China gives US nothing, but Germans get sweets
6/11/2013 11:39:06 AM

Selling more American goods and services in expanding markets of nearly half a billion middle-class consumers could be a win-win proposition for both countries: it would serve China's goal of economic modernization while boosting America's growth through smaller trade deficits.

But not much was heard about trade. That is in sharp contrast with the Chinese Prime Minister Li Keqiang's recent visit to Germany, where trade was hailed as part of the Sino-German "Dream Team." And dream it is. Last year, the German trade shortfall with China came in at less than 5 percent of the whopping $315 billion US trade deficit with Beijing. US and German exports to China were roughly comparable in 2012, but US imports from China were 4.4 times bigger than what Germany bought in China.

This year the US trade deficit with China will probably be even worse. China's moderating economic growth will slow down its import demand, but the continuing recovery of the US economy will provide expanding markets for Chinese exports.

US Gets the Heartburn, Allies Get the Sweets

In spite of that, there are no reports that the US was seriously talking trade with China during what White House called a "unique" summit meeting. We just got all those extremely contentious issues like North Korean nukes, Iranian suspected nukes, intractable conflicts in Central Asia and territorial spats in the Sea of Japan and the East and South China Seas.

All the topics that (a) exacerbate our adversarial tensions with China, (b) lead to extremely dangerous intrusions into each other's cyber space and (c) prompt our security strategists to move nearly two-thirds of our naval assets into China's neighborhood.

And then we want to build trust with China. Don't bother, say the Chinese. In a tense debate between the top American and Chinese military officials during the conference organized by the International Institute for Strategic Studies in Singapore May 31-June 2, 2013 (the "Shangri-La Dialogue"), the Chinese Major General Yao Yunzhu (she is also director of the Center for China-America Defense Relations at the People's Liberation Army) firmly declared that the US policy of "rebalancing" (or "pivoting") to Asia was intended to contain China.

No wonder the Chinese want a "dream team" with Germany. During his visit to Berlin two weeks ago, Prime Minister Li urged closer cooperation in manufacturing and said that China would give Germany preferential treatment for investments in logistics, education and healthcare. That is in addition to the huge local production of German cars and top-of-the-line machinery imports, in exchange for Chinese exports of textiles, electrical goods and toys.

Interestingly, before visiting Germany, Mr Li stopped off in Switzerland to sign the framework of a free-trade agreement, the first with a west European economy. China is looking for Swiss pharmaceutical products, watches, precision machinery and food processing technology. Mr. Li also said that China envisages to make Switzerland its preferred financial center for offshore yuan trading – a piece of business fiercely contested by London and Paris, and a dig at the US at a time when Washington is dismantling Switzerland's centuries old bank secrecy laws and practices.

(Read MoreChina Data Highlights Weak Economy, Remedies in Focus)

China Doesn't Do "Unscripted" Business

This, too, is "unscripted," as our strategic analysts would say?

Nothing is "unscripted" in Chinese global political and economic strategy. Those who think that the Chinese president came for "unscripted" talks with his chief geopolitical adversary should think again. As the Singapore "Shangri-La Dialogue" showed, Beijing has clear strategic markers about Sino-American relations. And all these "red lines" come from the Politburo - China's highest policy making forum.

Here is another detail for those who need to understand the long arm of China's party bosses. The Politburo held a special session on the economy in mid-April, instructing the government that "China needs to cement its economic growth momentum and guard against potential risks in financial sectors," adding that "macro-economic policies should be stabilized while loosening micro controls in some sectors."

These are clear marching orders – and performance evaluation criteria - for both the current economic management and economic reforms presently under way and those to come.

Clearly, strategic considerations and development programs are at the heart of China's quest for a "dream team" with Germany and a preferred offshore financial center in Switzerland. Apart from the fact that Germany is eager to sell the technology China needs, and that Switzerland has the expertise and the financial infrastructure to help China's gradual introduction of the yuan as a global currency, neither country is Beijing's strategic adversary.

And here is what that means. When Mr Xi talks about new world power relationships, he clearly has in mind China's key (i.e., dominant) position in Asia. But that is the position the US holds and is unwilling to relinquish. In fact, the whole "rebalancing" to Asia is part of Washington's intention to remain a dominant Asia-Pacific power. China is unlikely to mount a military challenge to the US for the time being, but Mr Xi's frequent visits to various army units are assorted with impatient and widely reported exhortations to "get ready to fight and to win wars," with particular emphasis on the need "to win regional warfare under conditions shaped by information technologies."

That is a clear collision course. President Obama wants to manage that course by attempting to put an end to cyber intrusions, and by dissolving the Korean crisis through an uncertain cooperative effort to get rid of North Korean nuclear arms.

But that is crisis management rather than a mutually acceptable and sustainable Sino-American modus vivendi. "Unscripted" summits and multi-level bilateral talking shops may be useful only if – and that may be a big if -- they are underpinned by a deeper, broader and more balanced economic engagement of the world's two largest economies.

A good place to start testing this proposition would be a fully scripted agreement at the highest level to swiftly rebalance the US trade relationship with China, and to ensure a more open access for American companies to Chinese markets.

It is unfortunate that these two problems were glossed over in California.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also 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.