Global trade and its discontents
Special points to highlight in this issue:
• The Trump administration seems serious about implementing trade intervention policies aimed at reducing the US trade deficit, and especially the deficit with China. While part of the bluster may be for negotiation purposes, whatever happens in the next few weeks and months, I do not expect trade concerns to go away any time soon.
• There are a limited number of ways Beijing can retaliate if Washington does indeed impose tariffs on Chinese goods. Beijing can impose counter-tariffs on US goods, it can threaten to reduce its purchases of US Treasury bonds, and it can punish American companies that are active in Chinese markets. Except for the last, Beijing is more constrained in its ability to retaliate than many analysts might realize.
• There are two key points to remember. First, for economies suffering from weak demand and in which productive investment is not constrained by scarce savings (and this includes both China and the US), the trade imbalance is a way of moderating the tradeoff between unemployment and debt. A smaller trade surplus or a larger trade deficit forces a country to choose between a rise in unemployment or a larger debt burden, and vice versa. This is why in a generalized trade dispute, a diversified economy with a large deficit holds all the best cards relative to a trade surplus country.
• But it can still play its cards badly, and this points to the second important point. Since the 1970s, trade imbalances have been driven by capital imbalances, and not the other way around. Policies that try to address these imbalances by changing relative production costs, such as imposing tariffs on imports, will change the composition of the trade imbalance, usually in a sub-optimal way, but will not change the imbalance itself.
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