Trump vs. the Economy


 

Trump vs. the Economy

December 30, 2018  by

https://www.project-syndicate.org/commentary/trump-behavior-causes-stock-market-drop-by-nouriel-roubini-2018-12

Between publicly chastising US Federal Reserve Chair Jerome Powell and escalating his trade war with China, US President Donald Trump has finally rattled the markets. While investors were happy to look the other way during the first half of Trump’s term, the dangerous spectacle unfolding in the White House can no longer be ignored.

NEW YORK – Financial markets have finally awoken to the fact that Donald Trump is US president. Given that the world has endured two years of reckless tweets and public statements by the world’s most powerful man, the obvious question is, What took so long?

For one thing, until now, investors had bought into the argument that Trump is all bark and no bite. They were willing to give him the benefit of the doubt as long as he pursued tax cuts, deregulation, and other policies beneficial to the corporate sector and shareholders. And many trusted that, at the end of the day, the “adults in the room” would restrain Trump and ensure that the administration’s policies didn’t jump the guardrails of orthodoxy.

These assumptions were more or less vindicated during Trump’s first year in office, when economic growth and an expected increase in corporate profits – owing to forthcoming tax cuts and deregulation – resulted in strong stock-market performance. In 2017, US stock indices rose more than 20%.

But things changed radically in 2018, and especially in the last few months. Despite corporate earnings growing by over 20% (thanks to the tax cuts), US equity markets moved sideways for most of the year, and have now taken a sharp turn south. At this point, broad indices are in correction territory (meaning a 10% drop from the recent peak), and indices of tech stocks, such as the Nasdaq, are in bear-market territory (a drop of 20% or more).

Though financial markets’ higher volatility reflects concerns about China, Italy and other eurozone economies, and key emerging economies, most of the recent turmoil is due to Trump. The year started with the enactment of a reckless tax cut that pushed up long-term interest rates and created a sugar high in an economy already close to full employment. As early as February, growing concerns about inflation rising above the US Federal Reserve’s 2% target led to the year’s first risk-off.

Then came Trump’s trade wars with China and other key US trade partners. Market worries about the administration’s protectionist policies have waxed and waned throughout the year, but they are now reaching a new peak. The latest US actions against China seem to augur a broader trade, economic, and geopolitical cold war.

An additional worry is that Trump’s other policies will have stagflationary effects (reduced growth alongside higher inflation). After all, Trump is planning to limit inward foreign direct investment, and has already implemented broad restrictions on immigration, which will reduce labor-supply growth at a time when workforce aging and skills mismatches are already a growing problem.

Moreover, the administration has yet to propose an infrastructure plan to spur private-sector productivity or hasten the transition to a green economy. And on Twitter and elsewhere, Trump has continued to bash corporations for their hiring, production, investment, and pricing practices, singling out tech firms just when they are already facing a wider backlash and increased competition from their Chinese counterparts.

Emerging markets have also been shaken by US policies. Fiscal stimulus and monetary-policy tightening have pushed up short- and long-term interest rates and strengthened the US dollar. As a result, emerging economies have experienced capital flight and rising dollar-denominated debt. Those that rely heavily on exports have suffered the effects of lower commodity prices, and all that trade even indirectly with China have felt the effects of the trade war.

Even Trump’s oil policies have created volatility. After the resumption of US sanctions against Iran pushed up oil prices, the administration’s efforts to carve out exemptions and bully Saudi Arabia into increasing its own production led to a sharp price drop. Though US consumers benefit from lower oil prices, US energy firms’ stock prices do not. Besides, excessive oil-price volatility is bad for producers and consumers alike, because it hinders sensible investment and consumption decisions.

Making matters worse, it is now clear that the benefits of last year’s tax cuts have accrued almost entirely to the corporate sector, rather than to households in the form of higher real (inflation-adjusted) wages. That means household consumption could soon slow down, further undercutting the economy.

More than anything else, though, the sharp fall in US and global equities during the last quarter is a response to Trump’s own utterances and actions. Even worse than the heightened risk of a full-scale trade war with China (despite the recent “” agreed with Chinese President Xi Jinping) are Trump’s public attacks on the Fed, which began as early as the spring of 2018, when the US economy was growing at more than 4%.

