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Updated 10:46 16/06/19

Trade War or Trade Flaw – Are Trump’s economics brave or foolish?

Liam Sheasby

By Liam Sheasby, News Editor

28 Sep 2018

Nobody can deny that the United States – and arguably President Trump personally – is winning the trade war against China. The US imports a lot more from China than it exports back to them, so in the war of who can tax imports the most, the US is leaving China behind.

So far, including the latest raft of tariffs worth $200 billion, the United States is taxing more than half of China’s exports stateside. In comparison, China has only managed to tax $60 billion US imports, simply because they are running out of things to tax. China has stuck with its stance of tit for tat action, but the latest levies are a mere 5-10%, compared to the 10-25% from America, because Chinese officials know that there’s not too much time left in the dispute before they have to just take the hits.

The trade war initially started larger, with Trump accusing Canada and Mexico of unfair practices and threatening to abandon the North American Free Trade Agreement (NAFTA). The power politics was not only a bullying exercise from the US, but also a PR push for the unpopular President Trump. You gain fans with success and by winning, and with Canada and Mexico conceding, Trump won.

America has legitimate concerns with China, in terms of China breaching US intellectual property rights, but accusations about devaluing the Yuan and interfering in US politics are harder to prove. Indeed, the US President has deliberately devalued the US Dollar for large periods of his presidency in order to make American exports more attractive to the global market – a level of hypocrisy that some think Trump can’t see, but in reality, he just doesn’t care. His job is to get the best possible deals for the United States. If this involves some sly behaviour, so be it.

The problem with the continuation of the trade war is savings. Every nation has less savings than they need, especially as populations begin to live longer with more advanced healthcare available. The USA has a net domestic saving rate of just 1.5%, with Federal and personal savings falling in percentage terms since the 1950s. This leaves America with an imbalance between savings and investment.

The analogy below from financial research group Zacks explains the USA’s predicament:
“Consider your own income as the value of goods and services that you produce and “export” to others, and what you spend on food, shelter and other items as “imports” into your home. When you spend the same amount that you earn, your net exports are zero. You also have no leftover savings to invest. If you spend more than you earn, you must borrow money. If you spend less than you earn (have a positive trade balance) you build up savings.”

The United States of America is spending far more than it is earning. The US has operated at a trade deficit since the early 1990s. This is commonplace, but only to a certain degree. Investor confidence that a government is okay to carry on at a deficit comes in the form of positive economic performance. The Trump Administration made the risky move of cutting taxes for big businesses and the wealthiest in society, at the same time as launching a huge infrastructure renewal programme. The idea is to form one big stimulus that will propel the US economy for years to come. So far, so good, but with a growing economy comes inflation.

On the one hand, growing inflation is a sign of a strong economy. The US has near record low levels of unemployment. Rising inflation also means higher interest rates, introduced to protect the US Dollar’s value. The Federal Reserve has raised interest rates five times during President Trump’s time in office. Higher interest rates make for better savings rates and could see US households banking more of their incomes than in previous years. The US Dollar’s increased value also attracts foreign investment to US companies and the US stock markets, hence the record market figures we’ve seen within the last fortnight.

This sounds great for America, but the higher interest rates have a downside; more expensive loans and lending. Repayment costs go up, and if a company is focussing on repayments rather than growth or further investment then it won’t act, which in turn causes economic slowdown. A slowing economy doesn’t entice investors, and slowly but surely money drifts away from the USA. It’s for this reason that President Trump has publicly criticised Jerome Powell, Chair of the Federal Reserve, for raising interest rates this year, because the President does not want to scare people away from the US economy.

The Congressional Budget Office published their forecast for the next five years, which predicts an average budget deficit in the US of 4.2%. This threatens domestic savings, meaning foreign investment in America is especially important, but this puts Trump at a disadvantage. He’s the President of America, not the world. His economic plan is bold but risky, and while the saying is that ‘fortune favours the brave’, too much dependency on foreign funds is a bad look, especially when these investors can just up and leave at any time.

The Trump administration has the following ideology: Globalism is bad and Protectionism is good. Protect America, Make America Great Again, America First… the irony is that America’s economic growth is driven by world trade and international and not through self-sufficiency.

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