The US keeps cutting large checks to China, Japan and Germany
- China, Japan and Germany accounted for nearly two-thirds of America’s $652.4 trade deficit in the first nine months of this year.
- Expect a long period of rolling and intractable trade disputes.
- That will dampen U.S. economic growth and depress asset prices.
The smart mercantilist leaders of China, Japan and Germany — the three countries accounting for nearly 30 percent of the world economy — knew all along that U.S. President Donald Trump's huge fiscal stimulus would be sending wonderfully large gifts their way.
And here it is: During the first three quarters of this year, America cut them a $401.7 billion check from its growing domestic purchasing power.
That was an 8 percent increase from the same period of last year, with China's lion share of $301.4 billion soaring 10 percent.
Those who are sadly and incorrectly arguing that this does not matter should note that America's trade deficits will be added to its $8.6 trillion of net foreign debt recorded at the end of the second quarter.
That large overseas transfer of American wealth is also a drag on economic growth. In the first nine months of this year, the growth of the gross domestic product was lower than the growth of domestic demand as a result of increasing U.S. trade deficits.
Competitors are adversaries
Looking at all that, the Chinese must be laughing all the way to the bank when Washington dignitaries — apparently very eager to reestablish friendly relations — keep falling over each other to convince Beijing that the U.S.-China competition does not imply an adversarial posture.
Some pictures of glad-handing suggest that the Chinese don't care. And they surely don't need a semiotician of the late Umberto Eco's caliber to explain to them that competitors are always engaged in adversarial games. Shrugging it all off with the philosophical "never mind" resignation, the Chinese are happy to pocket the money while promoting their own "win-win cooperation" ditties.
Eventually, though, the Chinese, the Japanese and the Germans should think of how long that extraordinary bonanza can last. Who knows, one fine day somebody in Washington might realize that this outrage can no longer be tolerated.
So, here is an idea: Beijing, Tokyo and Berlin should quickly come out with a statement that they are ready — no kidding — to immediately begin buying more, much more, from America while dumping their excess production on somebody else.
That would be a wonderful Twitter line, and it would also pave the way for another gushing torrent of: "I think we'll make a deal with China, and I think it will be a very fair deal for everybody, but it will be a good deal for the United States."
Deals with China don't come easy, though, as Indians and Russians can testify. India unsuccessfully tried to make a border deal with China in April 1960. After a brief war in 1962 and occasional skirmishes, Beijing and Delhi are still talking about an unlikely but crucially important bilateral agreement. And it took 40 years of negotiations for the Russians and the Chinese to agree on their more than 2,600-mile border.
Closer to home, it's been 46 years since the U.S. and China agreed on a "One-China" policy, but Beijing still protests that the agreement is being violated, asking Washington twice last week to stop "official contacts or military ties in any form between the U.S. side and Taiwan region."
No solution in Buenos Aires
It would, therefore, seem reasonable to temper a sudden enthusiasm that Trump and Chinese President Xi Jinping will solve the trade issue during the G-20 meeting in Buenos Aires, Argentina, that starts Nov. 30. There are a number of things to consider.
First, China is not in a hurry and is unlikely to rush into a trade deal. Beijing apparently believes that it can handle tariff walls and exact an unacceptably high political and economic price for Trump by hurting, among others, his farming constituency.
Second, trade issues raised by Washington have hit some of China's systemic red lines in the area of economic and financial management. That was a deal breaker last spring. Washington still insists on those "reforms," but Beijing is unlikely to yield.
Third, Trump probably had a chance to reach an interim, practical trade deal while he claimed to have established a friendly relationship with Xi. That deal could have stopped and reversed the upward trend in U.S. trade deficits with China, in expectation of structural changes to reach a sustainable position of balanced bilateral trade flows.
But that opportunity seems to have been lost. An ever-elusive U.S.-China mutual trust is in short supply, if any exists . The relations have veered back to confrontation on a broad range of issues, setting up an inauspicious framework for trade talks. Indeed, the summit cannot skirt problems of (a) arm sales and "official" contacts with Taiwan, (b) clashes around China's contested air and maritime borders in East and South China Seas, (c) a contentious Korean peace process, (d) competition vs. win-win cooperation quandaries, etc.
Trump was right to start out with Canada and Mexico trade problems. He had leverage and used it reasonably well. His next, or simultaneous, move should have been to do the same thing with Germany and Japan. The chances of success in rearranging trade relations with those two close allies were high.
With those three trade agreements under his belt, Trump would have put China in a difficult negotiating position. And a clear path to the U.S.-China trade deal would have been set.
But that's now water under the bridge, and a real puzzle why Trump did not do the easy things first.
The irony is that there may no longer be "easy" trade solutions with Germany and Japan. Emboldened by Washington's problems with China, Tokyo and Berlin could now be much tougher customers.
Investment thoughts
China, Japan and Germany accounted for nearly two-thirds of America's $652.4 trade deficit in the first nine months of this year. And that deficit was 10 percent above its year-earlier level.
An even worse outcome is in the pipelines. The U.S. trade gap is bound to widen during the current quarter as retailers step up foreign purchases to manage their most active selling season of the year.
We are now watching Trump's fiscal stimulus leaking out into huge, and growing, wealth transfers to China, Japan and Germany — a devastating and totally predictable result of an ineffective trade policy.
Barring a miracle, pinning hopes of a trade deal with China on a Trump-Xi meeting later this month seems unreasonable.
That is a great pity because changes of trade regimes with China, Japan and the German-run European Union would have allowed the U.S. to retain most of the demand, output and employment benefits of its expansionary economic policy mix.
A long period of rolling and intractable trade disputes is what's ahead. That will dampen economic activity and depress U.S. asset prices.
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.