"Team Trump" Asia Pivot: US-China-Japan Dynamics Moves into Focus

Press Release

By Jesper Koll, Head of WisdomTree Japan

The coming two weeks are poised to go down as the first real insight into “Team Trump’s” global economic leadership skills. At stake is the US-China-Japan trade and investment dynamics, in other words, the future of economic relations in the world’s most dynamic region, Asia Pacific. Can the reality of “America First” go hand-in-hand with shared Asian prosperity? The key agenda items are as follows and suggest we’ll have some concrete answers by around 23-25 April. In my view, these events must be taken together and, amidst high uncertainty, have the potential to become a positive catalyst for “risk on” for global assets in general, Japanese risk assets in particular:

6-7 April: US President Trump to meet China President Xi Jinping
14 April: US Treasury to publish report on Currency Manipulation, the first under the new regime
17 April week: US Vice President Pence and Commerce Secretary Ross go to Tokyo for first US-Japan economic, trade and finance framework talk

The Trump administration has shown great ambition to rewrite the rules of global trade and investment. Here, the US-Japan relationship is a clear first-mover: PM Abe has already met President Trump twice; the 17 April talks mark the move from the abstract towards concrete deals—trade rules, investment initiatives, specific infrastructure projects, joint ventures.
Ambitions run high in Tokyo and Washington—Trump’s America and Abe’s Japan aim to create the first bilateral “Free and Fair Trade & Investment Agreement”, a possible blueprint for other countries’ dealings with Trump’s America. Both Vice President Pence and Commerce Secretary Ross have extensive experience and networks Japan. They also negotiate from a position of strength—“Team Abe” is keen to make fast and concrete progress. The better the US-Japan economic relationship, the better US-Japan security and defence relations, and Abe’s popularity.
In contrast, the US-China relationship is off to a more complex start. Both sides have lowered expectations consistently by stressing their differences. The key question will be whether they can agree to set up a similar working-level group for economic and trade issues similar to the US-Japan one. A commitment to continued US-China dialogue is a minimum necessary condition for global risk takers. No commitment to a new framework of bilateral talks would trigger “risk off”, in my view. I am hopeful pragmatism prevails.
Currency manipulator—does the White House coordinate with Treasury?
Meanwhile, the Treasury will publish its report on Global Currency Manipulation on 14 April, the first one to be drafted by the new regime. Here, Japan’s position is technically somewhat weaker than China’s. It will be interesting to see whether White House to Treasury coordination could actually work in favour of Japan and/or against China.
Currently, three criteria determine currency manipulation for the US Treasury, under the Trade Facilitation and Trade Enforcement Act of 2015:

a bi-lateral trade surplus larger than US$20 billion
a current account surplus in excess of 3% of GDP
persistent FX intervention

Both Japan and China surpass the bi-lateral deficit threshold: In 2016, the US ran a US$347 billion[1] trade deficit with China; and a US$69 billion[2] deficit with Japan. Key mitigating factors with respect to Japan’s surplus include the fact that there is a large income surplus from investments in the US, typically overseas earnings based on factories and jobs in the US.
Meanwhile, Japan has not intervened in FX markets since November 2011, while China runs an FX regime that, de-facto, dictates constant and direct buying and selling in FX markets by monetary authorities. However, over the last two years, China’s managed exchange rate regime has been evolving away from a straight US Dollar peg to a multi-currency basket peg and, in my personal view, there could be room for a perhaps more lenient interpretation (rather than calling it currency manipulation).
All said, the time has come when “Team Trump” will have to demonstrate its global economic policy leadership. Failure to deliver a professional, pragmatic and comprehensive outcome over the next three weeks could seriously undermine global money flows and risk appetite. In contrast to US-Europe economic relations, where nobody expects significant progress or movement soon, US-Asia policy is a key focus area, with all players aware that this region is where much of global prosperity potential lies. In uncertainty lies opportunity and, in my personal view, Japan is poised to seize the opportunity.
Long-term investment strategies

[1] US Census Bureau https://www.census.gov/foreign-trade/balance/c5700.html
[2] US Census Bureau https://www.census.gov/foreign-trade/balance/c5880.html