It’s often easier to talk about issues than to resolve them. Take President Trump’s approach to trade with China, for instance.
Trump seeks to reduce the ever-growing trade deficit with China, a pledge central to his “Make America Great Again” campaign. In May 2016, he famously stated:
“We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.”
However, as he nears the one-year mark of his presidency, Trump appears to be moving in the opposite direction. The trade deficit with China hasn’t diminished; it has significantly increased.
For example, from January to November 2017, the U.S. trade deficit with China reached around $342 billion, compared to approximately $317.4 billion during the same period in 2016. That reflects a 7.7 percent increase in the trade deficit under Trump’s leadership.
So, what’s going on? Is China outpacing the U.S. in trade tactics and currency manipulation?
Rest assured, President Trump will get to the bottom of this…
Unintended Consequences
Recently, Trump had an open discussion with Chinese President Xi Jinping about these rising trade concerns. Reports indicate that Trump expressed his frustration regarding the unrelenting growth of the U.S. trade deficit.
We can only speculate about Xi’s response. Perhaps he thought, “Donald, you haven’t seen anything yet!”
A significant unintended result of increasing the budget deficit to facilitate the GOP tax reform is the corresponding increase in the trade deficit. In simpler terms, the gap between governmental revenue and spending directly affects foreign trade balances. Economist Ralph W. Huenemann elaborated on this in an article in Asia & the Pacific Policy Studies:
“In 2016, the American government recorded a fiscal deficit of $865 billion, while the balance of payments indicated a trade deficit of $521 billion. A surplus of private savings, including substantial retained corporate profits of about $344 billion, partially mitigated the budget deficit. However, as long as the government continues to run such a large budget deficit, imports will keep flowing in. This principle of national income cannot be altered by any President—Trump or otherwise—without addressing the government budget deficit.”
If Trump genuinely wishes to curtail the trade deficit with China, he must focus on reducing the government’s budget deficit. Unfortunately, under the newly implemented GOP tax reform, that prospect seems nearly impossible. As a result, Trump finds himself in a weak negotiating position.
Tax Reform and Trump’s Chinese Trade Deficit Conundrum
This week, Reuters shared excerpts from an exclusive interview with President Trump. On the subject of a potential trade war with China, he commented that while he hopes it can be avoided, “if there is, there is.”
Trump also asserted that any potential changes in China’s purchases of U.S. Treasuries would not harm the U.S. economy, claiming that “everybody wants to buy Treasuries.”
Let’s hope he’s correct. Currently, China and Japan collectively hold a staggering one-third of all foreign-held Treasuries. However, China has recently reduced its Treasury holdings to a four-month low, while Japan’s have fallen to a four-year low.
Perhaps Trump is right and the actions of China and Japan don’t matter. Maybe someone else, like the Swiss National Bank, will step in to help finance his deficit.
Nonetheless, this strategy won’t alleviate the trade deficit; in fact, it might exacerbate it further.
The reality is that attempting to spend a country into prosperity through borrowed funds carries its own consequences. In the short term, one might experience an illusion of wealth. But over the long haul, that illusion deteriorates just when payment is due.
This is a critical trade-off of government stimulus funded by deficit spending, which often goes unacknowledged by politicians making promises they can’t fulfill. Any economic boost from a deficit-financed tax reform will likely be fleeting.
In truth, such an artificially created economic uplift is akin to burning furniture for warmth. The temporary relief feels great, but once everything valuable is gone, the situation becomes dire.
Sincerely,
MN Gordon
for Economic Prism
Return from Tax Reform and Trump’s Trade Deficit Conundrum to Economic Prism
