Trump Triggers Trade-offs in Geopolitics

This week India and China met to talk peace. What caused the change in China’s approach with India? The state of China’s economy and the possibility of Trump 2.0. Trump’s brand of geo-economics has triggered a quest for trade-offs in financial markets and in geopolitics. While pollsters in the US say the race is too close to call, consensus elsewhere is zeroing on Trump. In 2016 the debate was whether to take Trump literally or seriously. In 2024 it seems they are taking Trump literally and seriously.

Shankkar Aiyar | The Third Eye | The New Indian Express | 27 Oct 2024

It was 8 pm in Beijing, 5:30 pm in New Delhi, 3 pm in Kazan in Russia and 8 am in Washington DC. The world paused to register the headline moment flashing across screens, as the leaders of two nations accounting for a third of humanity met.

It was the first bilateral meeting between Prime Minister Narendra Modi and Chinese President Xi Jinping after five years of conflict triggered by China’s expansionism. It is early days to assess if the thaw will last and deliver?—?on the face of it, the two countries agreed on a patrolling arrangement along the Line of Actual Control and have talked about talking to reduce tensions.

The big question is what caused the change in China’s approach considering that the “deal” was on the table for over four years. The answer is embedded in a confluence of circumstances. The deterioration in the state of the Chinese economy juxtaposed on the plausibility of a possible second Trump presidency.

The risk of Trump II is real for China. Barring post-Covid 2021, its GDP growth has not crossed the 7.9 percent recorded in 2012 , the year Xi took charge. Data shows China’s economy grew at 4.8 per cent in the first nine months of this year and growth in the third quarter was the slowest in six quarters. The worsening state of real estate has afflicted consumption and employment.

This week saw 3.2 million of young Chinese apply for 39,700 government posts. Hope rests on manufacturing capacity which accounts for a fourth of its GDP . But to monetise this, China needs markets- India’s imports netted USD 101 billion in 2023–24.

Enter the Trump brand of geo-economics. Trump told the Chicago Economic Club that the most beautiful word in the dictionary is ‘tariff’. Trump plans to leverage the size of the US economy and impose 10–20 per cent tariffs on all imports into the US and a targeted 60 per cent tariff on all Chinese imports.

In 2023, the total value of US imports was $3.35 trillion , of which China accounted for over $47 billion a month or roughly USD 550 billion. China is already facing tariffs, and scrutiny on investments and the target of strong bipartisan anger and angst.

China’s use of proxy routes ?—?through investments to circumvent tariff barriers?—?is no longer a secret. The rise of Mexico as the largest trading partner of the US has triggered scrutiny of its southern neighbour that has attracted investment from Chinese companies.

Trump has threatened a 2000 per cent tariff on cars built in Mexico, even as the US is already reviewing automotive imports from Mexico under the USMCA rules of origin clause. Trump has spared none in his tariff theology. He has dubbed India the “highest tariff charger ”, vowed reciprocal action and pledged to block the acquisition of US Steel by Japanese Nippon Steel .

The European Union has come in for special mention. Trump told the “lovely EU ”, which accounted for USD 542 billion of US imports in 2023, to brace for tariffs. Predictably, this sent tremors across Europe, particularly in Germany , which is already in contraction, and France , which faces a debt-to-GDP ratio of over 110 percent. Trump has brusquely brushed off criticism in Chicago, studies by think tanks and warnings by the IMF of contraction in the world economy.

The financial markets have assessed Trumponomics and crafted a playbook hash-tagged #TrumpTrade ?—?bearish on bonds on inflation expectations and bullish on stocks on hopes of cuts in taxes and regulatory binds. There is no playbook yet hash-tagged for the spectrum of geopolitical issues, but the possible return of Trump has triggered the quest for trade-offs, pre-emptive moves to insure from risks.

Last month, President Volodymyr Zelenskyy sought time in New York to understand Trump’s plans to end the war in Ukraine. Also in the queue was Prime Minister Keir Starmer seeking to underline the special relationship between the US and the UK; the effort didn’t age well as the Trump campaign filed an extraordinary complaint against Starmer’s Labour party for what it claims is “interference” in the US presidential election. This week saw German Chancellor Olaf Scholz in New Delhi seeking to boost economic ties.

The existential question about Taiwan surfaced following China’s war games, described as the ‘anaconda strategy ’, around Taiwan. The US responded by sending a warship through the Taiwan Strait even as former US National Security Adviser John Bolton warned Taiwan could “potentially be toast if Trump wins”.

The possibility of a Trump presidency has also emboldened risk-taking. Reports that are yet to be conclusively proved or denied claim Russia has inducted North Korean troops for the war in Ukraine. In West Asia and Europe,it is clear that all hopes for peace and the definition of its contours await the election of the next US president. On Saturday, Israel bombed military targets in Iran a day after Secretary of State Antony Blinken failed to seal a ceasefire in Gaza and Lebanon with West Asian leaders in London.

The outcome of the US election will be known after November 5. This week, a CNN poll found the contenders locked in a tie on the final stretch; most polls suggest the result is TCTC or too close to call . For whatever reason, consensus outside the US is zeroing on Trump. In 2016, the debate was whether Trump must be taken literally or seriously. In 2024, it would seem Trump is being taken both literally and seriously.

Shankkar Aiyar , political economy analyst, is author of ‘Accidental India ’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution ’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions ’.

You can email him at [email protected] and follow him on X / Twitter @ShankkarAiyar . This column was first published here. His previous columns can be found here .