Fix the trade deficit or risk another financial crisis
By Dr. Peter Morici
The Commerce Department reported the deficit on international trade goods and services in March was about $43.7 billion, indicating the United States is on track to another trade gap in excess of $500 billion for 2017.
For decades, the trade deficit has been a source of torment. Critics blame it for jobs losses, and apologists say it permits Americans to consume more and cheaper products without much harm.
Both arguments have an element of truth but most importantly, the trade deficit must be financed. Foreign governments and private persons buy U.S. Treasuries, corporate stocks and bonds and real estate in tony locations like Manhattan and Miami Beach, and we have to pay interest, dividends and rent on those assets that grow larger each year.
Americans make similar investments abroad, but overall foreigners are buying more here. The U.S. Net International Investment Position (NIIP) is now minus 45 percent of GDP and if large trade deficits persist, the NIIP could reach negative 60 percent over the next decade—likely sooner. In recent years, no nation has reached that level of indebtedness without eventually going through a reversal of its trade deficit, often accompanied by a financial crisis or severe domestic deflation.
Economists are inclined to believe bilateral deficits—or even deficits in particular commodities like oil—don’t matter but if one country or commodity is huge in the numbers then the global problem can’t be addressed without addressing the particular country or commodity.
China accounts for more than 60 percent of the U.S. trade deficit and petroleum for more than a quarter of the rest.
Trump administration proposes to fix the China trade by applying pressure to open its markets—if Americans can sell more in China, then we can continue to enjoy cheap consumer goods at Wal-Mart. And by liberating the oil and gas sector from Obama era regulations and continuing to build out wind, solar and other renewable energy sources.
As for China, the president’s recent statement on trade policy indicates revved up use of trade remedy laws to keep out or at least penalize subsidized and dumped imports. For U.S. industries that benefit hooray, but Beijing advantages domestic producers in so many ways—from forced technology transfers from foreign investors to generous benefits for technology startups—that Mr. Trump’s strategy reminds me of the farmer chasing an infestation of grasshoppers with a butterfly net.
The Peterson Institute suggests in a forthcoming study a program of currency market intervention to offset foreign government intervention in currency markets and lower the value of the dollar across the board. These days, manipulation by foreign governments is not the problem—but rather the lack of confidence in the durability of existing regimes. Marine Le Pen challenging the future of the EU and China’s authoritarian regime are scaring investors and driving down the euro and yuan.
At the Mar-a-Lago Summit, Presidents Trump and Xi announced a 100-day review of policies to address the trade deficit but that is as unlikely to yield results as were similar bilateral talks initiated by Presidents Bush or Obama.
Warren Buffet, for many years, has suggested a system of import certificates and elsewhere, I have advocated a tax on the conversion of currency into yuan. The latter would essentially raise the price of imported goods and encourage reshoring.
Under the Buffet Plan, exporters would receive certificates to import goods in amounts equal to their foreign sales and in turn, those could be sold to importers, who would be required to present certificates to bring goods and services into the country. Those certificates would go to the highest bidders and hence be used to import goods that had the highest value to consumers.
Rather than apply it to all our trading partners—and cause global outrage—I would just apply it to trade with China and endure its bellicosity as needed. Either Beijing finally starts realigning its economy to rely less on trade surpluses with the United States or this scheme would do it for them.
No matter which tact chosen, Americans would pay more for toasters, tee shirts and TVs. However, that burden would pale by comparison to losses in jobs and living standards imposed by a debt crisis on the scale of that endured by other nations who left their problems to fester until international investors quit buying their bonds and other assets.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.