Given these earlier attacks, markets were spooked this month when the Fed correctly decided to hike interest rates while also signaling a more gradual pace of rate increases in 2019. Most likely, the Fed’s relative hawkishness is a reaction to Trump’s threats against it. In the face of hostile presidential tweets, Fed Chair Jerome Powell needed to signal that the central bank remains politically independent.

But then came Trump’s decision to shut down large segments of the federal government over Congress’s refusal to fund his useless Mexican border wall. That sent markets into a near-panic, and the government shutdown was soon followed by reports that Trump wants to fire Powell – a move that could turn a correction into a crash. Just before the Christmas holiday, US Treasury secretary Steven Mnuchin was forced to issue a public statement to placate the markets. He announced that Trump was not planning to fire Powell after all, and that US banks’ finances are sound, effectively highlighting the question of whether they really are.

Recent changes within the administration that do not necessarily affect economic policy making are also rattling the markets. The impending departure of White House Chief of Staff John Kelly and Secretary of Defense James Mattis will leave the room devoid of adults. The coterie of economic nationalists and foreign-policy hawks who remain will cater to Trump’s every whim.

As matters stand, the risk of a full-scale geopolitical conflagration with China cannot be ruled out. A new cold war would effectively lead to de-globalization, disrupting supply chains everywhere, but particularly in the tech sector, as the recent ZTE and Huawei cases signal. At the same time, Trump seems to be hell-bent on undermining the cohesion of the European Union and NATO at a time when Europe is economically and politically fragile. And Special Counsel Robert Mueller’s investigation into Trump’s 2016 election campaign’s ties to Russia hangs like a Sword of Damocles over his presidency.

Trump is now the Dr. Strangelove of financial markets. Like the paranoid madman in Stanley Kubrick’s classic film, he is flirting with mutually assured economic destruction. Now that markets see the danger, the risk of a financial crisis and global recession has grown.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

 

 

Europe in Disarray


December 15, 2018

Europe in Disarray

In what by historical standards constitutes an instant, the future of democracy, prosperity, and peace in Europe has become uncertain. And with the US under President Donald Trump treating its allies like enemies, the continent must confront the growing threats it faces largely on its own.

 

NEW YORK – It was not all that long ago – just a few years, as hard as that it is to believe – that Europe appeared to be the part of the world most closely resembling the end-of-history idyll depicted by Francis Fukuyama at the end of the Cold War. Democracy, prosperity, and peace all seemed firmly entrenched.

 Not anymore. Parts of Paris are literally burning. The United Kingdom is consumed and divided by Brexit. Italy is led by an unwieldy left-right coalition that is resisting EU budget rules. Germany is contending with a political realignment and in the early phases of a transition to a new leader. Hungary and Poland have embraced the illiberalism seen across much of the world. Spain is confronting Catalan nationalism. And Russia is committing new acts of aggression against Ukraine.

In what by historical standards constitutes an instant, the future of democracy, prosperity, and peace in Europe has become uncertain. Much of what had been widely assumed to be settled is not. NATO’s rapid demobilization after the Cold War looks premature and precipitous.

There is no single explanation for these developments. What we are seeing in France is populism of the left, the result of people having difficulty making ends meet and rejecting new taxes, whatever the justification for them. This is different from what has fueled the rise of the far right across Europe: cultural defensiveness amid local and global challenges, above all immigration.

The European Union, for its part, has gradually lost its hold on the public imagination. It has been too remote, too bureaucratic, and too elite-driven for too long. Meanwhile, renewed Russian aggression may simply reflect President Vladimir Putin’s judgment that, having realized large political returns on his previous military “investments” in Ukraine and Syria, he had little to fear or lose from further actions.

Europe’s political class deserves its share of responsibility for today’s growing disarray. The EU introduced a common currency without a fiscal or banking union, making it all but impossible to conduct a coherent economic policy. The decision to put the UK’s continued EU membership to a popular vote, while allowing a simple majority to decide the issue and failing to spell out the terms of departure, was misguided.

