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Davos

Experts argue Trump doesn’t understand trade deficits ahead of visit to World Economic Forum in Switzerland

The US leader is known for his populist views on trade and criticism of ‘the false song of globalism’

PUBLISHED : Monday, 22 January, 2018, 4:15pm
UPDATED : Monday, 22 January, 2018, 9:39pm

This week, President Donald Trump is expected to head to the 2018 World Economic Forum in Davos, Switzerland. The US leader may seem an unlikely guest because Davos brings together the world’s political and economic elite for what is generally viewed as a celebration of globalisation.

Trump, meanwhile, is known for his populist views on trade and criticism of “the false song of globalism”. Indeed, Trump is expected to call for more reciprocal trade deals in a speech on Friday. The scale of the disagreement between the two viewpoints is outlined in a new paper put out by the WEF’s network of trade experts ahead of Trump’s arrival; it directly challenges his administration’s views on trade.

Described as a “Strategic Brief on Misconceptions around Trade Balances”, the paper criticises the narratives that have emerged in a number of countries that relate how “unfair” trade policies led to “large trade deficits, particularly in goods trade, which in turn have driven a decline in manufacturing employment over the past two decades”.

The paper, which was first reported by Reuters, does not mention Trump by name. It does, however, state that these narratives have emerged in “the United States as well as elsewhere” and that the current US “administration is seeking to reduce the trade deficit by renegotiating US trade agreements and adopting more protectionist US policies”.

In all of Trump’s foreign policy, his distaste for what he views as “bad trade deals” may be one of the most consistent positions. The president has criticised not only multilateral trade deals such as the North American Free Trade Agreement or the Trans-Pacific Partnership, but also bilateral deals with allies, such as the free trade agreement with South Korea. Trade deficits, such as the sprawling gap that exists in trade with China, are a particular subject of ire for the Trump administration, too.

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The WEF paper describes a number of “misconceptions” about trade and includes short rebuttals to them, as well as two graphs that look at the link between US trade against employment and GDP growth. Lead authors Robert Lawrence, a professor at the Harvard Kennedy School of Government, and Yeling Tan, a postdoctoral fellow at Princeton University, specifically address many ideas about trade put forward by Trump and his surrogates.

For example, the paper states that it is a misconception that bilateral trade between two nations should be balanced.

“If a bilateral free trade agreement allows a country to meet more of its needs by importing at lower costs from a particular partner, it will benefit,” the authors write. “Even if the value of these increased imports exceeds the value of the exports that it sells to that partner.”

The paper also takes aim at the idea that trade deficits result in job losses.

“While in theory the relationship between imports, trade deficits, and employment and growth could be positive or negative, in practice in the United States, rapid import growth and larger trade deficits have been associated with faster employment growth.”

These positions are likely to be shared by many at Davos. In a recent report compiled by the WEF on the most pressing issues the world faces now and in the future, the “death of trade” was listed as a future shock.

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“Against a backdrop of deepening protectionist sentiment, trade disputes could spread rapidly by triggering adverse impacts and retaliatory moves along global value chains,” the report warns.

Will Trump heed the advice? Though the president is sometimes seen as persuadable on certain issues, he has been stubborn on the risks posed by trade. When Trump appeared at the Asia-Pacific Economic Cooperation summit in Vietnam last year, he gave a speech that struck a distinctly protectionist tone, despite warnings that China was moving to fill the void in international trade.

Indeed, even as Trump heads to Davos to mingle with the free-trade elites, his team is believed to be in the final stages of planning trade penalties against China for what are viewed as unfair practices.