Trade freeloaders and their enablers are turning the tables on Washington.
President Donald Trump has been the only world leader who relentlessly, and correctly, kept denouncing, over the last two years, the dysfunctional world trade "order," where huge trade surpluses of a handful of countries are undermining the growth and stability of global economy.
Instead of getting support and cooperation in restoring the rules and practices of a sound multilateral system of free trade, all the President Trump got from our Asian and European friends and allies are angry insults and labels of "protectionist," "isolationist," and "danger to the 'free trade'" that allows them to live off America and the rest of the world.
President Trump made a mistake by focusing on purely defensive trade measures, instead of framing his discussion on excessive trade imbalances as a major problem for the U.S. – and for the world economy as a whole.
Raise the game
Putting things in that context, with some data and policy concepts, here are the two key trade issues that President Trump has been talking about.
First, a number of countries are setting back global growth and financial markets by drawing out of the world economy a huge amount of purchasing power – about one trillion dollars in 2016 – in the form of systematic trade surpluses.
Second, by running large external surpluses year in and year out these countries are abusing an open multilateral trading system based on principles of free movement of goods, services and factors of production (labor and capital).
The world is acquiescing in this highly destabilizing economic behavior, with G7, G20, Bretton Woods institutions (I.M.F. and World Bank) and the World Trade Organization looking the other way. Mercantilists are ignoring the concerns of their trade partners and their own obligation to balance trade accounts – the rule that lies at the foundation of the world economic order established in July 1944 at that beautiful New Hampshire resort.
President Trump has the merit of being the first American leader to warn that he will not tolerate the damage caused to the U.S. economy by abuses of the multilateral system of free trade.
Put more bluntly: Since trade surplus countries refuse to manage their economies according to the rules of the multilateral trading system, the U.S. will have to protect its jobs and incomes that are being threatened by annual trade deficits of $750 billion – where China , Japan , Germany and South Korea accounted for $508.5 billion in 2016.
That is an unassailable argument and a winning negotiating position.
But, sadly, it now looks like President Trump is losing that winning hand with meek and defensive trade rhetoric, tinkering around the edges of existing free-trade agreements, levying punitive tariffs and pushing bilateral deals on unwilling and downright hostile trade partners.
Washington should raise its game. The U.S. has a huge stake in a growing, orderly and balanced world economy. And if the U.S. does not lead – nobody will.
Kick over the table in Sicily
There is an opportunity for President Trump to transform a glad-handing G7 summit in Taormina, Italy, May 26-27, into a substantive discussion about the livelihoods in an exhausted, disoriented and mismanaged (G7) economy that represents 70 percent of the industrialized world. The president should do that, instead of wasting time with Europe's self-inflicted immigration disasters, its home-grown terrorism and politics of hate and division under Washington's security cover.
There is no need for bluster and threats, but the president should tell the Germans and the Japanese what they did not here last week in Washington: Get off your export gravy train and generate more economic growth from household consumption and (public and private) investments. Yes, the U.S. will be watching your progress in reducing excessive trade surpluses with America and the rest of the world. And do drop a hint over that gutsy Sicilian "tre forze" espresso about America's readiness for defensive measures – should making nice fail.
That would be the beginning of upholding the true system of multilateral free trade. The rules of that system must be followed. Otherwise there is no system at all.
Germany and Japan know that. They also know that their trade policies are unsustainable.
Witness the confused German defense of their trade surpluses during last week's international meetings in Washington. The most influential pro-government right-of-center German daily followed suit last Friday (April 21) with a discussion pretending that, poor souls, they did not know what to do: German products are just very good, they said, and the world wants to buy them.
Well, here is an idea. Germany's household consumption is estimated to have grown last year at a rate of 1.4 percent, and the business investment at a stagnating 1 percent. If Germans stimulated these two demand components – exactly two-thirds of the economy – they could make it possible for foreigners to sell them something (that would raise German imports), and German companies would not have to export to survive and escape weak demand at home.
Japan is a similar case. Half of its growth last year came from trade surpluses, while the household consumption and business investments advanced at lethargic growth rates of 0.4 percent and 1 percent, respectively.
Tokyo wants to hang on to its export-driven growth; it has no interest in a bilateral trade deal with the U.S. that would open up closed sectors of its economy. And furious about Washington's alleged trade pressure, Japan's deputy prime minister was aggressively disparaging the American society at my alma mater in New York last Wednesday (April 19), while praising "an open multilateral trading system" that gave Tokyo a trade surplus of $200 billion and net foreign assets of $3.3 trillion in 2016.
These great friends and allies of ours just want the U.S. to keep taking in stride $700-$800 billion of annual trade deficits, and the soaring net foreign debt -- $8 trillion at the last count – without "making noises about foreign trade."
They apparently left Washington over the weekend convinced that they achieved that objective. Far from reading them a well-deserved riot act, U.S. officials showered the trade free-loaders with conciliatory remarks, and the I.M.F. even promised that they would "educate" the Trump administration about the virtues of a free multilateral trading system that reduced the U.S. economy to the dumping ground of the world.
Investment thoughts
President Trump is losing the trade game -- and the world public opinion with it -- because he allowed the trade miscreants and their enablers to paint America as a dumb protectionist hell-bent on scuttling the multilateral system of free trade, which, in reality, does not exist.
That is disappointing. Huge world trade imbalances and America's systematic deficits are a clear proof that the global trading system is seriously out of order. The White House should have led the way to correct that with policy changes that follow trade adjustment rules.
As things now stand, that chance may have been lost. Washington will now be toying with trade agreements with Canada, Mexico and South Korea; it will also continue to levy countervailing duties on some Chinese industries and to push bilateral trade deals.
Caught up in the middle of all that, one may wonder what can keep the Trump rally alive. The answer, as always, is simple: The Fed and its generous liquidity provisions is the only sure bet.
President Trump could still help – but don't hold your breath for it -- by pushing out mercantilists and promoting growth-enhancing policies in a truly multilateral system of free trade.
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Dr. Michael Ivanovitch
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