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With relations at an all-time low, punitive actions targeting China have become politically popular, even if they have no analytical basis. Five years ago, then president Donald Trump launched a tariff-fueled trade war with China designed to reduce the bilateral trade deficit. His successor, President Joe Biden, then added a decoupling focus by restricting high-tech exports and curtailing professional and financial links. Both wanted to reduce imports of manufactured goods and bring home more jobs. How should one judge the effectiveness of their policies? Back then, and even more so today, the logic of Trump’s fixation on trade deficits made little sense. But security concerns have now become the rationale for reducing America’s trade relations with China and undercutting China’s growth potential. Against these yardsticks, the results are mixed but on balance unconvincing, given the costs in the form of inflationary pressures, repressed export growth, and a projected decline in global output. But U.S. politicians from both parties strongly support these restrictive measures because the costs are not obvious to their constituents, while the benefits from appearing to be tough on China resonate well with voters. Rising trade deficits The recent U.S. Census Bureau data indicate that the politically sensitive U.S. merchandise trade deficit with China was larger in 2022 than when Trump became president, while America’s overall trade deficit hit an all-time high of $1.18 trillion. This reinforces the views of nearly all the economists surveyed at the launching of Trump’s trade war: that the tariffs would not reduce U.S. trade deficits and the costs would be paid largely by Americans. For the Trump administration, the wild card was the “phase one” purchase agreement, which called for an increase of $200 billion in China’s imports from the United States. But state-to-state purchase agreements have no logical basis when global trade is largely shaped by the market-driven decisions of firms and consumers and subject to unpredictable events such as the coronavirus pandemic. Economic principles tell us that how much a country saves and spends determines its trade balance. The combination of Trump’s large tax cuts and Biden’s huge expenditure initiatives has led to soaring budget deficits, which are mirrored in record trade deficits. All this has little to do with China. Yet the Biden administration still insists that China honor the purchase agreement and links the removal of tariffs to its fulfillment. Asking China to honor an agreement that made no sense to begin with as a condition for dropping another equally ineffective policy defies logic. Trade diversification but increasing import dependence on other countries But this focus on bilateral trade numbers overlooks the sharp decline in China’s share of trade with the United States. Whereas China accounted for 47 percent of the U.S. trade deficit in 2017, it accounted for only 32 percent last year, with most of this decline offset by the increasing shares of other East Asian economies. Europe’s share of America’s overall trade deficit also declined from 21 percent to 18 percent. Only Canada and Mexico, via the United States-Mexico-Canada Agreement (USMCA), were able to increase their share from 11 to 18 percent. More insights can be gleaned from looking at the components of trade. Although the value of U.S. imports from China was essentially the same in 2022 as it was in 2017, total U.S. imports increased by about $900 billion during this period. As a result, China’s share of the total, made up largely of manufactured goods, fell from 22 to 17 percent. This decline, however, did not reduce America’s dependency on imports of manufactured goods. The share of imports relative to overall expenditures on manufactured goods rose steadily to 34 percent in 2022 from 23 percent two decades ago. The decline in China’s share of U.S. imports of manufactured goods was more than offset by imports from other countries, notably Mexico and Vietnam. These two developing countries, more than others, were able to import heavily from the United States based on their locational advantages and free trade agreements. Vietnam and China share a border and are linked by the ASEAN-China trade agreement, while Mexico and the United States also share a border and are linked by the USMCA trade agreement. Less noticed, however, is the behind-the-scenes role that China plays in supplying the components and materials for these other countries’ exports to the United States. Most of Vietnam’s increased exports were in product lines where U.S. imports from China fell, such as computer accessories and telecommunication equipment. China’s exports to Vietnam have more than doubled since 2017, and its trade surplus nearly tripled by 2022. China’s exports to Mexico increased by nearly 30 percent last year, on top of a 50 percent increase in 2021. China may be exporting less to the United States directly, but it is now indirectly exporting more. This explains why China’s share of global manufacturing production