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Are US-China relations key to narrowing US-Asia trade gap?

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In the first seven months of this year, America's trade deficit with Asia came in at $241 billion – nearly two-thirds of its total trade gap. That was the contribution America's feeble domestic demand made to the fastest-growing segment of the world economy.

And this is by no means an exceptional event. Last year, for example, Washington's net contribution to Asia's economic growth was $426.4 billion, or 58 percent of its total shortfall in trade of goods and services with the rest of the world.

I may have missed something, but I have not seen any public record of the U.S. expressing concern about these vital issues during last week's meetings of the Association of Pacific Economic Cooperation (APEC) in Indonesia and of the Association of South East Asian Nations (ASEAN) in Brunei.

(Read more: Free trade deals can help growth - but which one?)

Instead there were anxious discussions about the U.S. budget dispute putting the world at risk of economic recession and financial crisis, and about the alleged damage to Asian economies from the talk of monetary tightening by the U.S. Federal Reserve (Fed).

Trans-Pacific Partnership (TPP) is not the answer

And then, somewhat unexpectedly, the lead to Washington's solution of its trade problems with Asia came from President Obama. Regretting his absence from the two Asian summits, this is what he said during his press conference at the White House on October 8, 2013: "It didn't help that I wasn't there to make sure that we went ahead and closed a trade deal that would open up markets and create jobs for the United States.

"President Obama was referring to the meeting the leaders of the 12 Trans Pacific Partnership, or TPP nations were supposed to hold in Indonesia during the APEC summit to reach a free trade agreement by the end of this year.

That agreement, however, is far from a done deal. The Japanese, who initially refused to join these negotiations, have serious problems with opening up some politically sensitive sectors of the economy (agriculture, in particular) and exposing the entire economy to unfettered foreign competition.

(Read more: Why Japan should fear US shutdown: IMF)

And it is not clear that many of Japan's requested "opt-outs" would be acceptable to other nations, including the U.S., whose car manufacturers and service industries don't agree with concessions Washington seems ready to offer. These are big problems whose solution will require more than a single summit meeting on the margins of an international conference.

More importantly, the TPP leaves out China and South Korea, the two nations whose combined trade surplus with the U.S. in the first seven months of this year amounted to $191 billion, or 80 percent of America's total trade gap with Asia.

ASEAN and China have other trade ideas

At the moment, both China and South Korea want to stay out of TPP. China, in particular, wants to see an East Asian free trade area. That's what China's President Xi Jinping said during the bilateral summit with Indonesia's President Yudhoyono (before the beginning of the APEC meeting) when they witnessed the signing of $28.2 billion worth of trade and investment deals between Chinese and Indonesian companies and the opening up of a $16 billion yuan-rupiah swap line.

An East Asian free-trade area is what the ten ASEAN countries – home to more than 600 million people – want to set up by 2015. China, of course, wants to be part of the deal. Building on an annual two-way trade and investment flow of $500 billion, Beijing would like to upgrade its strategic partnership and free-trade agreement with ASEAN. That was foreshadowed by Mr. Xi's statements in Indonesia about the creation of an Asian infrastructure investment bank, and about Beijing's readiness to help finance regional infrastructure projects.

(Read more: For Japan, China is losing its competitive edge)

It, therefore, seems very unlikely that China would become part of a trading relationship that could narrow America's bilateral trade gap currently running at an annual rate of $340 billion (an increase of about 10 percent from last year), representing about 80 percent of the U.S. trade deficit with Asia.

And here is a strange situation: A struggling American economy contributing $340 billion to the fastest-growing major economy in the world in exchange for the latter's declining purchases of U.S. debt instruments.

Diplomacy has to catch up with business

Clearly, the U.S. cannot narrow its trade gap with Asia without a major re-balancing of its trade relationship with China.How can that be done?

Staying with trade policy, the only thing Washington can do is (a) make sure that American firms have a fair access to Chinese markets for goods and services, and (b) that China abides by the World Trade Organization (WTO) rules in its export sales to the U.S.

The problem of the growing Sino-American trade imbalance has been a long time in the making. It started with wholesale outsourcing of American manufacturers attracted by low production costs (high profit margins), China's large domestic market and a springboard for competitive exports of things "made in China." In the process, U.S. firms did not just outsource; they also agreed to technology transfers to their joint-venture partners as a condition for producing in China.

(Read more: China wonders: Why do we own so much U.S. debt?)

No wonder we now have a situation where Apple, America's most valuable company, produces its world beating "i" products in China; or that Wal-Mart, the world's largest retailer, imports $30 billion worth of goods from China to sell in the United States.

And then, think of the fact that China's current account surplus, estimated to hit $420 billion by the end of this year, has to be recycled through China's investments overseas.

The latest news is that China's state-owned Dongfeng Motors is about to buy 30 percent of PSA Peugeot-Citroen (PSA), Europe's second-largest car maker, for an estimated $1.2 billion euros. China's late Paramount Leader Deng Xiaoping must be smiling somewhere. As a young man, Mr. Deng worked in the 1920s as a fitter in a French automobile factory while on a four-year work-study program in France.

This deal obviously has the blessings of Paris and Beijing, and is part of PSA's efforts to expand its presence in Chinese market.

(Read more: Asia still at risk from quantitative easing: Nomura)

The political blessing is important, not so much because in this particular operation the French government will also take 20 percent of PSA, but because it shows a diplomacy at work to buttress trade and investment ties with China.The message is clear: the U.S. has to find an appropriate modus vivendi with China.

Referring to what happened during last week's Asian summits, Washington cannot expect to build a more advantageous trade relationship with China while pursuing a confrontational posture and pushing a trade agreement (TPP) viewed in East Asia as an instrument of countering Beijing's growing economic and political ties with its neighbors.

Most East Asians consider that a "mission impossible" and a game they don't want to play – with the exception of a few countries using the U.S. in their territorial disputes with China.

Follow the author on Twitter @msiglobal9

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.