US-China trade war: A stable deal with a mortal enemy is an elusive quest

• America’s flexible and growing $20.7 trillion economy would take in stride the loss of $130 billion of its goods exports to China, with supply chain disruptions filled in by substitutes.
• For China, a loss of $550 billion goods exports to the U.S. would be a big deal.

By Michael Ivanovitch 

President Donald Trump and Xi Jinping during dinner at in West Palm Beach, Florida, on April 6, 2017.

America's soaring and systematic goods trade deficits with China — with 2018's estimated to reach $430 billion, for an increase of more than 20 percent from the previous year — are one of the fundamental political and security issues dividing the world's two largest economies.
No one should, therefore, be surprised by the statement made last week by the U.S. Commerce Secretary Wilbur Ross that Washington and Beijing were "miles and miles" from any trade agreement. 

China, after all, is considered by the U.S. to be a strategic "competitor" (adversary) and a revisionist power, seeking to upend the American world order.

According to U.S. Bureau of Economic Analysis figures, American goods exports to China amounted to a total of $102.5 billion while China's goods exports to the U.S. came in at $447 billion in the first 10 months of last year. 

That gave China a huge advantage of a $344.5 billion trade surplus, a number that accounts for nearly one-half of America's total trade gap.
Big deal? 

Yes and no.
Such a totally and systematically unbalanced bilateral trade relationship must be corrected. 

Both countries recognize that. 

The only problem is that Washington and Beijing don't seem to agree on a mutually acceptable procedure to reach the necessary trade adjustment.
The logic and the urgency of the matter would call for an immediate, sustained and large increase of U.S. sales to China, and a similar decline of Chinese exports to America. 

To support that process, China should broaden market access to American firms and respond to American complaints about predatory trade practices, such as export subsidies, illegal acquisitions of intellectual property, forced technology transfers and more.

Trade is part of the US core strategy
That sounds like a two-step procedure — immediate redirection of trade flows and structural trade policy changes — but it isn't: A sustained and successful trade adjustment requires synchronous moves on both policy tracks.
Simple, isn't it? 

Yes, but nothing works. 

Two years into the Trump administration's term of office, China will have accumulated a $1 trillion surplus on its U.S. goods trade once all the 2018 numbers are in.
I am not privy to trade negotiations, but from media reports in the public domain it appears that China finds the American position unacceptable when U.S. officials demand Beijing stop technology thefts, trade-distorting export subsidies and suspicious exchange rate management.
Underlying all that is Washington's view that there would be no sustainable progress on reducing the U.S.-China trade imbalances without transparent and verifiable structural trade and economic reforms in China.
Hence the impasse. 

China cannot accept reform demands to discontinue illegal technology acquisitions and export subsidies. 

And China would not even think of allowing American authorities to conduct enforcement reviews of its own trade and economic reforms.
What's the way out of that deadlock? 

It's called the World Trade Organization. 

Yes, a possible solution here would be for the U.S. and China to accept the screening and arbitration procedures of the WTO. 

But that is something that, most probably, Washington would just laugh out of court.
So, there it is: The U.S.-China trade talk has hit a blind alley. 

China suspects Washington of pursuing an hostile political and security agenda under the guise of trade talks. 

U.S. "pivots to Asia" and official statements about opposing China's global expansion have convinced Beijing that Washington was out to disrupt the Chinese economy and to stop China's rapid ascent as a credible challenger to America's interests.
How on earth can you have a bona fide trade negotiation – or any negotiation at all – under those circumstances?
Take seriously the statement by Ross that the U.S. and China are "miles and miles" away from a trade agreement.
I would also add a rider: As things now stand, such an agreement is nowhere in sight.
How important is that? 

Not very much, in purely economic terms. 

For America's growing $20.7 trillion economy, a potential loss of $130 billion of its exports to China is a drop in the bucket. 

Assuming Washington takes a radical approach to China trade, America's flexible economy would take in stride temporary disruptions of its supply chains, and their replacement by widely available gross substitutes.
And don't worry about the "global multilateral trading system" – a fiction bandied about to discredit U.S. policies seeking to shake off its excessive trade deficits. 

