Markets shouldn't overreact even if there's no US-China trade deal

• The U.S. has needlessly wasted two years on totally unproductive trade negotiations with China.
• A good trade agreement with Europe, Mexico, Canada and Japan would be much more important, as those economies are America's key markets and they make up nearly two-thirds of U.S. exports.
• Washington should realign its policy toward China on the basis of its new principle of “free, fair and reciprocal trade.”

Johannes Eisele | AFP | Getty Images

A Chinese flag is seen in front of containers at the Yangshan Deep-Water Port, an automated cargo wharf, in Shanghai on April 9, 2018.

Nearly all of Washington's trade policy efforts over the last two years have been wasted on an obviously no-win China deal.

Since the Trump administration took office in January 2017, the goods trade deficit with the rest of the world has subtracted $1.6 trillion from the U.S. economy. About half of that — $760 billion — was a net wealth transfer to China on goods trade, with assorted technologies and liberal access to U.S. markets.

During that time, the excessive and totally misguided focus on China left an unattended and deepening $670 billion black hole of American deficits on goods trade with Europe, Mexico, Canada and Japan — markets that account for about two-thirds of U.S. exports.

On current policies, trade deficits are set to keep soaring, taking away American wealth, jobs and earnings in hard-pressed import-competing industries.

Absurdly, the U.S. is being lectured by China to be "cooperative" (sic). In other words, Beijing is saying that America's transfers of wealth and technologies to China are the way it should be. So, the implied advice to Washington is not to fuss about it, and to work with Beijing on a "great power relationship" — whatever that is.

Stop the farce

An 11 percent increase in China's trade surplus with the U.S. during the January to November period of last year is perhaps "proof" to the Chinese that Washington is falling for that nonsense.

That's quite an affront to the China hands in the White House, who must be horrified to see that for those first 11 months of last year, Beijing piled on half-a-trillion dollars worth of export sales to the U.S.

Wonderful, Beijing must be saying, let's keep talking "win-win cooperation" while we continue to sell — and just be "cooperative," don't do anything rash, like trade tariffs, etc.

What's the way out of that farce? The answer: A bruising trade confrontation. Here's why.

China apparently believes that its expected $430 billion trade surplus with the U.S. in 2018 — an increase of 14 percent from 2017 – is perfectly acceptable. Beijing, therefore, vows to "fight to the bitter end" in defense of its huge American trade and investment revenues.

Washington, obviously, disagrees.

The inevitable clash comes as a surprise to most American observers who thought trade issues could be neatly separated from the rest of a dangerously adversarial U.S.-China relationship.

By contrast, China views trade as a supremely political and security issue. The trade negotiating process, therefore, is regarded by Beijing as an existential struggle of a sovereign China.

US-China rivalry

China is right. There are a number of issues defining the rivalry of the two nuclear-armed adversaries.

One, the U.S. does not accept China's territorial claims. Washington considers, along with most of the world, that China's maritime borders are a territorial overreach sanctioned by international law and arbitration procedures. China indignantly rejects that. The U.S. is constantly clashing with Chinese military assets while it continues to test the disputed naval and air corridors in the South China Sea.

Two, the U.S. formally recognizes Taiwan as part of China, but provides arms to the island and maintains ambiguity with regard to its defense if attacked by Beijing. Tibet is also an irritant in U.S.-China relations. Washington recognizes Tibet as part of China, but Beijing suspects that the U.S. is encouraging the region's independence.

Three, the U.S. supports Japan in the contested claim over Senkaku/Diaoyu islands in East China Sea. Beijing considers these islands part of its ancient territory.

Four, Washington and Beijing agree that the Korean Peninsula should be free of nuclear arms, but they hold quasi irreconcilable views on how to achieve that objective. Fundamentally, Beijing wants the U.S. out of Korea and out of Asia.

Five, the U.S. is openly opposing China's broadening global influence. China is branded as a "strategic competitor" and a "revisionist power" hell-bent on upending the American world order.

Six, the case of Huawei is the best illustration of America's struggle to contain China. It is a fight to keep Beijing from any position of dominance in information and telecommunication technologies. The pending legal case against Huawei in Canada and in the U.S. is a test of China's response to what Washington considers a simple law-enforcement issue. For China, however, it's a case of an unacceptable exterritorial application of U.S. laws, based on American sanctions against Iran.

The Huawei case makes many things very clear, and it is a litmus test of whether the U.S. and China can maintain a peaceful dialogue. Remember, China has demanded an immediate release of its citizen — a Huawei executive detained in Canada on Washington's request and awaiting extradition to the U.S.

Will China back down? Don't hold your breath for that.

Meanwhile, the Huawei case has brought the fence-sitters to the point of having to choose sides. In Europe, Italy will use Huawei 5G technologies, Germany will work with Huawei, and Hungary is setting up a Huawei logistics center. More European countries are expected to follow the Italian and German lead.

In Asia, Thailand, America's oldest Asian ally, launched last Friday a Huawei 5G test site.

Investment thoughts

In the middle of all that, one must wonder if it's possible to have a reasonable dialogue to realign the flows of trade, finance and investments between the U.S. and China.

I don't expect any breakthrough this week on U.S. demands for China's enforceable structural reforms that would protect intellectual property, end illegal export subsidies and outlaw forced technology transfers.

But markets should not overreact to no trade deal with China. U.S. exports to China represented only 7.2 percent of total American sales abroad from January to November last year, according to the Bureau of Economic Analysis.

A good trade agreement with Europe, Mexico, Canada and Japan would be much more important. Those economies are America's key markets and they make up nearly two-thirds of U.S. exports.

So, stop wasting time. Simply apply Washington's new principle of "free, fair and reciprocal trade" in dealing with China.

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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