has continued to increase from 26 percent in 2017 to 31 percent in 2021. As for U.S. exports, the total averaged about $1.5 trillion from 2017 to 2020 but then jumped to $1.9 trillion in 2022. But this increase was not in manufactured goods but in exports of energy products and chemicals to Europe, spurred by the Ukraine crisis. The trade war did little to expand U.S. exports to China, the share of which fell from 8.4 percent in 2017 to 7.5 percent in 2022. Costs and benefits of decoupling According to one study, U.S. firms were handicapped by tariff-related higher costs of their imported inputs, and coupled with China’s retaliatory tariffs, this resulted in U.S. exports to China being 23 percent lower than they would have been in the absence of the trade war. The consequence is that America’s trade war policies generated very little growth in exports of manufactured products, despite the priority given to those policies by both the Trump and Biden administrations. If the purpose of the U.S. punitive actions toward China was to weaken China economically, there is no clear evidence of that happening. By developing alternative export markets and tapping pandemic-driven demand in the West for manufactured goods, China pushed its share of global exports to record levels in recent years. Meanwhile, China’s imports as a share of its GDP have been declining steadily, from a high of 28 percent in the early 2000s to 17 percent in 2022. One could argue that the world has become more dependent on China in trade while China has become less dependent on the world. The benefits of decoupling—if any—should be weighed against the costs imposed on U.S. consumers and producers and damage done to the export competitiveness of U.S. firms. To counter such tendencies, the Biden administration is promoting domestic manufacturing with subsidies in the Inflation Reduction Act. Such actions can be justified for strategic reasons, but the rationale is weakened by protectionist Buy America conditions. U.S. policymakers often counter by pointing to China’s use of subsidies to promote strategic industries, but Chinese firms were keen to import key technologies and components to ensure that their products were globally competitive on cost and performance grounds. The recent semiconductor and other U.S. restrictions on China’s access to high-tech products are also problematic because these products are “dual use,” with a much larger commercial market relative to military applications. Such restrictions hurt the many U.S. firms that derive significant revenues from selling to China and may contravene World Trade Organization guidelines. The costs of trade-related distortionary policies can be substantial. One oft-cited study estimates that taxpayers end up paying about $250,000 for each job saved in typical Buy America programs. At a broader level, a recent International Monetary Fund study estimates that a combination of U.S. trade and technological decoupling measures could reduce global GDP by some 7 to 12 percent. Ultimately, the problem lies in the lack of clarity on U.S. policy objectives. What does it mean to undercut China, and how will the United States know if it has succeeded? With U.S.-China relations at an all-time low, punitive actions targeting China have become politically popular, even if they have no analytical basis. The reality is that the United States and China have no choice but to continue trading with each other. But with security overriding commercial considerations, the economic interdependence built up over decades is now being reversed, leaving everyone worse off.

​Although the dollar continues to be the dominant global currency, Russia and China could dent this dominance. In the aftermath of global financial exclusion, Russia has had to make some strategic adaptations. The West’s sanctions had crippling consequences, and the Kremlin scrambled to find alternatives. In light of these developments, China became an important ally, and the Yuan—its currency—has taken on a more prominent role. It is telling that in Russia, the yuan has surpassed the United States Dollar (USD) in trading volume, a feat achieved a year after the Ukraine conflict, which triggered a series of sanctions against Moscow. As Russia and China band together, one wonders what other shifts will take place and how they will shape the future. Change is afoot, and the Russian market bears witness. The month of February saw a watershed moment as the yuan surged past the dollar in monthly trading volume for the first time. The momentum continued into March as the gap between the two currencies widened, showcasing the growing sway of the yuan. It’s an impressive feat, considering that the yuan’s trading volume on the Russian market was once quite insignificant. The winds of change blew through Russia’s financial system as the year progressed. Additional sanctions had taken their toll on the few remaining banks that still held power to make cross-border transactions in the currencies of countries that had been deemed “unfriendly” by the Kremlin. One such bank was Raiffeisen Bank International AG, whose Russian