China may reconsider its trade surplus with the US

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A motorist drives past shipping containers,
including one from China Shipping, awaiting transportation at the Port
of Long Beach on July 12, 2018 in Long Beach, California.
Washington’s apparent shift of emphasis from its
unassailable trade argument to an uncertain legal battle about China’s
foreign trade policies and practices looks like an own goal.
Upon reflection, Washington could soon recover. Some own goals during the recent World Cup ultimately led to a win.
By its size and complexity, the trade deficit with China
is, arguably, one of the most acute problems ever encountered in
American economic history. Its solution requires a bilateral agreement
to rapidly and drastically narrow that trade gap — which stands at
hundreds of billions of dollars.
But linking trade with a wide web of U.S.-China political and security issues should be vigorously resisted.
Indeed, attempts to place an unwinnable trade dispute with the U.S. in a broader geopolitical context is a road to nowhere.
There is no meaningful
constituency to support China’s systematic — and growing — trade
surpluses with the U.S. And there is no way that Washington’s efforts to
stop that can be construed as a destruction of the multilateral trading
system. Given a hopelessly unbalanced world economy, that multilateral
system is just a pious wish.

Play by the rules

The White House is trying to defend its economy from long-standing abuses of the post-WWII world order.
Some countries continue to ignore the rules of international trade adjustment, enshrined in the International Monetary Fund’s original Articles of Agreement, and in constant calls by the Group of 20 (the world’s main economic forum) for a balanced global economy.
Countries like China,
that have a huge trade surplus, will have to reckon with that. Alleged
obstructions to market access and violations of intellectual property
rules are only part of the problem.
An equally serious issue
is that countries with large and systematic trade surpluses are also
running inappropriate economic policies. By deliberately producing much
more than they are consuming — and dumping huge excess supplies on the
rest of the world — the surplus countries are, by design, export-driven
economies living off their trade partners.
That’s why the architects
of the post-war global economic system introduced symmetric trade
adjustment rules applying to surplus and deficit countries alike. Under
those rules, surplus countries have to stimulate growth through domestic
means — such as household consumption, public spending, residential
investments and business capital expenditures — rather than exports.
By doing that, they are
expected to boost import demand, reduce their external surpluses and
offset restrictive economic policies in deficit countries to keep the
world economy growing.
Beijing knows that. Its
huge surpluses on U.S. trades have a depressive impact on the American
economy (they are a subtraction from the U.S. GDP growth), but they
serve as a big stimulus to the Chinese economy (they are an addition to
China’s GDP growth). Clearly, there is no win-win here.
China’s rhetoric to
portray America’s trade complaint as anything but legitimate is
propaganda. The simple truth is that the global balance of payments
needs to be balanced — that means it must be equal to zero (adjusted for
minor measurement errors) — and there is no American hegemony or unfair
advantage in that particular economic concept.

China owes a lot to the US

Current account surplus countries such as China,
Japan and South Korea are getting richer by accumulating net foreign
assets, including the huge and well remunerated claims on the United
States. By contrast, America is getting poorer with $8 trillion, and
counting, of net foreign liabilities.
How can anyone blame the White House for trying to put an immediate end to that decades-old mismanagement of the U.S. economy?
Perhaps China should give a thought to that.
Another consideration is
that China’s huge domestic and foreign investments come, in large part,
from the money it earns on its export sales to America. In other words,
China is recycling its U.S. trade surpluses in the form of soaring
investments around the world.
Is that President Xi Jinping’s
“win-win cooperation” that should serve as a founding principle of
China’s “community with a shared future for mankind” that he talked about at the BRICS Business Forum in Johannesburg, South Africa, last week?
I doubt that he can sell that even to his good friend President Vladimir Putin of Russia.
The two men had a full-court bilateral summit with their top advisors last Thursday on the sidelines of the BRICS
meeting, before sharing a private dinner. Russians, too, are concerned
about the balance of their bilateral trade with China that could
approximate $100 billion by the end of this year.
That, of course, pales in
significance to a U.S.-China $636 billion goods trade last year, where
$505.6 billion represented Chinese exports to America.
So, what now? A rational government should call for China to balance its trade accounts with the U.S.
Beijing would probably do
well to promptly initiate that process on its own because the current
situation cannot continue and there is nothing to gain by dragging
things out.
Washington, for its part, should treat China, and its leaders, with respect.
China, like any other
country, can be called out — within the appropriate WTO committees — for
suspected trade violations, but the White House cannot keep blaming
China for decades-long wealth and technology transfers at the U.S.
expense. The blame is with previous administrations that unforgivably
mismanaged trade relations with China.

Investment thoughts

It would be in China’s interest to move toward
squaring its trade books with the U.S. Sadly, I am not holding my breath
for that.
Judging by China’s policy
statements in the last week or so, the U.S.-China relationship looks
like it’s already settled at zero trust and irretrievable hostility.
China, however, should
think again if it counts on the EU support to confront America in trade
and other disputes. Beijing may also be miscalculating if it expects
that Trump could give up his trade claims in the run-up to November
elections. The opposite may be more likely because a trade scuffle with
China could be his bipartisan rallying point.

Investment strategists
can assign a negligibly low probability to the U.S.-EU trade war. But,
on current evidence, a trade war — or worse — with China is a distinct
possibility.