by Samir Veliev

Trade Balance to Unbalance Political Balance [The Politicon]

P.S. This analysis is written for The Politicon (my very first piece for that promising platform)

Trade balance to unbalance political balance

February 18, 2017

Mercantilism vs Global Free Trade

International economic relations have not been only bringing considerable advantages for each and every country during the globalizing decades, but also easily become a means to manipulate politics for populists, such as the new United States President Donald Trump. Mercantilism, a policy to increase a country’s exports to the point when they exceed its imports, has not been a big issue in the global trade policy agenda for a long time. Instead, the liberalization processes had gained enormous speed to challenge mercantilists trying to mar global trade. Several rounds of trade negotiations resulted in gradual liberalization of the border regimes until the Doha Round which has been strongly criticized by many prominent economists in the developed world and officials in the global Southovermultiple issues, including unfair income distribution and non-tariff barriers.

Quite a shock for the wider world, Mr. Trump’s proclaimed policies of “making America great again” instigate an understandable sense of discomfort for the U.S. large trading partners such as Mexico, Germany and China. Despite being a policy-makervery difficultto forecast, his arguments on foreign policy may have strong implications on the trade balance of the U.S. He mostly attacks those arrangements that result in the U.S. running net trade deficit, and his will to withdraw from The Trans-Pacific Partnership (TPP)[1]and a critical approach to the North American Free Trade Agreement (NAFTA)[2]clearly represent policy concerns for the leaders like Germany`s Angela Merkel. His trade appointees are criticized because “most of their business experience has been in the twentieth-century industries such as steel production, programming them to pursue twentieth-century solutions for America’s twenty-first-century industrial problems.”[3]

Explaining Trade Deficit

Before analyzing the U.S. trading partners, let’s make,for the sake of refreshing the reader’s mind, a brief overview of trade deficit issues for the Trump administration.As a very recent analysis by the Peterson Institute for International Economics (PIIE) claims, “the United States incurs a trade deficit when it spends more than it earns—bearing in mind that national spending and earnings are influenced by the tempo of economic activity abroad and the foreign exchange value of the dollar. When economic activity abroad is robust, it’s easier for the American firms to sell goods and services to foreign buyers, but when the dollar is strong, they find it harder to sell abroad and easier to buy foreign goods and services”[4]. With a-$50 bn trade deficit, the Trump Administration immediately embarked on deteriorating certain arrangements by planning to build a wall on borders. Mr. Trump targets those countries with which the United States runs trade deficits. The PIIE experts argue that “President Trump’s economic agenda centers on tax cuts, infrastructure and defense, implying a larger budget deficit and considerable fiscal stimulus… Withdrawal from the TPP, renegotiation of NAFTA, and launching trade actions against China help to capture political headlines, but they will not make much difference to the global U.S. trade deficit. Nor will they bring more jobs and higher wages to U.S. workers”[5]. Textbook-level understanding is also enough to analyze that increasing tariff restrictions vis-à-vis large trading partners will also hurt American consumers who voted for Mr.Trump.

Trump vs Major Trading Partners

Concerning the recent developments of the American trade policies, the Mexican president has already warned that his country will not pay for the proposed wall after President Trump proposed to impose a 20% tax on imports from Mexico to the U.S. Officials on the both sides had even resorted to harsher languages in recent statements.[6]

Another vantage point should explain the project trade between Germany and the United States because the increasing trade surplus of Germany definitely raises concerns in the new American administration. German exporters, well-known for their global competitiveness in the recent decades, now encounter sensitive trade volatilities. The Trump Administration criticizes Germany on manipulating with a cheaper euro to make her exports more competitive. The Economist report comments on the   observed developments within Germany, i.e. increasing savings of its aging population, recently stabilizing investment ratio and a mighty political shift towards the Social Democrats may decrease the German export supply but it will not drastically change its position among the largest economies. Therefore, the Germans think Mr. Trump could only blame himself. He has promised huge tax cuts and increases in infrastructure spending, which will drive up interest rates in America, boosting the dollar[7]against other currencies, including euro. Considering the strategic alliance of the two within the NATO, as well as Germany’s strong interest in global free trade, especially with the U.S; and China, the ongoing policy uncertainty does trigger concerns globally.[8]

Moreover, China, one of the largest trade partners of the U.S., faces with a critical finance outflow, and the federal exchange reserves have declined to the lowest level since 2011. The trade balance challenges of China might work in favor of the US attracting capital into the domestic economy. However, it should mean for Mr.Trump that implementing such crude tactics vis-à-vis China will necessarily bring about unwelcome surprises. China has financial weapons, including trillions of dollars of the US debt it holds. A disruption of trade with China could lead to massive price increases in the low-cost stores…”[9]

Consequences of Trade War

For decades, the USA has been enjoying benefits of a trade deficit to attract foreign investments to further boost domestic economy, to increase employment and dampen inflation. Though foreign loan claims would be raised by foreign countries, it will not be a challenging task for any U.S.. leadership to mitigate the possible consequences. In addition, Mr. Trump has to acknowledge that the American economy he tries so hard to save is the largest one, and thus his trade deficit also provides economic stimulus to the other stakeholders of global economy.

If a trade balance is a problem for the U.S. big enough to unbalance the international political realm, the question should sound like “is it worth to start a trade war behind walls?”

“Global trade wars are rare. But, like military conflicts, they often start with accidental skirmishes or misunderstandings… the Tariff Act of 1930… that led to a catastrophic global trade war, which many believe turned a serious recession into the Great Depression.” [10] As the prominent French thinker F. Bastiat says, if goods don’t cross borders, soldiers will. Perhaps, it will not be soldiers to cross borders in the 21st century global village, but possible consequences of Mr. Trump’s trade war are surely capable of delivering heavy blows upon the global economy.

 

References:

 

[1] N.Woolf, et.al, (2016), “Trump to withdraw from Trans-Pacific Partnership on first day in office”

[2]P. Gillespie, (2016), “Donald Trump check: Has NAFTA ‘destroyed our country?”

[3] R. Baldwin (2017), “Trump’s Anachronistic Trade Strategy”

[4]G. Hufbauer and E.Jung (2017), “Is Our Trade Deficit a Problem?”

[5]Ibid

[6] J. Diamond, (2017), “Trump floats 20% tax on Mexican imports to pay for wall, but considering other options”

[7] The Economist, (2017), “Surplus war – Germany’s current-account surplus is a problem”

[8]J. Fischer, (2017), “Germany in the Age of Trump”

[9] K. Rogoff, (2017), “Why Trump Can’t Bully China”

[10]S.S. Roach, (2016), “Trump’s Gathering Trade War”

Leave a comment