It’s increasingly clear that in the last few weeks we’ve entered a brave new world where a phone call from one man can set off shockwaves around the planet.
That man, of course, is Donald Trump.
We’ve already witnessed one such phone call that reverberated globally; his surprising congratulatory call over the weekend with Taiwan’s leader, President Tsai Ing-wen.
Give the delicacy of the diplomatic triangle involving China, Taiwan and the U.S., Trump’s call was widely lambasted as the action of an uninformed bull in the Chinese geopolitical “shop.”
The Chinese did not react as ferociously as some expected. They used the incident as an opportunity to chide Taiwan, which they regard as a renegade part of China, rather than criticizing Trump. They did, however, make their displeasure with some tweets Trump had written about China at a news conference Monday morning.
What motivated the phone call isn’t clear, but some U.S. commentators have interpreted it as a canny way of firing a shot across China’s bow – of sending a signal that the incoming administration has a greater willingness to play tough with China.
The Middle Kingdom isn’t the only nation the US has a trade deficit with – in fact, as of 2015, it had 101.
But its deficit with China is its largest; at about 31 billion U.S. dollars in October, it dwarfed Canada’s at $1.3 billion, Mexico’s at $6.2 billion and the EU’s at $10.6 billion.
There are also domestic factors that suggest Trump may take action against China: accusing it of stealing manufacturing jobs from the U.S. by keeping its currency low and its exports affordable was a key plank in his election campaign.
But how much he can actually do about it is a big question.
On Monday, Republican leaders in the House of Representatives indicated they will not support Trump’s plan of imposing a 35% tariff on goods manufactured overseas in countries like China by U.S. companies and then imported back to the U.S.
Beyond that specific measure, there’s a big gap between Trump’s professed intentions and the thinking of both mainstream economists and mainstream Republicans, many of whom are strong advocates of liberalized trade.
The New York Times has suggested Trump’s vision of a protectionist U.S. which puts up trade barriers in an effort to foster a manufacturing revival flies in the face of 200 years of economic orthodoxy. That may be too strong a current for even a stubborn, self-described outsider like Trump to swim against – particularly when his key cabinet picks in the economic realm have close ties to Wall Street and presumably more orthodox beliefs on trade.
One of the most intriguing developments in the days since the U.S. election has been the rally in stock markets. Investors seem to have embraced the notion that Trump’s economic policies – which also include tax cuts and infrastructure spending – will be stimulative to such a degree that it will offset the negative impact of any of his trade initiatives. Or perhaps investors’ willingness to bet on growth reflects a shrewd assessment of the relative likelihood of stimulus as opposed to protectionism – the former highly likely and the latter much less.
There’s another reason for skepticism about Trump’s intentions to radically revamp U.S. trade policies. America’s trade deficits with China – and 100 other countries – are only part of its global balance sheet. As Stephen Roach, Morgan Stanley’s chief economist, has written, the other side of the equation is the fact the U.S. imports money from those countries.
It has to do that because Americans aren’t saving enough money to enable their economy to grow on its own. Instead, for decades now the U.S. has borrowed money from the rest of the world to finance its consumption of foreign goods.
The U.S. is like a high-income family that is living beyond its means. It makes a lot of money each month, but it spends even more. In order to do that it has to keep borrowing money from anyone who will give it credit, including the merchants it buys from.
As long as that interdependence persists, the U.S. dollar will likely remain strong; those creditors do their lending to the U.S. by buying assets denominated in U.S. dollars.
If Trump has some success in reducing the American dependence on imports and on offshore borrowing to finance them, that would result in reduced demand for the greenback and downward pressure on the currency.
But it’s a Herculean task. As Roach pointed out in a recent article at Project Syndicate, even if the U.S. shuts down its trade pipelines with China or Trump’s other trade bugaboo, Mexico, it will simply shift its buying to other countries.
Rebalancing the U.S. economy so that Americans consume less and save more, and thus become less dependent on other countries, doesn’t seem to be on Trump’s agenda.
Instead, his approach to policy seems to be rather more piecemeal. Flying around the country and securing manufacturing jobs a thousand or two a time by making “deals” with firms isn’t going to reverse decades of overspending and borrowing.
Trade may be the area where Trump could do the most damage to the global economy – but it may also be the sector where his room to maneuver is the most limited.
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