US kicks itself in teeth with trade aggression

Although the longer-term trade balances of the United States remain unknown, the July data at least should caution the Donald Trump administration that its hawkish trade policy may be backfiring. President Trump has always argued that the colossal trade deficits come from other countries’ “unfair” trade practices. But this conveniently excuses the fact that the US’ domestic savings rate has been consistently low in the past decades. Which, as many mainstream economists have pointed out, means that Americans spend too much and demand imports to support their consumption habits.

The president has also ignored the evolving trend of the international division of labor, which has led to a large number of US multinationals transferring their production to other countries, especially East Asian economies. Rather than China exporting its oversupply and low wages as the administration claims, it is “exports” of these companies to the US that account for much of the overall trade deficit.

By imposing hefty tariffs on imports from China and other trade partners, the US has failed to tackle the fundamental weaknesses in its economy. Thus, the tariffs will not effectively help it attain its professed policy goal of reducing the country’s trade deficits. Instead, they will only hinder the healthy growth of the US economy.

The administration’s protectionist stance has triggered legitimate retaliation from the US’ trade partners, leading to declining exports of agricultural products to those countries, which is believed to be behind the significant widening of its trade deficits in July.

If the Trump administration sticks to its unilateral intimidation-based trade policies, the situation will only get worse, affecting exports of more US products and possibly leading to widening trade deficits in the coming months.

Economists have warned that the protectionist trade policies of the US and the ensuing trade retaliation by affected countries risk disrupting the global trade order and dragging on the still fragile global economy. If the further tariffs the administration has proposed become a reality, they will, coupled with the strengthening dollar, further dampen US exports and exacerbate its trade deficits.

The US started to accumulate a goods trade deficit in the 1970s but failed to tackle the root cause: its low savings rate. Instead, it sought to pressure its economic competitors, such as Japan in the 1980s, to try to reduce its deficits.

Now it is using the same strategy against China. And it is predictable that it will not work.