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US economy needs Trump to push on with Asia pivot, with India a potential ally

Donald Trump speaks during a Hindu political organization's anti-terror fundraiser, October 15, 2016.
Dominick Reuter | AFP | Getty Images
Donald Trump speaks during a Hindu political organization's anti-terror fundraiser, October 15, 2016.

The case for a strong and urgent economic pivot to Asia by the incoming administration is easy to make. Here are the most salient points of that argument.

Asia is more than one-third of the world GDP, and it is by far the fastest-growing segment of the global economy. With its 4.4 billion people, Asia is home to 60 percent of humanity. It is the largest potential market for infrastructure projects, capital goods and wide-ranging consumer products.

What is the U.S. doing in that huge and rapidly developing market? The answer is: Not much.

Last year, America ran half-a-trillion dollar trade deficit with Asian economies. That was exactly two-thirds of our total trade gap. This year will be no better. In the first nine months, our trade deficit with Asia came in at $370 billion, accounting again for 66 percent of the total.

These deficits are reducing American economic growth (because a negative trade balance is subtracted from domestic GDP components), and such a strong import penetration of American markets is literally killing our jobs and import-competing industries.

Clearly, for the Trump administration, promising to focus on our sluggish economy, the foreign trade matters are urgent, and the hour is late. Lowering the beam on Asian trade is a must.

India on the way to China

India looks like a great place to start. A three-part tweet from India's Prime Minister Narendra Modi is, to the best of my knowledge, the warmest and the friendliest congratulatory message that Donald Trump, the 45th President of the United States, received from foreign leaders.

Here is what Mr. Modi said: "We appreciate the friendship you have articulated towards India during your campaign. We look forward to working with you closely to take India-US bilateral ties to a new height."

India's courteous, respectful and statesman's message is a sharp contrast to personal insults and denigration thrown at America's new chief executive from our European friends and allies (quotation marks on friends and allies is an optional matter of taste). It seems that the only warm and friendly European message came from an Italian who sent an SMS and three magnums of Amarone, one of the finest Italian wines, to teetotaler Donald Trump.

India's gracious invitation to raise "bilateral ties to a new height" is exactly the message we need from Asia. The U.S. businesses are grossly underperforming in India - a country clocking up an average growth rate of 7 percent in the last three years, and well on the way to keeping that forward momentum over the medium term. Our export sales of $21.5 billion to India in 2015 are way too low in such a fast-growing economy of 1.3 billion consumers.

Sadly, this year could be even worse. In the first nine months, American exports to this true Asian giant came in at $15.4 billion – a 7 percent decline from the year-earlier level.

We must do better than that because a bigger trade volume with India could help to solve our difficult trade problems with the rest of Asia.

For example, part of the solution to America's $257.7 billion trade deficit with China (46 percent of our total trade gap) during the first three quarters of this year may be in answering Mr. Modi's "Make in India" call as he seeks to create the world's "most open" economy. With labor costs continuing to escalate rapidly in China, India could offer more profitable production alternatives.

These possibilities will probably be explored, but it is not clear to what extent they could offer an effective relief to our negative trade balance with China. A politically viable modus vivendi with the Middle Kingdom seems like a pre-condition for stable and growing commerce in goods and services.

Guanxi at Mar-a-Lago

We cannot expect a constructive trade relationship in an environment widely perceived as a hostile strategic competition. As recently as last Saturday, an editorial of China's government news agency called the U.S. a "hit-and-run meddler" hell-bent on creating chaos in Asia. These are not atmospherics; that is the depth of Sino-American problems.

Threats of a 45 percent import tariff on goods produced in China, technically unprovable charges of China's exchange-rate manipulation and unrelenting anti-dumping suits are no substitutes for effective trade policies. Campaign trail bluster will no longer fly. Mr. Trump won the election. He now has to fix the damage he found. That won't be easy. The Chinese hold strong cards. And the Chinese are not in a hurry; in fact, they think that time is working for them.

Here are a few things to think about.

One, Mr. Trump might wish to use some guanxi - fancy a weekend at Mar-a-Lago, Palm Beach? Don't laugh. That's about restoring confidence on the basis of clearly stated – and vigorously defended – American strategic interests in Asia and in the rest of the world. An agreement to respect American and Chinese core interests is a matter of difficult compromise.

After four hours of exactly that kind of bruising talk, China's President Xi Jinping took President Obama for an evening stroll around the West Lake in Hongzhou during the G20 summit last September. They then set down for a cup of long jing (dragon well) – a delicate green tea – to share a convivial moment that included Mr. Xi's interest in his American guest's daily exercise routine.

Who knows what a stroll in Florida's balmy evenings might produce. Give it a chance.

Two, even if some headway is made toward a rapprochement with China, Mr. Trump should harbor no illusions about easy trade agreements to follow. Russian dealings with China show that Beijing will mercilessly push its negotiating advantage even with an apparently trusted strategic partner and a sole supplier of badly needed sophisticated weapons.

Three, it follows then that Washington has to weaken Beijing's negotiating trade position. That will be very tough because we have made China our largest provider of imported consumer products. We would, therefore, have to bring back, or modify, some of our strategically important manufacturing operations in China. By doing that, the U.S. would also cut off the free-flow of our technology transfers that are part of Sino-American joint ventures. Changes in the U.S. corporate tax system are the main instruments to conduct that process.

Four, bilateral investment regulations with China are another item on our trade agenda. Beijing is on an overseas shopping spree because it is recycling the bounty – an estimated $314 billion this year - earned on its net exports of goods and services. The balance of payments has to balance – a current account surplus must equal a capital account deficit.

Investment thoughts

Mr. Trump's intention to focus on the economy is a cause for cheer, even though we don't know how he will pay for a vast spending program he wishes to implement. He is inheriting a soaring budget deficit (somewhere between 3 and 4 percent of GDP) and a gross public debt of $19.8 trillion (106 percent of GDP).

Improving the U.S. trade balance by generating more export sales could greatly help Mr. Trump's efforts to revive the economy's growth dynamics. That's where America's economic pivot to Asia comes in. But in such a vitally important strategic move, "the art of the deal" should be tested by trading smarts rather than empty threats of trade limitations and hints of a military confrontation of nuclear-armed states.

Our trade deficit with a moribund EU economy is partly a cyclical issue, but toting up half-a-trillion dollar trade bills with Asia – the growth champion of the world economy – is a serious structural problem that might remind you of Mr. Trump's campaign scream: "They are eating our lunch."

Mr. Trump will have to stop that by (a) improving access of U.S. businesses to overseas markets, (b) restoring the growth of U.S. manufacturing industries through tax changes, labor market policies and infrastructure investments, and (c) fighting Asian (and European) freeloaders by insisting on international rules of trade adjustment.

India is offering an interesting entry point in this economic rebalancing to Asia. But get this: India's PM Modi just returned home from a three-day visit to Japan last week. Delhi and Tokyo have signed 10 multibillion dollar deals in energy, transportation, space technology and agriculture. Having pocketed a big paycheck, Japan's prime minister will be asking Mr. Trump in New York next Thursday for America's support (involving U.S.finances and military assets) in Tokyo's confrontation with China.

Go figure!

Meanwhile, Mr. Trump is sending signals that his large spending programs won't be good for bonds. But he is floating a promise that equities and commodities could be great money spinners.

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