US-China trade war: A stable deal with a strategic adversary is an elusive quest

  • America’s flexible and growing $20.7 trillion economy would take in stride the loss of $130 billion of its goods exports to China, with supply chain disruptions filled in by substitutes.
  • For China, a loss of $550 billion goods exports to the U.S. would be a big deal.
  • Such extreme outcomes in an escalating trade confrontation are in no one’s interest. Washington and Beijing are on an old and permanent collision course.
President Donald Trump and Chinese President Xi Jinping during dinner at in West Palm Beach, Florida, on April 6, 2017.
Jim Watson | AFP | Getty Images
President Donald Trump and Chinese President Xi Jinping during dinner at in West Palm Beach, Florida, on April 6, 2017.

America's soaring and systematic goods trade deficits with China — with 2018's estimated to reach $430 billion, for an increase of more than 20 percent from the previous year — are one of the fundamental political and security issues dividing the world's two largest economies.

No one should, therefore, be surprised by the statement made last week by the U.S. Commerce Secretary Wilbur Ross that Washington and Beijing were "miles and miles" from any trade agreement. China, after all, is also considered by the U.S. to be a strategic "competitor" (adversary) and a "revisionist power," seeking to upend the American world order.

In a strange case of myopia, economic and financial analysts don't see that strategic assessment as a key driver of Washington's dealings with Beijing. Their market outlook is caught up in a bizarre view of an allegedly disintegrating Chinese economy and "news" leakages from ongoing trade negotiations.

All that is frivolous chatter and cheap trading fodder. The Chinese economy is not falling apart. Beijing has, and is actively using, a number of demand management instruments to stabilize the economic growth in the 6 percent to 6.5 percent range it apparently sees as a chief policy objective.

Stop the nonsense about China's economy

But it seems that the pessimism about the Chinese economy is not enough. There is also the nonsense of pretending that China's economic statistics are all "fake numbers."

People should come to their senses. They are dealing with an economy that has become one of the main pillars of the international monetary system. China's economic structure, policies and performance are regularly examined by the International Monetary Fund, various other United Nations agencies and the Organization for Economic Cooperation and Development.

When someone says China's economic and financial numbers are "fake," they are saying that all of those organizations — where the U.S. is a ranking member and a principal player — are enablers of Beijing's official misrepresentations.

Think of it. How would that be possible?

Now, with respect to the U.S.-China trade deal itself, here is what's at stake.

According to U.S. Bureau of Economic Analysis figures, American goods exports to China amounted to a total of $102.5 billion while China's goods exports to the U.S. came in at $447 billion in the first 10 months of last year. That gave China a huge advantage of a $344.5 billion trade surplus, a number that accounts for nearly one-half of America's total trade gap.

Big deal? Yes and no.

Such a totally and systematically unbalanced bilateral trade relationship must be corrected. Both countries recognize that. The only problem is that Washington and Beijing don't seem to agree on a mutually acceptable procedure to reach the necessary trade adjustment.

The logic and the urgency of the matter would call for an immediate, sustained and large increase of U.S. sales to China, and a similar decline of Chinese exports to America. To support that process, China should broaden market access to American firms and respond to American complaints about allegedly market-distorting trade practices, such as export subsidies, illegal acquisitions of intellectual property, forced technology transfers and more.

Trade is part of the US core strategy

That sounds like a two-step procedure — immediate redirection of trade flows and structural trade policy changes — but it isn't: A sustained and successful trade adjustment requires synchronous moves on both policy tracks.

Simple, isn't it? Yes, but nothing works. Two years into the Trump administration's term of office, China will have accumulated a $1 trillion surplus on its U.S. goods trade once all the 2018 numbers are in.

I am not privy to trade negotiations, but from media reports in the public domain it appears that China finds the American position unacceptable when U.S. officials demand Beijing stop what really amounts to technology thefts, trade-distorting export subsidies and suspicious exchange rate management.

Underlying all that is Washington's view that there would be no sustainable progress on reducing the U.S.-China trade imbalances without transparent and verifiable structural trade and economic reforms in China.

Hence the impasse. China apparently cannot accept reform demands to discontinue illegal technology acquisitions and export subsidies — because Beijing strenuously denies those American allegations. And China reportedly would not even think of allowing American authorities to conduct enforcement reviews of its own trade and economic reforms.

What's the way out of that deadlock? It's called the World Trade Organization. Yes, a possible solution here would be for the U.S. and China to accept the screening and arbitration procedures of the WTO. But that is something that, most probably, Washington would just laugh out of court.

So, there it is: The U.S.-China trade talk has hit a blind alley. China, it seems, suspects Washington of pursuing an allegedly hostile political and security agenda under the guise of trade talks. U.S. "pivots to Asia" and official statements about opposing China's global expansion appear to have convinced Beijing that Washington was out to disrupt the Chinese economy and to stop China's rapid ascent as a credible challenger to America's interests.

How on earth can you have a bona fide trade negotiation – or any negotiation at all – under those circumstances?

Investment thoughts

Take seriously the statement by Ross that the U.S. and China are "miles and miles" away from a trade agreement.

I would also add a rider: As things now stand, such an agreement is nowhere in sight.

How important is that? Not very much, in purely economic terms. For America's growing $20.7 trillion economy, a potential loss of $130 billion of its exports to China is a drop in the bucket. Even assuming Washington takes a brutally radical approach (which I deem unlikely) to China trade, America's flexible economy would take in stride temporary disruptions of its supply chains, and their replacement by widely available gross substitutes.

And don't worry about the "global multilateral trading system" – a fiction bandied about to discredit U.S. policies seeking to shake off its excessive trade deficits. That "system" was killed the minute the trade surplus countries took it as a license for free-riding on the rest of the world.

Sadly, though, a looming escalation of the U.S.-China trade confrontation could bring the world's Doomsday Clock one minute closer to midnight.

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.