Wall Street has used the “trade war” panic to reprice assets in an accelerating economy facing Federal Reserve announcements of “gradual” interest rate increases and the U.S. Treasury’s soaring deficit financing needs.
A huge buildup of cash positions over the last few months had to be used to acquire the frothy assets at a “right” price. A process euphemistically known as a “market correction” will continue, using trade and other media-hyped issues as proximate causes for further risk-adjusted valuations driven by changing economic fundamentals.
America’s $640.8 billion problem with the European Union (mainly Germany) and East Asia (mainly China) should be an easy win.
That scandalously large and intolerable trade deficit in 2017 is now running at an annual rate of $630.6 billion, based on numbers for the first two months of this year. Over that period, U.S. exports to the EU increased 8.8 percent, but exports to China declined — there was virtually no improvement for American sales to East Asia as a whole.
Washington lawyers negotiating trade problems need no coaching to understand that the Europeans and East Asians have got themselves into a position where they must yield. Surely, it would help to remind these systematic trade surplus runners that they failed to observe the rules of international trade adjustment enshrined in the founding charter of the International Monetary Fund.
Reasons behind the U.S. administration suddenly waking up to its trillion dollar foreign debts are irrelevant to the ongoing trade argument. But that can underscore the urgency of stopping America’s huge losses of wealth and intellectual property in a system that violates the long-established rules of orderly and balanced world trade.
Now, Washington has nothing to gain by feeding the frenzy of a courtroom drama pitting tough-talking American lawyers against furious Europeans and East Asians staring at large political and economic losses from their withering trade windfalls.
The White House has amply made its case. It’s time to calm things down by explaining to the world the decades-old damage — in terms of dollars, job losses and intellectual property thefts — suffered by the American economy.
It is important to do that because the Europeans and East Asians are pushing back by raising the decibels of “trade war” histrionics with improper accusations that America is destroying the world trading system.
Europeans, in particular, are bristling with claims that the U.S. is undermining their vital interests and the wellsprings of their prosperity.
The U.S. needs Europe in its confrontation with countries it has qualified as “strategic competitors” and “revisionist powers” hell-bent on deconstructing the Western world order. A united trans-Atlantic front is necessary to establish a more balanced global trading system, and to preserve the credibility of the largest and most powerful military alliance the world has ever seen.
That alliance, however, is in a state of disrepair.
Germany’s precarious governing coalition of political arch-rivals seems in grave danger. Chancellor Angela Merkel is being asked to move over by a strong conservative faction within her own party of Christian Democrats (CDU). The “sister” party CSU (Bavaria’s Christian Social Democrats) is tearing the government apart with its own immigration and social policies. And, to top it all off, the Social Democrats (SPD) have threatened last Saturday to reconsider the coalition support unless Merkel stops immigration and healthcare disputes.
France is no better. The country is now in one of its recurring cycles of street demonstrations and paralyzing public transport strikes to protest labor reforms and social policies. With nearly 60 percent of the French voters holding negative views of President Emmanuel Macron, it is difficult to see how he can hang tough on reforms no French government has ever won against debilitating strikes and massive street protests.
In the middle of that, Macron is attacked from his own center-right ranks with claims that he wants to score easy wins with reforms while leaving aside the growing anti-Semitic violence and terrorism perpetrated by Islamic fundamentalism.
President Donald Trump will therefore be talking with two strongly challenged allies when he hosts the French and German leaders later this month.
Problems with East Asia are much more serious. Trade issues should be the easier part — they will probably be solved with South Korea and Japan in a relatively friendly manner.
Trade problems with China are more difficult because they have been mixed up with intractable security considerations. Chances are, however, that Beijing could relent — if the trade agreement is reached in a way that would not cause a humiliating retreat.
But there is a whole spectrum of other problems Washington is facing with its “strategic competitor” on the Korean Peninsula, in the Indo-Pacific area and beyond. An unnecessary hostility about trade issues appears to have seriously compromised Washington’s quest for “transactional cooperation” with Beijing on issues where that might be feasible.
It now seems, for example, that the planned U.S.-North Korea summit may never take place.
Last week, China’s State Councilor and Foreign Minister Wang Yi was in Moscow as a special emissary of President Xi Jinping to organize, among other things, the Russia-China summit next June. On that occasion, Yi talked about a “step-by-step approach” that would “address the North Korean security concerns during the process of denuclearization.”
Fresh from a China-North Korea summit on March 25-28, 2018, it is reasonable to assume that Yi was presenting that process as something that Beijing and Pyongyang had agreed upon. But that process is totally at odds with the U.S. policy of maximum military and economic pressure on Pyongyang to give up its nuclear arsenal as a condition to initiate peace negotiations.
China’s support for an inter-Korean summit on April 27 also signals a determination to intensify the contacts between Seoul and Pyongyang that would be very difficult to stop or throw off track. In time, Beijing apparently hopes, these contacts are expected to create economic, social, cultural and family exchanges that would set in place peace dynamics irrespective of any outside pressure.
China is also working, presumably with some success, with East Asian neighbors to settle the problems of contested maritime borders, while strengthening its military positions throughout the South and East China Seas.
The “trade war” talk has little meaning in a case where parties to the dispute know that could not possibly be the solution to the problem at hand. The EU (Germany) and East Asia (China) know they have to correct their unsustainably large trade imbalances with the U.S.
But the “trade war” stunt will be played out as the Fed moves to anchor inflation expectations and the Treasury continues to unload an avalanche of debt liabilities. Fundamentally, though, the “trade war” scares will have very little to do with declining asset prices.
Investors placing long-term bets may wish to be aware of serious political and security problems in the trans-Atlantic community. With China, these problems are much greater and of an entirely different nature. I have touched upon some of them to lift the “trade war” screen, but they are really a story for another day.
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.
