Of Coercion and Conciliation

A weekly bulletin offering news and analysis related to the Middle Kingdom. This week, trade terms, the Iran nuclear deal and incomplete maps dominated China’s diplomacy.

1. Trade Wars: Will they happen or won’t they?

China’s Vice-Premier Liu He – incidentally Chinese President Xi Jinping’s top economic advisor – visited the United States this week to try and cool bilateral tensions in the field of trade and commerce. Talks earlier this month, held to achieve the same objective failed to reach a conclusive agreement.  During the visit, Liu met with top US officials, including President Donald Trump. Reports emerged that China reportedly offered to slash the trade deficit by $200 billion. But Chinese state made was quick to point out that such reports were mere rumours.

Liu He’s visit comes on the heels of Trump’s unexpected tweet on Sunday, in which he pledged to put Chinese telecom equipment giant, and current eye of the trade storm, ZTE, “back in business fast.” This is an announcement that has taken US lawmakers and China-watchers aback – it is a major reversal of American policy, which as of last week, was to deny the Chinese company export privileges on grounds of “egregious behavior.”

Although it’s a conciliatory move, it is also something that has American interests at heart. According to this piece by Fortune, American companies – which are heavily dependent on Chinese fibre-optics manufacturers – stand to lose a lot, if US-China trade talks fail to yield any result. ZTE alone has given itself two crucial weeks to stay afloat, before it downs its shutters. The impact of that could be brutal not just for the Chinese economy, but for the American economy. Trump’s tweet seems to acknowledge this fact, as does Chinese Foreign Ministry Lu Kang’s statement at a recent press briefing, at which he emphasized that China would be willing to work with the United States towards a positive outcome in the trade talks.

Contrast this to Terry Branstad, current US Ambassador to China. Speaking at a conference in Tokyo on 14 May (just a day after President Trump sent out his tweet), Branstad revealed that the United States wants to set deadlines for China on opening markets for US exports. He went a step further, stating that the two countries are still “far apart” when it comes to finding a suitable resolution. In much the same vein, US Commerce Secretary Wilbur Ross has stated that the event of a tit-for-tat trade war won’t be, as he put it, “life-threatening” for the United States. In the face of these mixed signals of defiance and conciliation, it remains to be seen whether the Chinese Vice-Premier will be able to pull off the kind of positive outcome that Beijing – and the rest of the world – is hoping to achieve.

2. Foreign Affairs Commission: Steering Chinese Diplomacy

On 15 May, China convened the first meeting of the Foreign Affairs Commission, which will steer the course for new Chinese diplomatic initiatives. It will – unsurprisingly – be helmed by Xi Jinping, with Premier Li Keqiang as deputy head. More interestingly, Wang Qishan – the face of the Party’s crackdown against corruption – has been given a central role in the Commission. This piece by the South China Morning Post is an excellent analysis of the motivations behind the choice of Wang Qishan, and the role he is expected to play in the new Commission.

In his speech at the meeting on Tuesday, Xi emphasized on the need to plan ahead, given the rapidly changing international situation. From his speech, it is fairly clear that China is more than aware of the current geopolitical flux, and is methodically looking to address situations as they arise, based on prior assessment and evaluations. If utilized well, the Foreign Affairs Commission could provide a key and highly innovative role in the formulation of successful foreign policy responses by China.

3. Iran Nuclear Deal

Last week, Donald Trump withdrew the United States from the Joint Comprehensive Plan of Action (JCPOA) – signed in 2015 under predecessor Barack Obama. The move has triggered alarm across the board, with European signatories, in particular, not mincing their words in criticizing the decision. China, also a signatory, has also expressed concern. Foreign Ministry spokesman, Geng Shuang, has been quick to make China’s position clear, stating that Beijing would “maintain communication with all parties” and see to it that the agreement continues to be effectively protected and implemented. But worry continues to bubble below the surface.

The American withdrawal might certainly push Iran closer to Russia and China, but it comes at a time when China has reason enough, with a looming trade war, to be concerned on the economic front. In addition to Huawei, ZTE is involved here as well – considering that the trouble began when Washington clamped down on American companies selling components and software to the Chinese telecom equipment giant, after ruling that it had breached US sanctions in Iran. Added to this is the fact that China, as a prominent buyer of Iranian oil, could be caught in the crosshairs of any future US restrictions on the oil trade emanating from Iran. One option is to work with the European Union to try and circumvent any possible restrictive measures from the United States. This piece by South China Morning Post provides a comprehensive deconstruction of how the US withdrawal from the JCPOA has just made the threat of a trade war with China that much more serious – and that much more likely.