Likewise, opening Germany’s borders to a flood of refugees, however pure Chancellor Angela Merkel’s motives, was sure to trigger a backlash. Most recently, French President Emmanuel Macron did himself no favors by backing down to the “Yellow Vest” protesters and offering compromises more likely to fuel additional demonstrations and exacerbate his country’s budget predicament.

We should not assume things will get better. It is only a matter of time before France’s far-right National Rally (formerly the National Front) and political parties across Europe figure out how to combine economic and cultural populism and threaten the post-World War II political order. Italy’s hybrid populist government is a version of just that.

The UK will remain torn over its relationship (or lack thereof) with the EU no matter what comes of Brexit; and it is entirely possible that a post-Brexit UK might come under serious strain itself, given renewed calls for Irish unity and Scottish independence. There is no formula for dividing power between Brussels and capitals that would be acceptable to both the EU and national governments. Meanwhile, it is far from certain that Putin is content or done with his aggression against Ukraine or conceivably others.

Moreover, in a world of increasing inequality, violence within and between countries, and climate change, the pressures posed by immigration are more likely to worsen than fade away. And economic dislocation is bound to intensify in a world of global competition and new technologies that will eliminate millions of existing jobs.

Why this matters should be obvious. Europe still represents a quarter of the world’s economy. It is the largest constellation of democratic countries. The last century demonstrated more than once the cost of a breakdown of order on the continent.

Alas, just as there is no single cause that explains Europe’s increasing disarray, there is no single solution either. To be precise, there is no solution of any sort. There is, however, a set of policies that, if adopted, would help leaders manage the challenges.

A comprehensive immigration strategy that balances security, human rights, and economic competitiveness is one such policy. A defense effort that focuses more on how money is spent than on how much is needed would go a considerable way in buttressing Europe’s security. Moreover, deterrence should be strengthened by bolstering NATO and further arming Ukraine. Weaning Europe from Russian natural gas makes sense as well, which implies halting the Nord Stream II pipeline that is meant to bring gas directly from Russia to Germany, bypassing Ukraine. And additional retraining programs are needed for workers whose jobs will disappear as a result of globalization and automation.

Much of this agenda would benefit from American involvement and support. It would help if the United States stopped viewing the EU as an enemy and NATO allies as free-riders. Europe includes the countries most prepared to work with the US to deter Russian aggression; integrate China into global trade and investment frameworks on terms consistent with Western interests; mitigate and, where necessary, adapt to climate change; and set rules of the road for cyberspace.

Alas, such an approach is unlikely to be forthcoming from Donald Trump any time soon. That leaves Europe with no choice but to confront its disarray mostly on its own.

Brexit–David Cameron led us to this calamity.


October 23, 2018

 

“David Cameron is a former PM. He not only has the right to offer his solution but a duty. If he is to earn the right to a hearing, however, he must first find not only self-knowledge and courage, but an un-English seriousness of purpose he has evaded all his life.”–Nick Cohen

John Major, Tony Blair and Gordon Brown have warned of the dangers of Brexit. But where is the former Prime Minister who called the referendum that will blight Britain for as far ahead as anyone can see? Whatever happened to that likely lad? David Cameron doesn’t want to talk about it, one of his friends tells me. “He doesn’t defend the referendum, but won’t say he made a mistake either. Europe is like a family scandal. We know what’s happened but we don’t say a word: it’s his no-go zone.”

At a personal level, the consequences swirl around him. I may be exhausting your capacity for compassion but the smallest of the casualties of Brexit has been the good fellowship of the Chipping Norton set. Naturally, the Cotswolds’ wealthy Leavers are grateful. But Cameron must resent them. He must know that he has been the useful idiot who succumbed to the demands of Rupert Murdoch’s Rebekah Brooks, a member of the local nouveau gentry by virtue of her converted barn, in the crashingly stupid belief that no harm would come from his surrender.

Invitations to “kitchen suppers” from Remainers, however, can only include Samantha Cameron’s name – if, they are extended at all. Tania Rotherwick invited the Camerons to her pool at the magnificent Cornbury Park estate before she split from her husband and Cameron split Britain from Europe. She is now particularly contemptuous, I hear.

