China’s merchandise sales to the U.S. increased last January to an annual rate of $470 billion. During the same period, U.S. sales to China nearly doubled from the year earlier at an annual rate of $155 billion.

That may sound like an auspicious pickup of U.S. exports to China, but we still have a long way to go to meaningfully narrow our excessively large bilateral trade gap.

American exports to China are just one-third of what China sells to the U.S. If that trend were to continue, China could pocket this year a net income of $315 billion on its American good trades – an amount that would still be slightly above the trade surplus Beijing took from the U.S. in 2020.

But China will do much better than that in the months ahead. Here is why.

Driven by an exceptionally large monetary and fiscal stimulus, the American economy has entered a very strong cyclical rebound. The consensus forecast currently calls for a 4.5% growth this year, and a somewhat lower pace of advance in 2022.

That growth forecast is more than double the economy’s potential output of 1.8%, based on America’s present stock and quality of labor and physical capital.

“Locomotive USA” is a gift to China

Under those circumstances, it is inevitable that a large part of a strongly growing domestic demand for goods and services in the U.S. will have to be met by foreign suppliers.

Indeed, historical data indicate that the U.S. import demand is quite responsive to changes of domestic spending (i.e., household and public sector consumption, and residential and business investments). For example, a one percentage change in domestic demand triggers (with a time lag) more than one percentage change in the demand for foreign goods and services.

Based on that data, a quick calculation shows that -- with a 4.5% consensus forecast of the U.S. GDP growth in 2021, and a very conservative estimate of an import growth of 4.6% -- China’s exports to the U.S. would grow this year 19% (from 2020) to a whopping total of $517 billion.   

That would come a shade below the all-time record of $539.5 billion observed in 2018, but please note that China’s take could easily exceed that number -- if the growth momentum of the U.S. economy were to run ahead of a current consensus.

Trade issues will also be raised with the EU and Japan, because their combined surpluses with the U.S.

account for nearly 30% of America’s total trade gap. But they will easily get a pass at a time when Washington is busy rebuilding alliances to confront China and Russia.

China, however, should be taken to task if it is true that it is not living up to the Trump trade deal. Beyond that, Washington would be well advised to initiate a thorough review of the entire trade and investment business with China.

First and foremost, the U.S. should seek balanced trade accounts. China’s systematic and excessive trade surpluses are unacceptable under any norms of free trade. The choice of ways to reach the bilateral trade balance is negotiable, but the objective of an expedient process of squaring the books is not.

The best way of achieving that goal would be for Beijing to step up its purchases of American goods and services. That would allow China to maintain its presence on U.S. markets, and it would offer a constructive channel of cooperation on mutually beneficial transactions – something similar to Beijing’s mantra of a “win-win cooperation.”

Sadly, this cool business approach to solving a pressing problem of huge trade imbalances is totally unrealistic in a currently poisonous atmosphere of a bellicose U.S.-China confrontation.

Balance the U.S. trade accounts

Nothing will be done without an appropriate political agreement at the highest level of state. Looking for a short-cut by lowering trade issues to technical discussions will just lead to messy, acrimonious and unproductive talk shops. 

And the worst thing that Washington could do now is to engage in a regulatory overreach to change China’s economic and trade policies. That’s a non-starter. As in the past, China would dismiss that out of hand, while laughing all the way to the bank with wealth and technology transfers from the U.S.

Perversely, perhaps, that would be a good thing because Washington does not need China’s trade instruments to (a) protect American intellectual properties, (b) prohibit allegedly forced technology transfers, (c) assess countervailing duties on illegal export subsidies and (d) even out market access for American companies in China.

The U.S. can effectively deal with all that by using its own trade rules and regulations – in addition to arbitrage panels of the World Trade Organization.

What does all that mean?

One, the U.S. will lose up to an entire percentage point of GDP growth this year and next as its huge stimulus to domestic demand leaks out to the rest of the world in the form of runaway trade deficits.

Two, the U.S. financial diplomacy should use the G7 and G20 forums – as well as bilateral channels -- to force economic policy coordination. Going it alone as the proverbial “economic locomotive USA” is a gift to China, EU and Japan that saddles America with rising debts, deficits and soaring net foreign liabilities.

Three, feeding China’s booming exports, large trade surpluses and its increasing global net creditor positions – while asking American people for trillions of dollars to confront an allegedly growing “China aggression” should give pause for thought.

Four, those policies cannot build alliances the U.S. needs to defend Pax Americana.

Dr. Michael Ivanovitch is 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.