Trump’s World Trade War

The United States’ economy has been in trouble for a long time. While GDP growth has continued, albeit slower in the 21st century than in the previous one, it has been underpinned by government deficit spending, mounting national debt and chronic trade and current account deficits. Long and costly wars in Iraq and Afghanistan from the 1990s, and financial corruption that led to the debilitating global financial crisis in the late 2000s didn’t help.

The first chart below shows the proclivity of deficit federal budgets over half a century, while the second chart shows the United States’ scary debt level.

A lot of this deficit has been the outcome of being a global policeman and carrying the vast bulk of the defence costs involved. The US has been in a series of costly wars since its major win in 1945, without winning many since. However, most of these conflicts have been lauded, if not adequately supported financially, by its allies.

In 2016, China achieved the status of largest economy in the world, as measured by PPP. China’s economic rise has added to the pressures on the United States, especially in terms of China’s – and other Asian nations’ – trade advantages and claimed “theft” of US intellectual property.

China’s large trade balance of goods and services has infuriated President Trump, who also vented his wrath on the EU in mid-July, even though Russia was excluded from his outrage with its third largest world trade balance (after second place Germany). Of course, the United States does little trade with Russia. But, how these surpluses could eliminate the United States’ colossal trade deficit – which is more than China, Germany and Russia’s combined surpluses – is not explained.

Most commentators agree that the West at large needs to start paying its way when it comes to defence. Commentators also agree that intellectual property should be protected from plagiarism and theft. However, the United States’ problems go much deeper than these issues, important as they are. And trade wars always end in tears with no winners, as history has demonstrated over and over again.

So, what are the deeper issues?

Firstly, balancing government budgets is a tier one discipline, no matter what the difficulties, and deficit spending needs to be confined to emergency periods, such as recessions, depressions and major wars. The United States has not followed this discipline, and as a result ended up with a mountain of debt that can only be quickly extinguished by runaway inflation that destroys the value of government bonds and reduces the debt to GDP ratio. Australia did that in the 1950s. However, there can be collateral damage to savings and mutual funds with that cure.

It is useful to know that world exports have climbed from 22% of world GDP at the end of the last century to 27% these days, and US exports have edged up from under 10% of the country’s GDP to approximately 12%. One of the United States’ basic problems is less to do with too many imports – important as that is – and more to do with low exports, as seen in the following chart.

Exports account for a lower share of GDP in the United States’ economy than in any other large nation, and have done so for a long time. The country’s large population and economy meant it could be largely self-sufficient without the need for imports, and therefore did not have to be an aggressive exporter.

However, when the country’s manufacturing industry came under pressure from emerging economies, it did not adjust as quickly as other nations (including Australia, where manufacturing accounts for only 6% of GDP, compared with double that in the United States). Nor did the United States have the world’s best practice (WBP) in a lot of its manufacturing that Germany had, and which enabled Germany to maintain a much larger manufacturing share of its economy than the United States. Can the United States improve its manufacturing to compete in some sectors like Germany does? Surely that potential is there.

The United States also needs to focus on potential exports from its service industries. Unfortunately, having the world’s most expensive healthcare sector – at over 16% of GDP – is limiting its ability to export health services. As a result, the healthcare sector needs a serious restructure and overhaul to better equip it for its own citizens and to reach its export potential.

Tourism and education represent other potential growth areas. These sectors already have significant exports, but there is also a lot more potential for growth. However, these sectors take time to gear up for exports.

Of course, balancing trade is one thing, but it is more important to balance one’s current account. The current account includes incomes (dividends, interest payments and other monetary transfers) as well as trade in goods and services. Having a large debt offshore, as the United States has, means the country has to pay out a lot of interest payments abroad.

On the other hand, having a lot of multinational businesses means the repatriation of dividends into the United States is a positive. Unfortunately, President Trump exhorted the bigger US multinationals to bring their surplus capital home this year. Oops.

So far, the United States’ income balance is still positive, as we see in the following chart. This positive income balance reduces the country’s overall current account balance accordingly, as seen in the second chart below, and it is the current account balance that is the most important.

So, the United States needs to do a lot of work on:

  • balancing its government budgets
  • re-engineering a number of manufacturing sectors to be WBP and competitive
  • exporting more services (after a lot of internal panel-beating)
  • encouraging more offshore multinational activity to help the incomes balance

Without question, the United States has been a generous superpower in the post-World War II era, and a global policeman. However, this giant, and once the world’s biggest economy, has some real challenges indeed. Is the US President helping or hindering these formidable challenges? Time will tell.

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