branch played a significant role in facilitating international payments within the country. However, the lender found itself under the watchful eye of both European and US authorities, which only added to the pressure. These events spurred the Kremlin and Russian companies to shift their foreign-trade transactions to currencies of countries that had not imposed sanctions.Converging coalitionsThe bond between Russia and China is growing stronger, with both nations seeking to bolster their positions on the global stage. Their alliance has spread across various spheres: military, economic, and political. With relations between Russia and the West crumbling, China has emerged as a key partner for Russia, providing it with the necessary support to counter economic and political pressure. On the other hand, China is keen on expanding its global reach, especially in the Eurasian region, and sees Russia as an important ally in this regard. President Xi Jinping’s recent visit to Moscow and his pledge to expand cooperation are likely to take this partnership to greater heights. Trade and investment ties are set to grow stronger, with both nations seeking to reduce their dependence on Western economies. Russia’s focus on infrastructure development and mega projects is also likely to benefit from China’s expertise in these areas. Energy is another significant area of collaboration, with Russia being a leading exporter of oil and gas and China being the world’s largest importer of these resources. Technology is also an essential domain, with both countries investing heavily in research and development to remain competitive in the global economy. While the alliance between Russia and China will likely have far-reaching geopolitical consequences, it is a complicated relationship with both nations pursuing their interests, even as they work towards common goals. As a result of Western sanctions, Russia has shifted its foreign trade transactions away from the dollar and euro to currencies of non-restricted countries. By doing so, the Kremlin and Russian companies hope to decrease their dependence on the Western financial system and explore new avenues for conducting their trade and economic activities. This shift in strategy reflects Russia’s determination to maintain its economic stability despite restrictions on its access to the global financial system. It also underlines the growing importance of alternative currencies in global trade as countries strive to minimise the impact of sanctions and safeguard their economic interests.Structural overhaulsThe Russian Finance Ministry was not immune to the winds of change either. Earlier this year, it made the switch from the dollar to the yuan for its market operations. It even went a step further by devising a new structure for the national wealth fund, earmarking 60 percent of its assets for the yuan. The Bank of Russia joined the chorus, urging its people and businesses to consider moving their assets to the rouble or other currencies considered “friendly.” This would help mitigate the risk of having their funds blocked or frozen. As the world undergoes a seismic geopolitical shift, it seems Russia is moving in tandem, searching for ways to secure its economic future. However, the dollar still reigns supreme in the Russian market. Even with all the changes taking place, it remains the most widely used currency, ceding its throne only occasionally to the yuan. This underscores the enduring dominance of the dollar, which has played a significant role in Russia’s financial landscape for years. However, as the world continues to evolve, one wonders how long it can hold on to its crown.

In the event of hostilities in the Taiwan Strait, Manila’s defense treaty with the United States will give it little room to manoeuvre. President Ferdinand “Bongbong” Marcos Jr.’s recent visit to China underscores his intent to have a constructive relationship with China, and a balanced and diversified Philippine foreign policy. But as Sino-US relations deteriorate and United States President Joseph Biden veers towards strategic clarity to defend Taiwan amid heightened cross-Strait tensions, the risk of getting entangled in a Sino-US conflict over Taiwan has become a major policy issue for Manila.  All Philippine presidents have strictly adhered to the One-China policy which is enshrined in the Joint Communique on normalisation of Sino-Philippine ties in 1975. Even President Benigno Aquino III, who arguably pursued the most critical China policy in 2010-2016, toed the line on the One-China policy and repatriated wanted Taiwanese nationals to Beijing in 2011. Manila’s adherence to the One-China policy was reaffirmed by Marcos Jr. after U.S. House Speaker Nancy Pelosi’s visit to Taiwan last year.  