Opinion - World Economy

Europe may be playing spoiler to the elusive US-China trade deal

Key Points
  • It seems that Beijing’s trade arrangements with Europe are complicating American efforts to radically change trade relations with China.
  • Washington’s difficult trade round with the EU is another reason why China may not be in a hurry to strike a deal with the U.S.
  • Financial markets should focus on economic policies, growth, inflation and corporate earnings instead of being distracted by posturing on international trade issues.
Chinese President Xi Jinping reacts during the signing of a memorandum of understanding on China's Belt and Road Initiative in Rome, Italy, on March 23, 2019.
Alessia Pierdomenico | Bloomberg | Getty Images

Washington is announcing that has largely agreed on an enforcement mechanism with Beijing to monitor bilateral trade while China continues to accumulate soaring surpluses on its goods sales to the U.S.

China's customs records show that the country's surplus with the U.S. rose 40 percent in March from the previous month to stand at $62.66 billion for the first quarter of this year.

That's how China is responding to threats U.S. President Donald Trump issued during his election campaign — and repeatedly since — that he would put a stop to that. Speaking of China, Trump told a campaign rally on Staten Island, New York in April 2016 that "they're ripping us off, folks." He repeated the same view last September during a press conference in Warsaw, Poland.

Trump could say it again tomorrow without being contradicted by the data.

EU allies going their own ways

The trade statistics from the U.S. Commerce Department indicate that — on Trump's watch — China pocketed a U.S. trade surplus of $829.3 billion between January 2017 and January 2019 (the latest U.S. data point available).

I believe that the Chinese are making a mistake by challenging the U.S. on such a sensitive issue. Granting that Washington may have gone too far in its attempts to control China's economic policies, Beijing still could have – and should have – preempted all that by reducing its sales to the U.S. while stepping up purchases of American goods and services. That would have shown Beijing's determination to substantially run down its excessive, and unsustainable, surpluses on U.S. trades.

Had Beijing made such a gesture of smart statecraft, it would have smoothed the way to a fast and reasonable trade agreement. And it is quite possible that such a gesture could have also opened up a new chapter of friendlier, more cooperative and more productive bilateral relations.

Indeed, Chinese President Xi Jinping cannot expect his idea of a "great power relationship" to work while China continues to maintain an excessively unbalanced trade relationship with the United States.

Beijing, of course, has its own reasons for doing what it's doing, and its attitude on trade issues reflects a much broader view of its relations with Washington.

It is also very likely that China could have been encouraged in its intransigence on U.S. trade by the fact that America's close friends and allies are all flocking to Beijing in search of trade and investments.

China has now become the EU's second-largest trade partner, closely behind the United States. Beijing's share of EU trade has tripled since 2000 to 15.4 percent, and is now only slightly below the U.S. share of 17.1 percent. The big difference is that last year the EU ran a 184 billion euro trade deficit with China, while recording a 140 billion euro trade surplus with the U.S.

A recent visit to Europe by Xi in late March followed by last week's visit of Chinese Premier Li Keqiang are the latest indications of how much the U.S. "trade war" with China differs from majestic welcoming ceremonies and an eager search for mutually beneficial relations the Chinese statesmen have encountered during their trips to Italy, France, the EU Commission and the Balkans for an annual summit with Central and East European leaders.

China promises

Italy rolled out the red carpet for China's president, clinching deals worth $2.8 billion in energy, finance, engineering and agricultural produce. Italy also offered China access to the port of Trieste, an ideal entry-point to major European markets, and agreed on China's development of the port of Genoa.

The crowning achievement for China was Italy's decision to participate in China's Belt and Road Initiative — the first G-7 country to do so.

The U.S. National Security Council publicly disapproved, saying that Italy's "Endorsing BRI lends legitimacy to China's predatory approach to investment."

WHNSC tweet: Italy is a major global economy and a great investment destination. Endorsing BRI lends legitimacy to China's predatory approach to investment and will bring no benefits to the Italian people.

French President Emmanuel Macron also lobbied hard against Italy's China deals, invoking the European solidarity and the need for a common economic and political approach to China.

Macron eventually softened his attitude and rhetoric as China decided to place an estimated $30 billion order for Airbus planes. That was a contract he was expected to sign during his visit to China in January of last year, but the Chinese decided to keep dangling the juicy deals to test Macron's policies.

Last week's annual EU-China summit in Brussels was held in a friendly atmosphere as Beijing committed to concluding an investment agreement, a work-in-progress since 2013, by the end of next year or earlier. That document should rule out China's industrial subsidies and forced technological transfers while opening up markets for EU companies.

In addition to all of those promises, Beijing pressed the right buttons with regard to rules-based multilateral trading system, the enhanced role of the World Trade Organization, and China's firm interest in EU's unity. That was all music to European ears and a sharp contrast to U.S. hostility to multilateralism, WTO and the EU as a trading bloc.

Reassuring the EU that China does not want to divide Europe, Li was off to Croatia, beaming about the "diamond era" with that small Balkan country where he secured access to the port of Rijeka, another strategic entry point into Europe for the maritime traffic that delivers most of its merchandise to the continent. Croatia also hosted the annual 16+1 meeting of China and countries of Central and Eastern Europe, 11 of which are EU members.

Investment thoughts

With the U.S.-China trade talks showing no signs of bringing "the right deal" Washington expects, it seems that Beijing's trade arrangements with Europe are complicating American efforts to radically change trade relations with China.

The beginning of Washington's difficult trade round with the EU is another reason why China may not be in a hurry to strike a deal with the U.S.

Financial markets, therefore, should focus on economic growth, inflation and corporate earnings instead of being distracted by posturing on international trade issues.

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.