US trade deficit: Trump fights the symptoms instead of the causes
The International Monetary Fund’s (IMF) recent report on how to deal with today’s global trade imbalances could not be more timely or useful. At a time when the Trump administration appears to be taking the world down the route to destructive beggar-my-neighbor trade policies, the IMF is proposing global policy coordination to resolve the trade imbalance problem in a constructive manner.
One has to hope that the Trump administration will take the IMF’s policy recommendations seriously. Maybe then they will start to work together with our trade partners to resolve today’s global trade imbalances in a manner that will not threaten global economic prosperity.
Like the Trump administration, the IMF reminds us that the world’s external trade imbalances are increasingly concentrated in a small group of countries. Among those countries that, year-in and year-out, have been registering large trade surpluses are Germany, China, Japan and South Korea. Among those countries that have been registering large trade deficits on a continuing basis have been the United States and the United Kingdom.
The Trump administration’s preferred approach to reducing the large and persistent U.S. trade deficit seems to be to deal with the symptoms rather than with the causes of that imbalance. Among its preferred arsenal of weapons are import tariffs, the renegotiation of free trade deals and threats to get countries to stop manipulating their exchange rates.
As part of this strategy, it seems that the Trump administration is now readying itself to introduce steel import tariffs on a variety of countries to provide protection to the U.S. steel industry. It is doing so despite warnings that such action is bound to provoke retaliation by the U.S. trade partners that could be harmful to U.S. exporters, and that could take us down the road to the beggar-my-neighbor policies of the past.
In contrast to the Trump administration, the IMF’s recommended policy approach is to deal with the causes rather than with the symptoms of today’s trade imbalances. It is reminding us that the reasons why countries register trade deficits is that those countries consume more than they produce.
They do so by effectively saving less than they invest. Similarly, the IMF is reminding us that those countries that serially run big trade surpluses are doing so because they continually have their economies save more than they invest.
Recognizing the causes of today’s global imbalances, the IMF is suggesting a coordinated policy approach that requires concerted action by both the trade deficit and surplus countries. According to the IMF, the trade deficit countries like the United States should aim at reducing their budget deficits with the goal of increasing their level of domestic savings.
At the same time, they should introduce policies that might help to improve external competitiveness and overall saving. In that context, particular emphasis might be given to policy reforms that boost education outcomes and strengthen the business climate.
For their part, surplus countries like Germany and China should be moving in the opposite direction. They should be using the fiscal space that they have to reduce their level of public savings and to boost their economies. At the same time, they should focus on lifting distortions that constrain domestic consumer demand and limit trade competition. This would be particularly true for China, where the absence of a social safety net induces households to save excessively.
It is all too likely that by not addressing the U.S. savings-investment imbalance, the Trump administration’s policies will fail to reduce the country’s trade deficit. When that happens, there is the real risk that the administration will double down on its trade-protectionist policies, which would heighten the prospects of a global trade war.
Hopefully the Trump administration will heed the IMF’s advice on how to cure today’s global trade imbalances and will take seriously the IMF’s warning that the drift toward protectionism now constitutes the greatest risk to the global economy. However, judging by how important the “America First” plank was in Donald Trump’s election campaign, I would not suggest holding one’s breath for that to happen.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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