In the event of a Sino-U.S. conflict over Taiwan, the legal status of Manila’s commitment to the One-China policy would be tested against its obligations under the 1951 Philippine-US Mutual Defense Treaty (MDT). The treaty highlights the “sense of unity,” “common determination” and “collective defense” against an “external armed attack” and “potential aggressor”, but it is ambiguous about the specific geographic scope of its application in the Pacific. While the Philippines sees the utility of the MDT primarily for a South China Sea contingency, the U.S. can invoke Article IV of the MDT in a Taiwan conflict. The article states that each party deems that “an armed attack in the Pacific area on either of the Parties would be dangerous to its own peace and safety and declares that it would act to meet the common dangers in accordance with its constitutional processes.”  With respect to “constitutional processes”, the 1987 Philippine Constitution gives the Congress the power to declare “the existence of a state of war”; only under such conditions or another national emergency, would the President be authorised by law to wield the necessary powers “to carry out a declared national policy.” As such, congressional intervention would be an important variable that needs to be closely watched. Manila can also mitigate entrapment risks by exercising its sovereign authority on where and how the U.S. military could access and use its facilities. The preamble to the Enhanced Defense Cooperation Agreement (EDCA) states that “US access to and use of facilities and areas will be at the invitation of the Philippines and with full respect for the Philippine Constitution and Philippine laws.” Yet, history has shown how the Philippines could be involved in a war over Taiwan even in the absence of a U.S. formal invocation of the MDT. Manila could send boots on the ground and/or provide logistical access for U.S. military operations. This was the case in the Korean War, Vietnam War, and U.S. wars in Afghanistan and Iraq.  Put differently, Manila is caught in a bind. On one hand, it fears Washington’s abandonment in the event of a South China Sea conflict with China. Manila has repeatedly demanded clarity and immediacy in U.S. alliance commitments. To this end, Manila concluded the 1998 Visiting Forces Agreement (VFA) and the 2014 EDCA with Washington to secure U.S. military presence in the region and security guarantees. On the other hand, the Philippine security establishment increasingly fears entrapment, where the country’s military is drawn into a Sino-US conflict over Taiwan. This reality became evident following former U.S. House Speaker Nancy Pelosi’s visit to Taiwan in August 2022. In September 2021, the Philippine ambassador to America said that the U.S. can use Philippine bases in a Taiwan conflict if it is important for the Philippines’ security. The condition, however, remains open-ended and is contingent on many indeterminate factors.  At the moment, the risks of entrapment are increasing, at least from the operational perspective. Since its coming to power, the Marcos Jr. administration has taken steps to bolster security ties with Washington. Both countries have agreed to explore joint patrols in the South China Sea, and accelerate the implementation of the EDCA through infrastructure enhancement at various locations. Both allies are looking at adding more sites for American military access, including in the northern province of Cagayan near Taiwan, to facilitate faster response to crisis situations. They have also agreed to double the number of troops involved in joint exercises and plan to sharply increase the number of bilateral defence activities in 2023. Given the timing of these initiatives, Beijing would likely see these Philippine moves as siding with America to undermine its One-China principle and enable U.S. military prepositioning for war-time contingencies. Should the Philippines provide basing access in a cross-strait conflict, Manila would certainly face Chinese sanctions. China could also play hardball in the South China Sea and its ballistic missiles could target countries facilitating U.S. combat operations. But if tensions in the South China Sea escalate and coincide with tensions in Taiwan, there will be a greater incentive for Manila to strategically align with Washington and accommodate U.S. military hardware.  How the Philippines should respond to a Taiwan contingency is not simply a legal question but a critical national security concern. There are around 200,000 overseas Filipino workers in Taiwan; repatriating them during an armed confrontation over Taiwan would be an enormous undertaking. This will be compounded by a massive human migration of Taiwanese nationals.  Even if Manila manages to sidestep the risks associated with entrapment in a Taiwan Strait conflict, it cannot escape the geopolitical ramifications of such a historic event. Should China successfully reunify Taiwan by force, China could inch closer to the northern Philippines and it will be easier for China to break through the First Island Chain. China’s takeover of Taiwan would also augment its power projection capability in the South China Sea. This would consequently impact Philippine maritime and security interests. Given the Philippines’ geographic proximity to Taiwan, its status as a U.S. defence treaty ally and its stakes in the South China Sea, there will be complications in Manila’s desire to be neutral in a Taiwan contingency.