence see little possibility of military warfare, as the American and Chinese military maintain multiple lines of open communication. Both sides understand the dire costs of outright conflict, despite whatever the president might say at whim.

My second takeaway is that although military warfare is unlikely, trade tensions will surely rise. Prior to his election, Trump called China a currency manipulator and threatened to slap tariffs, as high as 45 per cent, on Chinese imports. Once elected, Mr Trump placed America’s trade deficit with China, which stood at $347 billion in 2016, at the top of his agenda. Not only that, he emphasised the damage that this deficit has done to the American economy.

Peter Navarro, the top US trade official, espouses and reinforces Trump’s mercantilist view of trade. Even though Mr Navarro has recently toned down his combative stance, his guiding philosophy is clear: whenever import exceeds export, it must be a drag on growth.

As one expert experienced in commerce issues explained, Mr Trump’s renewed focus on the trade deficit is a striking departure from previous policies. Earlier US talks with China had mainly focused on opening China’s markets to American goods and investments. Underlying that belief was that if China progressed towards an open market and consumption-led growth, the trade deficit would naturally subside. Hence, the goal in the past was on pushing China to undertake capitalist reforms. By contrast, under the current administration, the priority is to cut imports from China, rather than to open China’s markets to American companies.

Under this protectionist climate, Section 301 of US Trade Law, which permits the United States to sanction countries for unfair trade practices, may be revived. This section was given up when the World Trade Organisation was formed. Once reactivated, the US may initiate more dumping and countervailing investigations against China, and potentially impose higher tariffs.

Meanwhile, China is clearly recalibrating its economy in preparation for rising protectionism. This process began years before President Trump’s election. The shock of the 2008 global financial crisis, which originated in the US but spread to China, shook the Chinese leadership. It exposed the vulnerability of China’s dependence on export manufacturing for economic growth.

To enhance its economic independence, China is taking a two-pronged approach. One is outward investment, most prominently through the “One Belt, One Road” initiative. The other approach, however, is little publicised: promoting industrial transfer within China — migration of capital and factories from wealthy but saturated coastal cities to poor inland locales. In 2010, China’s cabinet, the State Council, elevated industrial transfer to a national strategy, which prompted a suite of new policies to encourage inland migration.

What will rising trade tensions between the US and China mean for Singapore? As a highly trade-dependent economy, Singapore risks getting caught in the winds. If the US slaps higher tariffs on China, it will certainly lead to higher prices in the US market, as well as retaliation from China, which could spiral into a global recession.

At the same time, Singapore could respond more proactively to the evolving terrain. Gone are the days when the global economy was dominated by Western multinationals and China was defined by low-wage manufacturing. Today, China has become a formidable source of outward investment, and new hot spots are emerging in previously laggard parts of the country.

Curiously, the US and China appear to be switching roles. While Trump calls for a return to traditional US manufacturing in order to “bring jobs home”, China aspires to build innovative industries. China also has ambitious plans to connect its domestic regions into a national supply chain, augmented by growing ties with neighbouring economies.

For Singapore to adapt, it must understand that the world is not only changing but also virtually turning upside down.

—The Straits Times/Singapore

Published in Dawn, April 5th, 2017