James Trescothick

Education Manager at easyMarkets. Passionate about the markets, the excitement, the story driving the markets at the time, the fundamentals and even the technicals.

In his first meeting with Japanese Prime Minister Shinzo Abe, U.S. President Donald Trump vowed to help his ally safeguard national security against an increasingly hostile North Korea, which recently carried out a successful ballistic missile test. Trump’s comments have raised questions about growing hostility with China, which continues to support Pyongyang economically.

The United States is “committed to the security of Japan and all areas under its administrative control,”[1] Trump told reporters earlier this month at the Mar-a-Lago club in Florida, the site of his first meeting with Prime Minister Abe.

Trump had previously vowed to get tough on North Korea, a country with few diplomatic allies. The recent missile test may offer the President the opportunity to follow through on his pledge. Strengthening ties with Japan, a “great ally” of the United States, could be the easiest way of doing so.[2] Obviously, getting China on board to confront North Korea would be a big help for President Trump and his Japanese ally. Although there are signs that Beijing is becoming increasingly fed up with North Korea’s reluctance to pursue peace, there is no evidence it is willing cut off all links to its isolated neighbour.

China plays a powerful role in the North Korean economy, demonstrated by its recent decision to cancel coal imports from the country. China imported $1.89 billion in coal from North Korea last year. That accounts for roughly 76% of Beijing’s total imports from the country that year.[3] Chinese state-run media announced on Monday that the coal crackdown showed Beijing’s determination in finding a diplomatic resolution to North Korea’s nuclear program.

“Despite participating in UN sanctions, Chinese society’s friendship to the North remains unchanged. Chinese sanctions only target at its nuclear weapon program, and we are firmly opposed to Seoul’s political fantasy against Pyongyang,” the Global Times said in a Monday editorial.[4]

Assuming that China has no intention of turning its back on its North Korean ally, an increasingly committed American-Japanese axis could potentially threaten even greater instability in the region. China’s relationship with the U.S. has soured since Trump took office. The President has practically accused China of currency manipulation, and has vowed to renegotiate existing trade agreements with the country.

Trump’s stance on the yuan is one area that both political parties in Washington are willing to support, according to Republican Senator Lindsey Graham.

“There’s bipartisan support to declare China a currency manipulator,” said Graham, who was backed by Jeanne Shaheen, a New Hampshire Democrat.[5]

Although the U.S. has long accused Beijing of undervaluing its currency to strengthen its trade position, Trump would be the first to officially declare China a currency manipulator. In Trump’s defense, it’s difficult to argue this point.

The Chinese yuan operates on a pegged exchange system, which allows the central bank to intervene in the market as it deems necessary. The People’s Bank of China (PBOC) shocked the markets in August 2015 by cutting the daily reference rate on the yuan renminbi by nearly 2%, triggering the currency’s biggest one-day drop since January 1994.[6] Although the PBOC said the change was a one-time only adjustment, its currency would continue to fall throughout 2016, eventually reaching an eight-year low against the dollar.

China is currently facing a myriad of challenges related to capital outflows and slowing economic growth, forcing it to rely on its massive stash of foreign reserves to support the yuan. In January, the yuan renminbi gained nearly 1% against the U.S. dollar, its biggest advance since last March. That followed a 13% plunge in 2014-2016.[7]

It’s unclear how North Korea will influence U.S.-China relations. Some analysts are concerned that it could lead to another sparring match between the two great powers, who already appear divided on the question of globalization. Trump has already decreed that the United States will not participate in the Trans-Pacific Partnership (TPP), a move that could strengthen China’s trade position in the region.

It remains to be seen whether the Trump administration will make Japan a regional priority in the face of North Korean aggression. Trump’s unconventional style makes it difficult to predict whether he is really pivoting to Japan. At the present time, his “America first” policy is likely to prevail.

[1] VOA News (February 11, 2017). “Trump: US-Japan Alliance Foundation for Peace in East Asia Region.”

[2] Tara McKelvey (January 13, 2017). “Japan PM Shinzo Abe’s diplomatic hole in one with Trump.” BBC.

[3] Ben Blanchard and Philip Wen (February 20, 2017). “China wields stick with North Korea, but is still pushing for talks.” Reuters.

[4] Ben Blanchard and Philip Wen (February 20, 2017). “China wields stick with North Korea, but is still pushing for talks.” Reuters.

[5] Patrick Donahue (February 19, 20170. “Trump Seen Having Support If He Dubs China Yuan Manipulator.” Bloomberg

[6] Bloomberg News (August 10, 2015). “China Rattles Markets With Yuan Devaluation.”

[7] Patrick Donahue (February 19, 20170. “Trump Seen Having Support If He Dubs China Yuan Manipulator.” Bloomberg

Was this article helpful?

0 0 0