Cameron’s memoirs were meant to be published this month but have been delayed until next year. The early signs are ominous. A book has to be coherent if it is to find a readership: its opening must prefigure its conclusion. As described in the publishing press, Cameron’s effort will have no consistency. He will tell the story of the formation of the coalition, his contributions to economic, welfare and foreign policy, his surprise victory in the 2015 election and then – as if from nowhere – the conventional memoir will end with the author carelessly deciding he will settle the European question, without planning a campaign or preparing an argument and, instead, launching a crisis that will last for decades. Nothing will make sense. Nothing will hang together. It’s as if a romcom were to conclude with serial killers murdering the cooing lovers or Hilary Mantel were to have aliens invade Tudor England on the last page of her Thomas Cromwell trilogy.

The book Cameron cannot write would accept that his political battles and achievements were as nothing when set against his decision to appeal to the worst of the Tory party. It would begin with Cameron honouring the decision that won him the Conservative leadership in 2005. He would confess that he should have known better than to pull the Conservatives out of the centre-right group in the European parliament and align them with Law and Justice, the know-nothing Polish nationalists who are reducing their country to an ill-governed autocracy. The manoeuvre was pure Cameron: tactics above strategy; appeasement instead of confrontation.

The pattern continued throughout his premiership. He thought he could buy off the right by refusing to explain the benefits of EU membership to the voters. At one point in 2014 he threatened to leave the EU. He then turned around in 2016 and asked the public to believe that leaving would be a disaster and was surprised when 17.4 million men and women he had never treated as adults worthy of inclusion in a serious conversation ignored him.

If he were being honest, Cameron would admit too that Brexit ought to bring an end to a British or, to be specific, English, style that is by no means confined to the upper class, but was everywhere present among the public-school boys who ruled us.

‘One Etonian led the Remain campaign and another led the Leave campaign, and the English couldn’t see why that was wrong.’
Pinterest
‘One Etonian led the Remain campaign and another led the Leave campaign, and the English couldn’t see why that was wrong.’ Photograph: Frantzesco Kangaris for the Guardian

I mean the ironic style that gives us our famously impenetrable sense of humour (which we will need now the rest of the world is laughing at us). The perfidious style that allows us to hide behind masks and has made England superb at producing brilliant actors for the West End but hopeless at producing practical politicians for Westminster. The teasing style of speaking in codes that benighted foreigners can never understand, however well they speak English. The cliquey style that treats England as a club, not a country, and allowed Jeremy Corbyn to say that Jews cannot “understand English irony”, however long their ancestors have lived here.

 

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The deferential style that allowed one Etonian to lead the Remain campaign and another to lead the Leave campaign and for the English to not even see why that was wrong. The life’s-a-game-you-shouldn’t-take-too-seriously style that inspired Cameron to say he holds “no grudges” against Boris Johnson now the match is over and the covers back on the pitch.

The gentleman amateur style that convinced Cameron he could treat a momentous decision like an Oxford essay crisis and charm the electorate into agreeing with him in a couple of weeks, as if voters were a sherry-soaked don who could be won round with a few clever asides. The effortlessly superior style that never makes the effort to ask what the hell the English have to feel superior about. The gutless, dilettantish and fatally flippant style that has dominated England for so long and failed it so completely. The time for its funeral has long passed.

A politician who bumped into Cameron said he thinks the referendum result must be respected, but that Britain should protect living standards by going for the softest Brexit imaginable and staying in the single market. This is a compromise well to the “left” of Theresa May and Corbyn’s plans and is worth discussing. Whatever his critics say, David Cameron is a former PM. He not only has the right to offer his solution but a duty. If he is to earn the right to a hearing, however, he must first find not only self-knowledge and courage, but an un-English seriousness of purpose he has evaded all his life.

Nick Cohen is an Observer columnist

How to win the Cold War with China–Dr. Fareed Zakaria


October 15, 2018

How to win the cold war with China–Dr. Fareed Zakaria

https://www.washingtonpost.com

The Trump administration’s most significant and lasting decisions will be about U.S. policy toward China. Far more consequential than even the Supreme Court’s composition or immigration policy is whether the 21st century will be marked by conflict or cooperation between the two most prosperous and powerful countries on the planet. The last time there was such a question — when Britain confronted a rising Germany 150 years ago — it did not work out so well.

