[Analytics] It’s looking like a US-China trade deal is near

Thomas Peter | Pool | Getty Images Chinese President Xi Jinping at the Great Hall of the People on Nov. 2, 2018 in Beijing, China.

China’s government negotiators are famously tough. For one example, Russia and China came to their first border agreements in the early part of the 18th century — but the final settlement was reached only in the late 1990s, with Russian negotiators describing their Chinese counterparts as “tough and unemotional” arm-twisters. That story came to my mind when thinking of U.S. President Donald Trump’s vow to put an end to the great China “rip-off” of the American economy. Dr. Michael Ivanovitch specially for the CNBC.

A strong hand went awry

At any rate, I thought Trump had a good shot because the Chinese had found themselves cornered with excessive American trade surpluses, bound up with allegedly massive trade and industrial violations.

Trump just had to drive Beijing further against the wall by pushing for “free, fair and reciprocal” trade.

Here is what that would have meant, based on the latest U.S. trade numbers covering the first 11 months of last year.

Over that period, U.S. exports to China came in at a pitiful $111.16 billion, a measly 7.2 percent of total American sales abroad. China, by contrast, unloaded, during the same interval, a whopping $493.49 billion of its exports on U.S. markets.

Trump just had to advise China to limit, immediately and irrevocably, its exports to the U.S. to the amount of its purchases from America. Only after that was done would Washington be willing to discuss ways of expanding a stable and mutually acceptable trade relationship with Beijing.

That’s the sort of reciprocal trading that China feared. And that was the reason why it led, among America’s European friends and allies, to a strong and vocal global advocacy against Trump’s trade policies — they simultaneously praised the fiction of the “multilateral trading system.”

And then, abracadabra: Trump handed China a way out, along with the keys to the trade dispute.

Unacceptable overreach

How? Trump was apparently (ill) advised that China’s readiness to reduce the bilateral trade imbalance won’t be enough. No, Washington needed to impose on China enforceable structural reforms. Without that, as has been frequently repeated by U.S. Commerce Secretary Wilbur Ross, China’s destabilizing trade surpluses would be back in no time.

What are those enforceable structural reforms the U.S. wants China to implement?

Essentially, there are three: the protection of intellectual property, the outlawing of forced technology transfers and the cessation of illegal, market-distorting industry subsidies.

China denies any of those violations, leading to an apparently insurmountable stalemate.

It was obvious that China would not accept the claim that its economic and industrial revival was based on decades of intellectual property theft and coerced technology transfers. Beijing says that’s slander and part of Washington’s attempts to smear and contain China.

One of the news leaks from last week’s trade negotiations in Beijing is an example of the key blockages. Reportedly, China would make its industry subsidies compliant with the relevant rules of the World Trade Organization, but it is not willing to discuss that with Washington. China wants to work with the WTO to align its policies with existing trade rules and arbitration procedures. The U.S. can participate in those deliberations as any other WTO member.

Washington finds that unacceptable because it wants to keep the “enforcement control” as a trigger for trade tariffs in case it determines that China violated agreed-upon industry subsidy rules.

That is, in a nutshell, the entire U.S.-China trade problem: Beijing rejects the coercion of an American trade “enforcement mechanism” and wants to operate in the multilateral framework of WTO rules.

Those breakdown lines in a months-long technical dialogue are clear and simple. They leave nothing for the American and Chinese heads of state and government to talk about. Beijing seems to understand that, but Washington apparently believes it can still bring China into its own world.

That is an appalling ignorance of China’s statecraft.

Investment thoughts

Last Wednesday, the Global Times, a Communist Party-run newspaper, published an article saying that the U.S. started trade frictions but now seems willing to make a deal.

For China, the deal will be based on the discussion late last year between Trump and Chinese President Xi Jinping at the G-20 summit in Argentina.

Xi has probably agreed to a gradual decline of China’s huge trade surpluses with the U.S., but there is no way that China’s core leader would have agreed to U.S.-imposed structural reforms and American enforcement mechanisms that would serve as triggers for trade tariffs at Washington’s discretion.

Beijing correctly believes that Trump, gearing up for a re-election run, will jump on such a deal, partly because Wall Street would love it — even though that would perpetuate an unforgivable, decades-old neglect of nearly one-third of the U.S. economy (the sum of exports and imports as a share of American GDP).

The bottom line: The deal appears to be done. China will continue to run large trade surpluses with the U.S., and it will never accept Washington-imposed reforms of its trade and industry.

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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