Trying to Contain and Isolate China Is a Mug’s Game

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

A quarter of last year’s China GDP growth of 2.3% is estimated to have come from the rest of a deeply depressed world economy.

This year, nearly 2% of China’s economic growth of about 8% is expected to originate in its net exports.

The U.S. will remain the largest single contributor to China’s stellar performance. The European Union (EU), a fully integrated trading block, will be a close second. Here are some numbers.

During the first quarter of this year, China’s merchandise trade surplus with the U.S. came in at an astounding $78.6 billion – a 46% increase from the year earlier. That is an annual rate ($314.4 billion) bound to be overshot as the U.S. economy continues to strengthen in the months ahead.

Particularly devastating is the fact that in the January-March interval China’s sales to the U.S. were nearly 3.5 times larger than Chinese purchases of American goods.

The EU has done better with China trade in the first two months of this year -- the only data points available from EU sources at this writing. Beijing pocketed a $40 billion surplus on sales that were double the value of its European imports.

China has investors’ confidence

An accelerating trend of China’s trade with the U.S. and the EU in the coming months is foreshadowed by Chinese trade statistics released at the time (May 7) of this publication. That data shows that trade with America and Europe surged in the first four months of this year at respective annual rates of 50.3% and 32.1%.

Global investment flows also indicate that China remains the world’s most favored destination for multinational producers of goods and services.  Last year, for example, China topped the U.S. by attracting $163 billion of foreign direct investments, a 22% increase from 2019.

This year looks even more promising. In the first quarter, foreign investments in China-based manufacturing facilities came in at $46.74 billion, a 40% increase from the same period of last year.

To understand where China stands in global trade and finance, consider the key factors determining transnational direct investment flows.

Investments are acts of faith, a leap into an unknowable future, decisions driven by confidence of positive returns over a relevant time horizon. Obviously, that confidence (usually expressed as a probability assessment of various scenarios) relies on an evaluation of market potential, expected sales and related cash flow calculations.

More crucially, however, the confidence is based on foreign investors’ perceptions of the country’s political stability, and on the stability and predictability of its regulatory framework. That is the political risk analysis for a long-term – and usually irreversible – business commitment.

So, all that money pouring into China-based manufacturing outlets is a vote of confidence in the country’s political and economic governance.

The question now is: In view of all that, how credible does it sound to say that the West must contain and isolate a country like China -- a strategic competitor hell-bent on destroying Western world order?

Do great business with China

I don’t think much of that. The U.S. should embrace China as a hugely lucrative market, while using its formidable political, economic and technological leverage to open up business opportunities for American companies. In the process of doing that, the U.S. can apply a panoply of its trade regulations, and the multilateral trade provisions, to guarantee market access and sanction illegal trade practices.

Then what’s the problem? Why is the U.S. not doing that, instead of complaining about China’s unfair trade, and Beijing’s alleged failure to live up to last year’s trade agreements?

The U.S.-China trade numbers we are seeing now are conforming to the basic laws of economics: A strongly growing domestic demand in an open economy is boosting foreign imports and devastating American import-competing industries.

I hope that somebody will see the light and recognize that a hostile and unworkable “strategic competition” with China is a blind alley.

Germans know that. They, therefore, will not sacrifice their $120 billion of annual export sales to China. The rest of the EU will follow.

And so will Japan -- an export-starved country cannot throw away $141.3 billion of goods sales to China.

China has always been very clear about its socio-political order and policies. To see that, amateurs of politics and economic history may wish to read Deng Xiaoping’s interviews with Oriana Fallaci or Mike Wallace. More recently, last December, President Xi Jinping told EU leaders that China will brook no interference in its internal affairs (Hong Kong, Xinjiang, Taiwan, human rights, etc.). Beijing’s contested maritime borders are an issue, but China is discussing that with its Asian neighbors.

The U.S.-China problems, whatever they are, have no military solution. Still, if the U.S. security and vital national interests are threatened, Pentagon knows all the return addresses.

That being clear, the U.S. should stay away from vacuous rhetoric and petty squabbles. But do great business with China instead, while insisting on balanced trade accounts – yes, illico presto, no excuses -- and enforcing strict bilateral and multilateral trade rules.

Such a policy would be the best form of “strategic competition.”

Remember, an analytically challenged and still living American cold war “strategist” famously despaired: “This is all economics.”

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*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.