The recent executive order on trade policy by former US President Donald Trump highlights a fundamental misunderstanding of the root causes behind America's persistent trade imbalances. The order mandates an investigation into the origins of these deficits, proposing measures like global tariffs. However, economists argue that the true culprits lie in domestic macroeconomic factors such as fiscal policies and savings-investment gaps. Furthermore, the order assigns this critical task to departments without expertise in macroeconomic policy, sidelining the Treasury Department. Additionally, the focus on currency manipulation overlooks broader economic realities, potentially leading to ineffective or counterproductive actions.
Domestic Factors Drive Trade Imbalances
Understanding the core reasons for America's trade deficits is crucial. The nation's substantial fiscal deficits, exacerbated by proposed policies, significantly contribute to these imbalances. These deficits create a gap between savings and investment, which is reflected in the current account deficit. Moreover, the strong dollar, fueled by robust economic performance and higher interest rates compared to Europe, attracts capital inflows, further widening the deficit. While external factors play a role, they are secondary to internal economic dynamics.
The executive order's emphasis on investigating trade deficits primarily through the lens of commerce and trade policy misplaces responsibility. The Commerce Department and the United States Trade Representative lack the necessary expertise in macroeconomic policy, which should be the purview of the Treasury Department. By assigning this task to less qualified entities, the administration risks formulating misguided policies. The Treasury Department, traditionally responsible for economic matters, has been sidelined, undermining its authority and effectiveness. This shift could lead to impractical recommendations that fail to address the underlying issues driving the trade imbalances.
Currency Manipulation: An Oversimplified Solution
The order also addresses currency manipulation, a complex issue often oversimplified. It directs the Treasury to identify and counteract practices that distort international trade. Historically, this has involved analyzing criteria such as bilateral trade surpluses, current account balances, and reserve accumulation. However, the effectiveness of these measures has been limited, with little market impact from past designations.
Despite the attention given to currency manipulation, most economists agree that focusing on bilateral trade balances is misguided. The criteria used to determine manipulation can be manipulated themselves, leading to inconsistent designations. For instance, China was labeled a manipulator based on one criterion, while Vietnam and Switzerland met all three. The remedies proposed—such as cutting off Export-Import Bank financing—are unlikely to have significant effects on major economies like China. Moreover, the concept of equilibrium exchange rates remains elusive, influenced by capital flows rather than trade alone. Efforts to tie currency policies to trade agreements, seen in TPP and USMCA, have faced resistance and resulted in weak provisions. Transparency improvements, while positive, do not address the deeper macroeconomic issues driving imbalances. Ultimately, blaming foreign practices may generate friction but will not resolve the core problems rooted in US economic policy.