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Since the end of the Cold War, we have lived in an era of almost no genuine great-power competition, which has led to the emergence of a dynamic global economy and a huge expansion of international trade, travel, culture and contact. All this happened under the United States’ uncontested supremacy — military, political, economic and cultural.

That age is over. Twenty-five years ago, China made up less than 2 percent of the global gross domestic product. Today that figure is 15 percent, second only to the United States’ 24 percent. In the next decade or so, the Chinese economy will surpass the size of America’s. Already, nine of the 20 most valuable technology companies in the world are based in China. Beijing has also become far more active on the global stage, ramping up its defense spending, foreign aid and international cultural missions. Its Belt and Road Initiative, infrastructure investment in dozens of countries, will ultimately be at least seven times larger than the Marshall Plan, if not far more, in inflation-adjusted terms.

The Trump administration has many of the right instincts on China. Beijing has taken advantage of free trade and the United States’ desire to integrate China into the global system. The administration is right to push back and try to get a fundamentally different attitude from China on trade. But instincts do not make for a grand strategy.

Were Washington to be more strategic, it would have allied with Europe, Japan and Canada on trade and presented China with a united front, almost guaranteeing that Beijing would have to acquiesce. It would have embraced the Trans-Pacific Partnership as a way to provide Pacific countries an alternative to the Chinese economic system. But in place of a China strategy, we have a series of contradictory initiatives and rhetoric.

President Trump’s Trade Gangster–Peter Navarro

If there is one person in the White House whose ‘to do’ list you want to avoid, it’s Peter Navarro. They call him the ‘most dangerous’ man for the global economic order. He is radical, determined and wields enormous influence on US President Donald Trump– source–https://blogs.economictimes.indiatimes.com/letterfromwashington/peter-navarro-most-dangerous-man-for-the-global-economic-order/

In fact, the administration seems divided on the broader issue of U.S.-China relations. On one side are people such as Treasury Secretary Steven Mnuchin, who want to use tough talk and tariffs to extract a better deal from China, while staying within the basic framework of the international system. Others, such as trade adviser Peter Navarro, would prefer that the United States and China were far less intertwined. This would undoubtedly mean a more mercantilist world economy and a more tense international order. There is a similar split among geo-politicians, with the Pentagon being more hawkish (not least because it ensures huge budgets) and the State Department more conciliatory.

Vice President Pence recently gave a fiery speech that came close to declaring that we are in a new Cold War with China. An outright labeling of China as the enemy would be a seismic shift in U.S. strategy and would certainly trigger a Chinese response. It could lead us to a divided, unstable and less prosperous world. Here’s hoping the Trump administration has thought through the dangers of such a confrontational approach.

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History tells us that if China is indeed now the United States’ main rival for superpower status, the best way to handle such a challenge lies less in tariffs and military threats and more in revitalization at home. The United States prevailed over the Soviet Union not because it waged war in Vietnam or funded the contras in Nicaragua, but because it had a fundamentally more vibrant and productive political-economic model. The Soviet threat pushed the United States to build the interstate highway system, put a man on the moon, and lavishly fund science and technology.

The former head of Google China, Kai-Fu Lee, has written an important book arguing that China is likely to win the race for artificial intelligence — the crucial technology of the 21st century. He points out that China’s companies are highly innovative, its government is willing to make big bets for the long term, and its entrepreneurs are driven and determined.

Tariffs and military maneuvers might be fine at a tactical level, but they don’t address the core challenge. The United States desperately needs to rebuild its infrastructure, fix its educational system, spend money on basic scientific research and solve the political dysfunction that has made its model less appealing around the world. If China is a threat, that’s the best response.

Trump’s Unilateralism, US Dollar and Its Discontents


October 12, 2018

Trump’s Unilateralism, US Dollar and Its Discontents

by Barry Eichengreen

https://www.project-syndicate.org/commentary/dollar-could-lose-global-hegemony-by-barry-eichengreen-2018-10

Having unilaterally reimposed sanctions on Iran, US President Donald Trump’s administration is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. But that could hasten the dollar’s demise as the main global currency.

