Allies Will Take the U.S. Trade Income, But They Won’t Follow the U.S. to Confront China

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

Continuing a long tradition of driving the global business cycle, America gave 1.6% of its domestic demand during the first half of this year to support economic activity in the rest of the world.

America continued to buy more goods and services than it sells to its global trade partners. That is called a trade deficit, expressed as exports minus imports.

And there is more to come. Based on trade numbers for the first six months, the U.S. is on course to inject $1 trillion of net purchasing power into the world economy by the end of this year.

No other country, or a group of countries, offer a similar impulse to employment and wealth creation on a global scale. Europe, China and the rest of East Asia are all beneficiaries of America’s largesse. They are all running large trade surpluses by selling more and buying less from their trade partners.

The euro area, a currency and a trading block of 19 countries, pocketed last year a net trade income of $520 billion. A $160 billion of that amount came from the euro area’s surplus on U.S. trades.

The Europeans will do much better this year. Their foreign trade income in 2021 is estimated at $630 billion, with an American contribution of $200 billion.

The locomotive USA

China is another large recipient of the trade bonanza. Last year, China took out of the rest of the world $370 billion in net exports. A $311 billion of that came from its trade surplus with the U.S.

China, too, will do better this year: Its U.S. trade surplus in the first half of 2021 was running at an annual rate of $320 billion.

In spite of bristling with all sorts of complaints about China, Washington, apparently, sees nothing wrong with such massive transfers of wealth and technology to a country it calls its chief strategic adversary. In fact, a recent note on China’s official newswires was saying that relations between the U.S. and China trade teams were “normal.”

All of East Asia greatly benefits from its American trade business.

ASEAN (Association of Southeast Asian Nations) is a ten-country community, and the world’s largest free trade area classified as “Dynamic Asian Economies.” ASEAN is China’s largest trade partner. In the first seven months of this year, Beijing took a $50 billion trade surplus out of those Asian neighbors.

But why ASEAN lost on its China business, it made a killing on its U.S. trades: In the first half of 2021, the group’s trade surplus with the U.S. rose to $115 billion.

Those trade numbers tell us a number of things.

First, they are setting the record straight about the roles played by the U.S., Europe, China and the ASEAN in global trade. With its large trade deficits, the U.S. remains the key driver of the world economy, while Europe, China and the rest of Asia benefit from those growing trade imbalances.

Second, to stabilize the world economy excessive trade imbalances must be corrected through an appropriate international policy coordination within the G20. Such a coordination should call on surplus countries to stimulate domestic demand to increase imports. Conversely, deficit countries would have to restrain domestic demand and support growth through rising export sales.

U.S. allies want to work both sides of the street

Third, the present configuration of global trade flows presents a twofold challenge for the U.S.: (a) the ability to engage allies to confront China, and (b) the need to align the U.S. trade with an adversarial strategic posture with respect to China.        

Getting allies to confront China is a tall order.

Washington saw that during the G7 summit in Cornwall last June. Europeans will talk about China’s “systemic competition,” problems of human rights, alleged mistreatment of ethnic minorities, and Taiwan’s administrative position, but they all want to do business with China. Nobody wants to confront, contain and isolate Beijing. Germany, France and Italy have no constituencies for such a policy.

Asia’s ASEAN is the same story. None of those countries want to take sides in the U.S.-China clash.

The latest example of that came as recently as last week.  On August 24, the U.S. Vice President Kamala Harris made a speech in Singapore to lay out America’s policy with regard to the Indo-Pacific region. Her focus was on China in the city-state whose prime minister has been on record for some time that he wanted no part of the U.S.-China “strategic competition.”

From Singapore, Harris flew to Vietnam, where the government issued a statement that “Vietnam does not align itself with one country against another.”

And then, there is China itself. Beijing refuses Washington’s concept of “transactional cooperation” – working together where there is mutual interest. The Chinese say they don’t want to cooperate while Washington conducts policies challenging China’s internal affairs, sovereignty and territorial integrity.

Something, clearly, has to give. Washington’s apparent willingness to tolerate huge and rising trade deficits with China is a sign that a lot is expected from a possible U.S.-China summit on the sidelines of the next G20 meeting in Rome on October 30-31, 2021.