A Bilateral Foil for America’s Multilateral Dilemma

The May 19 deal between the US and China seems to have reduced tensions between the two countries. But, given the global nature of America’s trade deficit, any effort to impose a solution focusing on one country will likely backfire.

The bad news is that the framework of negotiations is flawed: A deal with any one country will do little to resolve America’s fundamental economic imbalances that have arisen in an interconnected world.
.. In May 1930, some 1,028 of America’s leading academic economists wrote a public letter to US President Herbert Hoover urging him to veto the pending Smoot-Hawley tariff bill. Hoover ignored the advice, and the global trade war that followed made a garden-variety depression “great.”
President Donald Trump has put a comparable spin on what it takes to “make America great again.”
.. Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3% of national income in the fourth quarter of 2017 – counts for little in the arena of popular opinion.
.. Nor does it matter when we point out that correcting for supply-chain distortions – caused by inputs from other countries that enter into Chinese assembly platforms – would reduce the bilateral US-China trade imbalance by 35-40%.
.. Indeed, with budget deficits likely to widen, America’s saving shortfall will only deepen in the years ahead. That points to rising balance-of-payments and multilateral trade deficits, which are impossible to resolve through targeted bilateral actions against a single country.
.. China’s vague promise to purchase more American-made agricultural and energy products borrows a page from the “shopping list” approach of its earlier trade missions to the US. Unfortunately, the big-wallet mindset of a deal-hungry China reinforces the US narrative that China is guilty as charged.
.. Since 2000, the largest annual reduction in the US-China merchandise trade imbalance amounted to $41 billion, and that occurred in 2009, during the depths of the Great Recession. The goal of achieving back-to-back annual reductions totaling more than double that magnitude is sheer fantasy.
.. Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others.
.. Therein lies the cruelest twist of all. China is America’s low-cost provider of imported consumer goods. The Trump deal would shift the Chinese piece of America’s multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax hike on American families. As Hoover’s ghost might ask, what’s so great about that?