In related developments, the Iranian Foreign Minister, Mohammad Javad Zarif, has been shuttling between Beijing (on Sunday) and Moscow (on Monday) to try and preserve the nuclear deal. China has been unequivocal in its statements, following the meeting, stating that it was committed to maintaining this “hard-earned” deal. The fact that Beijing has been unbending in its resolve on this aspect, the ongoing trade talks assume a newer and much more complex significance.

4. Eye on Africa

The global impact of a possible trade war between the global economic giants finds echoes in Africa as well, with the continent in the final stages of negotiating a free trade agreement which will, if implemented, form the world’s largest free trade area. The statistics are impressive – a demographic of over 1.2 billion, a Gross Domestic Product (GDP) of USD 2.5 trillion and a total (ideally) of 55 countries. Speaking recently at the Commonwealth Business Forum in London, Kenya’s Minister of Industry, Trade and Cooperatives, Adan Mohamed, admitted that, if implemented, the African Continental Free Trade Area (AfCFTA) could provide an effective counterpoint to the trade tariffs imposed by the US and China on each other, besides substantially boosting intra-African trade and commerce.

China has been quick  to see the opportunity that this could present for its own economic initiatives – particularly the Belt and Road Initiative (BRI). On 13 May, Beijing’s top legislator and chairman of the Standing Committee of the National People’s Congress (NPC), Li Zhanshu arrived to hold talks with the Deputy Chairman of the African Union, Thomas Kwesi Quartey. Following the talks, Li emphasized that China will support the African Union’s attempts at closer regional and economic integration. More significantly, both countries agree that the proposed bloc is compatible not just with Africa’s own goal of “Agenda 2063”, but also with Xi Jinping’s Belt and Road Initiative.

To that end, attendees at a forum held in Addis Ababa to discuss challenges facing African electrification, urged closer bilateral partnerships in the field of energy. China’s Foreign Ministry spokesman Lu Kuang stated that aiding Africa in its electrification drive would only make the continent even more viable as a partner for future cooperation on the BRI – a prospect which is currently mutually attractive to both China and Africa.

Moves by China to deepen economic cooperation with the African Union come on the heels of new and unprecedented Indian initiatives in Africa. In a rather startling first, India has announced that it will be expanding infrastructural aid, by undertaking to build 21 convention centres across the continent, beginning with Niger. Indian investment in Africa is also being ramped up, with over 140 Indian enterprises (from Wipro to Mahindra and Mahindra) investing over USD 4  billion in South Africa alone. With the recent announcement that India is one step away from achieving universal rural electrification, some Sub-Saharan African countries have also reached out to India to undertake rural electrification – from financing to technology transfer, to detailed project reports and execution.

China will also be looking to counter competition from another unexpected source. Turkey is working on expanding its strategic and economic outlook and it is proving to be a force to reckon with in Africa. Given that it is a vital link in China’s Belt and Road Initiative, and that Ankara currently enjoys good relations with Beijing, this is a definite curveball for China. It remains to be seen how China will handle this, but Nikkei Asian Review provides a good first look at how this situation is developing currently.

4. A Gap in International Perception?

In yet another example in China’s unabashed diplomatic campaign to police international perceptions about its territorial sovereignty, US retailer Gap has been forced to issue a public apology to China for reflecting what the Global Times called an “incomplete map” of China on a T-shirt for sale in North America.

The T-shirt in question shows a map excluding Taiwan, that hotly disputed regional sore sport. It also fails to show what China calls “Southern Tibet” – more commonly known as the northeastern Indian state of Arunachal Pradesh. The logo also omitted a line around Chinese territorial claims in the South China Sea. This is not the first time that China has asked international companies to toe its line as far as its stand on the One China policy (and especially Taiwan) is concerned. Earlier this year, the international hotel chain Marriot, and international clothing line Zara were forced to issue apologies, along with a number of airline companies, for what Beijing saw as a wrongful projection of its territories. The White House strongly condemned what it termed as “Orwellian nonsense”, and pushed back strongly against these directives from China. The statement declared that any efforts by China to censor the rest of the free world would be resisted. It appears that Gap, despite its apology, is following this particular stand – with the offending T-shirts found by Business Insider India to still be on sale in North America.

