The US-China trade deal leaves a large American deficit and a permanent collision course

Looking at the latest U.S.-China trade numbers, one wonders how the agreement announced last week could lead to an acceptable balance of bilateral trade accounts.

China‘s surplus on its U.S. goods trade in the first 10 months of this year was $294.5 billion, and amounted to 40% of America’s total trade gap.

During the same period, Beijing slashed U.S. exports to China by 14.5% to $87.6 billion. By contrast, Chinese goods sales to the U.S. were more than four times larger at $382.1 billion.

In spite of that, reports indicate that Beijing promised to increase — over the next two years — its purchases of U.S. goods and services by $200 billion.

If thats all Beijing is offering, its exports to the U.S. would have to be halved from their current annual rate of $462.4 billion to reach a meaningful narrowing of the U.S. trade deficit with China.

How likely is that？

The sad truth is that the U.S. will continue to run huge wealth (and technology) transfers to China financed by America‘s increasing net foreign debt that will show as net foreign assets on China’s books.

Other big issues — such as intellectual property protection, forced technology transfers, illegal industry subsidies and exchange-rate management — are appearing as declaratory statements rather than clearly defined legal arguments. Their enforcement mechanism takes the form of bilateral consultations at technical levels that could escalate to top echelons in case of serious disagreements.

It is obvious that political expediency took precedence over an agreement to close the U.S. trade gap with China as a matter of American national security.

That clearly transpires from official statements.

Washington is emphasizing Chinas promises of larger purchases of farm and other American products, even though reports of $200 billion of likely Chinese imports from the U.S. over the next two years would still leave huge American trade deficits.

China is not mentioning any such promises. Chinese state media is pointing out that Beijing concluded a “trade agreement based on the principle of equality and mutual respect” and that the expansion of Chinas markets will lead to increasing imports of goods and services from abroad “including the United States under the WTO rules as well as market rules and business principles.”

All that sounds like an armistice rather than a credible end to the trade war.

Beijing would do well to realize that large and systematic imbalances on its U.S. trade cannot continue, regardless of who wins American presidential elections next year. Those imbalances are a provocation for a country experiencing a soaring public debt of more than $23 trillion, sharply deteriorating current budget conditions, and a calamitous net foreign investment position of -$10.56 trillion.

It should not be difficult for Beijing strategists to understand that their U.S. trade problem is a major roadblock to any meaningful improvement in the two countries deeply troubled relations.

For Beijing, it should all be very simple: buy more, much more from the U.S., or slash rapidly and radically extravagantly large sales to the U.S.

Why China did not move in that direction early enough to prevent a serious deterioration of its U.S. ties is part of a geopolitical calculus Beijing may wish to reconsider.

Investors should watch trade numbers for reliable signs of the real value of last weeks agreement.

Meanwhile, Washington will continue to praise its achievements in an election year, even though trade deficits with China will remain far too large to ignore. Trade spats will grind on. And so will other political and security issues the U.S. will pursue in its increasing strategic competition with China.

Any silver lining for financial markets？ Yes, a friendly Federal Reserve, because asset prices will always be determined by the course of monetary policy.