Malcolm Turnbull and Donald Trump buried the hatchet in New York last week to assure that the US-Australia alliance is on firm footing.

As Trump’s business confidant, Blackstone Group chairman Stephen Schwarzman, personally told Turnbull in New York on Friday within earshot of The Australian Financial Review, Trump was “in good form for you” and “he was really trying”.

“So I hope he succeeded,” Schwarzman said.

Yet no matter the success of the political theatre of the Prime Minister and President lavishing praise on each other more than three months after their tense phone call, the US-Australia relationship will face far more difficult tests in the first term of the Trump administration.

US President Donald Trump and Chinese President Xi Jinping may have plenty of differences to resolve in the future. Alex Brandon

US-China frictions are likely to be revived this year after a relative calm period, according to former president Barack Obama’s Asia adviser Evan Medeiros.

“US-China tensions will emerge as early as this [US] summer and at least by the end of the year, driven by China’s under-performance on both pressuring North Korea and lowering barriers to US goods and services exports,” Medeiros notes in a new analysis for Eurasia Group.

No need for choosing?

“This mismatch between what Beijing will be willing to do and what the Trump administration considers satisfactory assistance underpins our assessment that tensions will rise.

“When Trump realises that China is simply unwilling to do more (and certainly not apply regime-threatening sanctions), then Washington will quickly become disillusioned and may pivot to targeting China.”

For Australia, such tensions will not necessarily force the Turnbull government to choose per se between the US – its security guarantor and largest foreign investor – and China, the biggest trading partner.

But such a scenario will involve a series of difficult choices that will squeeze Turnbull between two nationalist strongmen in Trump and China’s President Xi Jinping.

In recent weeks, Trump has made positive statements about China’s recent efforts to more rigorously enforce trade sanctions to deter North Korea’s nuclear weapons program. North Korea has lashed Beijing for meddling.

A 100-day trade plan to open up market access for American financial services and farmers has lifted hopes that a threatened trade war can be averted.

‘Major deal’ delusions

Yet Asia experts in Washington outside the Trump administration feel they have seen variations of this movie before over the last decade and China is destined to disappoint again.

They believe Trump’s optimism for a major “deal” with Xi is delusional.

Hence, the Washington-Beijing truce may be temporary, unless China fundamentally changes its past hedging on North Korea and unwinds its mercantilist trade policies.

Trump wants to force real change by allowing US carmakers to operate without local Chinese joint venture partners – a hefty request for Xi.

The US is also likely to seek to stomp out Chinese trade barriers for American technology, media and advanced manufacturing firms, end intellectual property theft and is fighting China’s subsidised steel and aluminium makers.

Trump and Xi will likely both avoid making any rash moves until after the 19th Party Congress this autumn, where Xi wants to consolidate his powerbase in the Communist Party for the next five years. An escalation before then would risk overreaction from both sides to appease their domestic political bases.

Trump’s delaying tactics

American Enterprise Institute resident scholar Derek Scissors believes Trump is merely delaying any harsh trade actions against Beijing until he has his US trade representative and senior Asia policy officials in the State Department and Pentagon in place.

He argues it will put Australia – a US ally and China-dependent commodity exporter reliant on foreign trade – in a bind.

The US Commerce Department is currently considering applying tariffs against foreign steel and aluminium under the guise of national security to protect the American defence building industrial base.

Mining industry sources have played down any material negative impact on Australian producers of iron-ore, a key steel-making ingredient shipped to China to construct buildings, bridges and cars.

Yet if Trump and Xi do ultimately clash over trade and North Korea, the second and third round consequences are impossible to predict for global commerce and international security.

Using Fox News

Turnbull told Rupert Murdoch’s conservative US television channel Fox News on Friday that the “eyes of the world are on Beijing” in relation to North Korea.

“Beijing has to bring that pressure to bear to stop this escalating threat to peace in the region,” Turnbull said.

Presumably Turnbull appeared on Fox because it is an effective way for a foreign leader to speak directly to the White House. Trump and his band of nationalist advisers are avid viewers.

Ultimately, Turnbull wants the US to play an active security role in Asia and China to engage in as much trade as possible.

The Prime Minister may hope that Schwarzman, a pro-China businessman who set up a $US100 million fund to bring 200 American students to Beijing each year, can convince Trump not to lash out too hard against Xi.

Otherwise, Turnbull could face far more testing decisions than simply joining Trump last week for a colourful photo opportunity on a retired US Navy ship.

By John Kehoe

Financial Review



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