5. New Developments for PLAN

On 13 May, China’s first domestically built aircraft-carrier set out to sea, from a port outside the Dalian Shipyard. The carrier, which is now undergoing sea trials, is likely to be delivered to the People’s Liberation Army Navy (PLAN) by the end of the year, according to this Global Times report.

This new warship is an example of Xi’s plan for deeper civil-military cooperation. China will now be looking to build bigger, and more effective aircraft carriers as time progresses. With a newer, younger and more innovative group of experts in charge of research and development, there is every chance that China will achieve its objective of reducing (and overcoming) the existing gap between indigenous and foreign technology. This South China Morning Post report has a comprehensive analysis of the reasons behind this latest development, which stands as an undoubted advantage for PLAN.

6. Cross-Straits Relations: Taiwan

On 11 May, Su-35 fighters and H-6K bombers flew across the channel that separates Taiwan from the Philippines. This is the first time that China’s Air Force has ever directed its fighter jets in opposite directions, effectively circling the island. Observers have noted that drills such as these – possibly designed to intimidate Taiwan – have become more frequent since Tsai Ing-wen’s pro-independence Democratic Progressive Party (DPP) won the 2016 presidential elections. This South China Morning Post article adds that navy and ground forces from the mainland may well be deployed to bolster air force drills around the island which Beijing considers to be part of its own territory.

While neither Beijing nor Taipei have spoken about the number of jets involved in the drills, Taiwan has deployed 36 of its own independent jets to monitor and counter PLA actions in the area. Taiwan is also boosting its own domestic defense manufacturers, in a nod to the island’s awareness of a looming threat posed by the mainland. Even while this takes place, President Tsai Ing-wen has called for a rebuilding of basic mutual trust with China, stating that she is willing to sit down with President Xi Jinping, as long as there aren’t any political conditions involved. Only time can tell whether that’s asking a bit too much.

7. India and the Neighborhood

Wuhan continues to echo through bilateral relations this week. Indian Prime Minister Narendra Modi visited Nepal between May 11 and 12 last week, indicating that despite the bonhomie at Wuhan, India is extremely aware of Nepal’s strategic importance in South Asia. However, there was no discussion of the much-vaunted China-Nepal-India economic corridor, possibly indicating that India would like to maintain bilateral ties in the region on its own terms.

Another interesting development is a renewed buildup of troops at the Sino-Indian border, with India getting ready to recruit as many as 6000 new personnel, and China’s Global Times, has sounded a warning note. Referring to a Times of India press release, this article states that the Indian Ministry of Home Affairs is about to approve the formation of 9 new battalions, 47 new border outposts and enhanced troops at 18 border posts in Ladakh and Arunachal Pradesh. The analysis – which, significantly, comes from the Communist Party’s media mouthpiece – states that this could damage Sino-Indian trust, and only underlines the fact that real bilateral cooperation has a long way to go.

As Indian Army chief Bipin Rawat begins a four day visit to Sri Lanka to deepen military cooperation with the island country, China has cleared a one billion dollar loan to revive a much-delayed expressway in the heart of Sri Lanka. Initial reports from Indian media houses hint that this might be aimed at countering Indian influence in the region, but the fact is that China had long emerged as Sri Lanka’s largest lender, securing lucrative contracts to build roadways, ports and railways across the country, under the tenure of Mahinda Rajapakse.

Projects underway had been stalled for sometime as new Prime Minister Renil Wickremesinghe dealt with corruption allegations – but now projects and aid are proceeding apace. This is (somewhat lyrically) described in Xinhua’s latest editorial, which takes an in-depth look at Sri Lankan and Chinese cooperation in co-developing the port city of Colombo. On Monday, PM Wickremesinghe met with the Chinese Ambassador, and was informed that Beijing had decided to approve the loan, which will be provided through the Export-Import Bank of China.

In a first, a state-run Chinese bank has launched China’s first India-dedicated publicly offered investment fund. Named the ‘Industrial and Commercial Bank of China (ICBC) Credit Suisse India Market Fund’, it will invest in the future of the Indian economy According to this Economic Times article, it will track the trajectory of India’s industrial structure, highlighting suitable sectors for potential Chinese investment. This is a fairly significant development, coming as it does, just a fortnight after discussions concluded at Wuhan.

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