AS Donald Trump settles into his presidency and his surprise economic appointees begin to travel the world, signals are emerging on the likely external economic agenda of the United States during Trump’s term. One such signal came at the G20 summit of Finance Ministers and Central bankers at Baden-Baden in Germany on March 17 and 18 when U.S. Treasury Secretary Steven Mnuchin expressed unwillingness to accept the old normal that any departure from global free trade was taboo.
Conventionally, every communique from G20 summits since the first one in 2008 has committed to “resist all forms of protectionism”. This time, however, the consensus, which is a must at these informal meetings of 19 leading nations and the European Union (E.U), merely said: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.”
The bland recognition of the “contribution of trade” and the ominous reference to “excessive global imbalances” are both being seen as indications that the Trump campaign’s populism is likely to fructify in a dose of protectionism. “America First” is to mean American markets for American products, which deliver jobs in the U.S.
Wolfgang Schauble, Germany’s Finance Minister, is reported to have said: “We have reached an impasse. That’s why at the end we said nothing, because it meant different things when we said we didn’t want protectionism.” And Michel Sapin, France’s Finance Minister, joined him, saying: “I regret …. that our discussions today have not been able to achieve satisfactorily two priorities (free trade and climate change action) absolutely essential in our present world.”
The fear of protectionism has been strengthened by the standoff, outside the G20, between China and the U.S., on the one hand, and Germany and the U.S., on the other. There is material basis for trade friction. In 2016, the U.S. trade deficit with China stood at $309.7 billion, with Germany at $67 billion and with Japan at $56.3 billion. Of these countries, Japan has been the least critical of the approach of the new U.S. administration. The deficit with Mexico too stood at $61.7 billion, but that is the result of the North Amercian Free Trade Agreement (NAFTA) and the presence of U.S. firms in Mexico. So, trade tensions are highest between the U.S. on the one side and China and Germany on the other.
The stakes are, of course, too high for China for it to adopt a confrontationist position. But it is being pushed to the wall by U.S. aggression. U.S. Trade Representative Robert Lighthizer made it clear that addressing America’s “China problem” would require going outside the multilateral route.
“I don’t believe that the WTO [World Trade Organisation] was set up to deal effectively for a country like China and their industrial policy. We have to use the tools we have and then I think we have to . . . find a responsible way to deal with the problem by creating some new tools,” he reportedly said at his Senate confirmation hearing.
The response of China’s Premier, Li Keqiang, was measured. He made it clear that China did not want to see a trade war with the U.S. He promised that China would not devalue the renminbi to improve the competitiveness of its exports, and argued that the 7 per cent depreciation of the renminbi vis-a-vis the dollar in 2016 was much less than the depreciations recorded by other currencies. And, he emphasised that evidence suggested that a trade war between the U.S. and China would adversely affect foreign-invested companies operating in China, especially those from the U.S.
But the numbers are such that if the U.S. chooses to address its trade imbalance, addressing the “China problem” in the form of a deficit with one country that is more than 60 per cent of its aggregate trade deficit is unavoidable.
Measures to address trade with China are all the more likely because the U.S. is getting aggressive even with Germany, with which it has a trade deficit that is somewhere between a fourth and a fifth of its deficit with China. Peter Navarro, head of the newly established National Trade Council in the White House, has made it clear that in the new administration’s view Germany is a major contributor to global trade imbalances.
The announcement appointing Navarro explicitly stated that he will develop policies to shrink the trade deficit, besides promoting growth and preventing U.S. jobs from going abroad. Navarro went on record as saying that Germany was exploiting the U.S. and its own E.U. partners by relying on a grossly undervalued euro as a tool to drive exports and notch up a huge trade surplus.
He went further to suggest that German policies were sabotaging a potentially mutually beneficial trade accord between the U.S. and the rest of Europe, in the form of the Transatlantic Trade and Investment Partnership (TTIP) or some other accord.
The evidence against Germany is telling. While China runs a much larger trade surplus with the U.S. compared with Germany, the latter’s aggregate trade surplus with the “rest of the world”, at around $300 billion in 2016, is $50 billion higher than China’s aggregate surplus. Schauble admitted that there was a problem when he said that the European Central Bank’s (ECB) monetary policy, which had to be set for the eurozone as a whole, was too loose for Germany, resulting in turn in a euro exchange rate that was “too low” for a country with its competitive advantages.
Thus, “quantitative easing” by the ECB, that was infusing too much euro liquidity into the world economy, was keeping the euro low and increasing German exports, leading to a large trade surplus with countries outside the E.U. like the U.S.
A new Plaza Accord?The Trump administration, looking to frame its own mercantilist export policy, which will drive up exports and hold down imports so as to reduce its large trade deficit, will have none of this. It wants a 21st century version of the Plaza Accord of September 1985, when the U.S. sought to pressure its trading partners to allow their currencies to appreciate vis-a-vis the dollar so as to increase the competitiveness of U.S. exports and bring down its trade deficit. Then, too, the response was most marked in Japan. From a level of 240-plus-yen to the dollar at the time of the accord, the currency appreciated by close to 40 per cent to reach a level around 150 yen to the dollar a year later.
That appreciation, referred to as “endaka”, or a strong yen, damaged Japan badly—hollowing out the economy, boosting finance, increasing investments in real estate and the stock market, triggering a speculative boom and, finally, precipitating a crash from which Japan has yet to recover fully.
But the point is that, a year after the Plaza Accord, currency adjustments did not help the U.S. reduce its deficit and forced it to demand more concessions from its trading partners in the form of expansionary policies that were not easy to force. Yet today, the focus of the Trump administration’s effort is to get major trading partners with whom it has a deficit—China, Japan and Germany—to engineer a depreciation of the dollar vis-a-vis their currencies. In principle, while this may be possible in the case of China and Japan, if they acquiesce, it would be difficult in the case of Germany given that it is only one of the countries in the eurozone. Trump’s demand is for a break up of the eurozone. That is the fact that Schauble is seeking to cleverly exploit.
Thus, while the U.S. administration’s efforts to shift exchange rates and ensure a relative depreciation of the U.S. dollar continue, talk of other mercantilist policies is gaining ground. One such is a Republican proposal for a border-adjusted tax. If implemented, companies that import inputs would not be able to deduct the cost of those imported inputs from revenues when calculating net taxable revenues. That would mean, firms importing goods would pay higher taxes.
On the other hand, profits earned from exports would not be subject to tax at all. That is expected to reduce the use of imported inputs and promote exports, with salutary consequences for the trade deficit.
Measures such as these, besides threats to undo NAFTA and impose penal taxes on imports from countries that run large trade surpluses with the U.S., have triggered fears of a new protectionism.
But Mnuchin argues: “We believe in free trade, we are in one of the largest markets in the world, we are one of the largest trading partners in the world, trade has been good for us, it has been good for other people.” This seems to suggest that it is because America’s trading partners are not keeping trade free that U.S. trade deficits are large. The real problem is that the way trade occurs is not suiting the U.S., especially since it has lost competitiveness in many areas of manufacturing.
So the U.S. wants a change in the structure of trade such that it raises the U.S.’ export share and reduces its imports. What it wants is not protectionism. It wants to use its political and military power to force its trading partners to adjust their policies to boost U.S. exports and keep down exports to the U.S. It partially succeeded in doing that at Plaza Hotel in 1985. Whether the aggression of Trump and his team will manage that once again is yet to be seen.
