Trump’s mis­un­der­stood trade pol­icy

Toronto Sun - - COMMENT - PETER MORICI Guest Colum­nist Morici is an econ­o­mist and busi­ness pro­fes­sor at the Univer­sity of Mary­land @pmorici1

Pres­i­dent Don­ald Trump’s trade pol­icy is ter­ri­bly mis­un­der­stood and the sub­ject of much dem­a­goguery from crit­ics and sup­port­ers alike.

Crit­ics say his fo­cus on the trade deficit is mis­guided. Amer­i­cans don’t save enough to fi­nance do­mes­tic in­vest­ments — new ma­chines and soft­ware to ex­pand busi­nesses, and new homes — and gov­ern­ment deficits.

Con­se­quently, we bor­row from for­eign­ers by sell­ing trea­suries, other se­cu­ri­ties and real es­tate to make up the dif­fer­ence.

Put dif­fer­ently, pri­vate in­di­vid­u­als, busi­nesses and the gov­ern­ment spend more on goods and ser­vices than the na­tion pro­duces.

The trade deficit makes up the dif­fer­ence and is paid for by bor­row­ing from for­eign­ers and sell­ing as­sets.

If we saved more or if the fed­eral gov­ern­ment spent less, we would not need that for­eign cap­i­tal.

Hence, if the trade deficit is a prob­lem, Amer­i­cans cre­ated it by spend­ing too much.

The re­cent tax cut surely drove up the bud­get deficit and will re­quire more for­eign bor­row­ing and big­ger trade deficits.

Trea­sury Sec­re­tary Steven Mnuchin did Amer­i­cans a dis­ser­vice as­sert­ing that re­cent tax cuts would in­crease growth and tax rev­enues enough to pay for lower tax rates.

No fis­cal stim­u­lus — nei­ther Pres­i­dent Barack Obama’s mas­sive spend­ing nor Trump’s even big­ger tax cuts — ever cre­ated that kind of jolt to growth.

That’s why the fed­eral deficit was about $780 bil­lion in fis­cal 2018 and will likely ex­ceed $1 tril­lion in 2019.

The deficit has never been as large a share of GDP other than when the econ­omy was in a re­ces­sion or the coun­try at war.

If we used most of the nearly $600 bil­lion we bor­row an­nu­ally from for­eign­ers to cre­ate new busi­nesses, it might be use­ful.

In­stead, we are us­ing it to live be­yond our means, and what we owe for­eign­ers will soon reach lev­els that caused economies like Spain to col­lapse.

In all this, econ­o­mists are re­ly­ing on ba­sic ac­count­ing iden­ti­ties — the do­mes­tic sav­ings deficit must equal for­eign cap­i­tal in­flows must equal the trade deficit.

What they pur­pose­fully omit is that causal­ity can run in the op­po­site di­rec­tion — that’s mal­prac­tice.

If the fed­eral gov­ern­ment freed up con­straints on do­mes­tic en­ergy devel­op­ment — elim­i­nated reg­u­la­tory ob­sta­cles to pipe­line con­struc­tion and off­shore drilling — oil pro­duc­tion would rise, net im­ports of en­ergy and the trade deficit would fall, GDP and tax rev­enues would in­crease and the gov­ern­ment bud­get deficit would fall.

Sim­i­larly, were Trump’s tar­iffs suc­cess­ful at open­ing up the Chi­nese mar­ket to more U.S. prod­ucts, the trade deficit would go down.

The jolt to do­mes­tic de­mand would boost U.S. GDP and tax rev­enues, and the bud­get deficit would fall.

How­ever, pro­po­nents of a mus­cu­lar trade pol­icy, like Trump trade ad­viser Peter Navarro, do the na­tion a dis­ser­vice by claim­ing trade wars are easy to win — es­pe­cially when they ad­vo­cate slap­ping tar­iffs on our al­lies in­stead of just China and a few oth­ers.

When the U.S. econ­omy was nearly half the global pie, we might have been able to dic­tate terms, but th­ese days it is about one-sixth, and other play­ers can sim­ply re­tal­i­ate and go around us.

Wit­ness the Trans Pa­cific Part­ner­ship (TPP) mov­ing ahead with­out us, and the EU and Ja­pan ne­go­ti­at­ing a rather com­pre­hen­sive free trade pact that in­cludes con­ces­sions on prod­uct stan­dards Obama could not ob­tain in his failed trans-At­lantic ne­go­ti­a­tions.

Mer­can­til­ism is so much a part of the fab­ric of the other three big economies — Ger­many, China and Ja­pan — it is go­ing to take more than some tar­iffs to move them to re­form. In­stead, they will just play with each other.

If Trump’s ob­jec­tive is to ul­ti­mately force our trad­ing part­ners into gen­uine free trade, Navarro may be more ge­nius than he re­al­izes.

He is in­spir­ing free trade among the other play­ers that sadly locks us out.

In the mean­time, watch the prices of soy­beans and corn and the prof­its at GM — GDP growth will slow next year if Trump fails to reach some kind of ac­com­mo­da­tion with the TPP and EU.

Trade wars are easy to win — for the other guy.

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