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Trump is squandering US leverage

BRUSSELS – US President Donald Trump’s unilateralism is reshaping the world in profound and irreversible ways. He is undermining the working of multilateral institutions. Other countries, for their part, no longer regard the United States as a reliable alliance partner and feel impelled to develop their own geopolitical capabilities.

Now the Trump Administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks.

The threat is serious because US banks are the main source of dollars used in cross-border transactions. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), dollars are used in nearly half of all cross-border payments, a share far greater than the weight of the US in the world economy.

In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. “Plans” may be a bit strong, given that few details have been provided. But the three countries have described in general terms the creation of a stand-alone financial entity, owned and organized by the governments in question, to facilitate transactions between Iran and foreign companies.

Those companies will presumably settle their claims in euros, not dollars, freeing them from dependence on US banks. And insofar as the Europeans’ special-purpose financial vehicle also bypasses SWIFT, it will be hard for the US to track transactions between Iran and foreign companies and impose penalties.

Is this scheme viable? While there is no purely technical obstacle to creating an alternative payments channel, doing so is certain to enrage Trump, who will presumably respond with another round of tariffs against the offending countries. Such, unfortunately, is the price of political independence, at least for now.

Having learned a painful lesson about dependence on the dollar, will other countries move away from it more generally? The fact that the dollar is used so widely makes doing so difficult. Banks and companies prefer using dollars because so many other banks and companies use dollars and expect their counter parties to do likewise. Shifting to another currency would require coordinated action. But with the governments of three large European countries having announced just such coordination, such a scenario can no longer be excluded.

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It is worth recalling how the dollar gained international prominence in the first place. Before 1914, it played essentially no international role. But a geopolitical shock, together with an institutional change, transformed the dollar’s status.

The geopolitical shock was World War I, which made it hard for neutral countries to transact with British banks and settle their accounts using sterling. The institutional change was the Federal Reserve Act, which created an entity that enhanced the liquidity of markets in dollar-denominated credits and allowed US banks to operate abroad for the first time. By the early 1920s the dollar had matched and, on some dimensions, surpassed sterling as the principal vehicle for international transactions.

This precedent suggests that 5-10 years is a plausible time frame over which the US could lose what Valéry Giscard d’Estaing, then France’s Finance Minister, famously called the “exorbitant privilege” afforded it by issuing the world’s main international currency. This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. In particular, foreign companies will continue to use dollars in transactions with the US itself.

But in an era of US unilateralism, they will want to hedge their bets. If the geopolitical shock of Trump’s unilateralism spurs an institutional innovation that makes it easier for European banks and companies to make payments in euros, then the transformation could be swift (as it were). If Iran receives euros rather than dollars for its oil exports, it will use those euros to pay for merchandise imports. With companies elsewhere earning euros rather than dollars, there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. At this point, there would be no going back.

One motivation for establishing the euro was to free Europe from excessive dependence on the dollar. This is likewise one of China’s motivations for seeking to internationalize the renminbi. So far, the success of both efforts has been mixed, at best. In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals.

Moreover, Trump is squandering US leverage. Working with the Europeans and the Chinese, he could have threatened Iran, and companies doing business there, with comprehensive and effective sanctions had there been evidence that the country was failing to live up to its denuclearization obligations. But working together to ensure Iran’s compliance was, of course, precisely what the Joint Comprehensive Plan of Action, renounced by the Trump administration earlier this year, was established to do.

 

 

Will Trump’s Trade War Make America Great Again?


July  19, 2018

Will Trump’s Trade War Make America Great Again?

Image result for jomo  and anis chowdhury

The United States has had the world’s largest trade deficit for almost half a century. In 2017, the US trade deficit in goods and services was $566 billion; without services, the merchandise account deficit was $810 billion.

The largest US trade deficit is with China, amounting to $375 billion, rising dramatically from an average of $34 billion in the 1990s. In 2017, its trade deficit with Japan was $69 billion, and with Germany, $65 billion. The US also has trade deficits with both its NAFTA partners, including $71 billion with Mexico.

