There is no bilateral solution for the United States’ multilateral dilemma
The United States and China appear to have backed away from the precipice of a trade war, but that 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.
The good news is the United States and China appear to have backed away from the precipice of a trade war. Their May 19 agreement defuses tension and commits to further negotiation. 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.
Politicians have long favoured the bilateral perspective, because it simplifies blame: you “solve” problems by targeting a specific country.
By contrast, the multilateral approach appeals to most economists, because it stresses the balance-of-payments distortions that arise from mismatches between saving and investment. This contrast between the simple and the complex is an obvious and important reason economists often lose public debates.
Such is the case with the US-China debate. China is an easy political target. After all, it accounted for 46 per cent of America’s colossal US$800 billion merchandise trade gap last year. Moreover, China has been charged with violations of international rules, from allegations of currency manipulation to cyber hacking.
Equally significant, China has lost the battle in the arena of public opinion for having failed to live up to the grand bargain struck in 2001, when it was admitted to the World Trade Organisation. Strategic patience has given way to impatience, with the nationalistic Trump administration leading the charge against China.
The counter-argument rings hollow in this climate. Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3 per cent of national income in the fourth quarter of last year – counts for little in the arena of popular opinion.
Likewise, China is merely a large piece of a bigger multilateral problem: the US had bilateral merchandise trade deficits with 102 countries last year. Nor does it matter 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 per cent to 40 per cent.
While flawed, the bilateral political case argument resonates in a US where there is enormous pressure to ease the angst of the country’s beleaguered middle class. Trade deficits, goes the argument, lead to job losses and wage compression. As a result, targeting China has enormous political appeal.
So, what can be made of the May 19 deal? Beyond a ceasefire in tit-for-tat tariffs, there are few real benefits. US negotiators are fixated on reductions of about US$200 billion in the trade imbalance over two years. Given the extent of its multilateral problem, this is largely meaningless.
Indeed, with budget deficits likely to widen, America’s savings 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.
Even if the US was not facing a saving constraint, it stretches credibility to seek a formulaic bilateral solution to its multilateral problem. Since 2000, the largest reduction in the US-China merchandise trade imbalance was US$41 billion – in 2009, during the Great Recession. Back-to-back annual reductions of more than double that is sheer fantasy.
In the end, any effort to impose a bilateral solution on a multilateral problem will backfire, with ominous consequences for American consumers. Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others.
Therein lies the cruellest twist of all. China is America’s low-cost provider of imported consumer goods. The Trump deal would shift the Chinese piece of the US’ multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax increase on American families.
Stephen Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia