We are still a little over a month away from the inauguration of President-elect Donald Trump, but one thing about his administration already appears clear: this will not be a traditional presidency. With virtually no political experience, Trump is an unconventional president that promises an unconventional leadership style.
One area that really highlights the non-traditional nature of President-elect Trump is his stance on diplomacy. Trump ran an “America first” campaign, but he always has plenty of things to say about our allies and enemies.
Over the past week, we’ve begun to see what happens when Trump puts his own spin on long-standing diplomatic traditions as the government of China has protested the president-elect’s questioning of the “One China” policy that America has supported for nearly four decades.
If Trump goes on to fully reject the “One China” policy once he takes office, the decision will certainly initiate a massive change in our relationship with China, which could go on to have severe economic consequences for the Asian powerhouse’s already-volatile economy.
What Is One China?
The “One China” policy encompasses the U.S. government’s recognition that the island of Taiwan is actually part of mainland China. As it stands today, Taiwan is under the control of the Republic of China’s government, which fled to the island in 1949 after the Communist Party of China won the Chinese Civil War.
Nevertheless, China’s ruling Communist Party maintains that Taiwan is a renegade province and claims that the territory still belongs to China. In 1979, President Jimmy Carter changed America’s diplomatic recognition from Taiwan to China and initiated the “One China” policy.
This diplomatic tradition remains an incredibly important point of focus for the Chinese government, and Donald Trump’s recent comments about the policy have spurred a loud reaction from the country.
China’s objection to Trump’s stance on the “One China” policy first manifested after the president-elect accepted a congratulatory phone call from Taiwan’s president on Dec. 2. The conversation between the soon-to-be president and Taiwan’s leader was the first of its kind since President Carter first established the policy.
Trump defended the phone call and further targeted China’s existing policies over the weekend during an appearance on Fox News Sunday.
“I fully understand the 'One China' policy, but I don't know why we have to be bound by a 'one China' policy unless we make a deal with China having to do with other things, including trade,” Trump told Fox.
Trump would go on to question several other Chinese policies, including the nation’s relationship with North Korea and military posturing in the South China Sea.
The Global Times, a Chinese publication produced by the country’s Communist Party, called Trump “naïve like a child” in regards to diplomacy.
It seems relatively obvious that Trump will attempt to use the “One China” policy as leverage to strike a new trade deal with China, but it seems unlikely that the Chinese government well respond well to this type of bargaining. However, a full-on rejection of “One China” and a dissolution of U.S. and Chinese diplomatic relations would almost certainly cause dangerous economic consequences for the Asian nation.
China’s stock markets and currency valuations have already proven to be heavily manipulated by the Chinese government, which indicates a certain level of uncertainty and risk. Without a strong diplomatic relations with America, that uncertainty and risk would be further exacerbated.
The first two tickers that investors need to keep their eyes on are the iShares China Large-Cap ETF FXI and the Deutsche X-trackers A-Shares ETF ASHR. These tickers remain the two largest China-focused ETFs, and it’s safe to assume that economic uncertainty could send both China’s large cap stocks and A-share market crashing.
Of course, new risk in the Chinese economy will also affect the country’s real estate market, which is tracked by the Guggenheim China Real Estate ETF TAO, as well as American companies like Caterpillar CAT that get a lot of business from the development of China and its infrastructure.
Other stocks that could potentially feel some pain from this type of uncertainty include Yum China Holdings YUMC, the Global X China Consumer ETF CHIQ, and the Guggenheim China Small Cap ETF HAO.
Investors should also stay pay attention to the iShares MSCI Taiwan ETF EWT and the iShares Hong Kong MSCI Hong Kong ETF EWH.
Of course, China has plenty of bargaining chips in this game too. There are several American companies that would be impacted by China pulling back on their business dealings with the U.S. For example, Boeing BA is expected to deliver $11 billion worth of planes to China, but the same outcome could be achieved through its European rival, Airbus EADSY. Other vehicle manufactures, such as General Motors GM and Ford F could be threatened.
The most hopeful outcome from all of this is that Trump and China find a middle ground that allows both parties to benefit. While China will be reluctant to sacrifice traditional diplomatic practices, a new trade deal could positively impact its economy.
Stocks that Aren't in the News. Yet.
You are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. Many of these companies are almost unheard of by the general public and just starting to get noticed by Wall Street. They have been pinpointed by the Zacks system that nearly tripled the market from 1988 through 2015 with a stellar average gain of +26% per year. See these high-potential stocks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
BOEING CO (BA): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
ISHARS-CHINA LC (FXI): ETF Research Reports
ISHARS-HONGKONG (EWH): ETF Research Reports
CATERPILLAR INC (CAT): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
GUGG-CHINA SC (HAO): ETF Research Reports
AIRBUS GROUP NV (EADSY): Free Stock Analysis Report
GUGG-CHINA RE (TAO): ETF Research Reports
ISHRS-MS TAIWAN (EWT): ETF Research Reports
DEUTS-XT HV CS3 (ASHR): ETF Research Reports
YUM CHINA HLDGS (YUMC): Free Stock Analysis Report
GLBL-X CHIN CON (CHIQ): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research