If Trump does curb trade, he’d better get Americans to save more – a lot more
Stephen Roach says any move by the US president-elect to cut the trade deficit is impracticable in a nation with chronic low savings, and the effect would be disastrous
Donald Trump’s economic strategy is severely flawed. The US president-elect wants to restore growth via deficit spending in a country with a chronic shortfall of saving. This will make a widening of an already outsize trade gap all but inevitable.
That dynamic unmasks the Achilles’ heel of Trumponomics: a protectionist bias that collides with America’s inescapable reliance on foreign saving and trade deficits to sustain economic growth.
The Trump administration will not inherit a strong and sound US economy. Savings, the seed corn of future prosperity, remain in woefully short supply. It explains the pernicious trade deficits that Trump rails against. Lacking in saving and wanting to grow, the US must import surplus saving from abroad. And the only way to attract that foreign capital is by running current-account and trade deficits.
Trumponomics fixates on country-specific sources of the trade deficit, like China and Mexico, but misses the fundamental point that these bilateral deficits are symptoms of America’s far deeper saving problem. Presume for the moment that the US closes down trade with China and Mexico – the largest and fourth-largest components of the overall trade deficit – through a combination of tariffs and other measures. Without addressing America’s chronic saving shortage, the Chinese and Mexican components of the trade deficit would simply be redistributed to other countries – most likely to higher-cost producers. The result would be the functional equivalent of a tax hike on beleaguered middle-class US families.
In short, there is no bilateral fix for a multilateral problem. The US had trade deficits with 101 countries in 2015 – a multilateral problem stemming from a saving shortfall that cannot be effectively addressed through country-specific “remedies”. That’s not to say that America’s trading partners should be let off the hook for unfair practices. But it does mean that there is limited hope for resolving seemingly chronic trade deficits if the US doesn’t start saving again.
Trumponomics seems likely to exacerbate America’s saving shortfall. Analyses indicate that federal budget deficits under Trump’s economic plan are heading back towards at least 7 per cent of gross domestic product over the next 10 years.
Getting tough on trade at a time when national saving is about to come under ever-greater pressure simply doesn’t add up.
Protectionism, anaemic saving and deficit spending make for an especially toxic cocktail. Under Trumponomics, it will be exceedingly difficult to make America great again.
Stephen S. Roach, a faculty member at Yale University, is a former chairman of Morgan Stanley Asia. Copyright: Project Syndicate