Op-Ed: Asia-Pacific Trump rally killed by US-China standoff

The national flags of the U.S. and China.
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The national flags of the U.S. and China.

It seems that sitting on the fence will no longer do. China's powerful rise has drawn the lines Asia-Pacific nations thought they would never have to cross. They did not want to choose sides, aspiring for friendly relations and good business with America and China.

The interview Singapore's Prime Minister Lee Hsien Loong gave to the British government broadcaster last Wednesday is an example of that. He feared that if relations between Washington and Beijing became "very difficult" Singapore "would be coerced (sic) to choose" alliances. For him, that was "a real worry."

His late father, the legendary Lee Kuan Yew, saw that coming when he told – in 2005 – a German newsmagazine that "the only (Asian) country that's openly on America's side is Japan. All the others are either neutral or friendly to China."

So, after all these years since Mr. Lee Kuan Yew's famously candid talk, the U.S. has a military alliance with Japan and a $450 billion trade deficit – two-thirds of its total trade gap – with a region that is home to nearly two-thirds of humanity, accounts for 40 percent of the world economy and is by far the fastest growing segment of global demand and output. China takes more than three-quarters of Asia's trade surplus with America.

US came up short

And here is what our key Asian ally says about China trade. Shortly upon taking office in December 2012, Japan's Prime Minister Shinzo Abe told the world that "China is an indispensable country for the Japanese economy to keep growing. We need to use some wisdom so that political problems will not affect economic issues."

So far, Mr. Abe has managed to square that circle, thanks to Article 5 of Japan's defense treaty with the United States. During the four years of his government, Japan's bilateral goods trade with China increased 11 percent and stood at $262 billion at the end of last year. That was more than one-third larger than Tokyo's trade with the U.S. in 2016.

But the main difference is this: Last year, the U.S. booked a $69 billion trade deficit with Japan, while China took a $44 billion surplus trading with its virulently hostile Japanese neighbor.

America ended up holding the bag – again. And now President Trump wants to build 350 new ships, most of which will apparently go to protect commerce and navigation in Asia-Pacific.

If that is meant to be a tip of the hat to Commodore Perry (aka, the Father of the U.S. Navy), who opened up trade with Asia-Pacific, rich Asians should be paying for this vitally important public good. But, who knows, globalists may prevail again so that we can continue to spend the money we don't have. The same old deal perhaps: Asians will be happy to lend us back the money we paid for their goods and services, and we shall keep adding these loans for future generations to our soaring public debt -- $20 trillion and counting, fast.

Is there anything else the U.S. could do about this? Maybe there is.

China's President Xi Jinping sent last week a high-ranking emissary to Washington with a message that, according to official Chinese media, he wanted a "non-conflict, non-confrontation, mutual respect and win-win cooperation …" adding that "China is willing to work with the U.S. in the next stage to enhance exchanges on all levels from top down."

That sounds good -- and very puzzling. Do the Chinese mean that they will no longer claim their contested maritime borders in the East and South China Seas, and that they won't crush the South Korean economy because the Koreans agreed to deploy a THAAD anti-ballistic missile system? Or are the Chinese simply repeating their old "advice" to Washington to keep out of intra-Asian border disputes, and ignoring American assurances that the powerful X-band radar, to be located southeast of Seoul, would not penetrate deep into the Chinese (and Russian) territory?

A test for "win-win" idea

Whatever it is, if the Chinese want a "win-win" trade deal, President Trump could start out by asking them to rebalance the U.S.-China trade relationship, where we now have a deficit of $347 billion, nearly half of our total trade gap. Beijing should be asked to do that by tripling its annual purchases of American goods and services from the pitiful $116 billion they bought last year. [That's roughly the volume of American export sales to the U.K. and The Netherlands, countries that account for only 17 percent of the fast-growing Chinese economy.]

That would be a good deal for China. Even if the Chinese purchased from America three times the amount they did in 2016 they would still have a surplus of $115 billion in the U.S.-China trade.

China could easily do that. The Celestial is on the roll, with deep pockets America lined up for them since the late 1980s. And Mr. Xi would have no problem with that either; he is the unquestioned "core leader" – an honor bestowed only upon Mao Zedong and Deng Xiaoping -- of 88 million party cadres helping him to build a rapidly modernizing and growing economy. Since he took the helm in November 2012, he pulled out of poverty 55 million people; he has another 45 million to go to eradicate poverty by 2020. By that time, the Chinese hope to have a "moderately prosperous society," with more evenly distributed benefits of the country's prodigious economic development.

Rationalization of production capacities, massive shifts to smart manufacturing, booming infrastructure for mushrooming urban centers and private and public sector services to manage a huge process of urbanization should open enormous business opportunities in China for American companies. Germans are jumping on that – and celebrating with their oompah bands.

At the moment, only 57.35 percent of China's 1.38 billion people are urban dwellers. Beijing wants to increase that to 60 percent by 2020 – implying a move of 36.6 million people from rural to urban communities over the next three years.

Basking in the bounties of a huge trade surplus with America, China should open up its markets and public procurement policies to U.S. suppliers on a preferential basis (yes!), instead of giving cause for long-standing complaints by American companies and U.S. trade representatives.

Investment thoughts

The world economy and financial markets would greatly benefit if excessive American and Chinese trade imbalances were substantially reduced. Washington and Beijing should lead that process by establishing sustainable trade flows between their two countries.

Unfortunately, seemingly insurmountable economic, political and security tensions are precluding such U.S.-China trade realignment.

The Trump administration has to find a breakthrough with China that has eluded all previous governments over the last three decades. Long years of neglect and policy errors have created flammable American and Chinese red lines in Asia-Pacific. What China now calls issues of its sacrosanct national sovereignty and territorial integrity is seen by Washington as an unacceptable overreach in terms of international law, America's national security and treaty obligations to Japan.

The proverbial can has hit the wall; it's no longer possible to keep kicking it down the road.

The long-festering Korean problems have now become an immediate and ominous test case: Will the South Korean economy be mauled in a dangerous military confrontation, where China and Russia say that their vital security interests are gravely compromised by military operations Washington and Seoul claim to be of a purely defensive nature?

And all that is happening while the Sino-Japanese/American time bomb keeps ticking around the 2.7 square miles of Senkaku/Diaoyu islands in the East China Sea.

Asia-Pacific markets have seen the end of the Trump rally. I shall soon be visiting an overcrowded Chinese "99.9 percent pure" gold shop, whose annex features a "millionaire's soup" (where you can slurp with delight on succulent soupy noodles) and a top brand European car dealership. That's how some Asians beat inflation and yo-yo asset markets.

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