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Economist Professor Dr. Kwame Jomo Sundram

President Trump wants to reduce these deficits with protectionist measures. In March 2018, he imposed a 25% tariff on steel imports and a 10% tariff on aluminium, a month after imposing tariffs and quotas on imported solar panels and washing machines. On 10 July, the US listed Chinese imports worth $200 billion annually that will face 10% tariffs, probably from September, following 25% tariffs on $34 billion of such imports from 7 July.

Do US trade deficits reflect weakness?

The usual explanation for bilateral trade deficits is price differentials. However, the US accuses such countries of ‘unfair’ trade practices, such as currency manipulation, wage suppression and government subsidies to boost exports, besides blocking US imports.

Trump views most trade deals such as NAFTA as unfair. His team insists that renegotiating trade deals, ‘buying American’, a strong dollar and confronting China will shrink US trade deficits.

But the country’s overall trade deficit, offset by capital inflows, is related to the gap between its savings and investments. The US spends more than it produces, thus importing foreign goods and services. Cheap credit fuels debt-financed consumption, increasing the trade deficit.

Total US household debt rose to $13.2 trillion in the first quarter of 2018, the 15th consecutive quarter of growth in the mortgage, student, auto and credit card loan categories. American consumer debt was more than double GDP in 2017.

US government budget deficits have also been growing. From 67.7% of GDP in 2008, US government debt rose to 105.4% in 2017. The federal budget deficit was $665 billion in FY2017, rising 14% from $585 billion in FY2016.

The US budget deficit was 3.5% of GDP in 2017. According to the US Congressional Budget Office, it will surpass $1 trillion by 2020, two years sooner than previously projected, due to Trump tax cuts and spending increases.

Image result for anis chowdhury Anis
Dr. Anis Chowdhury, Adjunct Professor of Economics  at Western Sydney University (Australia)

The growing US economy may also increase the trade deficit, as consumers spend more on imported goods and services. The stronger dollar has made foreign products cheaper for American consumers while making US exports more expensive for foreigners.

These underlying economic forces have become more important than policies in raising the overall trade deficit, while bilateral deficits reflect specific commercial relations with particular countries. Thus, disrupting bilateral trade relations may only shift the trade deficit to others.

Have the cake and eat it?

So, why does the US have a structural trade deficit? As the de facto international ‘reserve currency’ after the Second World War, the US has provided the rest of the world with liquidity. Its perceived military strength means it is also seen as a safe place to keep financial assets. Of about $10 trillion in global reserves in 2016, for example, around three fifths (60 per cent) were held in US dollars.

US supply of international liquidity by issuing the global reserve currency offers several economic advantages. It also earns seigniorage from issuing the main currency used around the world, due to the difference between the face value of a currency note and the cost of issuing it.

With growing foreign demand for dollars, the US can run deficits almost indefinitely by creating more debt or selling assets. Demand for dollar-denominated assets, for example, US Treasury bonds, raises their prices, lowering interest rates, to finance both consumption and investment.

While foreign investors buy low-yielding, short-term US assets, Americans can invest abroad in higher-yielding, long-term assets. The US usually reaps higher returns on such investments than it pays for debt, labelled America’s ‘exorbitant privilege’.

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” As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance”.–Jomo and Anis

Thus, for the US to enjoy the ‘exorbitant privilege’ of the dollar’s role as the major reserve currency, it must run a chronic trade deficit. Therefore, giving up the dollar’s global reserve currency status will have major implications for the US economy, finances and living standards.

Can the US win Trump’s trade war?

Barry Eichengreen noted that countries in military alliances with reserve-currency issuing countries hold about 30% more of the partner’s currency in their foreign-exchange reserves than countries not in such alliances. Instead, Trump has prioritized reducing trade deficits to strengthen the US dollar and dominance while disrupting some old political alliances.

As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance.


Anis Chowdhury
, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development. In 2007, he was awarded received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He was recently appointed a member of Prime Minister Dr. Mahathir Mohamad’s Eminent Persons Council on Strategy and Policy.