Trump’s trade blunders will cost us dearly
A hallmark of the Trump administration is its disdain for the views of experts.
Judging by the president’s seemingly relentless march to a full-blown trade war with China, this disdain for expert advice is likely to cost both the U.S. and the global economies dearly. It is also likely to deprive Trump of a strong U.S. economy and a buoyant stock market on which to run his 2020 reelection bid. As if to underline the risks involved, U.S. and global stock markets have lost around 5 percent in value over the past few days on fears of an escalating trade war.
The most recent example of a costly policy mistake running counter to expert advice is President Trump’s threat last week to impose a 10 percent tariff on an additional $300 billion of Chinese exports beginning on September 1. Trump has done this in the apparent belief that the Chinese economy is weak. That leads him to believe that all that it will take to make China offer major trade concessions to the U.S. is an additional amount of economic pressure.
China’s immediate retaliation to the president’s announcement has come in the form of a significant depreciation of its currency and in the halting of agricultural imports from the United States. While this reaction might have come as an unpleasant surprise to Trump, it would not have surprised a Chinese expert.
Any Chinese expert would have reminded the president of China’s “century of humiliation” in the 1800s when foreign powers repeatedly imposed their will on a weak China. That experience makes it politically very difficult for a modern-day Chinese president to be seen to be kowtowing to the will of the United States at a time that China is rising.
Any Chinese expert would also have reminded the president of China’s authoritarian form of government that allows China politically to withstand very much more economic pain than could United States with its democratic system of government. This encourages President Xi to think that he can easily hold out beyond the Trump administration and that it is the U.S. that will cave to financial market pressure. As if to underline these points, it was not so long ago that Chairman Mao was able to remain in office despite 30 million people starving to death as a result of his misguided economic policies.
At a more basic level, any economic expert worth his salt would have explained to Trump the futility of trying to eliminate the U.S. trade deficit by resorting to higher import tariffs at a time of budget irresponsibility.
The expert would have explained that arithmetically a trade deficit is the result of a country saving less than it invests. He would also have explained that cutting taxes and allowing the budget deficit to balloon, as President Trump has done, has had effect of reducing the country’s savings level and paving the way for a return to the twin budget and trade deficit problem of the 1980s.
Had the president heeded the economic experts’ advice, he would not have been surprised to see the U.S. trade deficit widen by some 25 percent since his taking office in January 2017 despite increasingly resorting to import tariffs.
Sadly, it seems that President Trump is also not heeding the expert advice coming from the International Monetary Fund as to the risks to the global economic recovery from any escalation in the U.S.-China trade war. The IMF has been emphasizing that rising trade protection has already caused a marked economic slowing in China, the world’s second largest economy, which in turn has contributed to a synchronized global economic slowdown.
President Trump’s disdain for economic policy advice would be regretted in the best of economic times. But it is to be regretted particularly today at a time of many risks to the global economy in addition to that of an escalation in the U.S.-Chinese trade war. These risks include those of the United Kingdom possibly soon crashing out of Europe, a rapidly slowing European economy, an escalation in the Japanese-Korean trade war and geopolitical risks in the Persian Gulf.
President Trump’s ramping up of the Chinese-trade war today and thereby risking a global economic recession would seem to suggest that he is ignoring two other pieces of expert advice. The first is that U.S. presidential elections are generally about the economy, stupid. The second is that the United States is very much part of the global economy and that, much as the 2008 U.S. Lehman crisis plunged the rest of the world economy into recession, so too could economic and financial turbulence abroad derail the U.S. economic recovery.
All of this does not bode well for Trump’s 2020 reelection bid, especially should the U.S. stock market continue to swoon. More importantly, it does not bode well for the U.S. and global economies.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
The Hill has removed its comment section, as there are many other forums for readers to participate in the conversation. We invite you to join the discussion on Facebook and Twitter.