The US is losing an unassailable $600 billion trade case

  • With their growing surpluses on American trades, China, Japan and the European Union are defying U.S. trade policies — and getting away with it.
  • China says it is "locked and loaded" to "fight to the end" on its trade issues with the U.S.
  • German Chancellor Angela Merkel's upcoming visit to Washington should be used to make an example-setting deal for a new architecture of fair and reciprocal trade.

Before coming to Florida last week to talk trade, plan out East Asian security and play a round of golf, Japan's Prime Minister Shinzo Abe kicked off in Tokyo a series of meetings with China's visiting State Councillor Wang Yi.

The meetings were set to strengthen the Sino-Japanese "strategic relationship of mutual benefit," to expand a $300 billion bilateral trade and to increase further the flow of 7.3 million Chinese visitors to Japan.

Abe also welcomed the impending visit to Japan of China's Premier Li Keqiang to (a) set up a trilateral free trade area with China and South Korea, (b) conclude the agreement on an East Asian Regional Comprehensive Economic Partnership, (c) join China's erstwhile shunned Belt and Road infrastructure projects, (d) promote multilateral trade and (e) fight trade protectionism.

Clear messages, aren't they?

And then, while in Florida, Abe insisted on keeping the U.S.-Japan trade in a broad multilateral framework, fearing that President Donald Trump's preference for a bilateral deal would make a big dent in Japan's $68.8 billion trade surplus on American trades.

China should golf instead of spoiling for a fight

Promising to Trump an "honest trade relationship," Abe asked him to include Pyongyang's short- and medium-range missiles in the forthcoming disarmament negotiations, and to get back to Japan the people North Koreans allegedly abducted.

I wonder whether he also told Trump that Japan's high-ranking officials from foreign, defense and other government agencies were conducting consultations in Sendai, Japan last Thursday and Friday with their Chinese counterparts on contested maritime borders in the South China Sea. That comes close on the heels of a similar meeting in Shanghai last December, showing that a Sino-Japanese "strategic relationship of mutual benefit" may be heating up while Tokyo feels secure under the U.S. defense umbrella and enjoys full access to American markets.

China is not interested in the bourgeois game of golfing. No, Beijing says it is "locked and loaded" to retaliate and "fight to the end" in what it sees as an unfolding "trade war" with America.

That is an interesting negotiating posture for a country that ran a $375 billion trade surplus with the U.S. last year. And this year could be much worse. The American trade deficit with China in January and February was running at an annual rate of $391.2 billion — a 20 percent increase over the same period of 2017.

In spite of that, there is nothing in China's official statements to indicate that Beijing intends to bring those surpluses down. One can only see a belligerent defiance, promises to open up, to cling to multilateral trade and to pursue a "win-win cooperation."

Will Washington settle for that? Or is Trump ready to make good on his promise to give China a pass on trade for help with North Korean nukes?

Merkel for a Mar-a-Lago weekend

If true, that would be a huge mistake. There are no trade offs here. Beijing will not sell North Korea down the river in exchange for Trump's leniency on large, and growing, trade deficits with China. And neither will China suffocate Pyongyang for Washington's favors, whatever those might be.

Pyongyang said it is suspending nuclear and ballistic missile tests on a site that had reportedly become unusable. It also claims that no further tests are necessary — presumably for now. What will follow — if all goes well — is a long negotiating process where China will support North Korea's demands for iron-clad security guarantees and the dismantling of the sanctions regime in exchange for gradual measures of nuclear disarmament.

There are no ultimatums for quick fixes here. There is only a devilishly difficult, long and uncertain high-stakes bargaining among actors deeply suspicious of each other's sincerity and intentions.

But let's get back to the trade issue. Even on a heroic assumption that the expected U.S.-North Korean summit, midwifed by China, is a resounding success, Washington still could not ignore the size and the pace of increase of its trade deficit with Beijing.

The European Union, for its part, is also threatening retaliations in spite of a $151.4 billion trade surplus with the U.S. last year.

The silver lining is that German Chancellor Angela Merkel knows better. She dispatched her vice chancellor to Washington last week to talk trade and prepare the ground for her one-day visit to the White House on Friday, April 27.

Trump would do well to show more understanding for EU trades and more warmth for Merkel. About one-fifth of American exports go to the EU. In January and February, the U.S. sales to the EU were growing at an annual rate of 9 percent — while falling 1.5 percent to China. Over the same period, American exports to Germany soared 12 percent.

Germany may not oblige its estranged cousin Trump with Chevys on its autobahns, but show more courtesy and extend Merkel's Friday visit for a Mar-a-Lago weekend, and you might see a flood of sun-starved Germans to Florida. Also, keep in mind that Germans believe "alte Liebe rostet nicht" – old love does not rust.

Investment thoughts

China, Japan and the EU are defying Trump's trade policies — and are getting away with it. Last year, on Trump's watch, they ran a combined $595.4 billion surplus on their American trades — a 5.8 percent increase from 2016.

And things are now getting worse. With the U.S. domestic demand revving up a bit, America's trade gap this year could be much wider. In January and February, the U.S. trade deficit with those three large economic systems, accounting for about 40 percent of world's demand and output, was running at an annual rate of $612.3 billion, a 3 percent increase from the same period of 2017.

What can Washington do?

First, stop threatening. But do make sure that everybody understands the U.S. won't be the dumping ground of the world, with systematic losses of wealth, jobs and proprietary technology.

Second, make a deal with Germany to cut U.S. trade deficits by boosting American exports to the EU while replacing a significant part of imports with products generated by European companies in their U.S. production facilities.

Japan would follow suit by stepping up supplies from its U.S.-based manufacturing outlets. But whether Tokyo will open up its markets to American goods and services will depend on Washington's implementation of rules of reciprocity.

Third, watching all this, China would understand that it has to cooperate, provided Washington stops linking strategic security issues with what Beijing should normally do as a responsible world trader.

Remember, the Chinese realize that no trade concession on their part can wish away acute U.S.-China questions, such as Taiwan, contested maritime borders in the South China Sea, the sequels to the Korean War and "strategically competitive" issues in the Indo-Pacific region and beyond.

Talk reciprocal nickels and dimes with Beijing, and make sure that the people we call our friends and allies are following the same approach. The U.S. can't have monumental trade issues with China while its closest allies are flocking to Beijing for lucrative "golden era" relationships. If that continues, Washington will be left holding the bag.

The Chinese are in an untenable situation where they live off their main trade partners while advocating globalization, multilateralism and the empty shell of "win-win cooperation." If they continue on that path, they will discredit China's remarkable achievements accomplished over decades of hard and smart work to save, produce and sell to willing buyers around the world.

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.