America’s relationship with China could get very frosty under Trump

While Italy was occupying the headlines yesterday, something interesting was going on over in the US.

Donald Trump took a call from Taiwan's president. He then tweeted that the "president of Taiwan CALLED ME to wish me congratulations on winning the presidency".

Why's that a big deal? Well, he's the first US president(-elect) to speak directly to Taiwan's leader since 1979.

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And it suggests that his pre-election rhetoric on China isn't going to soften as much as perhaps some had thought...

Why Trump's call with Taiwan matters

Suffice to say that for Donald Trump to talk directly to the leader of Taiwan is a big deal diplomatically.

Since 1979, as The Economist puts it, every US president "has accepted the diplomatic fiction that there is but "One China", and that the respective governments on the mainland and in Taiwan are rival claimants to the glory of ruling over the unified nation".

The point is that taking this call and implicitly recognising Taiwan as a separate entity is a bit of a poke in the eye for Beijing.

China complained to the US about the call, but also downplayed its significance, appearing to blame both Taiwan, and the Trump team's naivety.

For his part, Trump later sent out a distinctly non-conciliatory tweet. "Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country (the US doesn't tax them) or to build a massive military complex in the middle of the South China Sea? I don't think so!"

As several pundits have pointed out, the last time that a US president even hinted at being helpful towards a Taiwanese president back in 1995, when Lee Teng-hui was allowed to speak at Cornell University it triggered eight months of "sabre-rattling", as CBC News puts it. China test-fired lots of missiles, and the US had to send warships through the Taiwan Strait.

That was the "hird Taiwan Strait Crisis", and clearly, everyone worries a little about what a fourth could lead to.

So that's a comforting thought for a Tuesday morning.

Trump might just mean all his trade promises on China

Trump has argued that China's policies cost American jobs, and he certainly came to power on the back of the anti-globalisation vote. So perhaps no one should be surprised that he's still taking this particularly manifesto promise seriously.

As Bill Powell notes in Newsweek, "Beijing and the rest of us had better come to terms with the fact that this appears to be the real Donald when it comes to China policy, particularly on trade".

Will it be as simple as slapping a 45% tariff on imports across the board, as Trump suggested during the campaign?Mark Williams of Capital Economics doubts it, mainly because of the potential retaliatory measures China can take.

"There are few alternative sources for the main products the US buys from China mobile phones, tablets/laptops, and network equipment." Does Trump really want US consumers' gadgets to soar in price? Unlikely.

However, what's more likely to happen is that each country imposes tariffs on selected products. "Both would presumably target products for which there are alternative suppliers, preferably at home, and which would cause maximum pain to the other." So "US exports of cars and aircraft would be in the firing line", for example.

It's possible that a certain amount of protectionism could end up being good for some industries and businesses while pushing the costs onto US consumers in the form of higher prices.

But the key danger, of course, is that a full-blown trade war kicks off, and you get a 1930s-style spiral into tit-for-tat, highly-damaging protectionism.

Of course, it's also possible that trying to tweak the US relationship with Taiwan, in a manner that highlights American concerns over China's efforts to lay claim to the South China Sea and much of that region, is a good idea. China's military ambitions in that area were always going to come to a head at some point and you might as well start as you mean to go on.

But again, you run the risk of tit-for-tat incidents that escalate into something far worse than a trade war.

It's something to monitor closely. And we'll have more in the implications in the next issue of MoneyWeek magazine, out on Friday. If you're not already a subscriber, why not sign up now?