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The US has been left alone to drive the world economy; China should help out

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Via CNBC

Chinese President Xi Jinping and U.S. President Donald Trump attend a welcome ceremony at the Great Hall of the People in Beijing on Nov. 9, 2017.

Fred Dufour | AFP | Getty Images

As always, America’s close friends and allies – Japan and Germany – will continue their free riding on the U.S. economy, and will make no net contribution to growth and employment in the rest of the world.

With a 0.6% average annual growth in the year to last June, Japan’s finance ministry announced last week that it was not considering measures to prop up its sluggish economy. Undeterred, punters went on betting about large support packages – probably one of those where it is impossible to decipher what is, as the Japanese say, a “clear water” stimulus and what is just a meaningless numbers game.

Germany, the indisputable pace-setter of the European economy, keeps saying the same thing: There is no need for any support to its recessionary economy, which is expected to stagnate in the months ahead.

Adding Japan to the German-run Europe, one gets a quarter of the world economy that wants to live off exports – which amount to $1.1 trillion dumped on the U.S. and China in 2018.

Mercantilism can never win

To its credit, Japan is not hiding its game. Its business forecasts always emphasize the crucial role played by exports for the country’s economic outlook. China is considered key to Japan’s trade, investments and economic growth, despite tensions caused by seemingly intractable disputes.

There are no such problems with the U.S. Tokyo easily gets a pass from Washington on its huge U.S. trade surpluses — $48.6 billion in the first eight months of this year, a 6.3% increase from the year earlier. That’s apparently a quid pro quo for Washington’s military presence in Japan and Tokyo’s expected opposition to China’s economic, political and military influence in Asia and the rest of the world.

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Working both sides of the street, Japan is doing brisk business with U.S. and China. In the first eight months of this year, Japanese exports to China came in at $86.4 billion, closely trailing exports to the U.S. of $94.6 billion. Those two countries currently account for nearly 40% of Japan’s total sales abroad.

Washington should perhaps note that Japan is practicing very different terms of endearment with its two largest trade partners: Tokyo is making a lot of money on its U.S. trades, while running considerable trade deficits with China.

Europe is showing the same trade pattern. During the January to August period, the European Union reported a 102.7 billion euro trade surplus with the U.S., and a 127.4 billion euro trade deficit with China.

Germany accounted for nearly one-third of the surplus with the U.S. and ran a very small (7.5 billion euro) deficit with China.

Is there a message here about differences of market access in the U.S. and China?

The ECB is offsetting tight fiscal policies

The Japanese have no comment on that, but the Europeans — led by French President Emmanuel Macron and the EU Chamber of Commerce in Beijing — strongly complain about China’s trade rules and practices.

Beijing is laughing that off because it sees no agreement on that between Paris and Berlin. Germany is apparently advocating a soft approach because the Chinese have reduced their surpluses on German trades to negligible amounts. But the French trade deficit with China – 29.2 billion euros in 2018 – is almost four times larger and represents France’s largest bilateral trade gap.

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China, apparently, wants to do something about that. Macron is visiting Shanghai this week and will talk trade with China’s President Xi Jinping at the China International Import Expo.

Not to be outdone, German Chancellor Angela Merkel – who was on a sales mission in India last week – wants to make trade with China a focal point of Germany’s rotating EU presidency next year with an all 27-member (assuming the U.K. leaves by that time) summit with China in Leipzig scheduled for September 2020.

Given that French-German rivalry — where Berlin wants to have the upper hand come what may – only ill-informed people can advocate that political skills were needed to make the monetary policies of the European Central Bank more acceptable to the 19 countries of the euro area.

That nonsense will continue because most people don’t understand that Germany’s systematic refusal to stop living off the rest of its euro area trade partners makes impossible any credible and sustainable growth policies. As a result of that, the ECB’s easy monetary policy had been put in place to offset German-imposed fiscal austerity.

Macron knows he cannot change German economic policies to get a pro-growth monetary and fiscal policy mix. And that can easily lead to Macron’s political demise during the next elections in 2022.

Only the U.S. can change those growth-stifling EU policies that are depressing America’s largest overseas markets. The way to do that is simple: Hit the German exports to the U.S. There are no other markets that can readily provide an alternative to Germany’s $126 billion goods sales to the U.S. in 2018.

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That’s the only way Germany could be forced to generate more growth from domestic demand and give some oxygen to suffocating euro area economies.

Investment thoughts

The U.S. would be well advised to make a quick trade deal with China and to tone down its gratuitous and counter-productive anti-Chinese rhetoric.

China, for its part, must understand that its balanced trade accounts with the U.S. are a point of departure for a constructive relationship that both countries can live with – and that could be of enormous benefit to the rest of the world.

Destructive confrontation and increasing hostility between nuclear-armed military powers — advocated by so many thought-challenged “strategists” – should give way to a sober-minded statecraft based on a worldly assessment of national interest.

Washington’s trans-Atlantic policy must focus on Germany’s uncooperative and unwise economic policies. If that means a recourse to targeted trade instruments, so be it. Germany’s wrong leadership has led to a chaotic and divided nation, with dangerous voices of the past rapidly taking the center stage of the political landscape. Washington should not allow that to destabilize the rest of Europe, and to destroy the beautiful project of a peaceful and united continent.

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.


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