Trump given a basic trade lesson by IMF, World Bank

Apotential trade war between China and the United States was the focus of attention as the world’s central bank governors and finance ministers assembled in Washington this week for the International Monetary Fund/World Bank annual spring meeting.

At the Tuesday morning news conference on the IMF’s World Economic Outlook report, I asked about the possible impact of US President Donald Trump’s announcement and imposition of tariffs and the threat to cancel trade deals. I was surprised, however, that journalists from Europe, Africa and Latin America all posed questions on how their regions and countries would be impacted by a trade war between the world’s two largest economies.

Such deep concern around the world was a key takeaway at the annual meeting. Indeed, the IMF’s report warns a trade war would have a devastating effect on the global economy, which would be the true loser of a trade war. The first shots were fired when, inconsistent with the World Trade Organization principles, the US announced in March its intent to slap tariffs on steel and aluminum imports for national security reasons.

The second takeaway was the constant mentioning in the IMF outlook report and by its officials that the multilateral mechanism, instead of unilateral actions, should be used to resolve trade disputes, a clear message directed at the US administration.

The Trump administration’s unilateral actions have threatened to break the World Trade Organization. US President Donald Trump has constantly attacked the WTO, including in his Tuesday’s tweet saying “… Look how bad WTO is to U.S.” The Trump administration has also been blocking a new appointment at the WTO appellate body that handles dispute settlement.

The third takeaway, probably a surprising one but an appropriate one, is the IMF’s repeated education on trade deficits, both in the World Economic Outlook report and by its officials. This, in my view, is purely for Trump’s benefit, as he continues to show little understanding of deficits, especially the bilateral deficit with China.

The IMF warned that the negotiations aimed at reducing the US’ trade deficit after the steel and aluminum tariffs were introduced will do little to change the multilateral or overall US external current account deficit. The reason: the deficit is largely a result of aggregate US spending that continues to exceed total income.

The IMF also warned that recent US fiscal measures will actually widen its current account deficit. Higher spending and tax cuts in the US will raise its current account deficit for 2019 to above $150 billion.

It is puzzling to most economists and trade experts why Trump is obsessed with his country’s trade deficits, especially its trade deficit with China, and why he blames US trade partners for the deficits and equates the deficits as a loss for the US. Neither of which is right.

While it is alarming that Trump does not understand Trade 101, the US president at least got the figure in the right ballpark for a change when he recently blamed China for $375 billion in US trade deficit.

For months, Trump has blamed China for a trade deficit of $500 billion, saying at a March 23 news conference, for instance, that “last year we lost $500 billion on trade with China”.

That number was actually the total Chinese exports in goods to US in 2017 and did not exclude the $130 billion US exports in goods to China. And if the $39 billion US trade surplus in services with China in 2017 was included, bilateral trade deficit was only $336 billion, according to US data. The Chinese data for the bilateral deficit is even lower.

It may take a while for Trump to get all the numbers right, but hopefully less time for him to heed the concerns raised at the IMF/World Bank annual meeting.

... the deficit is largely a result of aggregate US spending that continues to exceed total income.