In Donald Trump’s mercantilist world of winners and losers, trade deficits are inherently bad and proof that the United States is being ripped off by the rest of the world.
Indeed, this world view was behind Treasury Secretary Steven Mnuchin’s overturning at the weekend of the Group of 20’s past commitments to “resist all forms of protectionism”.
Trump is trying to create flexibility to potentially impose select tariffs or border taxes against countries with which the US runs large trade deficits, notably China, Mexico and Germany.
At least that is the impression he wants to give to build leverage in international trade negotiations.
Yet Trump’s obsession with trade deficits is deeply flawed.
The US runs a trade deficit with the rest of the world because it consumes more than it saves.
As Tufts University economics professor Michael Klein notes on his new EconoFact blog, trade deficits are accompanied by sales of domestic assets to foreigners.
“This is how a country finances buying more goods and services from the rest of the world than it sells abroad,” Klein says.
So the US sells property, businesses and financial instruments to foreigners to fund its voracious consumption of imports.
Trump’s unconventional trade adviser Peter Navarro dislikes the idea of importing too much and selling the farm to top rival China to fund imports.
He suggests imports cost US manufacturing jobs (studies show automation is the main culprit) and that asset sales to China pose a national security risk because Beijing hoovers up strategically important US firms and technology.
It may be surprising to know that the estimated overall accumulated foreign direct presence in the US was $US3.1 trillion in 2015, with 69 per cent owned by Europeans, 13 per cent by the Japanese and just 0.5 per cent by China, according to Klein.
In any event, raising the price of goods imported from abroad for American consumers via a border tariff is unlikely to address the underlying problem of a domestic US savings shortfall.
As former Goldman Sachs chief economist Jim O’Neill told me at The Australian Financial Review Business Summit this month: “The idea that the US can just cut its current account balance significantly by controlling imports is ridiculous.”
“It bothers me that amongst Trump’s people who make noise, there appears to be no acknowledgement of that.”
“If he had a plan to deliberately raise savings it would be so much more credible.”
Trump’s planned tax cuts and big spending on defence and infrastructure may in fact increase the US savings shortfall by blowing out the government’s budget deficit and debt.
His stimulatory policies, if passed by Congress, may also raise the value of the US dollar and hence increase the size of the US trade deficit as imports become cheaper and exports more expensive for foreigners.
Such a scenario would increase the prospect of a trade war, because Trump would find it increasingly difficult to fulfil his dubious pledge to return manufacturing jobs to American shores.
Before his awkward meeting at the weekend with Germany’s Chancellor Angela Merkel, Trump threatened German carmakers including BMW with a 35 per cent import tax.
Navarro sees it as unfair that US automakers such as Ford and General Motors face a 19 per cent value-added tax when they sell cars in Germany, whereas BMW faces no comparable sales tax in the US.
Again, this is faulty logic. BMW cars sold in Germany face the same 19 per cent VAT. It is a level playing field.
Navarro has also claimed that Germany uses a “grossly undervalued” euro to its advantage to sell more exports to the US and import fewer American products.
He blamed Germany’s alleged influence over the European Central Bank and its easy-money policies that have driven down the value of the euro to around a 13-year low against the greenback.
But Navarro is targeting the wrong policy instrument.
His argument would be more valid if he blamed Germany’s fiscal policy, not monetary policy.
Germany runs the world’s largest current-account surplus of about €270 billion ($370 billion), or about 8.6 per cent of GDP.
“Germany’s chronic current account surplus is a big problem for its eurozone partners and a small problem for the United States,” says Barry Eichengreen, professor of economics at the University of California, Berkeley.
“If Germany is always spending about 8 per cent of GDP less than it is saving, that makes it more difficult for the European economy to grow.”
The imbalance is caused by too much German saving and not enough spending, a problem for the rest of the world that the Obama administration pressured Berlin on for years.
Trump would be better leaning on Merkel to boost fiscal spending, lift tepid German wage growth and encourage private business investment via tax policy to help narrow Germany’s ballooning current account surplus.
If Trump really wants to “fix” trade imbalances, he needs to focus less on counterproductive trade measures and more on savings and investment policies.
Source: Financial Review