Asia-Pacific

China and the U.S. Continue Their Trade Dispute

China's stock market and currency value are reeling after the first round of U.S. tariffs on $50 billion worth of Chinese goods, and the next round will hamper the country's slowing, debt-ridden economy. A 25 percent tariff on $200 billion of Chinese goods will go into effect this quarter and will primarily impact electronic parts and machinery. And although the United States may adjust tariffs on some goods to minimize the impact on prices for U.S. consumers, Chinese manufacturers of products with thin profit margins, including furniture, auto parts and leather, will feel growing pressure or even risk bankruptcy. This situation will contribute to economic and employment stresses in coastal export regions such as Zhejiang, Jiangsu, Shanghai, Shandong and Guangdong. However, China will likely avoid negotiating ahead of U.S. midterm elections in November, since it expects U.S. President Donald Trump to make even more aggressive trade decisions after the elections.

Tariffs Disrupt China's Internal Machinations

To ease the pain of the ongoing trade battle, China will fall back on expanded credit and infrastructure spending, subsidies and rebates to prevent job losses and private sector revenue declines. This will not prevent a rise in corporate defaults and risk to local government debt, as the value of maturing bonds reaches up to $17 billion. Beijing will also step in to prevent the yuan's value from sliding too far while trying to temper U.S. accusations of currency manipulation. Economic challenges will increase pressure on the government and on President Xi Jinping in particular, since Beijing will be forced to juggle its economic agenda with strategies dealing with Washington. Ultimately, the Chinese government will be more willing to withstand economic struggles than to make compromises on its industrial policies. With Washington's threats to weaken China in mind, Chinese authorities will prioritize internal stability and cohesion over division, checking any threats to Xi's power and reinforcing social and internet controls.

The Middle Ground on North Korea Will Erode

Progress toward the U.S. goal of denuclearizing North Korea will be slow throughout the quarter. The United States has lost the middle ground and will now push for tangible progress on denuclearization, beginning with North Korea disclosing the scope of its program and committing to a clear timeline. But North Korea will first ask for progress on a Korean War peace deal, while pushing to have some sanctions lifted and to achieve international normalization. The North still maintains diplomatic momentum with South Korea and China, and both will continue engaging with Pyongyang and working to prevent U.S. military action. However, the United States will remain dedicated to a maximum pressure strategy, putting South Korea in a difficult position. But the United States will increasingly struggle to maintain its pressure as the North's good behavior erodes international support for sanctions. Russia, in particular, will shore up its support of the North ahead of a summit between North Korean leader Kim Jong Un and Russian President Vladimir Putin.

The U.S. and China Square Off on the Periphery

The United States will solidify its naval presence in the South China Sea and continue building up defense and economic ties along China's periphery from Taiwan to Southeast Asia. In response, Beijing will continue strategic efforts to improve its relations with its neighbors. China will hold its first shared naval drill with the Association of Southeast Asian Nations (ASEAN), and China and the Philippines will make progress on maritime management and on joint South China Sea energy exploration. However, countries such as Vietnam and Indonesia will continue to pursue defense and economic partnerships with the United States and Japan to balance against China. Beijing's tactic to isolate Taiwan, meanwhile, will likely strengthen the domestic Taiwanese pro-independence voice in November's local elections. And the United States will continue to focus on building ties with Taiwan in an effort to counter China.

Bumps Continue to Crop Up on the Belt and Road

Beijing will adjust its Belt and Road strategies in reaction to partner countries becoming suspicious of motives and to various projects running into trouble. Greater local and international scrutiny could prompt China to reach out to other countries, such as India, Japan and the core powers in the European Union. Indeed, a top leadership meeting between Japan and China in October will bring Tokyo onboard with some projects, probably in Southeast Asia or Africa. But the European Union will remain unwilling to accommodate China's gesture and will propose an alternative infrastructure project during an October meeting between Asian and European countries. 

Japan Will Try to Stay Stable

Japan's ruling Liberal Democratic Party is not eager to risk instability by trying to unseat Prime Minister Shinzo Abe in September's elections, so he will likely secure a third term. In response to U.S. tariff threats on Japanese auto exports, Japan will try to leverage its long-standing investment in U.S. plants and recent lowering of barriers in other markets. As a last resort, Tokyo could explore trade talks with Washington. Meetings between Putin and Abe might produce economic deals, but Russia will continue its trend of stopping short of any economic cooperation that could erode its sovereignty.

• Sept. 11-13: Russia's Eastern Economic Forum, which will be attended by Chinese, Russian and Japanese leaders.
• Sept. 18-20: Fifth inter-Korean summit in Pyongyang.
• Sept 18- Oct. 5: The U.N. General Assembly.
• Sept. 20: Japan's ruling party will select the next prime minister.
• September/October: The earliest time frame for the imposition of U.S. tariffs on $200 billion of Chinese products, which China will likely respond to with retaliatory tariffs on $60 billion of U.S. goods.
• October: The deadline for a U.S. report on alleged Chinese currency manipulation.
• October: Japanese Prime Minister Shinzo Abe will visit China.
• Oct. 20: Potential date for U.S.-South Korea joint naval training exercises.
• Late October: Japan's prime minister will likely visit China.
• November: China's president will visit the Philippines.
• Nov. 11-15: The ASEAN summit in Singapore.
• Nov. 24: Taiwan's local elections.
• Nov. 6: U.S. midterm elections, which could influence U.S. trade policy toward China.
• December: The U.S. and South Korea may hold Vigilant Ace air force exercises.