Trump has a long way to go on the road to fixing US-China trade

  • Don't link China trade with North Korea and other strategic issues, Michael Ivanovitch writes
  • Appeals to China for voluntary export restraint won't work
  • Trade problems with China and North Korea crisis will flare up again
  • The U.S. should strengthen ties with Japan, India, South Korea and other Indo-Pacific allies
President Donald Trump and China's President Xi Jinping leave after an opera performance at the Forbidden City in Beijing, China, November 8, 2017.
Jonathan Ernst | Reuters
President Donald Trump and China's President Xi Jinping leave after an opera performance at the Forbidden City in Beijing, China, November 8, 2017.

The U.S. and China leaders agreed at the Beijing summit last week that there were no quick solutions to their structurally unbalanced trade relations. In a remarkable departure from his earlier statements, President Donald Trump also acknowledged that this decades-old problem was mainly caused by America's negligent and inept trade policies.

That was not news to the Chinese because those issues have been thoroughly discussed through diplomatic channels much before Trump's "state visit plus."

And neither is it newsworthy that China won't be rushed. China, in case some impatient Westerners need to be reminded, will open up in its own time and on its own terms in a tough and excruciatingly difficult negotiating process. That was a hint Chinese Premier Li Keqiang dropped during his meeting with Trump, when he said that "the two countries should open up to each other," inviting the U.S. to increase "high-tech exports to China," an area of trade in "dual-use technologies" Washington keeps off limits.

Meanwhile, as a pacifier, Trump was offered a mega "hongbao" — China's traditional gift for special occasions — in the form of hundreds of billions of done and potential deals as a down payment on the long years ahead to reach a more balanced U.S.-China trade relationship. While Beijing was promoting its so-called win-win approach, Washington probably didn't even notice that this was American money China was recycling from its trade surplus accounts.

Let's even out the playing field

Cleverly, also, the money did not come in the customary red envelope; it came along as part of an apparent American acceptance of a special relationship praised by Chinese President Xi Jinping, who extolled the "head-of-state diplomacy," cooperation as "the only correct choice," and sought to "increase trust and diffuse doubts on major and sensitive issues."

That indeed is a vision of a wonderful new world, with disappearing red lines and merging national interests of countries whose diametrically opposed social, economic and political systems underpin their irreconcilable geo-strategic imperatives.

Some malicious European commentators took this literally, positing that Trump's visit, and all its details, were a monumental gift to China. Participants on one of Germany's most popular TV shows, including outgoing Foreign Minister Sigmar Gabriel, talked last Friday about the Chinese century, urging that Germany, the host to America's largest military bases in Europe, had to take account of that new reality. Print take-outs from the show were popular readings for two days.

And, talking about covering all the bases, Li Keqiang called the German caretaker, Chancellor Angela Merkel, in the middle of Trump's visit to Beijing, to reassure her about China's enduring fondness for the China-Germany "dream team." Li, of course, knows who holds the key to Europe, China's second-largest export market after the U.S. Last year, the Chinese unloaded in Europe more than $400 billion worth of goods, representing about one-fifth of China's overseas sales.

Putting aside the politicians, the European and American businesses share the same views about an increasingly difficult market access and unfavorable operating environment in China. Reflecting those views in the comments on last week's summit, the president of the American Chamber of Commerce in Beijing said that large business deals were fine, but "we still need to focus on leveling the playing field because U.S. companies continue to be disadvantaged doing business in China."

Strengthen the American presence in Asia

Simply put, the U.S. business representatives worry that trade problems are being swept under the rug, while the media continue to play up China's masterfully concocted combinations of real and pie-in-the-sky business deals for American companies.

One of those is Beijing's well-timed and largely hypothetical deal offered by a possible opening up of China's financial institutions. Without any attention to the actual meaning of the Chinese statement, the media rejoiced about U.S. investors snapping up the crown jewels of China's finance.

But that's not what the Chinese are saying, let alone thinking. The official statement, reported by China's government news agency, says that there was "no specific timetable … for lifting the equity ownership limit" in joint-venture agreements with foreign investors.

And the game goes on. The huge U.S. trade deficit with China — estimated at about $370 billion for 2017 — is driven by unstoppable and institutionalized dynamics. This year's trading patterns show that the Chinese want to keep their American purchases growing enough to blunt any possible Washington's attempt to "kick and rush" the rebalancing of trade accounts.

Trump must be aware of that gambit. But does he realize that "friendly appeals" to China to voluntarily stop raking in hundreds of billions of dollars in its U.S. trade surpluses is a road to nowhere? And if he does, what is he prepared to do about it?

At some point, and probably sooner than most people think, the trade numbers will force Trump to turn the leaf. Things are now happening on his watch, challenging his solemn pledge to stop China "robbing us blind." Excuses that he inherited the problems won't do. Americans elected him to stop and solve the policy errors of the past, and to offer new avenues of growing jobs and incomes.

The North Korean issue is of the same piece. Just as Trump committed to cooperate with China on a peaceful denuclearization of the Korean Peninsula, Pyongyang's ambassador to the United Nations chimed in that North Koreans "will not negotiate about their ballistic missiles and nuclear weapons until the U.S. completely stops its hostile policies and nuclear threats against us."

Do you think that the North Koreans issued such a statement without any consultation with China and Russia, the two world nuclear powers and veto-wielding Security Council members who told the U.S. exactly the same thing in their famous "suspension for suspension" document?

So, will Trump make a total U-turn on North Korea, play nice and cooperate with China in a new format of "head-of-state" diplomacy to bring the Hermit Kingdom back into the world community?

Investment thoughts

The U.S. may have fallen into a trap of its own making by softening its trade stance with China in exchange for Beijing's "help" in dealing with the North Korean crisis.

The U.S.-China trade imbalance is a standalone issue; it should be handled with economic and trade policy instruments. If done that way, the U.S. trade deficit with China is so glaring that Washington would have had no trouble at all getting a nod from the World Trade Organization and the International Monetary Fund. But the powers that be do not seem to think much about such easy diplomatic niceties that would help the U.S. to hold the high end of the road.

The Pentagon can deal with the military aspects of the North Korean problem to protect the U.S., South Korea and Japan. Anybody foolish enough to doubt that should take a look at the joint exercises of America's three supercarrier battle groups that started in Western Pacific last Saturday.

The political issues surrounding the North Korean crisis are equally momentous because they go to the core of the American presence in Asia. With an overwhelming military power, and a close cooperation with Indo-Pacific allies (Japan, India, South Korea, etc.) the U.S. should be able to take care of that, too.

On the home front, Washington's half-a-trillion dollar annual trade deficits are growth leakages that must be plugged through free and fair trade. Remember that "the shining city on the hill" can only be built with the resources the American economy can create to defend freedom and democracy, and to enrich the humanity with arts, sciences and education.

Meanwhile, expect that trade problems with China will flare up again. And so will the Korean crisis.

Watch the Fed.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He 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 Business School.

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