If the Treasury Department’s recent semiannual report is any guide, the Trump administration still doesn’t quite get it when it comes to trade imbalances. “The US government has all the tools it needs to achieve balanced trade without risking a trade war,” writes Joseph Gagnon for the Peterson Institute for International Economics. But it is using one of the main tools — fiscal policy — the wrong way.
Part of the problem, according to Gagnon, is that the administration and the recent Treasury report both blame the deficit on other countries. For one, Trump likes to point to foreign trade barriers to U.S. exports, which definitely do exist but “have essentially no impact on the overall US balance of trade,” argues Gagnon.
In addition, Trump has also made an (at least rhetorical) enemy of currency manipulators, even though the Treasury report declined to classify any country as such and despite the fact that, although currency manipulation is a problem, it likely accounts for only one-fifth of the trade deficit, according to research by Gagnon and Tessa Morrison, also from the Peterson Institute for International Economics.
Finally, the Treasury report singles out China and Germany in particular for low spending at home, which suppresses their consumption of exports. That dynamic undoubtedly plays a role in the trade imbalance, but focusing on it leaves out the United States’ own poorly calibrated fiscal decision-making.
“It is long past time to replace the strong dollar policy with a balanced dollar policy aimed at minimizing global imbalances,” concludes Gagnon. “Such a policy would include stabilizing foreign exchange intervention and possibly taxing foreign capital inflows to minimize swings in the dollar’s exchange value that give rise to unsustainable trade imbalances.” Unfortunately, the Trump administration’s preferred path appears to be overheating the U.S. economy through fiscal expansion and tax cuts, which will lead a flush United States to buy even more exports and dig its trade hole even deeper.
Greg Ip of the Wall Street Journal has more on the relationship between budget deficits and trade deficits. Rather discouragingly, Larry Kudlow, the president’s chief economic adviser and a friend of National Review, has argued that there’s not much of a relationship between the two. But as Ip makes clear in his column, the evidence suggests otherwise. He cites a recent Goldman Sachs report, which, drawing on past experience, “found that all else equal, every $100 boost to the budget deficit because of policy decisions (as opposed to economic developments such as a recession) raises the trade deficit by $35.”
If Gagnon and Ip are right, as I suspect they are, trade hawks really ought to be fiscal hawks. I’m torn, as I believe there is a case for “running the economy extra-hot,” for all the reasons Karl Smith of the Niskanen Center has outlined in Bloomberg View: Essentially, the post-crisis years have done a great deal of damage to the productive potential of the U.S. economy, and reversing its effects will require, for some time to come, more in the way of stimulus. One could argue that we will just have to grin and bear higher trade deficits.
Or perhaps we should do more to encourage the world’s surplus countries to do their part to boost global growth. Gagnon rightly observes that “improved social safety nets in China and Korea and infrastructure spending in Germany would meet internal needs and rebalance global trade at the same time.” Granted, there is not that much we can do to compel these countries to change course. But we can make calling on them to do right by their own citizens part of our ideological toolkit. Ronald Reagan succeeded in making life difficult for Soviet bloc leaders by demanding that they do right by their citizens. Perhaps Donald Trump can do the same by calling on Beijing and Berlin to adopt more worker-friendly policies — call it the Trump Doctrine.
For U.S. workers to flourish, we need our trading partners to allow their own workers to share in the fruits of rising prosperity. Admittedly, this would be playing against type: So far, the president hasn’t evinced much concern over whether Chinese or German workers are being given a fair shake. Nevertheless, the fact remains that for an America First agenda to succeed, it really is essential that the surplus countries boost their consumption. And this Trump Doctrine would greatly strengthen the president’s populist bona fides, which could use a boost in light of declining support for the recent GOP tax cut.