When Trump and Xi meet, trade is the only bilateral deal they can talk about

  • China would do well for itself, and its claim of a constructive role in the world economy, by agreeing to a prompt and meaningful reduction of its systematic and excessive trade surpluses with the U.S.
  • Washington should deal with its structural and systemic trade disputes with China in World Trade Organization forums. The U.S. can also solve some of those issues through its own regulations.
  • No progress should be expected on any political and security problems at the core of U.S.-China confrontation.
Chinese President Xi Jinping and U.S. President Donald Trump greet attendees waving American and Chinese national flags during a welcome ceremony outside the Great Hall of the People in Beijing, China, on Nov. 9, 2017.
Qilai Shen | Bloomberg | Getty Images
Chinese President Xi Jinping and U.S. President Donald Trump greet attendees waving American and Chinese national flags during a welcome ceremony outside the Great Hall of the People in Beijing, China, on Nov. 9, 2017.

So far, China does not have much to complain about America's present administration.

China's U.S. trades are flourishing as never before. President Donald Trump proudly talks about his friendship with his Chinese counterpart Xi Jinping, and Washington's earlier incendiary rhetoric about containment and confrontation has been largely put to the side.

Since Trump took power in January of last year, China pocketed $676.6 billion in the form of surpluses on its U.S. goods trades.

And, apparently showing no interest for Washington's trade concerns, China's surplus in the first nine months of this year accelerated to an annual growth rate of 10 percent. That surplus was driven by China's sales to the U.S. soaring 8.2 percent, while American sales to China slowed to a quasi-stagnating pace of 3.2 percent.

Looking at all that, one could think that the U.S. is owed an apology — and a credible commitment to correct such an abusive trade behavior.

At any rate, American sinologists, veterans and newcomers, should ponder the Chinese audacity. The challenge the Chinese threw to the U.S. is so daring that one could doubt the wisdom of such a move against the man who ran for office in 2015 on the promise of stopping the great China "rip-off."

Two-step trade deal

So, if there is any truth to Trump's claim of friendship, he should be getting an advance hongbao from his Chinese pal during next Friday's G-20 meeting in Buenos Aires, Argentina.

Indeed, both leaders know that they have to swiftly move beyond the problems of bilateral trade and investments if they want to — as they must — come to terms with acute issues of war and peace between competitors whose nuclear triads are pointed at each other.

Xi apparently seems ready to get the trade dispute out of the way.

Here's what he said after his telephone conversation with Trump at the beginning of this month: "The two countries' trade teams should strengthen contact and conduct consultations on issues of concern to both sides, and promote a plan that both can accept to reach a consensus on the China-U.S. trade issue."

Trump kept it much simpler with tweets and soundbites, saying that trade discussions were "moving along nicely," and that the Chinese were "ready to make a deal."

And then we heard a shocking news. The U.S. Trade Representative issued a report last Tuesday that "China has not fundamentally altered its unfair, unreasonable, and market-distorting practices," and that "China had made clear it would not change its policies."

The policy changes requested by the U.S. essentially concern (a) a reduction of the bilateral trade imbalance, (b) illegal acquisition of American intellectual property, and (c) the use of "foreign investment restrictions to require or pressure the transfer of technology from U.S. companies to Chinese entities."

Breaking that deadlock during next Friday's U.S.-China summit could involve the following steps.

First, China — with its systematic, excessive and growing trade surpluses — should act according to the rules of international trade adjustment to promptly and meaningfully narrow its trade gap with the U.S. Large volumes of U.S. farm and energy products are now ready to go to China.

Second, Washington should address the structural and systemic trade complaints against China in World Trade Organization forums, in its own trade regulations and with strictly reciprocal measures. That would cover the cases of intellectual property protection, forced technology transfers, illegal export subsidies, etc.

De-link trade from war and peace

Putting trade problems with China on two separate tracks would probably find support within the European Union, which is experiencing similar problems with China and in the rest of the world. In doing so, Washington would show that it is seeking relief from mercantilist, beggar-thy-neighbor trade policies rather than intentionally destroying the "multilateral system of free trade," which, incidentally, does not exist.

Another advantage of that two-step action would be to break the linkage between trade disputes and geo-strategic considerations that are at the core of the U.S.-China confrontation.

Certainly, a trade deal is simpler and easier than an agreement on a Korean peace treaty and a denuclearization of the Korean Peninsula. The U.S. and China agree on the need to rid North Korea of its nuclear arms, and their delivery vehicles, but they are worlds apart on how to reach that objective.

China's contested maritime borders are a much bigger problem. Beijing is bristling at a slightest challenge to the way its ancient heritage delineates its territorial waters. The only thing China will concede there is a peaceful and cooperative dialogue with its neighbors, most of whom did not even exist when China ruled the East Asian waves.

The Chinese don't consider the U.S. a party to those neighborly discussions. As a result, Beijing just wants military contacts to avoid accidents with American air and navy units operating in East and South China Seas.

Taiwan is another controversial issue. China considers that a One-China principle, agreed with the U.S. in 1972, is being violated by American arms sales and an implicit support for Taiwan's independence. Washington is denying that, arguing that the 1979 Taiwan Relations Act authorizes unofficial relationship with Taiwan and assistance to its defense forces.

It is possible that the Taiwan issue will become less acute after the poor showing of the island's pro-independence party in last Saturday's elections.

Investment thoughts

China would do well for itself, and its claim of a constructive role in the world economy, by adhering to the long-established rules of the international trade adjustment.

That would mean China's acceptance to promptly begin a meaningful reduction of its systematic, excessive and growing trade surpluses with the U.S. — a gesture followed by South Korea and, to a much lesser extent, by Japan.

The U.S., for its part, should deal with its structural and systemic complaints against China in the appropriate WTO forums. Washington can also solve some of these problems through its own regulations based on internationally agreed trade norms and strict rules of reciprocity.

Those are the main provisions of a possible U.S.-China trade agreement — the only deal Trump and Xi can conclude during their G-20 meeting this week in Argentina.

But expect no agreement on the Korean peace process, China's maritime borders and Taiwan's challenge to the One-China policy. The only exception will be the agreement to continue the U.S.-China military contacts to prevent accidents, or fatal misunderstandings, in the East and South China Seas, and in the waters surrounding the Korean Peninsula.

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.