Trillions of dollars in economic stimulus programs are being discussed on America's election campaign trails, and the U.S. clearly needs these programs to rev up growth and employment creation.
But the stimulus should be executed to meet these objectives without creating excessive trade deficits and increasing the country's large ($7.5 trillion) net foreign liabilities.
As things now stand, architects of these programs seem to be ignoring the fact that they are operating in a highly open American economy, where the external sector represents nearly one-third of GDP. I hope that is just a temporary oversight, because a large stimulus to domestic demand at a time of near-stagnation and slowing growth of our main trading partners would boost our imports and their exports. The ensuing increases in our trade deficits would erode the beneficial impact of the economic stimulus, while increasing our foreign debt and putting pressures on whatever is left of our manufacturing industries.
In order to avoid that outcome, Washington would be well advised to coordinate any future stimulus with similar measures in export-driven economies, which are running huge structural trade surpluses with the U.S. and the rest of the world. Multilateral and bilateral channels exist for such policy co-ordinations. They should be used to implement trade adjustment rules requiring that these stagnant and slow-growing trade-surplus economies have to stimulate their domestic demand.
The U.S. may wish to catch up quickly on such consultations. The existing large trade imbalances are destabilizing the world economy. They are also one of the causes of America's slow growth.
Fight the freeloading
Germany, for example, has the world's largest trade surplus ($320 billion or 9.2 percent of GDP), where the U.S. is bleeding with a bilateral trade deficit currently running at an annual rate of $65 billion. But that is only part of the story.
By refusing to adjust – i.e., to generate more growth from domestic demand – Germany is depressing the European economy it already gravely damaged with its austerity edicts enforced through market-frightening warnings about debt-ridden countries. These policies are killing the market for one-fifth of American exports. So, the damage to the U.S. economy is much larger than the trade deficit with Germany. At the moment, America's trade deficit with Europe is running at an annual rate of $159.6 billion.
Undeterred, the Germans are staying on-message. Berlin keeps pushing France, Italy and Spain (one-half of the euro area economy) to toe the line on the (fiscal) "stability pact" instead of trying to stimulate their moribund economies.