That "system" was killed the minute the trade surplus countries took it as a license for free-riding on the rest of the world.

National Security Threat

Huawei exec's arrest opens a new front in the US-China trade war

By Jethro Mullen

Hong Kong -- The conflict between the United States and China over trade and technology is expanding.
The arrest of a top executive at Chinese tech giant Huawei at the request of the US government has raised new doubts about the fragile truce that the leaders of the world's top two economies reached just days ago.
"You have to see this as a significant escalation in the trade war," said Christopher Balding, a China expert at the Fulbright University Vietnam in Saigon.
Viewed by the US as a national security threat, Huawei sells more smartphones than Apple and builds telecommunications networks in countries around the world.
Huawei CFO Meng Wanzhou arrested in Canada, faces extradition to United States

Canadian authorities said late Wednesday that Huawei's chief financial officer, Meng Wanzhou, had been arrested in Vancouver and that the United States is seeking her extradition.
The US and Canadian governments haven't specified what charges Meng faces, but her arrest follows reports this year that the US Justice Department was investigating whether Huawei violated American sanctions on Iran.
"Under the Obama administration, the US indicted Chinese personnel on similar charges, but was reluctant to take more drastic action such as arresting the individuals in third countries, over fear that Beijing would retaliate against US interests in China or in other countries," Eurasia Group political risk analysts wrote in a note.
Meng's arrest "suggests that the gloves are now fully off in this arena," the analysts said.
What happens next to Meng, the daughter of Huawei's reclusive founder, could have huge repercussions for Huawei's business.

What does it mean for the trade war?
The arrest comes as the US and Chinese governments are discussing ways to tackle problems that led to their trade conflict, which has resulted in new tariffs on hundreds of billions of dollars of goods.
"This type of action will affect the atmosphere around the negotiations," the Eurasia Group analysts said.

China's Commerce Ministry said Thursday it was confident a trade agreement with the United States could still be reached in time to hit a 90-day deadline set by President Donald Trump.
But the Chinese government is clearly angry about Meng's arrest. 

The big question is what Beijing and Washington do now. 

Analysts suggest China could retaliate, and the Trump administration may be preparing other moves against Chinese interests.
The stakes are extremely high.
"This case is like a sharp tug on a loose thread that could be part of an unraveling of the relationship," said Scott Kennedy, an expert on the Chinese economy at the Center for Strategic & International Studies in Washington. 

Technology is at the heart of the trade war. 

The Trump administration says the huge waves of tariffs it has slapped on Chinese goods are part of an effort to stop China from getting its hands on American technology unfairly through practices like cybertheft and forcing companies to hand over trade secrets.
The return to the negotiating table follows a ceasefire reached at a dinner between President Trump and Xi Jinping on Saturday.
Balding pointed out that the deal was reached the same day that Meng was arrested in Canada.
"That is very politically embarrassing to Xi," he said. 

"It has to be considered an escalation."

What does it mean for Huawei?
The arrest is one of the strongest moves yet against Huawei by US authorities.
The company is largely shut out of supplying telecommunications equipment to US carriers. American officials have repeatedly said that the Chinese government uses Huawei products for espionage.
Huawei's no good, very bad year just got even worse

Meng's case "could be a prelude to further action against the firm and its senior officials," Eurasia Group analysts said.
Huawei's smaller rival, ZTE, provides an example of how the US government could go further. 

The Chinese company was crippled for months after the US Commerce Department blocked it from buying vital parts from American companies.
The ban threatened to put ZTE out of business and highlighted China's continued reliance on American technology, a vulnerability Beijing is eager to reduce. 

ZTE eventually got a reprieve after Xi personally asked Trump for help. 

But the crisis caused disruption for telecommunications carriers ZTE supplies around the world.
A similar ban on Huawei would have a bigger impact because its equipment is more widely used.

A Huawei stand at an artificial intelligence conference in Shanghai.

The next moves in Meng's case are key.
"There is a lot of legal and diplomatic wrangling ahead," Balding said. 

"The US and Canada would not have taken this move lightly and it puts everything in a brand new light."