Donald Trump's December 2 phone call with Tsai Ing-wen, the president of Taiwan, sent shock waves through China and much of the world. For nearly four decades it has been Washington's official policy to recognize only China, and not Taiwan. Trump has indicated that he thought he could threaten China with abandoning this policy, in order to bargain for other concessions.
This has to be one of the worst diplomatic miscalculations of all time for a president-elect, and we should add, his incoming administration ― since it was apparently not just another foot-in-mouth event for Trump but a deliberate strategy complete with lobbyist influence. China considers Taiwan to be a breakaway province, and would go to war to prevent its secession, just as President Lincoln went to war to keep the South within the United States.
In fact, there were calls in the Chinese media for narrowing the gap between China's nuclear arsenal and capability and that of the US. Don't be fooled by the Chinese government's relatively restrained reaction: they are giving Trump a chance to chart a different course before he takes office on January 20.
Bullying may have helped Trump in his real estate career, but it is not going to move China. The Chinese economy is now bigger than ours, on a purchasing power parity (PPP) basis, which is what matters when we are talking about such things as military expenditure: the cost of a Chinese-made plane or a Chinese pilot is considerably less than its dollar equivalent (at current exchange rates) in the US. When we had an arms race with the Soviet Union, its economy was a fraction the size of ours. If we have an arms race with China, we can forget about things like Medicare, which the Republicans already want to privatize.
Trump's ostensible reason for the hard line against China is that he wants to negotiate a better deal for US manufacturing, including for workers in the US. The big complaint here is that China has manipulated its currency, keeping it undervalued against the US dollar. This would make US imports from China artificially cheap, and US exports more expensive. But there is an easy way to deal with this: as any economist knows, the US Treasury Department and Federal Reserve can move the value of the dollar against foreign currencies, like any other country. In fact it is even easier for us than for other countries, since the world accepts the US dollar as the major international reserve currency.
Blaming China for the value of the dollar against their currency is therefore mistaken. The reason that our government doesn't intervene to push down the dollar is that powerful US transnational corporations (like Walmart) prefer an overvalued dollar because it makes imports and overseas labor cheaper for them. The financial sector also prefers it because it lowers inflation. These people don't care about manufacturing jobs in the US. When our government has negotiated with China over economic issues, it has fought for things that profit US corporations, like more patent and copyright protection and greater access for US financial corporations.
Ironically, China has actually been intervening to keep its own currency from falling, and has burned through about a quarter of its international reserves (about $1 trillion) since June 2015 doing this. At this point, the Chinese would likely welcome US intervention in the same direction, at least to keep the dollar from rising further.
So we will soon see if the new US presidential administration actually wants to do anything to preserve US manufacturing jobs. In the meantime, picking a fight with China over Taiwan is about the worst way it could start out, short of actual warfare.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research in Washington, D.C., and the president of Just Foreign Policy. He is also the author of the new book "Failed: What the 'Experts' Got Wrong About the Global Economy" (2015, Oxford University Press). You can subscribe to his columns here.