The views expressed in this report are those of the authors. Their statements are not necessarily endorsed by the affiliated organisations or the Global Challenges Foundation.

As the US retreats from global governance under President Trump, will China be able to peacefully take its place as the leading champion of a globalized world? Rising protectionism in the US, withdrawal from trade agreements, and appointment of anti-China figures in key cabinet positions signal danger for the bilateral relationship, and beyond, for the entire international economic system.

The victory of Donald Trump in the recent American election has sent shockwaves to the world as well as within the United States. While many Americans still need time to digest his victory, the world has already felt the impact of his moves to achieve his dream of “America First”. Unlike many of his predecessors who often forgot about their campaign promises, President Trump is very serious about them: he is turning his anti-globalization campaign rhetoric into concrete policies. This turn in the United States will not only slow down the process of global economic integration, but also affect global governance systems that have already become more tenuous as a multi-polar world emerges.

President Trump is determined to avert President Obama’s attempts to enhance American leadership in global governance. By far, his most audacious move is to withdraw from the Trans-Pacific Partnership (TPP), a treaty that President Obama spearheaded to conclude with eleven other countries along the Pacific Rim. The TPP is not just a trade agreement. Indeed, most studies have found that its impacts on American trade will be minimal. It is closer to a pact aiming to unify the regulatory frameworks of member countries according to American standards. From this perspective, it is a one-sided agreement benefiting American companies. President Trump’s withdrawal can be interpreted as a gesture signifying the rejection of multilateral mechanisms as a way to advance American interests – unless it was based on a false reading of the TPP and its meaning. For the same reason, President Trump will not invest any effort to progress trade negotiations within the framework of the World Trade Organization. He is definitely not a pro-environment president, and there is no hope that he will push forward the Paris Agreement.

It just so happens that President Trump’s retreat from global governance is met by China’s ambition to move to the central stage of world affairs. The clash between the two countries is likely to happen not on the stage of global governance, but rather on the bilateral front.

Some analysts believe that the United States’ withdrawal from the TPP is good news for China because, after all, the TPP was widely believed to be part of America’s “Pivot to Asia” strategy – a strategic geopolitical shift of attention and resources towards Asia, with an implicit goal to hedge on China. However, this belief is premature. President Trump has been determined to promote “America First” using bilateral frameworks. China is a clear target in this plan. Of America’s 500+ billion dollars trade deficit, more than 40 percent is from trade with China. Despite a vivid debate as to whether knowledge-based technological progress is responsible for job reductions in the United States, recent studies by economists demonstrate that American job losses have been more severe in sectors where the country receives more imports from China. President Trump firmly believes that those lost jobs could come back to the United States if imports from China are reduced. In particular, he has repeatedly accused China of overtaking the United States by deliberately manipulating the value of its currency. Despite his reassuring words about the status of Taiwan in a belated phone call with the Chinese president, President Trump still vowed to “level the playfield” between the United States and China in a recent press conference with the Japanese prime minister. Indeed, the US Department of Commerce has already announced a 75 percent anti-dumping tariff on certain Chinese steel products.

Amidst strong anti-globalization sentiments in the United States and Europe, is China able to defend globalization by its own efforts?

Looking at some of the key appointments in President Trump’s cabinet, one has reasons to worry that this is just the beginning of a trade war between the two countries. The appointment of Peter Navarro as head of the newly created National Trade Council and Robert Lighthizer as the US trade representative should particularly worry the Chinese. Famous for his book Death by China, Navarro firmly believes that American trade with China hurts Americans. Lighthizer is a veteran lawyer representing the American steel industry and vehemently opposed China’s accession to the World Trade Organization. With those two gentlemen in the two most important positions handling American trade policy, it would be a blessing if the Sino-American trade relations did not deteriorate.

China has geared up its effort to build new multilateral mechanisms for global governance. The Asian Infrastructure Investment Bank is one of the examples. Will the retreat of the United States under the Trump administration accelerate this process? The Chinese president Xi Jinping sent a strong signal to the world in his 2017 Davos speech that China firmly defends economic globalization. His pledge reflected the fact that China has been the largest beneficiary of globalization in the last two decades.

The question is, amidst strong anti-globalization sentiments in the United States and Europe, is China able to defend globalization by its own efforts? The answer is probably negative, not just because China does not have the right amount of capacity, but also because the current global governing institutions still heavily rely on the support of the United States and Europe. Now, the prospect that the United States and China might be starting a tit-for-tat trade war will make things even worse. China may invest more into new multilateral mechanisms, partly as a response to America’s aggression to punish China, partly as a move to fill the vacuum left by America’s retreat from global governance. The worst scenario is one where two parallel systems are created, one of them dominated by the United States and the other dominated by China. The two countries have already become geo-political rivals in the Pacific; the world cannot afford to see the two largest economies entering a race to dominate global economic governance. This is one of the biggest global risks that the world has to watch out for in the next four years.

Yang Yao

Yang Yao is a Cheung-Kong Scholar Chair Professor at the National School of Development (NSD), Beijing University. He is currently the dean of NSD and the director of the China Center for Economic Research. He is a member of the China Finance 40 Forum. His research interests include economic transition and development in China. He has published widely in domestic and international academic journals as well as several books on institutional economics and economic development in China. He is also a prolific writer for magazines and newspapers, including the Financial Times and Project Syndicate.