President Trump is falling woefully short on his promise to fix the trade deficit. It’s on track to hit $570 billion this year — up from $505 billion in 2016.
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Critics blame the trade gap for lost manufacturing jobs, and apologists assert it permits Americans to consume more and cheaper products without much harm.
Both arguments have some merit but such a yawning trade gap must be financed. Foreign governments and private persons buy U.S. Treasuries, corporate stocks and bonds, and real estate in tony locations like Manhattan and Miami Beach, and we have to pay interest, dividends and rent on those assets that grow larger each year.
Americans make similar investments abroad but earlier this year, the U.S. net international investment position (NIIP) was estimated to be a negative 45 percent of gross domestic product and it is on track to surpass 60 percent within the next decade.
At that level, other countries have generally encountered a major economic crisis as foreigners balk at extending additional credit but the dollar’s status as the reserve currency—foreign central banks hold Treasuries and greenbacks to back up their currencies— make a wholesale U.S. meltdown less likely.
Still as our indebtedness grows, private creditors will get nervous and insist on much higher interest rates, making Treasuries a poor long-term investment for insurance companies and individual retirement accounts.
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Economists are inclined to believe bilateral deficits — or even deficits in particular commodities like oil — don’t matter. However, if one country or commodity is a huge share of the global imbalance then the global problem can’t be addressed without tackling the particular country or commodity.
China accounts for more than 60 percent of the U.S. trade deficit and petroleum a good deal of the rest.
The Trump administration proposes to fix the China trade by applying pressure to open its markets — if Americans can sell more in China, then we can continue to enjoy cheap consumer goods at Wal-Mart. And by liberating the oil and gas sector from Obama-era regulations and continuing to build out wind, solar and other renewable energy sources.
The president’s recent statement on trade policy indicates revved up use of trade remedy laws to keep out or at least penalize subsidized and dumped imports and resort to the WTO’s exemptions for critical defense industries.
For the U.S. industries that benefit — hooray! — but Beijing advantages domestic producers in so many ways, from forced technology transfers from foreign investors to generous benefits for technology startups, that Trump’s strategy reminds me of the farmer chasing an infestation of grasshoppers with a butterfly net.
At the Mar-a-Lago Summit, Presidents Trump and Xi announced a 100-day review to address bilateral trade but the deficit with China is too large and spans too many product categories to be tackled simply with individual deals on beef, access for credit-card companies, and others as the working agenda of these talks imply.
A recent Peterson Institute study suggests currency-market intervention to offset foreign government intervention in currency markets and lower the value of the dollar across the board. These days, manipulation by foreign governments is not the problem — but rather the lack of confidence in the durability of existing regimes. For example, China’s authoritarian regime scaring investors is driving down the yuan.
Warren Buffet, for many years, has suggested a system of import certificates and I have advocated a tax on the conversion of dollars into yuan. The latter would essentially raise the price of imported goods and encourage reshoring.
Under the Buffet plan, exporters would receive certificates to import goods in amounts equal to their foreign sales and in turn, those could be sold to importers, who would be required to present certificates to bring goods and services into the country. Those certificates would go to the highest bidders and hence be used to import goods that had the highest value to consumers.
Rather than apply it to all our trading partners — and cause global outrage — I would just apply it to trade with China and endure its bellicosity as needed. Either Beijing finally starts realigning its economy to rely less on trade surpluses with the United States or this scheme would do it for them.
No matter which tack is chosen, Americans would pay more for toasters, T-shirts and TVs. However, that burden would pale by comparison to losses in jobs and living standards imposed by a debt crisis on the scale of that endured by other nations who left their problems to fester until international investors quit buying their bonds and other assets.