Donald Trump’s opponent in his trade war is actually economics, and he will certainly lose

With each passing day, it becomes increasingly evident that US President Donald Trump’s administration cares less about economics and more about the aggressive exercise of political power. This is obviously a source of enormous frustration for those of us who practise the art and science of economics.

Trade policy is an obvious and essential case in point. Showing no appreciation of the time-honoured linkage between trade deficits and macroeconomic saving-investment imbalances, the president continues to fixate on bilateral solutions to a multilateral problem – in effect, blaming China for America’s merchandise trade deficits with 102 countries.

Similarly, his refusal to sign the recent G7 communiqué was couched in the claim that the United States is like a “piggy bank that everybody is robbing” through unfair trading practices. But piggy banks are for saving, and in the first quarter of this year, America’s net domestic saving rate was just 1.5 per cent of national income. Not much to rob there!

The same can be said of fiscal policy. Trump’s deficit-busting tax cuts and increases in government spending make no sense for an economy nearing a business-cycle peak and with an unemployment rate of 3.8 per cent. Moreover, the feedback loop through the savings channel only exacerbates the very trade problems that Trump claims to be solving.

With the Congressional Budget Office projecting that federal budget deficits will average 4.2 per cent of gross domestic product from now until 2023, domestic saving will come under further pressure, fuelling increased demand for surplus saving from abroad and even bigger trade deficits to fill the void. Yet Trump now ups the ante on tariffs – in effect, biting the very hand that feeds the US economy.