As in most matters, President Trump has taken an assertive, often belligerent, tone in addressing the issue of trade. He has talked of trade deals being the “worst ever,” and threatened to tear up trade agreements and dissolve long-term relationships often with long-standing allies. In his world, trade agreements should benefit the United States in general and U.S. jobs in particular, or at a minimum provide a level playing field on which U.S. business can compete.
Trump has stirred the trade pot with predictable reactions in the media but surprisingly little blowback from the countries under attack. Could it be that countries with trade surpluses realize that they enjoy a degree of largess in existing trade arrangements and are keeping a low profile until the political winds in the United States shift?
The United States enjoyed trade surpluses until the mid-1970s. Beginning in 1976, the U.S. trade balance moved into deficit, where it has remained for the 45 years since.
U.S. trade deficits were small at first. But, beginning in 1983, they began to expand exponentially with each global financial crisis. U.S. trade deficits had risen by a factor of five by 1987 with the Latin American Debt Crisis, and more than doubled again from the 1987 peak to almost $400 billion in 2000 after the Asian Financial Crisis. The U.S. trade deficit continued to climb until it reached almost $800 billion in 2006 just before the Global Financial Crisis.
The only point at which the U.S. trade deficit declined in any meaningful way was when the United States itself was in recession. While there is a limitless volume of literature on U.S. policy missteps concerning budget deficits and overconsumption, a clear-eyed view of the U.S. trade deficit could also conclude that U.S. markets have acted as an economic cushion or what economists would call an “automatic stabilizer” for the world (Chart 1).
In the face of these relentless and explosive U.S. trade deficits, how should we judge the relative openness of U.S. markets and the capability of U.S. firms to compete in the global marketplace? One would think, even if U.S. markets were very open to foreign imports—which they are—that the quality and cost competitiveness of U.S. firms would increase U.S. exports when growth is rapid abroad.
But that doesn’t seem to be the case. There may be some logic to larger U.S. deficits in the 1990s when the United States was growing at solid rates. There is no rationale, however, for the expanding U.S. deficit in the past 15 years when emerging market growth, led by China, accelerated to rates in the range of 6 to 10 percent or even higher. Instead of benefitting from rapid growth abroad, the U.S. trade deficit widened by almost $300 billion.
At least one explanation is that trade balances are not determined by cost competitiveness. It makes sense that the United Kingdom, which is one of the higher cost manufacturing locations in the world, has a substantial trade deficit with the rest of the world. Japan, with about the same cost structure as the United Kingdom, however, has a global trade surplus that is not only large in U.S. dollar terms but is almost 4 percent of total Japanese GDP.
Germany operates at a similar level of unit labor costs as the United States but has a large trade surplus—even larger (8.3 percent) when viewed as a share of GDP. Strikingly, although there are not vast differences in cost competitiveness between most advanced economies, most countries have trade deficits while South Korea, Germany, and Japan all have large trade surpluses.
Donald Trump has called out Germany and South Korea for their anti-competitive trade practices. China, another Trump target, is a bit more understandable in that it has a large trade surplus of around $200 billion but is also one of the lowest-cost producers in the world.
The question about cost competitiveness and trade balances is even more closely joined where U.S. bilateral trade balances are concerned. All countries in this sample have bilateral trade surpluses with the United States (except for Belgium and the United Kingdom), irrespective of their level of economic development or relative cost competitiveness (Chart 3).
China far outdistances all other countries with a bilateral trade surplus of almost $350 billion with the United States. Our current Chart of the Month, China’s Belt and Road: Shifting Trade to Asia?, shows how China is attempting to shift its trade deficit away from the United States to its neighbors in East and Central Asia by establishing greater trade links through the Belt and Road Initiative. Many countries in the Belt and Road region have a lower cost structure than China, however still face widening bilateral trade deficits with China.
OK, OK, crazy like a bull is not an expression, but it is difficult to refer to Donald Trump as a fox. Still, when you begin to dig into the detail and dynamics of U.S. trade with the rest of the world—which the Office of the United States Trade Representative will do in a report due out in coming months—it is hard to conclude that global trade relationships are built on a level playing field.
The United States has found itself caught in the contradiction between free trade and protectionism before. President Ronald Reagan, a strong free trade advocate, imposed tariffs on motorcycles and semiconductors, and negotiated a Voluntary Export Restraint (VER) program on autos with Japan. The Japanese response was to begin to locate production in the United States. President George W. Bush, another avowed free trader, briefly imposed tariffs on steel and later imposed tariffs on certain Chinese textiles.
President Trump has dropped the free trade mantel of his predecessors because he believes that anti-competitive policies are not limited to selective industries but are widespread and structural. The current world trade framework is not suited for the challenge of a rising China that uses a range of subsidies and intellectual property restraints as a formal part of its economic development strategy. Nor is it built to balance similar noncompetitive policies in advanced and emerging market countries.
In his recent exchange at the Center for Strategic and International Studies, United States Trade Representative Robert E. Lighthizer cited a long-term decline in the American public’s support for free trade and a growing sense that trade arrangements are unfair. On a level playing field, U.S. companies can compete anywhere any time. The question is how to get the efficient markets that Americans want.
It is legitimate to argue that form is substance in the international arena. Loose talk about protectionism does not signal America’s objectives in a way that other countries can understand and respond to effectively.
Nevertheless, the substance of the argument, including the failure not only of the Trans-Pacific Partnership but also of the WTO’s Doha Round, suggests that the rules and negotiation parameters governing world trade need an overhaul. It remains to be seen whether President Trump’s approach will yield the desired results.
 “U.S. Trade Policy Priorities: Robert Lighthizer, United States Trade Representative.” www.csis.org, Center for Strategic and International Studies, September 18, 2017.
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