Donald Trump treats trade like the profit and loss account of a commercial enterprise – Al Drago/Bloomberg After another roller-coaster ride in the financial markets I am left wondering if there is any sense in the Trump agenda. The answer, somewhat surprisingly, is mixed. In saying this, I do not include the shambles surrounding the position of Jerome Powell, the chairman of the Federal Reserve.
Central banks may not have covered themselves in glory over recent years but critics would do well to remember the monetary policy regime when politicians set interest rates over here. At least Trump saw the error of undermining Fed independence before too much damage was done. It is Trump’s stance on trade that continues to concern me.
He frequently refers to the trade balance as though it were the profit and loss account of a commercial enterprise. Since the US is running a large trade deficit, “the rest of the world is screwing us”. Interestingly, the implication is that international trade can bring no benefit for the world as a whole since for every surplus there must be a deficit.
Trump doesn’t seem to grasp that imposing tariffs on imports will raise the US price level and therefore, for a time at least, the inflation rate, with the danger that this inflation gets embedded in the system, perhaps requiring a bout of higher interest rates to wring it out. Meanwhile, he appears to be suffering from an acute case of manufacturing fetishism. There are some special characteristics of manufacturing, but this doesn’t necessarily mean that you should bend every effort to maximise the share of manufacturing in GDP.
Almost all developed countries have undergone a sharp fall in the share of manufacturing over the past 20 to 30 years. This is perfectly normal. As countries get richer they tend to want to spend more of their extra income on services rather than things.
Yet, for all this, there is some sense and justice in Trump’s complaints about America’s interaction with the rest of the world. America is running a current account deficit of just over 4pc of GDP. It has hardly ever run a surplus for the past 50 years.
The consequences of these perennial deficits are reflected in the progressive worsening of America’s net international asset position. Whereas in 1980, America had a surplus of foreign assets over liabilities to foreigners of about 10pc of GDP, it now has a deficit of about 80pc. Such deficits lead to a flow of interest payments and dividends to those who have provided the finance.
Yet deficits are not always bad. It all depends on what you do with the money. If a country runs a current account deficit in order to build up its stock of profitable domestic investment, this can be part of a viable growth strategy.
But this is not America’s position.
