- A large part of the solution to the Korean problem is in Beijing.
- Washington will have to unlock that by finding a tolerable peaceful coexistence with China.
- The trade deal with China the U.S. wants is not a road in that direction. The degree of control Washington seeks over China’s economy will most probably be rejected by Beijing.
The bizarre summit meetings between the U.S. and North Korea came to a logical end. Without any security guarantees and relief from debilitating sanctions, Pyongyang refused last Thursday in Hanoi, Vietnam to destroy its nuclear military assets and their delivery vehicles.
Why it took two summits and intensive bilateral consultations over a period of seven months to lead to such a predictable failure is a mystery historians will have to ponder.
The best result of the two top-level meetings is an apparent North Korean commitment to stop nuclear and ballistic tests, and the U.S. decision to discontinue mock-up North Korea invasions in the form of long and massive military exercises on and around the Korean Peninsula.
It seems that Washington-Pyongyang discussions are expected to keep that agreement alive. North Koreans may also wish to use those meetings to avoid the embarrassment of failed summits. But their friends, China in particular, could also have other ideas, such as an initiative within the United Nations Security Council to soften — on humanitarian grounds — the most damaging sanctions affecting the North Korean population.
Beijing holds Korean trump cards
The U.S. would oppose that because those are the sanctions aimed at exerting maximum pressure on Pyongyang to get rid of its nuclear arsenal. Still, a veto-laden impasse at the United Nations Security Council could open doors to more widespread sanctions-busting than is the case now, where the U.S. would have little leverage to intervene.
So, for all practical purposes, the North Korean problem will linger as a ticking time bomb until solutions can be found for security guarantees and an acceptable economic and political arrangement for the Korean Peninsula as a whole.
A large part of those solutions are in Beijing.
To unlock those solutions, the essential question for the U.S. is to find an acceptable modus vivendi — a sort of tolerable peaceful coexistence — with China. And it is important for Washington to understand that an openly hostile “strategic competition” is a logical opposite of that objective. Especially if that “competitor” is also branded a “revisionist power” keen on upending the American world order.
Looking at the existential economic issues of that relationship, it is enough to read the last Wednesday’s Congressional testimony of U.S. Trade Representative Robert Lighthizer to understand that the U.S. and China are on a permanent collision course.
Seeking to balance its trade accounts and reduce China’s nearly half-a-trillion-dollar surplus on U.S. goods trade, Washington is hitting Beijing’s most sensitive red lines. Indeed, the U.S. is demanding enforceable structural reforms to put an end to intellectual property thefts and forced technology transfers. The U.S. also wants to eliminate China’s non-tariff barriers to trade, such as industrial subsidies, as well as regulations, licensing procedures, technical standards and other practices that discriminate against U.S. businesses and give an unfair advantage to their Chinese competitors.
China denies all that, but the U.S. insists on establishing review procedures with tariffs in case Beijing violates any of the trade rules and practices Washington sets.
A deal Beijing cannot accept
If you stop and think about the nature of China’s structural reforms, and the enforcement procedures needed to ensure that those reforms are implemented, it is clear that a U.S.-China trade deal would establish an effective American oversight of China’s economy — with a permanent threat of trade tariffs.
And then, the U.S. also wants to control China’s monetary policy.
How? Claiming that China is manipulating the exchange rate to blunt the impact of trade tariffs and maintain a competitive advantage, the U.S. wants China to report its currency interventions.
That is a control of monetary policy pure and simple, because currency interventions are executed by increasing or withdrawing the quantity of yuan in China’s money markets. Currency intervention and monetary policy are one and the same thing.
Apart from that, Washington wants to make sure that China is not manipulating the exchange rate for purposes of deliberately altering its terms of trade.
That is technically impossible. First, China and the U.S. would have to agree on the price index used to conduct that analysis (for example, the consumer price index, the producer price index, export prices and unit labor costs). Second, they would also have to agree on the time period deemed relevant for that investigation.
Can anyone really believe that a great power like China would agree to such a pervasive American control over its economy?
The ongoing trade negotiating process will just reinforce China’s conviction that the U.S. is out to disrupt its economy, create dissent within its political system and foment social strife.
With an apparent agreement of no further nuclear and ballistic testing, and an indefinite suspension of U.S. military exercises on the Korean Peninsula, Washington wants to leave Pyongyang under maximum sanction pressure. But those sanctions are increasingly porous, and North Korea, supported by its friends and neighbors, won’t yield on nuclear disarmament until it gets credible security guarantees and a total lifting of economic isolation.
Washington will also get nowhere with its current trade strategy toward China. Beijing simply cannot accept Washington’s control over its economy.
As I have argued all along, the urgency of stopping America’s soaring trade deficits with China should have led to a different approach: An immediate and irrevocable limit to Chinese exports to the U.S. to the level of American exports to China. All clear, clean and brutally radical.
Once that balance is reached, the U.S. could have been ready to discuss other bilateral trade issues of its own choosing — but always keeping in mind the overriding objective of balanced U.S.-China trade.
The way things are being done now will lead to trade tariffs, muddling through, hidden agendas and an increasingly hostile relationship — which will not stop America’s huge wealth and technology transfers to China.
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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