If the United States wants security, it needs balanced trade and a strong economy

  • No country can match the U.S. net contribution to world's economic growth
  • The U.S. is leading the world economy and financial markets to new highs
  • Keep the focus firmly on America First

Since American economic policies continue to be heavily criticized by friends and foes, let me start by putting in a good word for a reinvigorated Uncle Sam.

A cargo ship is loaded with shipping containers at the Port of Long Beach, Calif.
Harriet Taylor | CNBC
A cargo ship is loaded with shipping containers at the Port of Long Beach, Calif.

In a typical U.S. fashion, the good old Uncle picked himself up, dusted off and came back to lead the world economy and financial markets to new highs — after the most debilitating recession and banking debacle since the Great Depression.

And it did that with aplomb and generosity. During the first 10 months of this year, America bought $672 billion more goods and services than it sold to the rest of the world.

Arguably, nearly 80 percent of that net contribution to the world economic growth went to the wrong people. But that's the way it is — until a promised new policy brings different trade patterns.

Indeed, over those 10 months, U.S. trade generated a $140 billion surplus for wealthy Europe, and added a whopping $388 billion to net trade revenues of an increasingly wealthy East Asia.

In spite of that, the good Uncle did not even get a thank-you note. No, those we insist on calling friends, and some of them allies, keep tagging us as "trade protectionists," hell-bent on destroying "the liberal world trading system."

Calling out the miscreants

Nice and very justified, isn't it? Those people apparently think that by ripping off Uncle Sam, they do more and better for the rest of the world.

Strangely, official Washington and the tweeter-in-chief (President Donald Trump) are doing nothing to denounce that charade, even though they wish to elevate "economic diplomacy" to a higher level of strategic prominence.

That deafening silence is allowing the administration's domestic and foreign opponents to pervert the profound meaning of "America First" — a parable of policy logic followed by any dedicated, successful and democratically elected public servants. Doing the people's work is becoming equated with "trade protectionism," "isolationism," and, yes, a "threat to world peace."

It is conveniently ignored that a correction of systematic and excessive trade imbalances is still part of the IMF's Articles of Agreement. The rules there are setting out the obligation for symmetric trade adjustments of surplus and deficit countries.

The absurd corollaries to ignoring IMF rules are the accusations of trade protectionism that come whenever Washington denounces the inappropriate, beggar-thy-neighbor, economic and trade policies of surplus countries that refuse to balance their trade accounts. That means it's fine for Europeans and East Asians to keep piling on their net foreign assets mirrored in America's $8 trillion, and counting, of net international liabilities.

The same is true of America's huge financial burden for global security, although the picture there is less clear cut. Some security "experts" argue that Washington is messing things up by interfering everywhere and in everything that is happening around the world.

They are contradicted by others who think that America is not doing enough of that because, in their view, it should be confronting China and Russia head-on — with nukes, if necessary.

The Chinese beg to differ. They find that America's recently announced national security strategy errs in labeling China a "strategic competitor" and a "revisionist power." China wants to be a "U.S. partner in maintaining world peace" and an "open system of world trade."

Will reluctant allies help?

That, of course, is not surprising. Beijing understands that political tensions are incompatible with a free flow of international trade, finance and technology transfers — the key factors underpinning China's fast-paced economic development, and its rapid climb along the curve of a high value-added manufacturing output.

China wants "win-win cooperation." President Xi Jinping last month told a visiting President Barack Obama that "a long-term, stable and healthy development of Sino-U.S. ties accords with the interests of both nations and the world."

Interestingly, those calls for cooperation cede nothing on China's contested maritime borders or the Korean conflict. And, pushing aside the "win-win" mantra, Xi ordered his armed forces a few weeks ago to "enhance the combat capability … and the ability to win wars."

Wars against whom?

China also continues to build up its strong economic and political ties with the rest of Asia, including with U.S. allies like Japan and South Korea. Vietnam, too, is warming up to its big neighbor. Hanoi says that relations with Beijing "are in full bloom," following the two summit meetings this year. China's "connectivity" projects are now extending high-speed rail lines, and assorted trade transactions, to Laos, Thailand, Malaysia and Singapore.

Canada's Prime Minister Justin Trudeau was also looking for stronger economic and political ties with China during his visit to Beijing earlier this month. EU leaders are doing the same thing, in an unending flow of high-level trade and political missions to China.

All that shows that Washington will find it increasingly difficult to compete with Beijing's rising economic and political clout, because the U.S. friends and allies cannot be expected to go against their own economic and political interests to support America's strategic competition with China.

The case of the Asian Infrastructure Investment Bank in 2015 should have been a wake-up call. In spite of Washington's strident appeals to stay away from China's new vehicle of economic and political power, U.S. allies ran over each other to become the founding members of that financial institution.

Investment thoughts

Maintaining a strong economy, and balanced trade accounts, is the only way the U.S. can strengthen the four pillars of its national security: homeland protection, economic prosperity, peace through strength and advancement of U.S. global influence.

So far, the Fed has done a good job of correcting its last decade's mistakes, but the economy is still shackled by a dismal potential and non-inflationary growth of 1.8 percent. That must be raised to 3-4 percent by expanding and upgrading the stock and quality of human and physical capital.

How much of the coming fiscal stimulus will benefit U.S. jobs and incomes, and how much will leak out through rising trade deficits to the rest of the world is an open question.

But here is a hint: The strengthening of the U.S. domestic demand in the first nine months of this year to an annual growth rate of 2.3 percent, from 1.6 percent a year earlier, has led to a 7.5 percent increase of the trade deficit during the January-October interval. Those leakages will be much worse when the foreign trade numbers for strong retail months of November and December get in.

The economy and foreign trade is what the U.S. must focus on. Washington does not need to convince anyone about its unrivaled military power. But it should be clear that the economic and trade mismanagement would do much greater damage to America's national security than Asian reefs, uninhabited islands, foreign ethnic and religious disputes, terror attacks and European shenanigans.

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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